<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 9, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to________.
Commission file number - 333-56031
_________________
ADVANCE HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
_________________
Virginia 54-1622754
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5673 Airport Road 24012
Roanoke Virginia (Zip Code)
(Address of Principal Executive Offices)
(540) 362-4911
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 22, 1999, the registrant had outstanding 28,306,050 shares
of Class A Common Stock, par value $0.01 per share (the only class of common
stock of the registrant outstanding). The registrant's Class A Common Stock is
not traded in a public market.
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<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
Twelve and Forty Weeks Ended October 9, 1999
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements of
Advance Holding Corporation and Subsidiaries
(Unaudited)
Condensed Consolidated Balance Sheets as of
October 9, 1999 and January 2, 1999....................1
Condensed Consolidated Statements of Operations
for the Twelve and Forty Week Periods Ended
October 9, 1999 and October 10, 1998...................2
Condensed Consolidated Statements of Cash
Flows for the Forty Week Periods Ended October 9,
1999 and October 10, 1998..............................3
Notes to Unaudited Condensed Consolidated
Financial Statements...................................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................19
Item 2. Changes in Securities and Use of Proceeds.............19
Item 6. Exhibits and Reports on Form 8-K......................20
SIGNATURE...............................................................S-1
i
<PAGE>
Advance Holding Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
October 9, 1999 and January 2, 1999
(dollars in thousands, except per data)
<TABLE>
<CAPTION>
October 9, January 2,
Assets 1999 1999
------ ----------- ----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,101 $ 36,115
Receivables, net 110,998 92,199
Inventories 758,878 726,172
Other current assets 29,864 9,477
------------ -----------
Total current assets 923,841 863,963
Property and equipment, net of accumulated depreciation of
$141,169 and $95,055 424,756 377,761
Other assets, net 21,938 23,631
------------ -----------
$ 1,370,535 $ 1,265,355
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Bank overdrafts $ 21,311 $ 20,403
Current portion of long-term debt 2,209 1,026
Accounts payable 328,170 356,750
Accrued expenses 164,514 162,622
Other current liabilities 31,065 13,049
------------ -----------
Total current liabilities 547,269 553,850
------------ -----------
Long-term debt 624,445 500,162
------------ -----------
Deferred revenue 12,939 1,389
------------ -----------
Other long-term liabilities 48,014 50,863
------------ -----------
Commitments and contingencies
Stockholders' equity:
Common stock, Class A, voting, $.01 par value,
62,500,000 shares authorized; 28,306,050 and
28,261,900 issued and outstanding 283 283
Additional paid-in capital 371,048 370,306
Other (813) (1,532)
Accumulated deficit (232,650) (209,966)
------------ -----------
Total stockholders' equity 137,868 159,091
------------ -----------
$ 1,370,535 $ 1,265,355
============ ===========
</TABLE>
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these balance sheets.
1
<PAGE>
Advance Holding Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
For the Twelve and Forty Week Periods Ended
October 9, 1999 and October 10, 1998
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Twelve Week Periods Ended Forty Week Periods Ended
------------------------- ------------------------
October 9, October 10, October 9, October 10,
1999 1998 1999 1998
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 522,239 $ 258,839 $ 1,733,727 $ 802,839
Cost of sales 318,740 160,464 1,098,155 493,289
---------- ---------- ----------- -----------
Gross profit 203,499 98,375 635,572 309,550
Selling, general and administrative expenses 188,752 81,205 623,554 260,017
Expenses associated with Recapitalization - 225 - 14,230
---------- ---------- ----------- -----------
Operating income 14,747 16,945 12,018 35,303
---------- ---------- ----------- -----------
Other (expense) income:
Interest expense (14,232) (10,116) (47,449) (23,675)
Other, net 215 543 428 860
---------- ---------- ----------- -----------
Total other expense, net (14,017) (9,573) (47,021) (22,815)
---------- ---------- ----------- -----------
Income (loss) before provision (benefit) for income taxes 730 7,372 (35,003) 12,488
Provision (benefit) for income taxes 539 3,279 (12,319) 5,822
---------- ---------- ----------- -----------
Net income (loss) $ 191 $ 4,093 $ (22,684) $ 6,666
========== ========== =========== ===========
</TABLE>
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
2
<PAGE>
Advance Holding Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Forty Week Periods Ended
October 9, 1999 and October 10, 1998
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Forty Week Periods Ended
---------------------------------------
October 9, 1999 October 10, 1998
--------------- ----------------
<S> <C> <C>
Cash flows (used in) provided by operating activities:
Net (loss) income $ (22,684) $ 6,666
Adjustments to reconcile net (loss) income to net cash (used in )
provided by operating activities:
Depreciation 43,677 19,993
Amortization of stock option compensation 989 243
Amortization of deferred debt issuance costs 2,715 1,399
Amortization of bond discount 6,586 3,779
Sales of marketable securities - 2,025
Benefit for deferred income taxes (4,218) (54)
Amortization of interest on capital lease obligation 61 -
Net periodic postretirement benefit expense, net of payments made 2,170 355
Net loss on sales of property and equipment 7 100
Net increase in:
Receivables, net (18,799) (6,795)
Inventories (32,521) (82,846)
Other (16,058) (5,884)
Net (decrease) increase in:
Accounts payable (28,580) 60,319
Accrued expenses (5,358) 33,213
Deferred revenue 23,779 1,671
Other (5,906) -
--------- ---------
Net cash (used in) provided by operating activities (54,140) 34,184
--------- ---------
Cash used in investing activities:
Purchases of property and equipment (81,758) (36,234)
Proceeds from sale of property and equipment 1,496 4,156
Western Merger, net of cash acquired (372) -
Other 1,091 682
--------- ---------
Net cash used in investing activities (79,543) (31,396)
--------- ---------
Cash flows provided by financing activities:
Increase (decrease) in bank overdrafts 908 (6,970)
Net repayments under notes payable - (2,959)
Proceeds from issuance of long-term debt - 11,500
Payments on long-term debt - (102,667)
Borrowings under credit facilities 358,500 385,017
Payments on credit facilities (242,500) -
Payment of debt issuance costs (972) (20,297)
Proceeds from issuance of Class A common stock 472 105,235
Payment for redemption of preferred and common stock - (351,000)
Other 5,261 2,298
--------- ---------
Net cash provided by financing activities 121,669 20,157
--------- ---------
Net (decrease) increase in cash and cash equivalents (12,014) 22,945
Cash and cash equivalents at beginning of period 36,115 15,463
--------- ---------
Cash and cash equivalents at end of period $ 24,101 $ 38,408
========= =========
Supplemental cash flow information:
Interest paid $ 29,775 $ 10,118
Income taxes paid, net of refunds received 4,719 2,850
Non-cash transactions:
Obligations under capital lease 3,345 -
Debt issuance costs and acquisition costs accrued 281 1,339
Loans receivable related to issuance of common stock 344 2,528
Stock options issued for redemption of common stock - 300
</TABLE>
The accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
3
<PAGE>
Advance Holding Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Twelve and Forty Week Periods Ended October 9, 1999 and October 10, 1998
(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 October 9, 1999, the
condensed consolidated statements of operations for the 12-week and 40-week
periods ended October 9, 1999 and October 10, 1998 and the statements of cash
flows for the 40-week periods ended October 9, 1999 and October 10, 1998, 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 2,
1999.
