<PAGE>
As filed with the Securities and Exchange Commission on July _, 1998
Registration Nos. 333-56013 and 333-56013-01
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
___________________
ADVANCE STORES COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Virginia 5531 54-0118110
(State or other jurisdiction of (Primary Standard Industrial (Employer
incorporation or organization) Classification Code Number) Identification No.)
5673 Airport Road
Roanoke, Virginia 24012
(540) 362-4911
</TABLE>
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
____________________
See Table of Co-Registrant below
____________________
J. O'Neil Leftwich
Senior Vice President and
Chief Financial Officer, Secretary and Treasurer
Advance Stores Company, Incorporated
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
______________________
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. [_]
_____________________
THE REGISTRANT AND THE CO-REGISTRANT HEREBY AMEND THIS REGISTRATION
STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE
UNTIL THE REGISTRANT AND THE CO-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.
================================================================================
<PAGE>
TABLE OF CO-REGISTRANT
----------------------
<TABLE>
<CAPTION>
PRIMARY STANDARD I.R.S. EMPLOYER
STATE OR OTHER JURISDICTION INDUSTRIAL CLASSIFICATION IDENTIFICATION
NAME OF INCORPORATION CODE NUMBER NUMBER
- ---------------------- ---------------------------- ------------------------- --------------------
<S> <C> <C> <C>
LARALEV, INC.(1) Delaware 6794 51-0340295
</TABLE>
__________________
(1) Address, including zip code and telephone 103 Foulk Road
number, including area code, of principal Suite 200
executive office of co-registrant. Wilmington, Delaware 19803
(302) 427-0421
<PAGE>
PROSPECTUS
ADVANCE STORES COMPANY, INCORPORATED
Offer to Exchange its
10.25% Series B Senior Subordinated Notes due April 15, 2008,
which have been registered under the Securities Act,
for any and all of its outstanding
10.25% Series A Senior Subordinated Notes due April 15, 2008
The Exchange Offer will expire at 5:00 P.M., New York City time, on , 1998,
unless extended.
-------------------
Advance Stores Company, Incorporated (the "Company") 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 $1,000 principal amount of its 10.25% Series B Senior Subordinated
Notes due April 15, 2008 (the "Series B Notes") 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 each $1,000 principal amount of its outstanding 10.25% Series A
Senior Subordinated Notes due April 15, 2008 (the "Series A Notes"), of which
$200.0 million principal amount is outstanding as of the date hereof.
The Company will accept for exchange any and all validly tendered Series A
Notes prior to 5:00 P.M., New York City time, on , 1998,
unless extended (the "Expiration Date"). Series A Notes may be tendered only in
integral multiples of $1,000. Tenders of Series A Notes 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
Notes being tendered for exchange. However, the Exchange Offer is subject to
certain customary conditions. In the event the Company terminates the Exchange
Offer and does not accept for exchange any Series A Notes, the Company will
promptly return the Series A Notes to the holders thereof. The Company will not
receive any proceeds from the Exchange Offer. See "The Exchange Offer."
The Series B Notes will be obligations of the Company evidencing the same debt
as the Series A Notes, and will be entitled to the benefits of the same
indenture (the "Indenture"). See "Description of Series B Notes". The form and
terms of the Series B Notes are the same as the form and terms of the Series A
Notes in all material respects except that the Series B Notes 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 Notes. The
Series A Notes were issued on April 15, 1998 as part of the transactions
comprising the Recapitalization (as defined herein) to the Initial Purchasers
(as defined herein) pursuant to an offering exempt from registration under
Section 4(2) of the Securities Act. The Initial Purchasers subsequently resold
the Series A Notes in reliance on the exemption available under Rule 144A under
the Securities Act. The Series A Notes have not been registered under the
Securities Act, are subject to certain restrictions on transfer (including who
may purchase the Series A Notes) and may not be offered or sold except pursuant
to an 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 NOTES ON , 1998.
SEE "RISK FACTORS" ON PAGE 13 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.
<PAGE>
(Continuation of cover page)
The Series B Notes are being offered hereunder in order to satisfy certain
obligations of the Company under the Registration Rights Agreement, dated as of
April 15, 1998 (the "Exchange Offer Registration Rights Agreement"), by and
among the Company, the Guarantor (as defined) 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 the
Company's obligations under the Exchange Offer Registration Rights Agreement to
register the Series A Notes under the Securities Act. Once the Exchange Offer is
consummated, the Company will have no further obligations to register any of the
Series A Notes not tendered by the holders of the Series A Notes (the "Holders")
for exchange. See "Risk Factors--Consequences to Non-Tendering Holders of Series
A Notes".
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in several no-action letters to third
parties, the Company believes that the Series B Notes issued pursuant to the
Exchange Offer in exchange for Series A Notes 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 the Company, any Holder who intended to
participate in the Exchange Offer for the purpose of distributing the Series B
Notes or any broker-dealer who acquired Series A Notes directly from the Company
(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
Notes 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 Notes, 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 Notes". In addition, each broker-dealer
that receives Series B Notes 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 Notes. 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 Notes received in
exchange for Series A Notes where such Series A Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities and not acquired directly from the Company. The Company 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 NOTES.
Series A Notes were initially represented by two Global Series A Notes (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
Notes exchanged for Series A Notes represented by the Global Series A Notes may
be initially represented by one or more global securities ("Global Series B
Note") in fully registered form, each registered in the name of the nominee of
DTC. The Global Series B Note will be exchangeable for Series B Notes in
registered form, in denominations of $1,000 and integral multiples thereof as
described herein. The Series B Notes 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 Notes will therefore settle in
immediately available funds. See "Description of Series B Notes--Form,
Denomination and Book-Entry Procedures".
The Series B Notes will bear interest at a rate equal to 10.25% per annum
from their date of issuance. Interest on the Series B Notes is payable semi-
annually on April 15 and October 15 of each year, commencing October 15, 1998.
Holders whose Series A Notes are accepted for exchange will receive, in cash,
accrued interest thereon to, but not including, the date of issuance of the
Series B Notes. Such interest will be paid with the first interest payment on
the Series B Notes. Interest on the Series A Notes accepted for exchange will
cease to accrue interest upon cancellation of the Series A Notes and issuance of
the Series B Notes.
(Continued on following page)
i
<PAGE>
(Continuation of cover page)
The Series B Notes will be redeemable at the option of the Company, in
whole or in part, at any time on or after April 15, 2003, at the redemption
prices set forth herein plus accrued interest and Liquidated Damages 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
Series B 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 (as defined); provided that, in each case, at least 65% of the
initially outstanding aggregate principal amount of the Series B 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. See "Description of Series B Notes--
Optional Redemption." Upon the occurrence of a Change of Control, each holder of
Series B Notes will have the right to require the Company to repurchase all or
any part of such holder's Series B Notes 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. See "Description of
Series B Notes--Repurchase at the Option of Holders--Change of Control." There
can be no assurance that, in the event of a Change of Control, the Company would
have sufficient funds to purchase all Series B Notes tendered. See "Risk
Factors--Possible Inability to Purchase Series B Notes upon Change of Control."
The Series A Notes are, and the Series B Notes will be, general unsecured
obligations of the Company and will rank subordinate in right of payment to all
existing and future Senior Debt (as defined herein). Because the Series B Notes
will be senior subordinated obligations, the Company is not permitted to issue
any other indebtedness which is subordinate to any Senior Debt unless such other
indebtedness is pari passu or subordinated to the Series B Notes. The Series B
Notes will be effectively subordinated to any secured indebtedness of the
Company. The Series B Notes will be unconditionally guaranteed, on a senior
subordinated basis by each Restricted Subsidiary (as defined herein) of the
Company that guarantees any other indebtedness of the Company or any Restricted
Subsidiary (each, a "Guarantor"). The Subsidiary Guarantees will be general
unsecured obligations of the Guarantors and will rank subordinate in right of
payment to all existing and future Senior Debt of the Guarantors. Because the
Subsidiary Guarantees will be senior subordinated obligations, the Guarantors
are not permitted to issue any other indebtedness which is subordinated to
Senior Debt unless such other indebtedness is pari passu or subordinated to the
Subsidiary Guarantees. As of June 20, 1998, the Company had outstanding Senior
Debt of $135.0 million, no pari passu indebtedness and secured indebtedness of
$135.0 million, and the Guarantor had no Senior Debt other than its guarantee
under the New Credit Facility.
Prior to this offering, there has been no public market for the Series A
Notes. Following completion of the Exchange Offer, the Company does not intend
to list the Series B Notes on a national securities exchange or to seek approval
for quotation through the Nasdaq National Market. The Initial Purchasers have
informed the Company that they currently intend to make a market in the Series B
Notes. 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 Notes. As the Series A Notes were issued and the
Series B Notes will be issued to a limited number of institutions who typically
hold similar securities for investment, the Company does not expect that an
active public market for the Series B Notes will develop. In addition, resales
by certain holders of the Series A Notes or the Series B Notes 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
Notes. To the extent that a market for the Series B Notes should develop, the
market value of the Series B Notes will depend on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition, performance and prospects of the Company. Such factors might cause
the Series B Notes to trade at a discount from face value. See "Risk Factors--
Lack of a Public Market for the Series B Notes." The Company 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 STORES COMPANY, INCORPORATED, 5673 AIRPORT ROAD,
ROANOKE, VIRGINIA 24012, TELEPHONE NUMBER (540) 362-4911.
ii
<PAGE>
AVAILABLE INFORMATION
The Company 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 Notes 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 the
Company and the Series B Notes 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 any such contract or other document shall be deemed qualified in
its entirety by such reference.
Upon consummation of the Exchange Offer, the Company 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 the Company 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 Notes remain outstanding, the Company will make available, upon
request, to any holder and any prospective purchaser of the Series A Notes the
information required by Rule 144A(d)(4) under the Securities Act during any
period in which the Company is not subject to Section 13 or 15(d) of the
Exchange Act. Any such request should be mailed to Advance Stores Company,
Incorporated, 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 Notes are outstanding, the
Company 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. The Company will also,
within 15 days of filing each such report with the Commission, provide the
Trustee and the holders of the Series B Notes 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 Notes remain outstanding, the Company will provide the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act to
holders of the Series B Notes and to securities analysts and prospective
investors upon their request.
iii
<PAGE>
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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 the Company, including the
notes thereto, contained elsewhere in this Prospectus. Unless the context
otherwise requires, the "Company" refers to Advance Stores Company, Incorporated
and its subsidiaries, and "Holding" refers to Advance Holding Corporation, the
Company's parent, and its subsidiaries, including the Company. 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 April 25, 1998.
THE COMPANY
The Company is the second largest specialty retailer of automotive parts and
accessories in the United States (based on store count) and, as of April 25,
1998, had 863 stores in 16 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 863. From
fiscal 1992 through fiscal 1997, the Company increased net sales, net income and
pro forma EBITDA by a compound annual growth rate of 29.3%, 15.5% and 28.4%,
respectively. See Footnote (5) to "-- Summary Consolidated Historical and Pro
Forma Financial Data" for information with respect to pro forma EBITDA 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, Florida, Georgia,
Indiana, Kentucky, Maryland, Michigan, Mississippi, Ohio, Pennsylvania and West
Virginia. For fiscal 1997, net sales, net income and pro forma EBITDA 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 468 stores and expects to add approximately 25
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.
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:
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1
<PAGE>
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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 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 is
expanding the PDQ(R) system with the opening of a master PDQ(R) facility which
will initially provide approximately 70,000 SKUs and will have 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 completed by the end of 1998, the Company will be
able to service over 1,600 stores, satisfying expected store requirements for
the foreseeable future.
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
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2
<PAGE>
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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, 50 stores in 1998
and plans to open approximately 125 stores in the remainder of fiscal 1998. To
further support its growth, the Company expects to begin television advertising
on a national basis in late 1998. The Company believes that its proven ability
to effectively select new markets and store locations and quickly open new
stores will allow it to double 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.
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 468 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 25 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.
- --------------------------------------------------------------------------------
3
<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.
Management, other than Nicolas 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 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 the 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 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
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 and paid a dividend to Holding (the "Company
Distribution") which amounts were, together with the proceeds of the sale of
the 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 $112.0 million principal amount 12.875% Senior Discount Debentures
due 2009 (the "Debentures Offering") yielding $60.0 million in gross proceeds to
Holding and the offering of the Company's Series A Notes (the "Notes Offering")
are referred to herein collectively as the "Recapitalization." The Debentures
are unsecured senior obligations of Holding and are effectively subordinated to
the Series B Notes since they are not obligations of, or guaranteed by, the
Company. See "Description of Holding Indebtedness." The transactions
constituting the Recapitalization effecting the Company have been accounted for
as the issuance of debt, the repayment of intercompany debt to Holding and as a
dividend to Holding for financial reporting purposes.
The following table illustrates the sources and uses of funds in the
Recapitalization of Holding on a consolidated basis.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
SOURCES:
New Credit Facility............................................................................ $125.0
Series A 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.................. $351.0
Repayment of existing indebtedness (b)......................................................... 81.3
Transaction fees and expenses and other transaction payments................................... 22.8
Loans to management investors.................................................................. 2.6
Excess cash.................................................................................... 35.8
------
Total uses......................................................................... $493.5
======
</TABLE>
The following table illustrates the sources and uses of funds for the
transactions effected by the Company in connection with the
Recapitalization.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
SOURCES:
New Credit Facility............................................................................ $125.0
Series A Notes................................................................................. 200.0
------
Total sources...................................................................... $325.0
======
USES:
Dividend to Holding............................................................................ $183.0
Repayment of indebtedness to Holding (b)....................................................... 91.1
Transaction fees and expenses.................................................................. 19.6
Excess cash.................................................................................... 31.3
------
Total uses......................................................................... $325.0
======
</TABLE>
______________________
(a) Approximately $2.6 million of such contributions consisted 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).