The results of operations for the 12-week and 40-week periods are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
Recent Accounting Pronouncements
Effective January 3, 1999, the Company adopted the American Institute of
Certified Public Accountant's Statement of Position (SOP) 98-1, "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use". The SOP
requires companies to capitalize certain expenditures related to development of
or obtaining computer software for internal use. The SOP was issued in March of
1998 and is effective for fiscal years beginning after December 15, 1998. The
adoption of the SOP did not have a material effect on the Company's financial
position or results of operations.
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.
Reclassifications
Certain 1998 amounts have been reclassified to conform with their 1999
presentation.
4
<PAGE>
Advance Holding Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Twelve and Forty Week Periods Ended October 9, 1999 and October 10, 1998
(dollars in thousands, except per share data)
(unaudited)
2. Receivables:
Receivables consist of the following:
<TABLE>
<CAPTION>
October 9, January 2,
1999 1999
----------- -----------
<S> <C> <C>
Trade:
Wholesale $ 20,989 $ 26,463
Retail 10,787 6,470
Vendor 58,927 38,142
Installment 12,636 11,311
Related parties 7,332 6,236
Employees 678 555
Other 2,927 6,802
----------- -----------
Total receivables 114,276 95,979
Less - Allowance for doubtful accounts (3,278) (3,780)
----------- -----------
Receivables, net $ 110,998 $ 92,199
=========== ===========
</TABLE>
3. 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 fiscal year based on the inventory levels
and costs at that time. Accordingly, interim LIFO calculations must be based on
management's estimates of expected fiscal year-end inventory levels and costs.
The Company capitalizes certain purchasing and warehousing costs into inventory.
Purchasing and warehousing costs included in inventory at October 9, 1999 and
January 2, 1999, were $45,132 and $41,168, respectively. Inventories consist of
the following:
<TABLE>
<CAPTION>
October 9, January 2,
1999 1999
----------- -----------
<S> <C> <C>
Inventories at FIFO $ 747,432 $ 718,909
Reserve to state inventories at LIFO 15,305 10,622
----------- -----------
Inventories at LIFO 762,737 729,531
Other reserves (3,859) (3,359)
----------- -----------
$ 758,878 $ 726,172
=========== ===========
</TABLE>
5
<PAGE>
Advance Holding Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Twelve and Forty Week Periods Ended October 9, 1999 and October 10, 1998
(dollars in thousands, except per share data)
(unaudited)
4. Western Merger:
On November 2, 1998, the Company consummated a Plan of Merger (the Western
Merger) with Sears, Roebuck and Co. (Sears) to acquire Western Auto Supply
Company (Western) for $175,000 in cash and 11,474,606 shares of the Company's
common stock. Additionally, the Company agreed to share losses incurred by Sears
as a result of the sale, or as a result of continuing the private label credit
card programs up to a maximum of $10,000. Based on the sale of the private label
credit card program, the Company has recorded the $10,000 as additional purchase
price.
The Western Merger has been accounted for under the purchase method of
accounting. Accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on fair values. In continuation of
management's plan related to the Western Merger (Note 5), the Company recognized
additional net liabilities of $2,167 during the third quarter of fiscal 1999.
The charges primarily represent adjustments in store and other facility exit
costs and pre-acquisition contingencies. During the third quarter of fiscal
1999, the Company also recognized $75 of acquisition costs associated with the
Western Merger. The above items resulted in a reduction of negative goodwill of
approximately $2,242, which resulted in an increase to property and equipment on
the condensed consolidated balance sheet as of October 9, 1999.
As of October 9, 1999, the Company finalized all purchase accounting
related to the Western Merger. As such, aggregate negative goodwill of $4,667,
resulting from excess fair value over the purchase price, has been allocated
proportionately as a reduction to certain non-current assets, primarily property
and equipment. A summary of the fair value of the net assets acquired and cash
paid in the Western Merger follows:
<TABLE>
<S> <C>
Fair value of assets acquired $ 661,305
Liabilities assumed (278,319)
----------
382,986
Common stock issued (193,003)
Credit card liability (10,000)
Accrued acquisition costs (137)
----------
Cash paid, including acquisition costs of $4,846 179,846
Less - Cash acquired (6,000)
----------
Net cash paid $ 173,846
==========
</TABLE>
Total acquisition costs related to the transaction were approximately
$4,983, of which $137 is reflected in accrued liabilities at October 9, 1999.
5. Restructuring Liabilities:
Expenses associated with restructuring are included in selling, general and
administrative expenses in the accompanying Statements of Operations. These
expenses include estimated exit costs and write-offs of related leasehold
improvements associated with the decision to close Advance Auto Parts stores in
overlapping markets with certain Parts America Stores obtained in the Western
Merger. From the date of the Western Merger through October 9, 1999, the Company
closed 31 of these overlapping stores, of which 27 stores were included in the
restructuring liability. During the third quarter of fiscal 1999, the Company
made the decision to close or relocate seven leased stores as part of normal
operations, four of which were closed as of October 9, 1999.
6
<PAGE>
Advance Holding Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Twelve and Forty Week Periods Ended October 9, 1999 and October 10, 1998
(dollars in thousands, except per share data)
(unaudited)
In connection with the Western Merger, the Company assumed the
restructuring accrual related to Western's restructuring activities prior to the
Western Merger. As of October 9, 1999, this restructuring accrual relates
primarily to ongoing lease obligations on closed facilities and estimated
severance payments.
A reconciliation of activity with respect to these restructuring accruals
is as follows:
Other Exit
Severance Costs
------------- ------------
Balance, January 2, 1999 $ 682 $ 14,773
New provisions - 890
Reserves utilized (599) (4,825)
------------- ------------
Balance, October 9, 1999 $ 83 $ 10,838
============= ============
As of the date of the Western Merger, management began to assess and
formulate a plan to close certain Parts America stores in overlapping markets or
stores not meeting the Company's profitability objectives, to exit certain other
facilities, to relocate certain Western administrative functions to the
Company's headquarters and to terminate certain management, administrative and
support employees of Western. As of October 9, 1999, the Company finalized its
plan for termination of employees and closure of Parts America stores. The
Company expects to complete the execution of the plan by the end of fiscal 1999.
Since the date of the Western Merger, the Company has terminated 352 employees
and closed 67 owned and leased Parts America stores, net of one relocation. Of
the closed locations, 54 were leased properties accrued as part of the
restructuring reserve.
A reconciliation of activity with respect to these liabilities, which are
included in accrued expenses and other long-term liabilities on the condensed
consolidated balance sheets, is as follows:
<TABLE>
<CAPTION>
Other Exit
Severance Relocation Costs
------------- ------------- ------------
<S> <C> <C> <C>
Balance, January 2, 1999 $ 7,738 $ 838 $ 13,732
Purchase accounting adjustments 3,893 (137) (2,003)
Reserves utilized (6,115) (441) (3,336)
---------- --------- -----------
Balance, October 9, 1999 $ 5,516 $ 260 $ 8,393
========== ========= ===========
</TABLE>
6. Contingencies:
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 discovery stage and
management plans a vigorous defense. In addition, three lawsuits were filed
against the Company in July 1998, for a wrongful death relating to an automobile
accident involving an employee of the Company. Management believes the financial
exposure related to the automobile accident is covered by insurance.
On November 1, 1999, the United States District Court of Appeals for the
Sixth District reaffirmed the decisions of the United States District Court for
the Western District of Kentucky. Those decisions held the Company was entitled
to exclusive use of the name "Advance Auto Parts" throughout the United States,
except in Jefferson County, Kentucky, and the Company was entitled to summary
judgment in connection with various infringement and unfair competition claims
brought by the appellant.
7
<PAGE>
Advance Holding Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Twelve and Forty Week Periods Ended October 9, 1999 and October 10, 1998
(dollars in thousands, except per share data)
(unaudited)
In January 1999, the Company was notified by the United States
Environmental Protection Agency (EPA) that Western Auto may have potential
liability under the Comprehensive Environmental Response Compensation and
Liability Act relating to two battery salvage and recycling sites in operation
in the 1970's and 1980's. The EPA has indicated the total cleanup costs for the
site will be approximately $1,600. Management is continuing their
investigation of the EPA notification. An estimate of the range of the Company's
liability is not reasonably possible until technical studies are sufficiently
completed and the amount of potential indemnification from Sears, if any, is
further investigated. The ultimate exposure will also depend upon the
participation of other parties named in the notification who are believed to
share in responsibility.
The Company 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 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.
7. Related Parties:
The following table presents the related party transactions with Sears as of
October 9, 1999 and for the period from January 2, 1999 to October 9, 1999:
Net sales to Sears $ 3,790
Shared services revenue 2,001
Shared services expense 1,072
Credit card fee expense 1,800
Receivables from Sears 5,645
Payables to Sears 2,805
8
<PAGE>
Advance Holding Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Twelve and Forty Week Periods Ended October 9, 1999 and October 10, 1998
(dollars in thousands, except per share data)
(unaudited)
8. Segment and Related Information:
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires entities to report financial and descriptive information
related to segments within the organization.
The Company has the following reportable segments: Advance Holding, Advance
Stores and Western. Advance Holding has no operations. Advance Stores consist of
the retail operations of the Company including the converted and non-converted
Parts America stores. Western consists of wholesale operations, including
distribution services to independent dealers and three franchisees, and 42
retail stores all operating under the "Western Auto" name.
As of October 9, 1999, the Company continues to integrate the Western
operations and formulate an appropriate management reporting approach for the
Western operations. For the period from January 2, 1999 to October 9, 1999,
management continued to receive and use financial information aggregated at the
Western level in evaluating the performance of the acquired operations.
<TABLE>
<CAPTION>
October 9, 1999 October 10, 1998
-------------------------------------------- -------------------------------------------
(Loss) Income Before (Loss) Income Before
Income Income
Net Tax (Benefit) Segment Net Tax (Benefit) Segment
Twelve Weeks Ended Sales Provision ( c ) Assets ( c ) Sales Provision ( c ) Assets ( c )
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Advance Holding $ - $ (2,023) $ 6,888 $ - $ (1,772) $ 6,353
Advance Stores (a) 442,029 5,705 1,217,527 258,839 9,144 607,242
Western (b) 80,210 (2,952) 155,294 - - -
Eliminations - - (9,174) - - (3,778)
---------- --------- ----------- --------- ----------- ---------
Consolidated $ 522,239 $ 730 $ 1,370,535 $ 258,839 $ 7,372 $ 609,817
========== ========= =========== ========= =========== =========
Forty Weeks Ended
- -------------------------------------------------------------------------------------------------------------------------------
Advance Holding $ - $ (6,602) $ 6,888 $ - $ (3,424) $ 6,353
Advance Stores (a) 1,420,464 (20,963) 1,217,527 802,839 15,912 607,242
Western (b) 313,263 (7,438) 155,294 - - -
Eliminations - - (9,174) - - (3,778)
---------- --------- ----------- --------- ----------- ---------
Consolidated $1,733,727 $ (35,003) $ 1,370,535 $ 802,839 $ 12,488 $ 609,817
========== ========= =========== ========= =========== =========
</TABLE>
(a) At October 9, 1999 and October 10, 1998, total revenues include
approximately $53,174 and $33,553 for the twelve week periods ended and
$155,532 and $101,702 for the forty week periods ended, respectively,
related to revenues derived from commercial sales including existing Advance
Auto Parts stores and Parts America stores after store level management
information system conversion.