RISK FACTORS
Holders of the Series A Notes should consider carefully all of the
information set forth in this Prospectus, and in particular, the information set
forth on page 13 under "Risk Factors" before tendering the Series A Notes in
exchange for the Series B Notes.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
TERMS OF SERIES B NOTES
Securities Offered... $200.0 million in aggregate principal amount of 10.25%
Series B Senior Subordinated Notes due 2008.
Issuer............... Advance Stores Company, Incorporated
Maturity Date........ April 15, 2008.
Interest Rate........ The Series B Notes 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.
Subordination........ The Series B Notes will be general unsecured obligations
of the Company and will rank subordinate in right of
payment to all existing and future Senior Debt. Because
the Series B Notes will be senior subordinated
obligations, the Company is not permitted to issue any
other indebtedness which is subordinate to any Senior
Debt unless such other indebtedness is pari passu or
subordinated to the Series B Notes. As of June 20, 1998,
the Series B Notes were subordinate to $135.0 million of
Senior Debt. In addition, the Company could have incurred
additional indebtedness of up to $240.0 million under the
New Credit Facility, which if borrowed, would be senior
to the Series B Notes. See "Risk Factors--Subordination
of the Series A Notes, Series B Notes and the Subsidiary
Guarantee."
Optional Redemption.. The Series B Notes will be 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 set forth
herein, 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 Series B 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
Series B 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. See
"Description of Series B Notes--Optional Redemption."
Change of Control.... Upon the occurrence of a Change of Control, each holder
of Series B Notes will have the right to require the
Company to repurchase all or any part of such holder's
Series B Notes 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. See "Description of Series B
Notes--Repurchase at the Option of Holders--Change of
Control." The New Credit Facility, which is senior to the
Series B Notes, includes events of default triggered by
(i) a Change in Control of the Company or Holding and
(ii) the occurrence of an event of default under the
other indebtedness of the Company in excess of $5.0
million. The New Credit Facility also prohibits the
Company from repurchasing the Series B Notes, including
upon a Change of Control. In addition, there can be no
assurance that, in the event of a Change of Control, the
Company would have sufficient funds to purchase all
Series B Notes tendered. See "Risk Factors--Possible
Inability to Purchase Series B Notes upon Change of
Control."
Guarantee............ The Series B Notes will be fully and unconditionally
guaranteed on a senior subordinated basis by each
Restricted Subsidiary of the Company that
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
guarantees any other indebtedness of the Company or any
Restricted Subsidiary. The Subsidiary Guarantees will be
general unsecured obligations of the Guarantors and will
rank subordinate in right of payment to all existing and
future Senior Debt of the Guarantors. Because the
Subsidiary Guarantees will be senior subordinated
obligations, the Guarantors are not permitted to issue
any other indebtedness which is subordinated to Senior
Debt unless such other indebtedness is pari passu or
subordinated to the Subsidiary Guarantees. The Series B
Notes will initially be guaranteed by LARALEV, INC.,
which owns trademarks and tradenames, and licenses the
Company to use such names and marks. The Company's only
other Subsidiary is Advance Trucking Corporation, which
was recently formed to hold title to certain Company
vehicles.
Certain Covenants..... The Indenture 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. See "Description of Series B Notes--Certain
Covenants."
Form and
Denomination.......... The Series B Notes initially sold by the Initial
Purchasers will be represented by Global Series B Notes
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
Notes 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 Notes are not entitled to any
exchange rights with respect to the Series B Notes.
Holders of Series A Notes are entitled to certain
exchange rights pursuant to the Exchange Offer
Registration Rights Agreement. Under the Exchange Offer
Registration Rights Agreement, the Company is required to
offer to exchange the Series A Notes for the Series B
Notes 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 Notes are the same as the form
and terms of the Series A Notes in all material respects
except that the Series B Notes 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
Notes. Once the Exchange Offer is consummated, the
Company will have no further obligations to register any
of the Series A Notes not tendered by the Holders for
exchange. See "Risk Factors--Consequences to Non-
Tendering Holders of Series A Notes."
Use of Proceeds....... The Company will not receive any proceeds from the
Exchange Offer.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER
The Exchange Offer.... $1,000 principal amount of Series B Notes in exchange for
each $1,000 principal amount of Series A Notes. As of the
date hereof, $200.0 million in aggregate principal amount
of Series A Notes were outstanding. The Company will
issue the Series B Notes 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,
the Company believes that Series B Notes issued pursuant
to the Exchange Offer in exchange for Series A Notes 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 Notes 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 Notes.
However, the Company 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 the
Company or who intends to participate in the Exchange
Offer for the purpose of distributing the Series B Notes
(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 Notes 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 Notes, 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 Notes."
Each broker-dealer that receives Series B Notes 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 Notes. 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
Notes received in exchange for Series A Notes where such
Series A Notes were acquired by such broker-dealer as a
result of market-making activities or other trading
activities and not acquired directly from the Company.
The Company 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.
Interest on the Series
B Notes; Accrued
Interest on the
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
Series A Notes..... The Series B Notes will bear interest from their issuance
date. Holders whose Series A Notes are accepted for
exchange will receive, in cash, accrued interest thereon
to, but excluding, the issuance date of the Series B Notes.
Such interest will be paid with the first interest payment
on the Series B Notes. Interest on the Series A Notes
accepted for exchange will cease to accrue upon
cancellation of the Series A Notes and issuance of the
Series B Notes. Holders of Series A Notes whose Series A
Notes are not exchanged will receive the accrued interest
payable on October 15, 1998 on such date in accordance with
the terms of the Indenture.
Conditions to the
Series B Notes..... 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
the Company to proceed with the Exchange Offer. As of April
25, 1998, none of these events had occurred, and the
Company believes their occurrence to be unlikely. If any
such conditions do exist prior to the Expiration Date, the
Company may (i) refuse to accept any Series A Notes and
return all previously tendered Series A Notes, (ii) extend
the Exchange Offer or (iii) waive such conditions. See "The
Exchange Offer--Conditions."
Procedures for
Tendering Series A
Notes.............. Each Holder of Series A Notes 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 Notes 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 Notes pursuant to the procedures for book-
entry transfer as provided for herein. By executing the
Letter of Transmittal, each Holder will represent to the
Company that, among other things, the Series B Notes
acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the person receiving
such Series B Notes, 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 Notes and
that neither the Holder nor any such person is an
"affiliate," as defined in Rule 405 under the Securities
Act, of the Company. Each broker-dealer that receives
Series B Notes for its own account in exchange for Series A
Notes, where such Series A Notes were acquired by such
broker-dealer as a result of market-making activities or
other trading activities and not acquired directly from the
Company, must acknowledge that it will deliver a prospectus
in connection with any resale of such Series B Notes. See
"The Exchange Offer--Procedures for Tendering" and "Plan of
Distribution."
Special Procedures
for Beneficial
Owners............. Any beneficial owner whose Series A Notes are registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender such
Series A Notes 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
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
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 Notes, either make
appropriate arrangements to register ownership of the
Series A Notes in such owner's name or obtain a properly
completed bond power from the registered Holder. The
transfer of registered ownership may take considerable 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 Notes who wish to tender their Series A
Notes and whose Series A Notes are not immediately
available or who cannot deliver their Series A Notes, 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 Notes 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 Notes and Delivery
of Series B Notes... The Company will accept for exchange any and all Series A
Notes 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 Notes issued pursuant to the Exchange
Offer will be delivered promptly following the Expiration
Date. Any Series A Notes 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."
Certain Tax
Considerations...... The exchange pursuant to the Exchange Offer should not be a
taxable event for Federal income tax purposes. See "Certain
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
The Company'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 Notes, see "Description of
Series B Notes" and "Certain Federal Income Tax Considerations."
- --------------------------------------------------------------------------------
9
<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 the Company. The summary
consolidated historical financial information of the Company for each of the
five fiscal years presented below has been derived from the audited consolidated
financial statements of the Company which have been audited by Arthur Andersen
LLP. The summary consolidated historical financial information of the Company
for the sixteen weeks ended April 19, 1997 and April 25, 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 the Company and notes thereto and the Unaudited Pro Forma
Consolidated Financial Data and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR(1) SIXTEEN WEEKS ENDED
------------------------------------------------ ------------------------------
PRO PRO
FORMA APRIL APRIL FORMA
FISCAL 19, 25, APRIL
1993 1994 1995 1996 1997 1997(2) 1997 1998 25,1998
-------- ------- ------- -------- ------ -------- -------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................... $365,241 $482,347 $602,559 $705,983 $848,108 $848,108 $239,151 $288,963 $ 288,963
Gross profit................ 137,491 184,903 232,597 268,368 323,522 323,522 92,291 112,586 112,586
Selling, general and
administrative
expenses(3)................ 117,733 155,457 196,153 228,049 279,924 278,039 82,008 99,178 98,441
Expenses associated with
recapitalization........... -- -- -- -- -- -- -- (14,005) --
Operating income (loss)..... 19,758 29,446 36,444 40,319 43,598 45,483 10,283 (597) 14,145
Net income (loss)(4)........ 10,964 22,832 16,705 20,212 20,372 5,528 4,400 (2,439) 1,725
OTHER DATA:
EBITDA(5)................... $ 28,953 $ 42,694 $ 51,243 $ 57,818 $ 65,399 $ 68,166 $ 16,578 $ 6,889 $ 21,631
EBITDAR(6).................. 44,792 64,893 82,427 96,423 113,697 116,476 30,247 24,305 39,047
Pro forma cash interest
expense(7)................. 31,938 10,416
Capital expenditures........ 25,316 25,781 42,939 44,264 48,864 48,864 9,658 15,813 15,813
Ratio of earnings to
fixed charges(8)........... 3.43x 4.29x 2.70x 2.78x 2.47x 1.17x 2.07x -- --
Percentage increase in
comparable store
sales(9)................... 17.3% 9.5% 1.7% 1.1% 5.1% 5.1% 10.4% 3.9% 3.9%
Net cash provided by
(used in) operating
activities................. 6,697 (5,358) 26,854 22,991 41,484 12,435 15,242
Net cash used in
investing activities....... (25,275) (14,201) (39,855) (44,121) (48,607) (9,603) (11,672)
Net cash provided by
(used in) financing
activities................. 18,578 19,559 22,925 13,777 7,638 (3,376) 25,523
PRO FORMA CREDIT RATIOS:
Ratio of EBITDA to cash
interest expense(7)........ 2.13x 2.08x
SELECTED STORE DATA:
New stores.................. 81 90 104 115 170 170 26 50 50
Number of stores (end of
period).................... 352 437 536 649 814 814 675 863 863
Stores with commercial
delivery program (end of
period).................... -- -- -- 213 421 421 296 468 468
Total store square footage
(000s)(end of period)
(10)........................ 2,408 3,150 3,939 4,710 5,857 5,857 4,895 6,180 6,180
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AT APRIL 25,
1998
------------
(DOLLARS IN
THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(11).................................. $ 36,540
Net working capital(12)........................................ 136,313
Net working capital, as adjusted(13)........................... 99,773
Total assets................................................... 562,975
Total debt..................................................... 335,000
Stockholder's deficit.......................................... (56,270)
</TABLE>
______________________
(1) The Company's fiscal year consists of 52 or 53 weeks ending on the Saturday
nearest to December 31. All fiscal years presented are 52 weeks except for
fiscal year 1997, which consists of 53 weeks. The Company's first fiscal
quarter consists of 16 weeks.
(2) The pro forma data for fiscal 1997 and the sixteen weeks ended April 25,
1998 sets forth the financial data of the Company as adjusted to give
effect to the Recapitalization which includes: (i) borrowings of $125.0
million under the New Credit Facility, the issuance of $200.0 million of
Series A Notes, (ii) the payment of $17.1 million of debt issuance costs,
and (iii) the repayment of $97.1 million of intercompany debt. The pro
forma consolidated statement of operations data excludes non-recurring
management bonuses of $11.5 million and $2.5 million of other expenses in
connection with the Recapitalization. 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 1997 historical and pro forma amounts include an unusual medical
claim that exceeded the Company's stop loss insurance coverage. The Company
has increased its stop loss coverage effective January 1, 1998 to a level
that would provide coverage for a medical claim of this magnitude. The pre-
tax amount of this claim, net of related increased insurance costs, was
$0.9 million. In addition, fiscal 1997 amounts exclude $1.0 million of
certain payroll and insurance costs that were allocated to Holding that are
expected to be incurred by the Company in the future.
(4) Fiscal 1994 includes a net after-tax gain of $6.7 million on the sale of
equity securities of TBC Corporation, a distributor of automotive products
in which the Company held a minority equity ownership interest.
(5) EBITDA represents operating income plus depreciation and amortization
included in operating income. While 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. The Company has
included it herein because management believes this information is useful
to investors as such measures provide additional information with respect
to the Company's ability to meet its future debt service, capital
expenditures and working capital requirements and, in addition, certain
covenants in the Indenture and the New Credit Facility are based upon an
EBITDA calculation. The Company's method for calculating EBITDA may differ
from similarly titled measures reported by other companies. Pro forma
EBITDA represents EBITDA, as defined above, plus management's estimate of
the elimination 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 will not be incurred after the
Recapitalization, non-recurring management bonuses and other expenses
incurred in connection with the Recapitalization, other unusual expenses
and allocation of certain costs to Holding (see Note 3 above).
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
The computation of pro forma EBITDA is set forth as follows:
<TABLE>
<CAPTION>
PRO FORMA
SIXTEEN WEEKS
PRO FORMA ENDED
FISCAL 1997 APRIL 25, 1998
-------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Historical EBITDA........................................................ $65,399 $ 6,889
Private company expenses(a)............................................. 3,056 845
Unusual medical claim(b)................................................ 882 --
Allocation of costs to Holding that are expected to be incurred by the
Company in the future(c)............................................... (1,017) --
Costs incurred at Holding that are expected to be incurred by the
Company in the future(d)............................................... (154) (108)
Non-recurring Recapitalization expenses(e).............................. -- 14,005
----------- ----------
Pro forma EBITDA........................................................ $68,166 $21,631
=========== ==========
</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 (See Note
3 above).