(b) During fiscal 1999, certain accounts and the corresponding activity related
to the Parts America store operations were transferred to Advance Stores
through a dividend to and the assumption of liabilities by Advance Stores.
(c) Excludes investment in and equity in net earnings or losses of subsidiaries.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Advance Holding Corporation ("Holding") conducts all of its operations
through its wholly owned subsidiary, Advance Stores Company, Incorporated (the
"Company") and its subsidiaries. The Company is the second largest retailer of
automotive parts and accessories in the United States. As of October 9, 1999,
the Company had 1,601 stores in 39 states, Puerto Rico and the U.S. Virgin
Islands operating under the "Advance Auto Parts" and "Western Auto" names.
Stores operating in Puerto Rico, the U.S. Virgin Islands and one store in each
of California and Hawaii operating under the Western Auto name (the "Service
Stores") offer automotive parts and accessories as well as service, repairs,
tires and certain non-automotive goods. In addition, the Company supplies
automotive parts, home products and various support services to approximately
690 independent stores in 48 states through the wholesale dealer network.
The Company was formed in 1929. In the 1980s, the Company sharpened its
marketing focus to target sales of automotive parts and accessories to "do-it-
yourself" ("DIY") customers and accelerated its growth strategy. From the 1980s
through the present, the Company has grown significantly through new store
openings and strategic acquisitions. In 1996, the Company began to aggressively
expand its sales to "do-it-for-me" ("DIFM") customers by implementing a
commercial delivery program that supplies parts and accessories to third party
automotive service and repair providers.
The following discussion of the consolidated historical results of
operations and financial condition of Holding should be read in conjunction with
the unaudited condensed consolidated financial statements of Holding and the
notes thereto included elsewhere in this Form 10-Q. The following discussion
and analysis covers periods before completion of the Recapitalization, as
described below. Holding's first quarter consists of 16 weeks and its other
three quarters consist of 12 weeks.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this quarterly report contain
certain "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. These statements include without limitation the
words "believes," "anticipates," "estimates," "intends," "expects," and words of
similar import. 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.
These potential risks and uncertainties 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;
weather conditions; integration of the Western Merger (as defined below); extent
of the market demand for auto parts; availability of inventory supply; adequacy
and perception of customer service, product quality and defect experience;
availability of and ability to take advantage of vendor pricing programs and
incentives; rate of new store openings; cannibalization of store sites; mix and
types of merchandise sold; governmental regulation of products; new store
development; performance of information systems; effectiveness of deliveries
from distribution centers; ability to hire, train and retain qualified
employees; and environmental risks. Forward-looking statements regarding
revenues, expenses, cash flows and liquidity 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. The Company disclaims any obligation to
update any such factors or to publicly announce the results of any revisions to
any of the forward-looking statements contained herein to reflect future events
or developments.
General
During the first quarter of 1998, Holding consummated a recapitalization
through the sale of common stock, the issuance of debt, the redemption of common
and preferred stock and the repayments of notes payable and long-term debt (the
"Recapitalization"). Additionally, on November 2, 1998, Western Auto Supply
Company
10
<PAGE>
merged into a subsidiary of the Company (the "Western Merger"). As a result of
the Western Merger, the Company issued to WA Holding Co., a wholly owned
subsidiary of Sears, Roebuck and Co. ("Sears"), 11,474,606 shares of Common
Stock of Holding (the "Holding Common Stock") representing approximately 40.6%
of the outstanding Holding Common Stock, in addition to cash and assumption of
certain liabilities.
As a result of the Western Merger, the Company added 612 auto parts stores
in the United States. The Parts America stores were similar to the Advance Auto
Parts stores in terms of size, format and product offerings. In addition,
Western Auto Supply Company operated 38 auto parts and service stores in Puerto
Rico and the U.S. Virgin Islands and one store in each of California and Hawaii
under the "Western Auto" name (the "Service Stores"). The Service Stores offer
automotive parts and accessories as well as service, repairs, tires and certain
non-automotive goods. Western Auto Supply Company also supplied a wholesale
dealer network in 48 states.
Beginning in the fourth quarter of 1998, the Company undertook a major
integration effort following the Western Merger. These integration efforts
included merchandise conversion strategies, sales force integration,
consolidation of duplicative stores and facilities, employee separations and
relocations and the integration of the management information systems of the
combined companies. From the date of the Western Merger, 352 employees have been
terminated and 67 Parts America stores, 31 Advance Auto Parts stores and one
distribution center have been closed. Subsequent to October 9, 1999, the Company
closed the Service Store located in Hilo, Hawaii. Additionally, the integration
of certain administrative functions associated with the Parts America stores,
Service Stores, and the wholesale dealer network with the Company's headquarters
is substantially complete. The Company expects to complete this integration plan
by the end of fiscal 1999. As of October 9, 1999, the Company finalized all
purchase accounting related to the Western Merger. Final purchase accounting
adjustments in the third quarter related primarily to changes in store and other
facility exit costs and pre-aquisition contingencies. As such, aggregate
negative goodwill of $4.7 million resulting from the excess of fair value over
purchase price has been allocated proportionately as a reduction to non-current
assets.
As of October 23, 1999, the Company completed the final phase of converting
the Parts America stores to Advance Auto Parts stores (the "Parts America
Conversion"). The Parts America Conversion changed certain merchandise lines
(the "Merchandise Conversion"), store level management information systems (the
"MIS Conversion"), and the format and name of the Parts America stores to
conform with the Advance Auto Parts stores (the "Physical Conversion"). The
Company does not plan to convert the Service Stores as part of the Parts America
Conversion.
The Company expects to achieve benefits from the Western Merger through
improved product pricing and terms from vendors, consolidated advertising,
distribution and corporate support efficiencies, and the closure of certain
overlapping store locations. However, due to the Western Merger, the Company
has incurred store closing, store conversion, distribution center conversion and
system conversion expenses, other exit costs as part of the Parts America
Conversion and other integration costs. The Company expects to incur additional
integration costs through the fourth quarter of fiscal 1999 related primarily to
store, distribution center and information system conversions. In addition, the
Company, as part of its plan, will continue to liquidate at reduced prices
certain SKU's carried in the Service Store inventory.
11
<PAGE>
Results of Operations
The following tables set forth the statement of operations data for Holding
expressed in dollars and as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Twelve Week Periods Ended Forty Week Periods Ended
(dollars in thousands) (dollars in thousands)
(unaudited) (unaudited)
----------------------------- -----------------------------
October 9, October 10, October 9, October 10,
1999 1998 1999 1998
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 522,239 $ 258,839 $1,733,727 $ 802,839
Cost of sales 318,740 160,464 1,098,155 493,289
---------- ---------- ---------- ----------
Gross profit 203,499 98,375 635,572 309,550
Selling, general and administrative expenses 178,511 81,205 587,151 259,172
Expenses associated with Recapitalization - 225 - 14,230
Expenses associated with merger integration 10,261 - 35,414 -
Expenses associated with private company - - - 845
Expenses associated with non-cash compensation (20) - 989 -
---------- ---------- ---------- ----------
Operating income 14,747 16,945 12,018 35,303
---------- ---------- ---------- ----------
Interest expense (14,232) (10,116) (47,449) (23,675)
Other, net 215 543 428 860
Provision (benefit) for income taxes 539 3,279 (12,319) 5,822
---------- ---------- ---------- ----------
Net income (loss) $ 191 $ 4,093 $ (22,684) $ 6,666
========== ========== ========== ==========
<CAPTION>
Twelve Week Periods Ended Forty Week Periods Ended
(unaudited) (unaudited)
---------------------------- --------------------------
October 9, October 10, October 9, October 10,
1999 1998 1999 1998
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 61.0 62.0 63.3 61.4
--------- --------- ---------- ----------
Gross profit 39.0 38.0 36.7 38.6
Selling, general and administrative expenses 34.2 31.4 33.9 32.3
Expenses associated with Recapitalization - 0.1 - 1.8
Expenses associated with merger integration 2.0 - 2.0 -
Expenses associated with private company - - - 0.1
Expenses associated with non-cash compensation (0.0) - 0.1 -
--------- --------- ---------- ----------
Operating income 2.8 6.5 0.7 4.4
--------- --------- ---------- ----------
Interest expense (2.7) (3.9) (2.7) (3.0)
Other, net 0.0 0.2 0.0 0.1
Provision (benefit) for income taxes 0.1 1.2 (0.7) 0.7
--------- --------- ---------- ----------
Net income 0.0% 1.6% (1.3%) 0.8%
========= ========= ========== ==========
</TABLE>
12
<PAGE>
Net sales consist primarily of comparable store net sales, new store net
sales and, for the twelve and forty weeks ended October 9, 1999, sales at stores
acquired in the Western Merger. Comparable store net sales is calculated based
on the change in net sales starting once a store has been opened for thirteen
complete accounting periods (each period represents four weeks). Relocations
are included in comparable store net sales from the date of opening.
Additionally, each converted Parts America store will be included in the
comparable store net sales calculation after thirteen complete accounting
periods following its Physical Conversion to an Advance Auto Parts store.
Holding has not included and currently does not plan to include Service Stores
in its comparable store net sales calculation.
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, depreciation and
amortization, 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.
Twelve Weeks Ended October 9, 1999 Compared to Twelve Weeks Ended October 10,
1998
Net sales for the twelve weeks ended October 9, 1999 were $522.2 million,
an increase of $263.4 million over net sales for the twelve weeks ended October
10, 1998. The net sales increase was a result of the Western Merger, comparable
store sales increase of 8.6% and new stores opened within the last year, despite
the negative impact of hurricanes Dennis and Floyd. The comparable sales
increase was due to the maturation of stores opened in 1997 and 1998, increased
product availability, continued growth in the commercial sales program and the
closure of certain Parts America stores in overlapping markets. Comparable store
sales increased 7.2% for the twelve weeks ended October 10, 1998.
During the twelve weeks ended October 9, 1999, the Company opened 27 new
stores, relocated two stores, and closed 16 stores in addition to the stores
closed due to relocations (14 of which were in connection with the Western
Merger store closure program). Also, the Company added 80 stores to its
commercial delivery program, bringing the total to 1,065 stores. As of October
9, 1999, the Company operated 1,601 stores in 39 states, Puerto Rico and the
U.S. Virgin Islands and supplied approximately 690 independent dealers through
the wholesale dealer network.
Gross profit for the twelve weeks ended October 9, 1999 was $203.5 million,
or 39.0% of net sales, compared with $98.4 million, or 38.0% of net sales, in
the twelve weeks ended October 10, 1998. The increase in the gross profit
percentage resulted from the realization of additional vendor support and price
reductions from purchasing synergies as a result of the Western Merger, offset
in part by additional shrinkage recorded in the third quarter of fiscal 1999
associated with the Parts America Conversion.
Selling, general and administrative expenses, before expenses associated
with the merger integration and non-cash compensation, increased to $178.5
million, or 34.2% of net sales, in the twelve weeks ended October 9, 1999 from
$81.2 million, or 31.4% of net sales, in the twelve weeks ended October 10,
1998. The increase as a percentage of sales was due primarily to higher store
labor and advertising costs. This increase was partially offset by a decrease
in occupancy expense, resulting from a higher percentage of owned locations.
Holding recorded $10.3 million in merger integration and transition expenses for
the twelve weeks ended October 9, 1999. Merger integration and transition
expenses consisted primarily of store, merchandise and information system
conversions.
Operating income, as adjusted for expenses associated with the merger
integration and non-cash compensation, in the twelve weeks ended October 9, 1999
was $25.0 million, or 4.8% of net sales, as compared to $16.9 million, or 6.5%
of net sales, in the twelve weeks ended October 10, 1998.