(c) Represents certain payroll and insurance costs that were allocated to
Holding.
(d) Represents primarily general and administrative costs of Holding
subsidiaries other than the Company.
(e) Represents non-recurring management bonuses and other expenses
incurred in connection with the Recapitalization.
(6) EBITDAR represents EBITDA plus operating lease expense. Because the
proportion of stores leased versus owned varies among industry competitors,
the Company believes that EBITDAR permits a meaningful comparison of
operation performance among industry competitors. The Company leases
substantially all of its stores. Pro forma EBITDAR includes approximately
$12,000 of lease expense in fiscal 1997 and $1,000 of lease expense in the
sixteen weeks ended April 25, 1998 that is included in the costs incurred
by Holding that are expected to be incurred by the Company in the future
(See Note 5 above).
(7) Cash interest expense represents total interest expense, excluding
amortization of deferred debt issuance costs.
(8) For purposes of computing the historical ratio of earnings to fixed
charges, earnings represent income (loss) before income taxes plus fixed
charges. For purposes of computing the pro forma ratio of earnings to fixed
charges, earnings represents historical income before income taxes,
adjusted for pro forma changes in interest expense, plus fixed charges.
Fixed charges consist of interest expense (including amortization of
deferred debt issuance cost) 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 ratio has not been computed
(on a historical and pro forma basis) for the sixteen weeks ended April
25, 1998 since earnings were not sufficient to cover fixed charges. The
coverage deficiency was $4,127 and $11,929 on a historical and pro forma
basis, respectively.
(9) 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.
(10) Total store square footage is based on the Company's actual store formats
and includes normal selling, office, stockroom and receiving space.
(11) Subsequent to April 25, 1998, Holding made a capital contribution to the
Company of $8.3 million.
(12) Net working capital represents total current assets less total current
liabilities.
(13) Net working capital, as adjusted, represents total current assets excluding
cash and cash equivalents, less total current liabilities excluding bank
overdrafts 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.
- --------------------------------------------------------------------------------
12
<PAGE>
RISK FACTORS
In evaluating the Exchange Offer, Holders of the Series A Notes should
carefully consider the following factors in addition to the other information
contained in this Prospectus.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
The Company has substantial indebtedness and debt service obligations. The
Company has entered into the indenture governing the Series A Notes and the
Series B Notes (the "Indenture") pursuant to which it 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 April 25, 1998, (i) the Company and its
subsidiaries had $135.0 million of indebtedness that constituted Senior Debt and
$258.8 million of trade payables and other accrued liabilities, (ii) the Company
had a stockholder's deficit of $56.3 million, and (iii) the Guarantor had no
outstanding indebtedness other than its guarantee of the Company's obligations
under the New Credit Facility. In addition, the Company is permitted to incur
additional indebtedness of up to $250.0 million under the New Credit Facility
which, if borrowed, would be senior to the Series B Notes. See "Description of
Series B Notes" and "Description of the New Credit Facility."
The level of the Company's indebtedness may have important consequences to
the holders of Series B Notes, including: (i) the ability of the Company to
obtain additional debt financing in the future for acquisitions, working capital
and capital expenditures may be limited; (ii) a substantial portion of the
Company's cash flow must be dedicated to debt service and will not be available
for other purposes; (iii) the Company's level of indebtedness could limit its
flexibility in reacting to changes in its operating environment and economic
conditions generally and (iv) the covenants contained in the Company's debt
instruments, including the Indenture, limit the Company's ability to, among
other things, borrow additional funds, dispose of assets or make investments.
In order to satisfy the Company's obligations under the Series B 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, the Company must generate substantial operating cash
flow. The ability of the Company to meet debt service and other obligations or
to refinance any such obligation will depend on the future performance of the
Company, which will be subject to prevailing economic conditions and to
financial, business and other factors beyond the control of the Company. In
addition, the New Credit Facility and the IRB will mature prior to the maturity
of the Series B Notes. While the Company believes that, based on current levels
of operations, it will be able to meet its 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, 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 the Company.
SUBORDINATION OF THE SERIES A NOTES, SERIES B NOTES AND THE SUBSIDIARY GUARANTEE
The Series A Notes and the Subsidiary Guarantee are, and the Series B Notes
will be, unsecured senior subordinated obligations of the Company and the
Guarantor, subordinate in right of payment to all existing and future Senior
Debt of the Company and the Guarantor, respectively, which include all present
and future borrowings under the New Credit Facility. Additional indebtedness,
including Senior Debt, may be incurred by the Company and the Guarantor from
time to time subject to certain restrictions contained in the New Credit
Facility and the Indenture.
In the event of a bankruptcy, liquidation or reorganization of the Company,
the assets of the Company will be available to pay obligations on the Series B
Notes only after all Senior Debt has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on any or all of the Series B
Notes then outstanding. The Company may not pay principal or premium, if any, or
interest or Liquidated Damages, if any, on the Series B
13
<PAGE>
Notes if Senior Debt, including indebtedness under the New Credit Facility, is
not paid when due. In addition, if any default occurs with respect to such
Senior Debt, and certain other conditions are satisfied, the Company may not
make any payments on the Series B Notes for a designated period of time.
Finally, if any judicial proceeding is pending with respect to any such default
in payment on any Senior Debt, or other default with respect to certain Senior
Debt, including indebtedness under the New Credit Facility, or if the maturity
of the Series B Notes is accelerated because of a default under the Indenture
and such default constitutes a default with respect to any Senior Debt, the
Company may not be able to make any payment on the Series B Notes. If the
Company incurs any additional pari passu debt, the holders of such debt would be
entitled to share ratably with the holders of Series B Notes in any proceedings
in connection with any insolvency, liquidation, reorganization, dissolution or
other winding up of the Company. See "Description of Series B Notes--
Subordination."
RESTRICTIONS UNDER THE NEW CREDIT FACILITY
The New Credit Facility contains, 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 may be affected by events beyond its control. A failure
to make any required payment under the New Credit Facility or a failure to
comply with any of the financial and operating covenants included in the New
Credit Facility 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. Additionally, the Company's ability to make
scheduled interest payments and/or principal payments, if then due, on the
Series B Notes may be prohibited during the existence of a default under the New
Credit Facility or such other indebtedness. See "Description of Series B Notes--
Subordination" and "--Certain Covenants." If the lenders under the New Credit
Facility 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 and its other indebtedness, including
the Series B Notes.
The indebtedness under the New Credit Facility is secured by a first
priority lien on substantially all of the assets of the Company and the
Guarantor now owned or hereafter acquired and is guaranteed by the Guarantor.
Holding has also issued a guarantee of the loans 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 and Holding's other subsidiaries. The
New Credit Facility matures prior to the maturity of the Series B Notes. See
"Description of the New Credit Facility."
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. See "Business--
Store Location and Development Strategy."
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
14
<PAGE>
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. controls approximately 79.7% of the outstanding
voting securities of Holding. As a result, FS&Co. has the ability to control
Holding's, and thus the Company's, management, policies and financing decisions.
See "Management."
POSSIBLE INABILITY TO PURCHASE SERIES B NOTES UPON CHANGE OF CONTROL
Upon a Change of Control (as defined in the Indenture), the Company will be
required to offer to repurchase all of the outstanding Series B Notes 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
the Company will have sufficient funds available or will be permitted by its
other debt agreements to purchase the Series B Notes upon the occurrence of a
Change of Control. In addition, a Change of Control may cause a default under
the New Credit Facility and other Senior Debt of the Company, in which case the
subordination provisions of the Series B Notes would require payment in full of
all such Senior Debt of the Company before repurchase of the Series B Notes. See
"Description of the Series B Notes--Subordination" and "Description of the
Series B Notes--Repurchase at the Option of Holders--Change of Control." The
inability to purchase all of the tendered Series B Notes, would constitute an
event of default under the Indenture which would, in turn, constitute a default
under the New Credit Facility and could constitute a default under other Senior
Debt.
LACK OF A PUBLIC MARKET FOR THE SERIES B NOTES
The Series B Notes are being offered to the Holders of the Series A Notes.
Prior to this Exchange Offer, there has been no public market for the Series A
Notes. The Company does not intend to apply for listing of the Series B Notes
on any securities exchange or for quotation through the Nasdaq National Market.
The Initial Purchasers have informed the Company that they currently intend to
make a market in the Series B Notes. However, the Initial Purchasers are not
obligated to do so and any such market making may be discontinued at any
15
<PAGE>
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 Notes. As
the Series A Notes were issued and the Series B Notes will be issued to a
limited number of institutions who typically hold similar securities for
investment, the Company does not expect that an active public market for the
Series B Notes will develop. In addition, resales by certain holders of the
Series A Notes or the Series B Notes 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 Notes. To the
extent that a market for the Series B Notes should develop, the market value of
the Series B Notes will depend on prevailing interest rates, the market for
similar securities and other factors, including the financial condition,
performance and prospects of the Company. Such factors might cause the Series B
Notes to trade at a discount from face value.
FRAUDULENT CONVEYANCE
The payments made in connection with the Recapitalization to stockholders
of Holding, the repayment of indebtedness of the Company and Holding, and the
related incurrence by the Company of indebtedness under the Series A Notes and
the Series B Notes 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 the Company. Under these laws, if a court were to find
that, after giving effect to the sale of the Series A Notes, the application of
the net proceeds therefrom, and the issuance of Series B Notes, either (a) the
Company 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) the Company
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 the Company 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 the Company, avoid the issuance of
such indebtedness and direct the repayment of any amounts paid thereunder to the
Company'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 Notes would ever be recovered by holders of the Series B Notes.
There can be no assurance that a court would not determine, regardless of
whether the Company was solvent on the date the Series A Notes were issued, that
(i) the payments made in connection with the Recapitalization constituted
fraudulent transfers on another ground or (ii) the Company did not receive fair
consideration or reasonably equivalent value for the incurrence of the
indebtedness evidenced by the Series A Notes and the Series B Notes.
The Company's obligations under the Series A Notes are, and the Series B
Notes will be, guaranteed by the Guarantor. The incurrence by a Guarantor of
the Subsidiary Guarantee may be subject to review under relevant state and
federal fraudulent conveyance laws if a bankruptcy case or lawsuit is commenced
by or on behalf of unpaid creditors of the Guarantor. Under these laws, if a
court were to find that either (a) the Subsidiary Guarantee was incurred by a
Guarantor with the intent of hindering, delaying or defrauding creditors or the
Guarantor contemplated insolvency with a desire to prefer one or more creditors
to the exclusion in whole or in part of others or (b) the Guarantor received
less than reasonably equivalent value or consideration for incurring the
Subsidiary Guarantee 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 the Guarantor 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 the
Subsidiary Guarantee to presently existing and future indebtedness of the
Guarantor, avoid the issuance of the Subsidiary Guarantee and direct the
repayment of any amounts paid thereunder to the Guarantor's creditors or take
other action detrimental to the holders of the Subsidiary Guarantee. A legal
challenge of the Subsidiary Guarantee on fraudulent conveyance grounds, may,
among other things, focus on the benefits, if any, realized by the Guarantor as
a result of the issuance by the Company of the Series A Notes and the Series B
Notes.
To the extent the Subsidiary Guarantee was avoided as a fraudulent
conveyance or held unenforceable for any other reason, or, by the terms of such
Subsidiary Guarantee, the obligations thereunder were reduced as necessary to
prevent such avoidance, holders of the Series A Notes and the Series B Notes
would to such extent cease to have any claim in respect of the Guarantor. In
such event, the claims of the holders of the applicable
16
<PAGE>
Series A Notes and the Series B Notes against the Guarantor would be subject to
the prior payment of all liabilities and preferred stock claims of the
Guarantor. There can be no assurance that, after providing for all prior claims
and preferred stock interests, if any, there would be sufficient assets to
satisfy the claims of the holders of the applicable Series A Notes and the
Series B Notes relating to any voided portions of the Subsidiary Guarantee.
The measure of insolvency for purposes of the foregoing considerations
varies depending upon the law of the jurisdiction which is being applied.
Generally, however, the Company would be considered insolvent if the sum of 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 the Company'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 the Company believes that the Series A Notes, the Series B Notes
and Subsidiary Guarantee are being incurred for proper purposes and in good
faith and that at the time the Series A Notes, the Series B Notes, and
Subsidiary Guarantee are issued the Company and the Guarantor 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, the Company 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 the Company would be adopted by a court or that a court would concur with the
Company's conclusions.
CONSEQUENCES TO NON-TENDERING HOLDERS OF SERIES A NOTES
Upon consummation of the Exchange Offer, the Company will have no further
obligation to register the Series A Notes. Thereafter, any Holder of Series A
Notes who does not tender its Series A Notes in the Exchange Offer, including
any Holder which is an "affiliate" (as that term is defined in Rule 405 of the
Securities Act) of the Company which cannot tender its Series A Notes 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 the Company
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 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; the
Company's substantial leverage and debt service obligations; restrictions on 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; 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. 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.
17
<PAGE>
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Exchange Offer Registration Rights Agreement. The Company
will not receive any cash proceeds from the issuance of the Series B Notes
offered in the Exchange Offer. In consideration for issuing the Series B Notes
as contemplated in this Prospectus, the Company will receive in exchange Series
A Notes 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 Notes except that
the Series B Notes 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 Notes. The Series A Notes surrendered in
exchange for Series B Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the Series B Notes will not result in any increase in
the indebtedness of the Company.
Net proceeds from the Notes Offering were approximately $200.0 million.
Such proceeds, together with the borrowings of $125.0 million under the New
Credit Facility, were distributed to Holding ($183.0 million) or used to repay
intercompany obligations to Holding of $91.1 million and pay transaction-
related fees and expenses of approximately $19.6 million. The Company had excess
cash of $31.3 million. See "Summary--The Recapitalization."