EBITDA (operating income plus depreciation and amortization), as adjusted
for expenses associated with the Recapitalization, merger integration and non-
cash compensation, was $39.3 million in the twelve weeks ended October 9, 1999,
or 7.5% of net sales, as compared to $23.7 million, or 9.1% of net sales, in the
twelve weeks ended October 10, 1998. EBITDA is not intended to represent cash
flow from operations as defined by GAAP and should not be considered as a
substitute for net income as an indicator of operating performance or as an
alternative to cash flow (as measured by GAAP) as a measure of liquidity.
Holding's method for calculating EBITDA may differ from
13
<PAGE>
similarly titled measures reported by other companies. Management believes
certain one-time expenses, expenses associated with the Recapitalization, merger
integration and non-cash compensation should be eliminated from the EBITDA
calculation to evaluate the operating performance of the Company.
Interest expense in the twelve weeks ended October 9, 1999 was $14.2
million, or 2.7% of net sales, compared to $10.1 million, or 3.9% of net sales,
in the twelve weeks ended October 10, 1998. The increase in interest expense in
the twelve weeks ended October 9, 1999 was primarily due to the additional debt
incurred in the Western Merger, increased borrowings under the Company's
revolving and delayed draw credit facilities and higher interest rates.
Income tax expense for the twelve weeks ended October 9, 1999 was $0.5
million compared to $3.3 million in the twelve weeks ended October 10, 1998.
This decrease was primarily due to the decrease in income before taxes.
As a result of the above factors, Holding recorded net income of $0.2
million in the twelve weeks ended October 9, 1999 as compared to $4.1 million in
the twelve weeks ended October 10, 1998.
Forty Weeks Ended October 9, 1999 Compared to Forty Weeks Ended October 10, 1998
Net sales for the forty weeks ended October 9, 1999 were $1,733.7 million,
an increase of $930.9 million over net sales for the forty weeks ended October
10, 1998. The net sales increase was a result of the Western Merger,
comparable store sales increase of 11.4% and new stores opened within the last
year. The comparable sales increase was due to the maturation of stores opened
in 1997 and 1998, increased product availability, continued growth in the
commercial sales program and closure of certain Parts America stores in
overlapping markets. Comparable store sales increased 7.0% for the forty weeks
ended October 10, 1998.
During the forty weeks ended October 9, 1999, the Company opened 82 new
stores, reopened one closed location, relocated seven stores, and closed 45
stores in addition to the stores closed due to relocations (33 of which were
overlapping Parts America and Advance Auto Parts stores closed in connection
with the Western Merger). Also, the Company added 533 stores to its commercial
delivery program, bringing the total to 1,065 stores. As of October 9, 1999,
the Company operated 1,601 stores in 39 states, Puerto Rico and the U.S. Virgin
Islands and supplied approximately 690 independent dealers through the wholesale
dealer network.
Gross profit for the forty weeks ended October 9, 1999 was $635.6 million,
or 36.7% of net sales, compared with $309.6 million, or 38.6% of net sales, in
the forty weeks ended October 10, 1998. The decrease in the gross profit
percentage resulted largely from the lower margins associated with the wholesale
dealer network, the liquidation of certain product lines related to the
Merchandise Conversion and shrinkage associated with the Parts America
Conversion. Excluding the impact of the above, Holding's gross profit
percentage on Advance Auto Parts and Parts America stores would have increased
as a result of generally better pricing and more favorable terms from its
vendors as well as the increased vendor support in the forty weeks ended October
9, 1999 compared to the forty weeks ended October 10, 1998. This increase in
vendor support from long-term vendor agreements entered into as a result of the
Western Merger will also provide for price reductions on future purchases and
has resulted in deferred revenue for amounts from vendors that have not yet been
earned.
Selling, general and administrative expenses, before expenses associated
with the Recapitalization, merger integration, private company and non-cash
compensation, increased to $587.2 million, or 33.9% of net sales, in the forty
weeks ended October 9, 1999 from $259.2 million, or 32.3 % of net sales, in the
forty weeks ended October 10, 1998. The increase as a percentage of sales was
due primarily to higher store labor costs, the increase in advertising costs and
costs associated with the Company's national managers' conference. This
increase was partially offset by a decrease in occupancy expense, resulting from
a higher percentage of owned locations. Holding recorded $35.4 million in
merger integration and transition expenses and $1.0 million of non-cash
compensation for the forty weeks ended October 9, 1999 and $14.2 million of
Recapitalization expenses and $0.8 million in private company expenses for the
forty weeks ended October 10, 1998. Merger integration and transition expenses
consisted primarily of store and Merchandise Conversions, professional services,
travel, training and project incentives.
14
<PAGE>
Operating income, as adjusted for expenses associated with the
Recapitalization, merger integration, private company and non-cash compensation,
in the forty weeks ended October 9, 1999 was $48.4 million, or 2.8% of net
sales, as compared to $50.4 million, or 6.3% of net sales, in the forty weeks
ended October 10, 1998.
EBITDA (operating income plus depreciation and amortization), as adjusted
for expenses associated with the Recapitalization, merger integration, private
company and non-cash compensation, was $92.1 million in the forty weeks ended
October 9, 1999, or 5.3% of net sales, as compared to $70.4 million, or 8.8% of
net sales, in the forty weeks ended October 10, 1998. EBITDA is not intended to
represent cash flow from operations as defined by GAAP and should not be
considered as a substitute for net income as an indicator of operating
performance or as an alternative to cash flow (as measured by GAAP) as a measure
of liquidity. Holding's method for calculating EBITDA may differ from similarly
titled measures reported by other companies. Management believes certain one
time expenses, expenses associated with the Recapitalization, merger
integration, private company and non-cash compensation should be eliminated from
the EBITDA calculation to evaluate the operating performance of the Company.
Interest expense in the forty weeks ended October 9, 1999 was $47.4
million, or 2.7% of net sales, compared to $23.7 million, or 3.0% of net sales,
in the forty weeks ended October 10, 1998. The increase in interest expense in
the forty weeks ended October 9, 1999 was primarily due to the increase in debt
related to the Recapitalization, the additional debt incurred in the Western
Merger, increased borrowings under the Company's revolving and delayed draw
credit facilities and higher interest rates.
Income tax benefit for the forty weeks ended October 9, 1999 was $12.3
million compared to an expense of $5.8 million in the forty weeks ended October
10, 1998. This decrease was primarily due to the decrease in income before
income taxes. The Company believes it will realize these tax benefits because
of loss carrybacks to prior periods, reversal of temporary differences, tax
planning strategies and anticipated future earnings.