18
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of April 25, 1998 and its capitalization on a pro forma basis after giving
effect to the Recapitalization. See "Summary--The Recapitalization" and "Use of
Proceeds." This table should be read in conjunction with "Unaudited Pro Forma
Consolidated Financial Data" and the consolidated financial statements of the
Company and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
APRIL 25,
1998
------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Cash and cash equivalents..................................... $ 36,540(1)
=========
Debt:
Industrial Development Revenue Bonds......................... $ 10,000
New Credit Facility.......................................... 125,000
Notes Offering............................................... 200,000
---------
Total Debt................................................. 335,000
Stockholder's deficit........................................ (56,270)
---------
Total capitalization......................................... $278,730
=========
</TABLE>
_____________________
(1) Amount reflects unused proceeds from the Recapitalization that are available
for working capital needs. Subsequent to April 25, 1998, Holding made a
capital contribution to the Company of $8.3 million.
19
<PAGE>
THE EXCHANGE OFFER
PURPOSES OF THE EXCHANGE OFFER
The Series A Notes were issued and sold by the Company on April 15, 1998 to
Donaldson, Lufkin & Jenrette Securities Corporation and Chase Securities Inc.
(collectively, the "Initial Purchasers"), who subsequently resold the Series A
Notes 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 Notes, the Company and the Initial Purchasers
entered into the Exchange Offer Registration Rights Agreement pursuant to which
the Company 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 Notes. However, if the Exchange
Offer is not permitted by applicable law or, under certain circumstances, if the
holders shall so request, the Company will, at its own expense, (a) as promptly
as practicable, file a shelf registration statement covering resales of the
Series A Notes (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 the Company to satisfy its obligations
pursuant to the Exchange Offer Registration Rights Agreement. The form and terms
of the Series B Notes are the same as the form and terms of the Series A Notes
in all material respects except that the Series B Notes 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 Notes. Once the Exchange
Offer is consummated, the Company will have no further obligations to register
any of the Series A Notes not tendered by the Holders for exchange. See "Risk
Factors--Consequences to Non-Tendering Holders of Series A Notes". 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, the Company believes that
Series B Notes issued pursuant to the Exchange Offer in exchange for Series A
Notes 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 Notes 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
Notes. However, the Company 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 the Company or who intends to participate in the
Exchange Offer for the purpose of distributing the Series B Notes (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 Notes 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 Notes, 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 Notes".
In addition, each broker-dealer that receives Series B Notes for its own
account in exchange for Series A Notes, where such Series A Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities and not acquired directly from the Company, must acknowledge that it
will deliver a copy of this Prospectus in connection with any resale of such
Series B Notes. 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 Notes.
20
<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, the Company will
accept any and all Series A Notes validly tendered and not withdrawn prior to
5:00 p.m., New York City time, on the Expiration Date. The Company will issue
$1,000 principal amount of Series B Notes in exchange for each $1,000 principal
outstanding Series A Notes accepted in the Exchange Offer. Holders may tender
some or all of their Series A Notes pursuant to the Exchange Offer. However,
Series B Notes may be tendered only in integral multiples of $1,000.
As of April 15, 1998, there was $200.0 million aggregate principal amount
of the Series A Notes outstanding and one registered Holder of Series A Notes.
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 Notes, the Company arranged
for the Series A Notes to be issued and transferable in book-entry form through
the facilities of DTC, acting as depository. The Series B Notes also will be
issued and transferable in book-entry form through DTC. See "Description of
Series B Notes--Form, Denomination and Book-Entry Procedures."
The Company shall be deemed to have accepted validly tendered Series A
Notes when, as and if the Company 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 Notes for the purpose of receiving the Series B Notes from
the Company.
If any tendered Series A Notes 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 Notes will be returned,
without expense, to the tendering Holder thereof as promptly as practicable
after the Expiration Date.
Holders of Series A Notes 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 Notes pursuant to the Exchange Offer. The Company 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 the
Company 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, the Company will notify the
Exchange Agent and the record Holders of Series A Notes 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 the Company 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 Notes are tendered.
The Company reserves the right to delay accepting any Series A Notes, to
extend the Exchange Offer, to amend the Exchange Offer or to terminate the
Exchange Offer and not accept Series A Notes not previously accepted if any of
the conditions set forth herein under "--Conditions" shall have occurred and
shall not have been waived by the Company 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 the Company to constitute a material
change, the Company will promptly disclose such amendment in a manner reasonably
calculated to inform the Holders of such amendment and the Company 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
21
<PAGE>
disclosure to Holders of the Series A Notes, if the Exchange Offer would
otherwise expire during such five to 10 business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
the Company 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.
ACCRUED INTEREST ON THE SERIES B NOTES AND THE SERIES A NOTES
The Series B Notes will bear interest at a rate equal to 10.25% per annum
from their date of issuance. Interest on the Series B Notes is payable semi-
annually on April 15 and October 15 of each year, commencing on October 15,
1998. Holders whose Series A Notes are accepted for exchange will receive, in
cash, accrued interest thereon to, but excluding, the date of issuance of the
Series B Notes. Such interest will be paid with the first interest payment on
the Series B Notes. Interest on the Series A Notes accepted for exchange will
cease to accrue upon cancellation of the Series A Notes and issuance of the
Series B Notes. Holders of Series A Notes whose Series A Notes are not exchanged
will receive the accrued interest payable on October 15, 1998.
PROCEDURES FOR TENDERING
The tender to the Company of the Series A Notes 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 Notes) who wishes to tender Series A Notes 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
Notes (i) certificates for such Series A Notes 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 Notes into
the Exchange Agent's account at The Depositary 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 NOTES, 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 NOTES
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 NOTES 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 NOTES, EITHER MAKE APPROPRIATE ARRANGEMENTS TO REGISTER OWNERSHIP
OF THE SERIES A NOTES 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.
22
<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 Notes 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 Notes listed therein, such Series A Notes must
be endorsed or accompanied by appropriate bond powers signed as the name of the
registered Holder or Holders appears on the Series A Notes.
If the Letter of Transmittal or any Series A Notes 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 the
Company, evidence satisfactory to the Company 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 Notes and withdrawal of tendered
Series A Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Series A Notes not properly tendered or any Series A
Notes the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Series A Notes. The
Company'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 Notes must be cured within such time as the
Company shall determine. Neither the Company, 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 Notes, nor shall any of them incur any
liability for failure to give such notification. Tenders of Series A Notes will
not be deemed to have been made until such irregularities have been cured or
waived. Any Series A Notes 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 Notes, unless otherwise provided in the Letter of Transmittal, as soon as
practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Series A Notes 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 Notes 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 the Company that, among other
things, the Series B Notes 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 Notes, and that such Holder is not an "affiliate", as defined under Rule 405
of the Securities Act, of the Company. If the Holder is a broker-dealer that
will receive Series B Notes for its own account in exchange for Series A Notes
that were acquired as a result of market-making activities or other trading
activities and not acquired directly from the Company, such Holder by tendering
will acknowledge that it will deliver a prospectus in connection with any resale
of such Series B Notes. See "Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Series A Notes and (i) whose Series A
Notes are not immediately available, or (ii) who cannot deliver their Series A
Notes, the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, may effect a tender if:
23
<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 Notes, the certificate number or
numbers of such Series A Notes and the principal amount of Series A Notes
tendered, stating that the tender is being 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 Notes 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 Notes 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 Notes in proper form for transfer (or confirmation of a book-entry
transfer into the Exchange Agent's account at DTC of Series A Notes 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 Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Series A Notes 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 Notes 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 Notes to be withdrawn (the
"Depositor"), (ii) identify the Series A Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Series A Notes),
(iii) be signed by the Holder in the same manner as the original signature on
the Letter of Transmittal by which such Series A Notes 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 Notes register the
transfer of such Series A Notes into the name of the person withdrawing the
tender, and (iv) specify the name in which any such Series A Notes 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 the Company, whose determination shall be final and binding on
all parties. Any Series A Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no Series B Notes will
be issued with respect thereto unless the Series A Notes so withdrawn are
validly retendered. Any Series A Notes 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 Notes 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, the Company will not
be required to accept for exchange, or exchange Series B Notes for, any Series A
Notes not theretofore accepted for exchange, and may terminate or amend the
Exchange Offer as provided herein before the acceptance of such Series A Notes,
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
24
<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 the Company, might impair the ability of the Company 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 the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer.
If any such conditions exist, the Company may (i) refuse to accept any
Series A Notes and return all tendered Series A Notes to exchanging Holders,
(ii) extend the Exchange Offer and retain all Series A Notes tendered prior to
the expiration of the Exchange Offer, subject, however, to the rights of Holders
to withdraw such Series A Notes (see "--Withdrawal of Tenders") or (iii) waive
certain of such conditions with respect to the Exchange Offer and accept all
properly tendered Series A Notes which have not been withdrawn or revoked. If
such waiver constitutes a material change to the Exchange Offer, the Company
will promptly disclose such waiver in a manner reasonably calculated to inform
Holders of Series A Notes of such waiver.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company 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, the
Company is not permitted to complete the Exchange Offer, then the Company shall
file a Shelf Registration Statement. Thereafter, the Company'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>
<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 the Company. 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 the Company and its affiliates.
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company may
25
<PAGE>
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 Notes,
and in handling or forwarding tenders for exchange.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company, 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.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Series A Notes pursuant to the Exchange Offer. If, however, certificates
representing Series B Notes or Series A Notes 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 Notes tendered, or if tendered Series A Notes 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 Notes
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 Notes will be recorded at the same carrying value as the
Series A Notes are reflected in the Company'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 Notes.
26
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data (the "Pro
Forma Financial Data") has been prepared by the Company's management from the
consolidated financial statements of the Company and the notes thereto included
elsewhere in this Prospectus. The unaudited pro forma consolidated statements of
operations for the fiscal year ended January 3, 1998 and the sixteen weeks ended
April 25, 1998 reflect adjustments as if the Recapitalization had been
consummated and was effective as of the beginning of the fiscal year ended
January 3, 1998. In connection with the Recapitalization of Holding, the Company
used net proceeds of $325.0 million from borrowings under the New Credit
Facility and the issuance of Senior Subordinated Notes primarily to repay all
intercompany debt and to make a dividend to Holding. See "Summary -- The
Recapitalization." The unaudited 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 as well as the costs that were incurred or will be
eliminated as a direct result of the Recapitalization of Holding. 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 financial effects to the Company of the Recapitalization as presented
in the Pro Forma Consolidated Financial Data are not necessarily indicative of
the Company's results of operations which would have been obtained had the
Recapitalization 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 the Company and the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 3, 1998
--------------------------------------------
HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- -------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales.............................................................. $ 848,108 $ -- $ 848,108
Cost of sales.......................................................... 524,586 -- 524,586
--------- -------- -------
Gross profit........................................................... 323,522 -- 323,522
Selling, general and administrative expenses........................... 279,924 (1,885)(2) 278,039
--------- -------- -------
Operating income....................................................... 43,598 1,885 45,483
Total interest expense................................................. 7,732 26,625 (3) 34,357
Other expenses, net.................................................... 824 -- 824
--------- -------- -------
Income before provision for taxes...................................... 35,042 (24,740) 10,302
Provision (benefit) for income taxes................................... 14,670 (9,896)(4) 4,774
--------- -------- -------
Net income (loss)...................................................... $ 20,372 $ (14,844) $ 5,528
========= ======== =======
OTHER DATA:
EBITDA(5).............................................................. $ 65,399 $ 2,767 $ 68,166
EBITDAR(6)............................................................. 113,697 2,779 116,476
Pro forma cash interest expense........................................ 31,938
PRO FORMA CREDIT RATIOS:
Ratio of EBITDA to cash interest expense(5)............................ 2.13x
Ratio of earnings to fixed charges(7).................................. 1.17x
</TABLE>
(Footnotes on subsequent page)
27
<PAGE>
<TABLE>
<CAPTION>
SIXTEEN WEEKS ENDED APRIL 25, 1998
--------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Sales.............................................................. $ 288,963 $ -- $ 288,963
Cost of Sales.......................................................... 176,377 -- 176,377
------- ------ -------
Gross Profit........................................................... 112,586 -- 112,586
Selling, general and administrative expenses........................... 99,178 (737)(2) 98,441
Expenses associated with the recapitalization of the Parent............ 14,005 (14,005)(8) --
------- ------ -------
Income (loss) from operations.......................................... (597) 14,742 14,145
Total interest expense................................................. 3,414 7,802 (3) 11,216
Other income (expense)................................................. (116) -- (116)
------- ------ -------
Income (loss) before provision for taxes............................... (4,127) 6,940 2,813
(Provision) benefit for income taxes................................... 1,688 (2,776)(4) (1,088)
------- ------ ------
Net income (loss)...................................................... $ (2,439) $ 4,164 $ 1,725
======= ====== ======
OTHER DATA:
EBITDA(5).............................................................. $ 21,631
EBITDAR(6)............................................................. 39,047
Pro forma cash interest expense........................................ 10,416
PROFORMA CREDIT RATIOS:
Ratio of EBITDA to cash interest expense(5)............................ 2.08x
Ratio of earnings to fixed charges(7).................................. --
</TABLE>
(Footnotes on following page)
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(1) Excludes non-recurring expense incurred in connection with the
Recapitalization in the sixteen weeks ended April 25, 1998 which include:
(i) management bonuses of $11.5 million and (ii) other expenses incurred of
$2.5 million.
(2) Reflects the elimination of (i) certain expenses primarily related to
compensation and other related benefits of the Company's Chairman, who
prior to the Recapitalization was Holding's principal stockholder, that
were eliminated after the Recapitalization, (ii) certain payroll and
insurance costs that were allocated to Holding that are expected to be
incurred by the Company in the future and (iii) certain general and
administrative costs that were incurred by Holding that are expected to be
incurred by the Company in the future. The amount is comprised of the
following:
<TABLE>
<CAPTION>
SIXTEEN WEEKS
FISCAL YEAR ENDED ENDED
JANUARY 3, 1998 APRIL 25, 1998
----------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Private company expenses.............................. $ (3,056) $ (845)
Allocation of costs to Holding that are expected to be
incurred by the Company in the future................ 1,017 --
Costs incurred by Holding that are expected to be
incurred by the Company in the future................ 154 108
---------- ----------
$ (1,885) $ (737)
========== ==========
</TABLE>
(3) Gives effect to the increase in estimated interest expense from the use of
borrowings to finance the Recapitalization:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIXTEEN WEEKS ENDED
JANUARY 3, 1998 APRIL 25, 1998
----------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest and commitment fees on unused borrowings
related to the New Credit Facility and Series A
Notes(a)............................................. $ 31,938 $ 9,030
Amortization of debt issuance costs related to the New
Credit Facility and Series A Notes................... 2,419 679
Less: Interest expense in historical statement of
operations related to debt extinguished in connection
with the Recapitalization(b)......................... (7,732) (1,907)
---------- ----------
$ 26,625 $ 7,802
========== ==========
</TABLE>
______________________
(a) Reflects (i) pro forma interest expense calculated using an interest rate
of 8.15% per annum on borrowings of $125.0 million on the New Credit
Facility and 10.25% per annum on borrowings of $200.0 million on the Series
A Notes and (ii) commitment fees on unused borrowings of $250.0 million
related to the New Credit Facility using a rate of 0.5% per annum. The
interest rates on the New Credit Facility and the Series A Notes 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
$0.2 million and for the sixteen weeks ended April 25, 1998 by less than
$0.1 million.
(b) Historical interest expense represents interest on intercompany debt, all
of which was retired with proceeds from borrowing related to the New Credit
Facility and Series A Notes. Historical intercompany debt consisted of
unsecured notes payable, for which interest was typically paid on a
quarterly basis at variable rates based on the prime rate or LIBOR. Average
borrowings outstanding on these notes were $92,700 during the year ended
January 3, 1998 and $93,400 during the sixteen weeks ended April 25, 1998.
Average interest rates on these notes were 8.2% during the year ended
January 3, 1998 and 6.6% during the sixteen weeks ended April 25, 1998.
(4) Estimated income tax effects of the pro forma adjustments at an effective
tax rate of 40%.
(5) EBITDA represents operating income plus depreciation and amortization
included in operating income. While EBITDA is not intended to represent
cash flow from operations as defined by GAAP and should not be considered
as a substitute for net income as an indicator of operating performance or
as an alternative to cash flow (as measured by GAAP) as a measure of
liquidity. The Company has included it herein because management believes
this information is useful to investors as such measures provide additional
information with respect to the Company's ability to meet its future debt
service, capital expenditure and working capital requirements and, in
addition, certain covenants in the Indenture and under the New Credit
Facility are based upon an EBITDA calculation. The Company's method for
calculating EBITDA may differ from similarly titled measures reported by
other companies. Pro forma EBITDA represents EBITDA, as defined above, plus
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 will not be incurred after
29
<PAGE>
the Recapitalization, non-recurring management bonuses and other expenses
incurred in connection with the Recapitalization, other unusual expenses
and allocation of certain costs to Holding.
The computation for pro forma EBITDA is set forth as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIXTEEN WEEKS ENDED
JANUARY 3, 1998 APRIL 25, 1998
----------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Historical EBITDA....................................... $ 65,399 $ 6,889
Private company expenses(a)............................. 3,056 845
Unusual medical claim(b)................................ 882 --
Allocation of costs to Holding that are expected to be (1,017) --
incurred by the Company in the future(c)...............
Costs incurred by Holding that are expected to be (154) (108)
incurred by the Company in the future(d)...............
Non-recurring Recapitalization expenses(e).............. -- 14,005
---------- ----------
Pro Forma EBITDA....................................... $ 68,166 $ 21,631
========== ==========
</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 certain payroll and insurance costs that were allocated to
Holding.
(d) Represents primarily general and administrative costs of Holding
subsidiaries other than the Company.
(e) Represents non-recurring management bonuses and other expenses incurred in
connection with the Recapitalization.
(6) EBITDAR represents EBITDA plus operating lease expense. Because the
proportion of stores leased versus owned varies among industry competitors,
the Company believes that EBITDAR permits a meaningful comparison of
operating performance among industry competitors. The Company leases
substantially all of its stores. Pro forma EBITDAR includes approximately
$12,000 of lease expense in fiscal 1997 and $1,000 of lease expense in the
sixteen weeks ended April 25, 1998 that is included in the costs incurred
by Holding that are expected to be incurred by the Company in the future
(See Note 5 above).
(7) For purposes of computing the pro forma ratio of earnings to fixed charges,
earnings represents historical income before income taxes, adjusted for pro
forma changes in interest expense, plus fixed charges. Fixed charges
consist of total 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 expenses. The pro
forma ratio of earnings to fixed charges has not been computed for the
sixteen weeks ended April 25, 1998 since earnings were not sufficient to
cover fixed charges. The coverage deficiency was $11,929.
(8) Represents non-recurring expenses incurred in connection with the
Recapitalization which include: (i) management bonuses of $11.5 million and
(ii) other expenses incurred of $2.5 million.
30
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated statement of
operations, balance sheet and other operating data of the Company. The selected
consolidated financial data for each of the five fiscal years during the period
ended January 3, 1998 are derived from the audited financial statements of the
Company which have been audited by Arthur Andersen LLP. The selected
consolidated financial data for the sixteen weeks ended April 19, 1997 and April
25, 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 the Company 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) SIXTEEN WEEKS ENDED
----------------------------------------------------------- --------------------------
1993 1994 1995 1996 1997 APRIL 19, APRIL 25,
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 $239,151 $288,963
Cost of sales................. 227,750 297,444 369,962 437,615 524,586 146,860 176,377
Selling, general and
administrative expenses(2)... 117,733 155,457 196,153 228,049 279,924 82,008 99,178
Expenses associated with the
Recapitalization............. -- -- -- -- -- -- 14,005
Operating income (loss)....... 19,758 29,446 36,444 40,319 43,598 10,283 (597)
Interest expense, primarily
related to debt to affiliated
entities..................... 2,031 3,633 6,327 6,221 7,732 2,538 3,414
Other income (expense)........ 27 10,472 (1,764) (151) (824) (177) (116)
Income (loss) before taxes(3). 17,754 36,285 28,353 33,947 35,042 7,568 (4,127)
Income tax expense (benefit).. 6,790 13,453 11,648 13,735 14,670 3,168 (1,688)
Net income (loss)(3).......... 10,964 22,832 16,705 20,212 20,372 4,400 (2,439)
OTHER DATA:
EBITDA(4)..................... $ 28,953 $ 42,694 $ 51,243 $ 57,818 $ 65,399 $ 16,578 $ 6,889
EBITDAR(5).................... 44,792 64,893 82,427 96,423 113,697 30,247 24,305
Capital expenditures.......... 25,316 25,781 42,939 44,264 48,864 9,658 15,813
Ratio of earnings to fixed
charges(6)................... 3.43x 4.29x 2.70x 2.78x 2.47x 2.07x --
Total store square footage
(000s) (at period end)(7).... 2,408 3,150 3,939 4,710 5,857 4,895 6,180
Percentage increase in
comparable store net
sales(8)..................... 17.3% 9.5% 1.7% 1.1% 5.1% 10.4% 3.9%
Net cash provided by (used
in) operating activities..... 6,697 (5,358) 26,854 22,991 41,484 12,435 15,242
Net cash used in investing
activities................... (25,275) (14,201) (39,855) (44,121) (48,607) (9,603) (11,672)
Net cash provided by (used
in) financing activities..... 18,578 19,559 22,925 13,777 7,638 (3,376) 25,523
Stores open at end of period.. 352 437 536 649 814 675 863
BALANCE SHEET DATA:
Net working capital(9)........ $ 24,903 $ 79,721 $ 92,699 $101,957 $113,136 $136,313
Net working capital,
as adjusted(10).............. 54,432 84,061 91,864 111,142 112,924 99,773
Total assets.................. 185,594 228,242 287,716 384,620 450,201 562,975
Total debt (including current
maturities).................. 24,903 79,721 92,699 101,957 113,136 136,313
Stockholder's equity
(deficit).................... 49,048 71,880 88,585 108,797 129,169 (56,270)
</TABLE>
31
<PAGE>
______________________
(1) The Company's fiscal year consists of 52 or 53 weeks ending on the Saturday
nearest to December 31. All fiscal years presented are 52 weeks except for
fiscal 1997, which consists of 53 weeks. The Company's first fiscal quarter
consists of 16 weeks.
(2) Fiscal 1997 includes an unusual medical claim that exceeded the Company's
stop loss insurance coverage. The Company 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 $0.9 million. In
addition, fiscal 1997 amounts excludes $1.0 million of certain payroll and
insurance costs that were allocated to Holding.
(3) Fiscal 1994 includes a net after-tax gain of $6.7 million 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. While EBITDA is not intended to represent
cash flow from operations as defined by GAAP and should not be considered as
a substitute for net income as an indicator of operating performance or as
an alternative to cash flow (as measured by GAAP) as a measure of liquidity.
The Company has included it herein because management believes this
information is useful to investors as such measures provide additional
information with respect to the ability of the Company to meet its future
debt service, capital expenditure and working capital requirements and, in
addition, certain covenants in the Indenture and the New Credit Facility are
based upon an EBITDA calculation. The Company'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,
the Company 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 cost) 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 ratio has not been computed for the sixteen weeks
ended April 25, 1998 since earnings were not sufficient to cover fixed
charges. The coverage deficiency was $4,127.
(7) Total store square footage is based on the Company's actual store formats
and includes normal selling, office, stockroom and receiving space.
(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 and cash equivalents, less total current liabilities excluding bank
overdrafts, notes payable and current maturities of long-term debt.
32
<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 the Company, the notes thereto and other data and information
appearing elsewhere in this Prospectus. The Company'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. The Company's first quarter consists of 16 weeks.
GENERAL
The Company is the second largest retailer of automotive parts and
accessories in the United States (based on store count) with 863 stores in 16
states as of April 25, 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 the Company'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 863.
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 468 stores. Due to its success in rapidly building its commercial
delivery program, the Company will continue to expand this program, including
adding approximately 25 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 completed by the end of 1998, the Company will be able to
serve over 1,600 stores, satisfying expected store requirements for the
forseeable future.
EFFECT OF THE RECAPITALIZATION
As a result of the Recapitalization, the Company has incurred approximately
$325.0 million in long-term debt and approximately $19.6 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 transactions constituting the Recapitalization effecting the
Company have been accounted for as the issuance of debt, the repayment of
intercompany debt to Holding and as a dividend to Holding for financial
reporting purposes.
33
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data for the
Company expressed as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIXTEEN WEEKS ENDED
------------------------------------------ -------------------------
DECEMBER 30, DECEMBER 28, JANUARY 3, APRIL 19, APRIL 25,
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 61.4 61.0
----- ----- ----- ----- -----
Gross profit.................................. 38.6 38.0 38.1 38.6 39.0
Selling, general and administrative expenses.. 32.6 32.3 33.0 34.3 34.3
Expenses associated with recapitalization -- -- -- -- 4.9
----- ----- ----- ----- -----
Operating profit (loss)....................... 6.0 5.7 5.1 4.3 (0.2)
Interest expense.............................. 1.0 0.9 0.9 1.1 1.2
Other expense, net............................ 0.3 0.0 0.1 0.1 0.0
Income tax expense (benefit).................. 1.9 1.9 1.7 1.3 (0.6)
----- ----- ----- ----- -----
Income (loss)................................. 2.8% 2.9% 2.4% 1.8% (0.8)%
===== ===== ===== ===== =====
</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.
The Company'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 the Company'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.
Sixteen Weeks Ended April 25, 1998 Compared to Sixteen Weeks Ended April 19,
1997
Net sales for the sixteen weeks ended April 25, 1998 increased by $49.8
million, or 20.8%, over net sales, for the comparable sixteen weeks ended April
19, 1997. This increase was due to an increase in comparable store net sales of
3.9%, or $9.2 million, an increase in net sales from stores opened in fiscal
1997 of $35.5 million, the contribution of $5.9 million in net sales from stores
opened in fiscal 1998, and a decrease in miscellaneous net sales of $0.8
million. During the sixteen weeks ended April 25, 1998, the Company opened 50
new stores, relocated 2 stores, remodeled 16 stores, and closed one store. As of
April 25, 1998, the Company operated 863 stores as compared to 675 stores at
April 19, 1997.
Gross profit for the sixteen weeks ended April 25, 1998 was $112.6 million,
or 39.0% of net sales, compared with $92.3 million, or 38.6% of net sales, for
the sixteen weeks ended April 19, 1997. The increase in the gross profit
percentage was primarily due to decreased warehouse and delivery expenses.
Selling, general and administrative expenses, for the sixteen weeks ended
April 25, 1998, increased by $17.2 million, as compared to the sixteen weeks
ended April 19, 1997, and, as a percentage of net sales remained constant at
34.3%.
As part of the Recapitalization, the Company incurred $14.0 million in
expenses which related to the Recapitalization, which includes $1.6 million of
expenses incurred by Holdings on behalf of Stores that have been allocated to
Stores. This expense consisted of $11.5 million of bonuses paid to certain
employees for past
34
<PAGE>
performances, $0.2 million related employment taxes and $2.3 million for non-
recurring expenses which consisted primarily of professional fees.
Operating profit decreased from $10.3 million, or 4.3% of net sales to a
loss of $0.6 million, or (0.2%) of net sales for the comparable time period due
to the expenses incurred with the Recapitalization. Excluding these expenses,
operating profit increased by 29.1% to $13.4 million, or, 4.6% of net sales, for
the sixteen weeks ended April 25, 1998, compared to the sixteen weeks ended
April 19, 1997, due to the factors cited above.