As a result of the above factors, Holding recorded a net loss of $22.7
million in the forty weeks ended October 9, 1999 as compared to net income of
$6.7 million in the forty weeks ended October 10, 1998. As a percentage of net
sales, net loss for the forty weeks ended October 9, 1999 was 1.3% as compared
to net income of 0.8% for the forty weeks ended October 10, 1998.
Liquidity and Capital Resources
The Company's primary capital requirements have been the funding of its
continued store expansion program, store relocations and remodels, inventory
requirements, the construction and upgrading of distribution centers, the
development and implementation of proprietary information systems and the
Western Merger. Holding has financed its growth through a combination of
internally generated funds, borrowings and issuances of equity.
The Company'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 is financed through vendor
payables. Pre-opening expenses, consisting primarily of store set-up costs and
training of new store employees, average approximately $25,000 per store and are
expensed when incurred. The Company expects to open approximately 100 new stores
during fiscal year 1999 and anticipates opening up to 150 new stores in fiscal
2000. Additionally, the Parts America Conversion required capital expenditures
of approximately $65,000 and conversion expense of approximately $30,000 per
store. Generally at the Western Merger date, Parts America stores carried
approximately $100,000 more inventory (including support inventory in the
distribution centers) than Advance Auto Parts stores. The Company expects to
continue to reduce the inventory levels in the converted Parts America stores to
the Company's average over the next three to nine months.
For the forty weeks ended October 9, 1999, net cash used in operating
activities was $54.1 million. Of this amount, $22.7 million was due to a net
loss. Depreciation provided an additional $43.7 million of funds, amortization
of deferred debt issuance costs and bond discount provided an additional $9.3
million and $84.4 million was used in working capital and other purposes,
consisting primarily of increases in inventory and receivables and a decrease in
accounts payable. Net cash used for investing activities was $79.5 million and
was comprised primarily of net capital expenditures of approximately $80.3
million. Net cash provided by financing activities was $121.6 million and was
comprised primarily of net borrowings.
15
<PAGE>
Holding believes it will have sufficient liquidity to fund its debt service
obligations and implement its growth strategy over the next twelve months. As
of October 9, 1999, Holding and the Company had outstanding indebtedness
consisting of $72.2 million of Senior Discount Debentures (the "Debentures"),
$200.0 million of Senior Subordinated Notes (the "Senior Subordinated Notes"),
borrowings of $341.0 million under the bank credit facility (the "Bank Credit
Facility"), $10.0 million of indebtedness under the McDuffie County Development
Authority Taxable Industrial Bonds ("IRB") and $3.3 million of obligation under
a capital lease.
The Debentures accrete at a rate of 12.875%, compounded semiannually, to an
aggregate principal amount of $112.0 million by April 15, 2003. Commencing
April 15, 2003, cash interest on the Debentures will accrue and be payable
semiannually at a rate of 12.875% per annum. The Indenture governing the
Debentures 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.
The Senior Subordinated Notes bear interest at a rate of 10.25%, payable
semiannually, and require no principal payments until maturity until April 2008.
The Indenture governing the Senior Subordinated Notes contains certain covenants
that limit, among other things, the ability of the Company and its restricted
subsidiaries to incur additional indebtedness and issue preferred stock, pay
dividends or certain other distributions, issue stock of subsidiaries, make
certain investments, repurchase stock and certain indebtedness, create or incur
liens, engage in transactions with affiliates, enter into new businesses, sell
stock of restricted subsidiaries and restrict the Company from engaging in
certain mergers or consolidations and sell assets. The $10.0 million principal
amount IRB bears interest at a variable rate and will require no principal
payments until maturity in November 2002.
The Company has access to a total of $465.0 million through the Bank Credit
Facility in addition to its operating cash flow. The Bank 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, subject to a borrowing base as
described below, with maximum borrowings including letters of credit of
approximately $125.0 million, of which $56.7 million was available as of October
9, 1999, (iii) a $125.0 million delayed draw term loan, subject to a borrowing
base as described below, of which $55.0 million was available to the Company
through April 15, 2001, and (iv) a $90.0 million deferred term loan facility
which was drawn at the closing of the Western Merger. The availability under the
revolver and the delayed draw term loan is limited to borrowings that will allow
the Company to remain in compliance with debt covenants. As of October 9, 1999,
availability was limited to an aggregate of $35.0 million under the revolver and
delayed draw term loan. 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 $236.5 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 interest rates under the delayed draw facilities and the revolver
are determined by reference to a pricing grid that will provide for reductions
in the applicable interest rate margins based on the Company's trailing total
debt to EBITDA ratio (as defined in the Bank Credit Facility). 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 term loan and the deferred term loan facility
is based, at the option of the Company, on a Eurodollar rate plus 2.50% or a
base rate plus 1.50%.
The Bank Credit Facility contains covenants restricting the ability of the
Company and its subsidiaries to, among others things, (i) pay dividends on any
class of capital stock or make any payment to purchase, redeem, retire, acquire,
cancel or terminate capital stock, (ii) prepay, redeem, retire, acquire, cancel
or terminate debt, (iii) incur liens or engage in sale-leaseback transactions,
(iv) make loans, investments, advances or guarantees, (v) incur additional debt
(including hedging arrangements), (vi) make capital expenditures, (vii) engage
in mergers, acquisitions and asset sales, (viii) engage in transactions with
affiliates, (ix) enter into any agreement which restricts the ability to create
liens on property or assets or the ability of subsidiaries to pay dividends or
make payments on advances or loans to the Company or other subsidiaries; (x)
change the nature of the business conducted by the Company and its subsidiaries,
(xi) change the passive holding company status of Holding, and (xii) amend
existing debt agreements or the Company's or Holding's certificate of
incorporation, by-laws or other organizational documents. The Company is also
required to comply with financial covenants in the Bank Credit Facility with
16
<PAGE>
respect to (a) limits on annual aggregate capital expenditures, (b) a maximum
leverage ratio, (c) a minimum interest coverage ratio, and (d) a minimum
retained cash earnings test. The Company is generally prohibited from paying
dividends (including to Holding) except that as long as no defined event of
default under the Bank 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. The Company
believes it is in compliance with the above covenants under the Bank Credit
Facility as of October 9, 1999.