Interest expense for the sixteen weeks ended April 25, 1998, was $3.4
million compared to $2.5 million, for the sixteen weeks ended April 19, 1997.
The increase in expense is the result of the Recapitalization which the Company
issued $200.0 million of 10.25% Senior Subordinated Notes due 2008 and increased
borrowings under a Senior Credit Facility.
An income tax benefit of $1.7 million for the sixteen weeks ended April 25,
1998 was recorded, as compared to an expense of $3.2 million, for the sixteen
weeks ended April 19, 1997.
As a result of the above factors, the Company incurred a net loss of $2.4
million, for the sixteen weeks ended April 25, 1998, as compared to net income
of $4.4 million, for the sixteen weeks ended April 19, 1997. As a percentage of
sales, the net loss for the sixteen weeks ended April 25, 1998 was (0.8%) as
compared to net income of 1.8%, for the sixteen weeks ended April 19, 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, the Company opened 170 stores and also relocated 15 stores and
remodeled 27 stores. By fiscal year end 1997, the Company 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, the Company
was able to offset lower gross profit margins in its commercial delivery
business with improved gross profit margins in its DIY business. The Company
believes that as its store count grows, it will achieve greater operating
leverage from its distribution centers, which management believes will support
1,600 stores by the end fiscal 1998.
Selling, general and administrative expenses for fiscal 1997 increased by
$51.9 million as compared to fiscal 1996 and, as a percentage of net sales,
increased from 32.3% to 33.0%. 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 attributable to increases in reserves
for self-insured medical and worker compensation plans.
Interest expense for fiscal 1997 was $7.7 million compared to $6.2 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 $13.8
million for fiscal 1996, with effective tax rates of 41.9% and 40.5%,
respectively. This increase was primarily due to increasing tax reserves.
35
<PAGE>
As a result of the above factors, net income of $20.4 million was recorded
in fiscal 1997 as compared to $20.2 million for fiscal 1996. As a percentage of
sales, net income for fiscal 1997 was 2.4% as compared to 2.9% 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 the
Company'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 Company stores and competitive new store
openings. The Company believes that although "in market" openings cannibalize
sales in existing stores, these openings serve to increase overall market share
and leverage fixed expenses. The Company opened 115 new stores in fiscal 1996
and also relocated three stores and remodeled 35 stores. By fiscal year end
1996, the Company 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 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, the Company spent considerable resources in
developing and rolling out its reengineered POS system and satellite
communication network.
Interest expense for fiscal 1996 was $6.2 million compared to $6.3 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 $13.7 million as compared to $11.6
million for fiscal 1995, with effective tax rates of 40.5% and 41.1%,
respectively.
As a result of the above factors, net income of $20.2 million was recorded
in fiscal 1996 as compared to $16.7 million for fiscal 1995. As a percent of
sales, net income for fiscal 1996 was 2.9% as compared to 2.8% for fiscal 1995.
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 and the
development and implementation of proprietary information systems. From 1995 to
1997, the Company opened 389 stores, constructed a new distribution center,
completed approximately 80% of another new distribution center and expanded its
Roanoke distribution center. The Company has financed its growth through a
combination of internally generated funds and borrowings. Net cash provided by
operating activities was $15.2 million in the sixteen weeks ended April 25,
1998, $41.5 million in fiscal 1997, $23.0 million in fiscal 1996, and $26.9
million in fiscal 1995.
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 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.
36
<PAGE>
Historically, the Company has negotiated extended payment terms from
suppliers to finance inventory growth, and the Company believes that it will be
able to continue financing much of its inventory growth through such extended
payment terms. The Company anticipates that inventory levels will continue to
increase primarily as a result of new store openings and increased SKU levels.
In fiscal 1995, net cash provided by operating activities was $26.9
million. Of this amount, $16.7 million was due to net income. Depreciation and
amortization provided an additional $14.8 million of funds and $4.6 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 $22.9 million and was comprised primarily of net
borrowings.
In fiscal 1996, net cash provided by operating activities was $23.0
million. Of this amount, $20.2 million was due to net income. Depreciation and
amortization provided an additional $17.5 million of funds and $14.7 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 $13.8 million and was comprised primarily of net
borrowings.
In fiscal 1997, net cash provided by operating activities was $41.5
million. Of this amount, $20.4 million was due to net income. Depreciation and
amortization provided an additional $21.8 million of funds and $0.7 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 $7.6 million and was comprised primarily of payments on
borrowings.
For the sixteen weeks ended April 25, 1998, net cash provided by operating
activities was $15.2 million, which consisted primarily of net working capital
of $10.0 million, depreciation and amortization of $7.6 million, and a net loss
of $2.4 million. Net cash used for investing activities was $11.7 million and
consisted primarily of $15.8 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 $25.5 million and was primarily the result
of the Recapitalization. See "Summary--The Recapitalization."
The Company believes it will have sufficient liquidity to fund its debt
service obligations and implement its growth strategy over the next several
years. The Company has outstanding indebtedness consisting of $200.0 million of
Series A Notes, $60.0 million of Debentures, borrowings of $125.0 million under
the New Credit Facility and the IRB. The Series A Notes bear, and the Series B
Notes will bear, interest at a rate of 10.25%, payable semiannually, and require
no principal payments until maturity. See "Description of Series B Notes." The
$10.0 million principal amount IRB bears interest at a variable rate and will
require 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 $50.0 million of which is available to the
Company through October 15, 1999 and $75.0 million of which is available to the
Company through April 15, 2001. 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. None of the delayed draw term loans have been
drawn in connection with the Recapitalization. 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. See "Description of the New
Credit Facility."
37
<PAGE>
QUARTERLY RESULTS AND 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.
The following table sets forth certain quarterly unaudited operating data
of the Company 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.
<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.. 8,869 12,798 8,646 10,006 10,283 11,966 10,347 11,002
Net Income........ 4,112 6,849 4,278 4,973 4,400 5,726 5,012 5,234
EBITDA............ 14,330 17,072 12,846 13,570 16,578 16,934 15,412 16,475
</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. The Company 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. The Company
has appointed an internal Year 2000 project manager and remediation team and has
adopted a three phase approach of assessment, correction, and testing. 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 and
the correction phase is in progress. The Company believes that this approach of
assessment (including prioritization by business risk), correction (including
conversions to new software), and testing of necessary changes will minimize the
business risk of Year 2000 from internal systems.
The Company 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 not 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.
Ongoing communications have been established with vendors and other
partners to monitor their progress in resolving Year 2000 issues. The Company
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 the
company.
The costs and time estimates of the Year 2000 project are based on the
Company's best estimates. There can be no guarantee that these estimates will
be achieved and that planned results will be achieved. Risk 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.
38
<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 April 25,
1998, had 863 stores in 16 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 863. From
fiscal 1992 through fiscal 1997, the Company increased net sales, net income and
pro forma EBITDA by a compound annual growth rate of 29.3%, 15.5% and 28.4%,
respectively. See footnote (5) to "Summary--Summary Consolidated Historical
and Pro Forma Financial Data" for information with respect to pro forma EBITDA
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, Florida, Georgia, Indiana,
Kentucky, Maryland, Michigan, Mississippi, Ohio, Pennsylvania and West Virginia.
For fiscal 1997, net sales, net income and pro forma EBITDA 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
468 stores and expects to add approximately 25 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.
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.
39
<PAGE>
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.
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 is expanding the PDQ(R) system with the opening of a
master PDQ(R) facility which will initially provide approximately 70,000 SKUs
and will have 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
40
<PAGE>
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 completed by the end of 1998, the Company will be
able to service over 1,600 stores, satisfying expected store requirements for
the foreseeable future.
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, 50 stores in 1998
and plans to open approximately 125 stores in the remainder of fiscal 1998. To
further support its growth, the Company expects to begin television advertising
on a national basis in late 1998. The Company believes that its proven ability
to effectively select new markets and store locations and quickly open new
stores will allow it to double 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.
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 468 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 25 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.
41
<PAGE>
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.
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.
42
<PAGE>
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 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 April 25, 1998
-------- -----------------
<S> <C>
North Carolina 155
Virginia 120
Georgia 111
Tennessee 93
South Carolina 90
Kentucky 56
Ohio 56
West Virginia 54
Alabama 51
Pennsylvania 50
Michigan 13
Indiana 7
Mississippi 3
Maryland 2
Florida 1
Arkansas 1
---
Total 863
</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.
43
<PAGE>
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. 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
in 1996 and plans to install it in the Gadsden, Alabama and Thomson, Georgia
distribution centers in 1998. 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
44
<PAGE>
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.
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 late 1998. On average, each distribution center is
able to serve approximately 400 stores.
45
<PAGE>
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 by
phone, and ordered parts are delivered to the store the next day through the
Company's dedicated PDQ(R) trucking fleet. During 1998, the Company plans to
open a new PDQ(R) warehouse that will stock approximately 100,000 SKUs
(expandable up to 200,000 SKUs) of harder to find automotive parts and
accessories. This facility will be known as the "master PDQ(R)" warehouse and
will utilize existing PDQ(R) distribution infrastructure to provide next day
service to substantially all the Company's stores. In addition, with the opening
of the master PDQ(R) warehouse, the Company will replace the phone ordering
system currently utilized by the PDQ(R) program with an on-line ordering system,
which the Company expects will reduce labor costs and enhance customer service.
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
South,
Thomson, Georgia (2)............... 1998 Southeast 50,000
Jeffersonville, Ohio (2)........... 1996 Midwest 50,000
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.
EMPLOYEES
As of April 30, 1998, the Company employed approximately 7,600 full-
time employees and 4,900 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.
46
<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
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 April 25, 1998, all but one of the Company's 863 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 38
2001-2005 86
2006-2010 147
2011-2020 586
2021-2030 5
</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, 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
47
<PAGE>
advantages, national and regional chains have been gaining market share in
recent years at the expense of independent retailers and jobbers.
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.
LEGAL PROCEEDINGS
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 the sale by the Company of used, old or out-of-warranty
automotive batteries as new. The complaint seeks compensatory and punitive
damages. The case is in the very early stages of discovery; however, based in
part upon advice of counsel, management believes that there is no merit to the
complaint, nor to the motion for class certification and, accordingly, plans a
vigorous defense.
48
<PAGE>
An appeal has been taken in connection with the November 1996 and the
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.
49
<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 the Company as of April 25, 1998:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
Nicholas F. Taubman 63 Chairman of the Board and Director
Garnett E. Smith 58 President and Chief Executive Officer and Director
Carroll R. Tilley, Jr. 48 Executive Vice President and General Manager
J. O'Neil Leftwich 36 Senior Vice President and Chief Financial Officer, Secretary and Treasurer
Paul W. Klasing 38 Senior Vice President, Merchandising
David R. Reid 35 Senior Vice President, Real Estate and Store Support
S. Lynn Stevens 49 Senior Vice President, Information Services
Jimmie L. Wade 44 Senior Vice President, Logistics
Anthony R. Weatherly 38 Senior Vice President, Store Operations
Kenneth A. Wirth, Jr. 39 Senior Vice President, Sales
Joe H. Vaughn, Jr. 37 Vice President, Finance, Assistant Secretary and Assistant Treasurer
Mark J. Doran 34 Director
John M. Roth 39 Director
J. Frederick Simmons 42 Director
Ronald P. Spogli 50 Director
Timothy C. Collins 41 Director
</TABLE>
Mr. Taubman, Chairman of the Board, joined the Company in 1956. Mr.
Taubman has served as Chairman since January 1985 and as Chief Executive Officer
from January 1985 to July 1997. From 1969 to 1984, Mr. Taubman served as
President. Mr. Taubman has served on numerous business, arts and civic boards.
Mr. Smith, President and Chief Executive Officer and a Director of 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 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.
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.
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.
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.
50
<PAGE>
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 in October 1997 and Assistant Secretary and Assistant
Treasurer 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.
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.,
Calmar 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 Buttrey Food and Drug Stores
Company and EnviroSource, Inc.
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.,
Buttrey Food and Drug Stores Company and Calmar 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."
51
<PAGE>
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.
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 in an amount and on substantially the
same terms and conditions as was being paid by the Company prior to the
Recapitalization 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 and certain other members of
management of the Company have entered into employment agreements with the
Company. 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 and eleven other management members'
agreements is two years; the remainder of such agreements have one-year terms.
The term of employment will extend from year-to-year unless terminated by either
the Company or the employee. Other provisions require the Company to pay bonuses
earned by the employee upon the Company's achievement of earnings targets
established by the Board of Directors, and an agreement by the employee not to
compete with the Company, to preserve its confidential information, not to
recruit or employ employees of the Company to or in other businesses, and not to
solicit customers or suppliers of the Company for competitors.
52
<PAGE>
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 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
53
<PAGE>
change in control of Holding or other extraordinary corporate transactions, as
more fully described in the Option Plans. In addition, all options granted
pursuant to the Option Plans will terminate 90 days after termination of
employment (unless termination was for cause, in which event an option will
terminate immediately) or 180 days in the event of termination due to death or
disability. Shares received upon exercise of options are subject to both a right
of first refusal and a repurchase right at stated prices in favor of Holding,
and co-sale rights in favor of the optionee. These rights will terminate upon an
initial public offering by Holding of its Common Stock, as further defined in
the Option Agreements. Shares received upon exercise of options, as well as all
outstanding options, are also subject to obligations to sell at the request of
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.