The loans under the Bank Credit Facility are secured by a first priority
security interest in 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. As of October 9, 1999, $237.7 million was available
under these facilities, net of $12.3 million outstanding for letters of credit.
The Company intends to use borrowings under the revolver and delayed draw term
loans for store expansion, the Parts America Conversion and funding of working
capital. Borrowings under the Bank 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 Bank 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 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 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 Debentures.
Seasonality
The Company's business is somewhat seasonal in nature, with the highest
sales occurring in the spring and summer months. In addition, the Company's
business is affected by weather conditions. While unusually heavy precipitation
tends to soften sales as elective maintenance is deferred during such periods,
extremely hot and cold weather tends to enhance sales by causing parts to fail.
Year 2000 Conversion
The following discussion about the implementation of the Company's Year
2000 program, the costs expected to be associated with the program and the
results the Company expects to achieve constitute forward-looking information.
As noted below, there are many uncertainties involved in the Year 2000 issue,
including the extent to which the Company will be able to adequately provide for
contingencies that may arise, as well as the broader scope of the Year 2000
issue as it may affect third parties and the Company's business partners.
Accordingly, the costs and results of the Company's Year 2000 program and the
extent of any impact on the Company's results of operations could vary
materially from that stated herein.
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. The Company believes it has completed the identification
of all necessary internal software changes required due to the Year 2000 issue.
During fiscal year 1998, the Company appointed an internal Year 2000 project
manager and remediation team and adopted a four phase approach of assessment,
remediation, testing, and contingency planning. The scope of the project
included 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, the remediation
17
<PAGE>
and testing phases are complete. Contingency planning for certain information
technology systems and business processes has been completed.
The Company has utilized internal and external resources to correct,
replace, and test its software and equipment for Year 2000 compliance. As of
August 31, 1999, the Company completed substantially all reprogramming required
to permit the proper functioning of all internal computer systems and equipment,
including the testing of such systems and equipment that will be operational on
December 31, 1999. The total cost of the Year 2000 project is estimated at $6.2
million. Of that cost, approximately $2.5 million represents the purchase of
new software and hardware, which will be capitalized. The remaining costs were
or will be expensed as incurred during fiscal 1998 and 1999. As of October 9,
1999, the Company has spent approximately $4.7 million on the Year 2000 project.
The Company's Year 2000 program is designed to minimize the possibility of
serious Year 2000 interruptions. Possible Year 2000 worst case scenarios
include the interruption of significant parts of the Company's business as a
result of critical information systems failure or the failure of vendors,
distributors or service providers. Since these possibilities cannot be
eliminated, ongoing communications have been established with almost all vendors
and other partners to monitor their progress in resolving Year 2000 issues, most
of which the Company believes are making substantial progress. However, the
Company cannot guarantee Year 2000 related systems issues of its business
partners will be corrected in a timely manner or the failure of its business
partners to correct these issues would not have a material adverse effect.
The Company has developed contingency plans in the event a business
interruption caused by Year 2000 problems should occur. For certain information
technology systems and business functions, contingency plans are in place.
Elements of the Company's contingency plans 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.
The cost and time estimated for the Year 2000 project are based on the
Company's best estimates. There can be no guarantee these estimates will be
achieved or planned results will be achieved. Risks factors include, but are not
limited to, the retention of internal and external resources dedicated to the
project, the timely delivery of software corrections from external vendors, and
the successful completion of key business partners' Year 2000 projects.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 1, 1999, the United States District Court of Appeals for the
Sixth District reaffirmed the decisions of the United States District Court for
the Western District of Kentucky. Those decisions held that the Company was
entitled to exclusive use of the name "Advance Auto Parts" throughout the United
States, except in Jefferson County, Kentucky, and the Company was entitled to
summary judgment in connection with various infringement and unfair competition
claims brought by the appellant.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 1, 1999, Holding issued and sold an aggregate of 5,000 shares of
its Class A common stock, $0.01 par value per share (the "Shares"), at a price
per share of $16.82 or an aggregate purchase price of $84,100 to an employee of
the Company other than a Company officer or director (the "Purchaser"). Holding
offered and sold the Shares pursuant to the Advance Holding Corporation 1998
Employee Stock Subscription Plan, as amended (the "Plan"), which the Company
filed as an exhibit to its Registration Statement on Form S-4, effective October
30, 1998 (Registration No. 333-56013). As consideration for the Shares, Holding
received $42,100 in cash, and $42,000 in the form of secured promissory notes,
the payment of which are secured by individual stock pledge agreements with the
Purchaser.
The issuance of the Shares was exempt from the registration requirements of
the Securities Act of 1933, as amended, pursuant to Rule 701 promulgated
thereunder, which exempts certain offers and sales of securities pursuant to
certain compensatory benefit plans. The Plan is a compensatory benefit plan
within the meaning of Rule 701 and the aggregate amount of securities sold by
Holding in reliance on Rule 701 during the applicable period has not exceeded
15% of the outstanding amount of Class A common stock.
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
20
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCE HOLDING CORPORATION,
a Virginia corporation
November 22, 1999 By: /s/ J. O'Neil Leftwich
__________________________________
J. O'Neil Leftwich
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
S-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JUL-18-1999
<PERIOD-END> OCT-09-1999
<CASH> 24,101
<SECURITIES> 0
<RECEIVABLES> 114,276
<ALLOWANCES> 3,278
<INVENTORY> 758,878
<CURRENT-ASSETS> 923,841
<PP&E> 565,925
<DEPRECIATION> 141,169
<TOTAL-ASSETS> 1,370,535
<CURRENT-LIABILITIES> 547,269
<BONDS> 0
0
0
<COMMON> 283
<OTHER-SE> 137,585
<TOTAL-LIABILITY-AND-EQUITY> 1,370,535
<SALES> 522,239
<TOTAL-REVENUES> 522,239
<CGS> 318,740
<TOTAL-COSTS> 318,740
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,232
<INCOME-PRETAX> 730
<INCOME-TAX> 539
<INCOME-CONTINUING> 191
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 191
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