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 current executive
officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------ POTENTIAL REALIZABLE VALUE AT
% OF TOTAL ASSUMED ANNUAL RATES OF STOCK
OPTIONS/ PRICE APPRECIATION
NUMBER OF SARS FOR OPTION TERM
SECURITIES GRANTED TO FIXED PRICE AND
UNDERLYING EMPLOYEES AT EXERCISE OR PERFORMANCE OPTIONS
OPTIONS/SARS RECAPITALI- BASE PRICE EXPIRATION --------------------------------
NAME GRANTED(#) ZATION ($/SH)(1) DATE 0%(2) 5% ($)(3) 10% ($)(3)
- ----------------------------- ------------ ----------- --------- ---------- ----- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Garnett E. Smith............. 362,500(4) 40.3 10.00 4/14/05 - 814,201 1,897,434
Carroll R. Tilley, Jr........ 145,000(5) 16.1 10.00 4/14/05 - 325,680 758,974
J. O'Neil Leftwich........... 72,500(6) 8.1 10.00 4/14/05 - 162,840 379,487
Kenneth A. Wirth, Jr......... 25,000(7) 2.8 10.00 4/14/05 - 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.
54
<PAGE>
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 leases with affiliates were amended so
that they would be no less favorable to the landlord 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 of common stock by Holding, 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 of
common stock by Holding. Pursuant to the Stockholders' Agreement, Mr. Taubman
has certain approval rights with respect to major corporate transactions.
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 of value provided by the
airplane's manufacturer). The airplane was purchased in 1995 for $5.2
million.
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REGISTRATION RIGHTS AGREEMENT
Pursuant to the Stockholders Agreement, Holding has agreed, beginning 180
days after consummation of an initial public offering of common stock by
Holding, that upon the request of FS&Co. and the Continuing 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.
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
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 have received collectively a $5.0 million fee for arranging the
financing, performing advisory and consulting services, and negotiating the
Recapitalization. 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.
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DESCRIPTION OF THE NEW CREDIT FACILITY
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. Pursuant to the New Credit Facility,
a syndicate of lenders ("Lenders") has agreed to lend to the Company up to
$375.0 million in the form of 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.
Use of Proceeds; Maturity. Proceeds of the Tranche B Facility, together
with a portion of the net proceeds of the issuance of the Series A Notes, have
been 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. 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 I, the Delayed Draw Facility II, and the Revolving
Facility (including the letters of credit) are available for general corporate
purposes. Both 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 $120.5 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.
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 the Lenders' redeployment costs
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 and Tranche B 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.
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 is based, at
the
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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 to which all of the Company's inventory delivery
vehicles will be transferred in connection with the New Credit Facility. 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.
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)
customary cross-default and cross-acceleration provisions to any other
indebtedness aggregating $5.0 million or more, (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.
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DESCRIPTION OF SERIES B NOTES
GENERAL
The Series A Notes were, and the Series B Notes will be, issued under an
Indenture dated as of April 15, 1998 (the "Indenture") among the Company, the
Guarantor 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 Notes, the Indendture will be subject to and governed by the Trust Indenture
Act of 1939, as amended (the "TIA"). The terms of the Series B Notes include
those stated in the Indenture and those made part of the Indenture by reference
to the TIA. The Series B Notes are subject to all such terms, and Holders of
Series B Notes 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 form of 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 "Company" refers only to
Advance Stores Company, Incorporated and not to Holding and its other
subsidiaries.
The Series B Notes will be general unsecured obligations of the Company and
will be subordinated in right of payment to all current and future Senior Debt.
As of April 25, 1998, the Company had $335.0 million of aggregate principal
amount of Indebtedness, of which $135.0 million was senior to the Series B
Notes, and the Company had a maximum remaining available borrowing capacity
under the New Credit Facility of $250.0 million, which, if borrowed, would be
senior to the Series B Notes.
As of the Issue Date, the Company will have one Subsidiary that will issue
a Subsidiary Guarantee and will be a Restricted Subsidiary. However, under
certain circumstances, the Company 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 Notes will be limited in aggregate principal amount to $200.0
million and will mature on April 15, 2008. Interest on the Series B Notes will
accrue at the rate of 10.25% per annum and will be payable semi-annually in
arrears on April 15 and October 15, commencing on October 15, 1998, to Holders
of record on the immediately preceding April 1 and October 1, respectively.
Interest on the Series B Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
original issuance.
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, if any, on the Series B Notes will be payable at the office or agency
of the Company maintained for such purpose within the City and State of New York
or, at the option of the Company, payment of principal, premium, interest and
Liquidated Damages, if any, may be made by check mailed to the Holders of the
Series B Notes at their respective addresses set forth in the register of
Holders of Series B Notes; provided that all payments of principal, premium,
interest and Liquidated Damages, if any, with respect to Series B Notes
represented by one or more permanent Global Series B Notes (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 the Company, the Company's office or agency in New York
will be the office of the Trustee maintained for such purpose. The Series B
Notes will be issued in denominations of $1,000 and integral multiples thereof.
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SUBORDINATION
The payment of Obligations in respect of the Series B Notes will be
subordinated in right of payment, as set forth in the Indenture, to the prior
payment in full of all Obligations in respect of Senior Debt, whether
outstanding on the Issue Date or thereafter incurred. In addition, as set forth
in "--Subsidiary Guarantees" below, the Subsidiary Guarantees will be general
unsecured obligations of the Guarantors, subordinated in right of payment to the
prior payment in full of all Senior Debt of such Guarantor.
Upon any payment or distribution of any kind to creditors of the Company,
whether in cash, property or securities, in a total or partial liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, whether voluntary or involuntary, the holders of Senior
Debt will be entitled to receive payment in full of all Obligations in respect
of such Senior Debt (including interest accruing after the commencement of any
such proceeding at the rate specified in the applicable Senior Debt whether or
not such interest is an allowed claim enforceable against a debtor in a
bankruptcy case under Title 11 of the United States Code) before the Holders of
Series B Notes will be entitled to receive any payment or distribution of any
kind with respect to the Series B Notes, and until all Obligations with respect
to Senior Debt are paid in full, any payment or distribution to which the
Holders of Series B Notes would be entitled shall be made to the holders of
Senior Debt (except for any distribution of Permitted Junior Securities made
pursuant to a reorganization in which the Senior Debt is not impaired and
payments made from the trust described under "--Legal Defeasance and Covenant
Defeasance").
The Company also may not make any payment upon or distribution in respect
of the Series B Notes (except for any distribution of Permitted Junior
Securities made pursuant to a reorganization in which the Senior Debt is not
impaired or from the trust described under "--Legal Defeasance and Covenant
Defeasance") if (i) any amount of principal, interest or other Obligation in
respect of any Designated Senior Debt (including, without limitation, any amount
due as a result of the acceleration of the maturity thereof) is not paid when
due and remains unpaid (a "Payment Default") or (ii) any other default (a
"Nonpayment Default") occurs and is continuing with respect to any Designated
Senior Debt that permits holders of such Designated Senior Debt or any agent or
trustee therefor to accelerate its maturity and, in the case of any such
Nonpayment Default, the Trustee receives a notice of such default invoking the
following provisions of this paragraph (a "Payment Blockage Notice") from the
holders of any Designated Senior Debt or any agent or trustee therefor.
However, the Company may pay the Series B Notes without regard to the foregoing
if the Company and the Trustee receive written notice approving such payment
from the representative of the Designated Senior Debt affected by such Payment
Default or Nonpayment Default. Payments on the Series B Notes may and shall be
resumed (a) in the case of a Payment Default, upon the date on which all Payment
Defaults have been cured or waived, unless a Payment Blockage Notice has been
delivered commencing a payment blockage period in respect of a Nonpayment
Default, and (b) in case of a Nonpayment Default, the earlier of (i) the date on
which all Payment Defaults and Nonpayment Defaults have been cured or waived or
(ii) the date 179 days after the date on which the applicable Payment Blockage
Notice is received, unless a Payment Default has occurred and is continuing. No
new period of payment blockage may be commenced in respect of a Nonpayment
Default unless and until 180 days have elapsed since the effectiveness of the
immediately prior Payment Blockage Notice. No Nonpayment Default that existed
or was continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice
unless such default shall have been cured or waived for a period of not less
than 90 days; provided that if such Nonpayment Default arose from the failure to
comply with a financial covenant and if the condition or performance measured by
such financial covenant has declined further from such condition or performance
as reflected in the most recent financial statements available on the date of
delivery of the original Payment Blockage Notice to the Trustee, such Nonpayment
Default may be, or be made, the basis for a subsequent Payment Blockage Notice.
Whenever the Company is prohibited from making any payment in respect of
the Series B Notes, the Company also shall be prohibited from making, directly
or indirectly, any deposit in the trust described under "--Legal Defeasance and
Covenant Defeasance" and any payment of any kind on account of the redemption,
purchase or other acquisition of the Series B Notes except for payments from the
trust described under "--Legal Defeasance and Covenant Defeasance." If any
Holder receives any payment or distribution that such Holder is not
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entitled to receive with respect to the Series B Notes, such Holder shall be
required to pay the same over to the holders of Senior Debt.
The Indenture will further require that the Company promptly notify holders
of Senior Debt if payment of the Series B Notes is accelerated because of an
Event of Default. The Company is prohibited from making any payment in respect
of the Series B Notes until the earlier of five business days after such notice
is delivered or the date of acceleration of any Designated Senior Debt and,
thereafter, may pay the Series B Notes only if the subordination provisions of
the Indenture otherwise permit payment at that time.
As a result of the subordination provisions described above, in the event
of a liquidation, insolvency or similar proceeding, Holders of Series B Notes
may recover less ratably than creditors of the Company who are holders of Senior
Debt. See "Risk Factors--Subordination of the Series A Notes, Series B Notes
and the Subsidiary Guarantee." As of April 25, 1998, the Company had $135.0
million in aggregate principal amount of Senior Debt, which would rank senior in
right of payment to the Series B Notes and Subsidiary Guarantees. In addition,
the Company may incur additional Senior Debt of up to $250 million under the New
Credit Facility which, if borrowed, would be senior to the Series B Notes and
Subsidiary Guarantees. The Indenture limits, subject to certain financial
tests, the amount of additional Indebtedness, including Senior Debt, that the
Company and its Subsidiaries, respectively, can incur. See "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock."
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Series B Notes will be
guaranteed pursuant to the Subsidiary Guarantee in effect on the Issue Date and
in certain circumstances future Subsidiary Guarantees on a senior subordinated
basis by the initial Guarantor and in certain circumstances Subsidiaries that
become Guarantors after the Issue Date. The Subsidiary Guarantee of each
Guarantor will be subordinated to the prior payment in full of all Senior Debt
of such Guarantor and the amounts for which the Guarantors will be liable under
the guarantees issued from time to time with respect to Senior Debt, which would
rank senior in right of payment to the Series B Notes and the Subsidiary
Guarantees, respectively. The initial Guarantor had no Senior Debt outstanding
as of January 3, 1998.
The obligations of each Guarantor under its Subsidiary Guarantee will be
limited so as not to constitute a fraudulent conveyance under applicable law.
See, however, "Risk Factors--Fraudulent Conveyance."
The Indenture will provide that no Guarantor may consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor, pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Indenture and its Subsidiary Guarantee; and (ii) immediately
after giving effect to such transaction, no Default or Event of Default exists.
The Indenture will provide that in the event of a sale or other disposition
of all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the Capital Stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all or substantially all of the assets of such
Guarantor) will be released and relieved of any obligations under its Subsidiary
Guarantee. See "--Repurchase at the Option of Holders--Asset Sales." In
addition, the Indenture will provide that, in the event the Company designates a
Restricted Subsidiary to be an Unrestricted Subsidiary in accordance with the
Indenture, then such Restricted Subsidiary shall be released from its
obligations under its Subsidiary Guarantee.
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OPTIONAL REDEMPTION
Except as described below with the proceeds of an Equity Offering, the
Series B Notes will not be redeemable at the Company's option prior to April 15,
2003. Thereafter, the Series B Notes will be subject to redemption at any time
at the option of the Company, 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 commencing on April 15 in the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
--------------------- ----------
<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 (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 Notes
originally issued 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, with the net proceeds of one or more Equity
Offerings; provided that, in each case, at least 65% in aggregate principal
amount of the Series B Notes 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
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Series B Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Series B Notes
will have the right to require the Company to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of such Holder's Series B Notes
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 (the "Change of Control Payment"). Within 30 days following any
Change of Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Series B Notes 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. The Company will comply with the requirements of Rule 14e-1 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 Notes 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, the
Company 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, the Company will, to the extent
lawful, (1) accept for payment all Series B Notes 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 Notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the Trustee the Series B Notes so accepted together
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with an Officers' Certificate stating the aggregate principal amount of Series B
Notes or portions thereof being purchased by the Company. The Paying Agent will
promptly mail to each Holder of Series B Notes so tendered the Change of Control
Payment for such Series B Notes, and the Trustee will promptly authenticate and
mail (or cause to be transferred by book entry) to each Holder a new Series B
Note equal in principal amount to any unpurchased portion of the Series B Notes
surrendered, if any; provided that each such new Series B Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Indenture will
provide that, prior to complying with the provisions of this covenant, but in
any event within 90 days following a Change of Control, the Company will either
repay all outstanding Senior Debt or obtain the requisite consents, if any,
under all agreements governing outstanding Senior Debt to permit the repurchase
of Series B Notes required by this covenant. The Company 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 Notes to require that the
Company repurchase or redeem the Series B Notes in the event of a takeover,
recapitalization or similar transaction.
The New Credit Facility will prohibit the Company from purchasing any
Series B Notes and provide that certain change of control events with respect to
the Company would constitute a default thereunder. Any future credit agreements
or other agreements relating to Senior Debt to which the Company becomes a party
may contain similar restrictions and provisions. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing Series B
Notes, the Company could seek the consent of its lenders to the purchase of
Series B Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Series B Notes.
In such case, the Company's failure to purchase tendered Series B Notes would
constitute an Event of Default under the Indenture which would, in turn,
constitute a default under the New Credit Facility. In such circumstances, the
subordination provisions in the Indenture would likely restrict payments to the
Holders of Series B Notes. In addition, the exercise by the Holders of Series B
Notes of their right to require the Company to repurchase the Series B Notes
could cause a default under such Senior Debt, even if the Change of Control
itself does not, due to the financial effect of such repurchases on the Company.
Finally, the Company's ability to pay cash to the Holders of Series B Notes upon
a repurchase may be limited by the Company's then existing financial resources.
There can be no assurance that sufficient funds will be available when necessary
to make any required repurchases.
The Company 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 the Company and
purchases all Series B Notes validly tendered and not withdrawn under such
Change of Control Offer.
ASSET SALES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, engage in or consummate an Asset Sale
unless (i) the Company (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) and
(ii) at least 75% of the consideration therefor received by the Company or such
Restricted Subsidiary is in the form of cash or Cash Equivalents other than in
the case where the Company or such Restricted Subsidiary is undertaking a
Permitted Asset Swap; provided that the amount of (x) any liabilities (as shown
on the Company's or such Restricted Subsidiary's most recent balance sheet), of
the Company or any Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Series B Notes or any
Guarantee thereof) that are assumed by the transferee of any such assets
pursuant to a customary agreement that releases the Company or such Restricted
Subsidiary from further liability and (y) any securities, notes or other
obligations received by the Company or any such Restricted Subsidiary from such
transferee that are
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converted within 15 days by the Company 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,
the Company or its Restricted Subsidiaries may, at its option, apply such Net
Proceeds (a) to permanently reduce Senior Debt, 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 the Company 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, the Company or its Restricted Subsidiaries may temporarily
reduce Senior Debt 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, the Company will be required to make an offer to all
Holders of Series B Notes 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 Notes 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, 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 of Series B Notes and any such Pari Passu
Indebtedness tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company or its Restricted Subsidiaries may use any remaining
Excess Proceeds for general corporate purposes. If the aggregate principal
amount of Series B Notes and any such Pari Passu Indebtedness surrendered by
holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Series B Notes 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. The
Company's ability to repurchase the Series B Notes will be subject to the
covenants contained in the New Credit Facility or any additional or successor
bank facility.
SELECTION AND NOTICE
If less than all of the Series B Notes are to be redeemed or repurchased in
an offer to purchase at any time, selection of Series B Notes 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 Notes
are listed, or, if the Series B Notes 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 Notes 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
Notes to be redeemed or repurchased at its registered address. If any Series B
Note is to be redeemed or repurchased in part only, the notice of redemption or
repurchase that relates to such Series B Note shall state the portion of the
principal amount thereof to be redeemed or repurchased. A new Series B Note 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 Note. On and after the redemption or repurchase date, interest and
Liquidated Damages will cease to accrue on Series B Notes or portions of them
called for redemption or repurchase.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture will provide that the Company 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 the
Company'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 the Company),
other than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company or dividends or distributions payable to the
Company or any Wholly Owned Subsidiary of the Company; (ii) purchase, redeem or
otherwise acquire or retire for value (including, without limitation, any such
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purchase, redemption, or other acquisition or retirement for value made as a
payment in connection with any merger or consolidation involving the Company)
any Equity Interests of the Company or any Restricted Subsidiary (other than any
such Equity Interests owned by the Company or any Restricted Subsidiary of the
Company); (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 Notes, 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) the Company 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 the Company and its Restricted
Subsidiaries after the Issue Date (excluding Restricted Payments permitted by
clauses (ii), (iii), (v), (vi), (vii), (ix) and (x) of the next succeeding
paragraph), is less than the sum (without duplication) of (i) 50% of the
Consolidated Net Income of the Company 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 the Company'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 the Company from the issue or sale subsequent to the Issue Date of
Equity Interests of the Company (other than Disqualified Stock) or of
Disqualified Stock or debt securities of the Company 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 the Company 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 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 the Company and its
Restricted Subsidiaries, plus (vi) $15.0 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 the Company
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 the Company) of, other Equity Interests of the Company
(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;
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(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 the Company, Holding or any
Restricted Subsidiary of the Company (including Restricted Payments to any
shareholder of the Company in order to permit such shareholder (directly or
indirectly) to repurchase, redeem or otherwise acquire Equity Interests in
Holding), held by any member of the Company'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)
$3.0 million and (B) the aggregate cash proceeds received by the Company from
any issuance of Equity Interests by Holding or the Company to members of
management, employees, directors or consultants of the Company 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 Series B 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 the Company to the
holders of its common Equity Interests on a pro rata basis;
(vi) payments (A) required to be made under the Tax Sharing
Agreement or (B) distributions made by the Company on the date of the Indenture,
the proceeds of which are utilized solely to consummate the Recapitalization;
(vii) the payment of dividends or the making of loans or advances
by the Company to Holding in an aggregate amount not to exceed $1.75 million in
any fiscal year for costs and expenses incurred by Holding in its capacity as a
holding company or for services rendered by Holding on behalf of the Company;
(viii) 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 the Company 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";
(ix) so long as (A) no Default or Event of Default has occurred
and is continuing and (B) immediately before and immediately after giving effect
thereto, the Company would have been permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in clause (i) under the caption "--Incurrence of Indebtedness and Issuance
of Preferred Stock", from and after the Issue Date, payments of cash dividends
to Holding in an amount sufficient to enable Holding to make payments of
interest required to be made in respect of the Holding Senior Discount
Debentures in accordance with the terms thereof in effect on the date of the
Indenture, provided such interest payments are made with the proceeds of such
dividends; and
(x) 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 Notes and (B) in all
events, no repurchase or redemption of such Indebtedness may be consummated
unless and until the Company shall have satisfied all repurchase obligations
with respect to any required purchase offer made with respect to the Series B
Notes.
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 the Company 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
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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 the Company 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, the Company 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
any, required by the Indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture will provide that the Company 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 the Company 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 the
Company or another Restricted Subsidiary; provided, however, that the Company 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 the Company'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 2.0 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.
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 the Company 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 the Company 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 the
Company 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 the Company and the Guarantors of
Indebtedness represented by the Series B Notes and the Subsidiary Guarantees;
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(iii) the incurrence by the Company 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 the
Company or any Restricted Subsidiary, in an aggregate principal amount not to
exceed $25.0 million at any time outstanding;
(iv) other Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the Issue Date;
(v) the incurrence by the Company 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 the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company 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 the Company or a Wholly Owned
Subsidiary will be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Restricted Subsidiary, as the case may be;
(vii) the incurrence by the Company 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 the Company 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 the Company or any Restricted Subsidiary in
the ordinary course of business;
(ix) Indebtedness arising from guarantees of Indebtedness of the
Company or any Restricted Subsidiary or the agreements of the Company 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 the Company in good faith) actually received by the
Company and its Restricted Subsidiaries in connection with such disposition;
(x) the guarantee by the Company or any of the Restricted
Subsidiaries of Indebtedness of the Company or a Restricted Subsidiary that was
permitted to be incurred by another provision of this covenant;
(xi) the incurrence by the Company 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 the Company or any other Restricted Subsidiary of the Company; and
(xiii) the incurrence by the Company 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.
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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, the
Company 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 the Company 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 Notes 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 Notes), 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 the Company 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 the Company 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 the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii) transfer
any of its properties or assets to the Company 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 Indenture and the Series B Notes,
(c) applicable law or any applicable rule, regulation or order, (d) any
agreement or instrument governing Indebtedness or Capital Stock of a Person
acquired by the Company 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 the Person, so acquired, (e) 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, (f) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (e) above on the property so acquired, (g) 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, (h) 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 (i)
customary restrictions in security agreements or mortgages securing Indebtedness
of the Company 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 the Company 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
the Company 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 the Company 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
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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 the Company may not consolidate or merge
with or into (whether or not the Company 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) the Company is the surviving corporation or the Person formed
by or surviving any such consolidation or merger (if other than the Company) 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 the Company) or the Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made assumes
all the obligations of the Company under the Series B Notes 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
the Company with or into a Wholly Owned Subsidiary of the Company, the Company
or the entity or Person formed by or surviving any such consolidation or merger
(if other than the Company), 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 the Company, which properties and assets,
if held by the Company instead of such Subsidiaries, would constitute all or
substantially all of the properties and assets of the Company on a consolidated
basis, shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Company. The foregoing clause (iv) will not
prohibit (a) a merger between the Company and a Wholly Owned Subsidiary of
Holding created for the purpose of holding the Capital Stock of the Company, (b)
a merger between the Company and a Wholly Owned Subsidiary of the Company or (c)
a merger between the Company and an Affiliate incorporated solely for the
purpose of reincorporating the Company in another State of United States so long
as, in the case of each clause (a), (b) and (c), the amount of Indebtedness of
the Company and its Restricted Subsidiaries is not increased thereby.
TRANSACTIONS WITH AFFILIATES
The Indenture will provide that the Company 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 the Company or such Restricted Subsidiary, as the case may be, and
are at least as favorable as the terms which could be obtained by the Company 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) the Company
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
the Company or any of its Restricted Subsidiaries
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in the ordinary course of business of the Company or such Restricted Subsidiary
to or with the officers, directors or employees of the Company or its Restricted
Subsidiaries, (x) transactions between or among the Company and/or its
Restricted Subsidiaries, (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 the Company, when such sales are exclusively
for cash.
SENIOR SUBORDINATED DEBT
The Indenture will provide that (i) the Company will not incur, create,
issue, assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Series B Notes, and (ii) no Guarantor will
incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to Senior Debt of
such Guarantor and senior in any respect in right of payment to such Guarantor's
Subsidiary Guarantee. For purposes of this covenant, Indebtedness is deemed to
be senior in right of payment to the Series B Notes or the Guarantees, as the
case may be, if it is not explicitly subordinated in right of payment to Senior
Debt at least to the same extent as the Series B Notes and the Guarantees, as
the case may be, are subordinated to such Senior Debt.
BUSINESS ACTIVITIES
The Indenture will provide that the Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, engage to a substantial
extent in any business activity other than a Permitted Business.
ADDITIONAL SUBSIDIARY GUARANTEES
The Indenture will provide that the Company will not permit any Restricted
Subsidiary to guarantee the payment of any Indebtedness of the Company or any
Indebtedness of any other Restricted Subsidiary (in each case, the "Guaranteed
Debt"), unless (i) if such Restricted Subsidiary is not a Guarantor, such
Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for a Subsidiary Guarantee of payment of
the Series B Notes by such Restricted Subsidiary, (ii) if the Series B Notes or
the Subsidiary Guarantee (if any) of such Restricted Subsidiary are subordinated
in right of payment to the Guaranteed Debt, the Subsidiary Guarantee under the
supplemental indenture shall be subordinated to such Restricted Subsidiary's
guarantee with respect to the Guaranteed Debt substantially to the same extent
as the Series B Notes or the Subsidiary Guarantee are subordinated to the
Guaranteed Debt under the Indenture, (iii) if the Guaranteed Debt is by its
express terms subordinated in right of payment to the Series B Notes or the
Subsidiary Guarantee (if any) of such Restricted Subsidiary, any such guarantee
of such Restricted Subsidiary with respect to the Guaranteed Debt shall be
subordinated in right of payment to such Restricted Subsidiary's Subsidiary
Guarantee with respect to the Series B Notes substantially to the same extent as
the Guaranteed Debt is subordinated to the Series B Notes or the Subsidiary
Guarantee (if any) of such Restricted Subsidiary, (iv) such Restricted
Subsidiary subordinates rights of reimbursement, indemnity or subrogation or any
other rights against the Company or any other Restricted Subsidiary as a result
of any payment by such Restricted Subsidiary under its Subsidiary Guarantee to
its obligation under its Subsidiary Guarantee, and (v) such Restricted
Subsidiary shall deliver to the Trustee an opinion of counsel to the effect that
(A) such Subsidiary Guarantee of the Series B Notes has been duly authorized,
executed and delivered, and (B) such Subsidiary Guarantee of the Series B Notes
constitutes a valid, binding and enforceable obligation of such Restricted
Subsidiary, except insofar as enforcement thereof may be limited by bankruptcy,
insolvency or similar laws (including, without limitation, all laws relating to
fraudulent transfers) and except insofar as enforcement thereof is subject to
general principles of equity.
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 Notes are outstanding, the Company will furnish to the
Holders of Series B Notes (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 the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that
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describes the financial condition and results of operations of the Company and
its consolidated Subsidiaries and, with respect to the annual information only,
a report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company 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, the Company 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, the Company and the Guarantors have agreed that, for so long
as any Series B Notes remain outstanding, they will furnish to the Holders and
to securities analysts and 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 Notes (whether or not
prohibited by the subordination provisions of the Indenture); (ii) default in
payment when due of the principal of or premium, if any, on the Series B Notes
(whether or not prohibited by the subordination provisions of the Indenture);
(iii) failure by the Company 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 Notes 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
the Company 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
Notes then outstanding to comply with any of its other agreements in the
Indenture or the Series B Notes; (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 the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the Company 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 the Company 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; (vii) the
Subsidiary Guarantee of a Significant Subsidiary shall be held in any judicial
proceeding to be unenforceable or invalid or, except as permitted by the
Indenture, shall cease for any reason to be in full force and effect or any
Guarantor that is a Significant Subsidiary, or any Person acting on behalf of
any Guarantor that is a Significant Subsidiary, shall deny or disaffirm its
obligations under its Subsidiary Guarantee; and (viii) certain events of
bankruptcy or insolvency with respect to the Company 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
Notes may declare all the Series B Notes 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 the Company, all
outstanding Series B Notes will become due and payable without further action or
notice. Holders of the Series B Notes may not enforce the Indenture or the
Series B Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Series B Notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Holders of the Series B Notes 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 Notes 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
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paragraph, the declaration of acceleration of the Series B Notes 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 Notes 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 Notes that became due solely because of the acceleration of the Series
B Notes, have been cured or waived.
The Holders of a majority in aggregate principal amount of the Series B
Notes then outstanding by notice to the Trustee may on behalf of the Holders of
all of the Series B Notes waive any existing Default or 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 Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company 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 the Company,
as such, shall have any liability for any obligations of the Company under the
Series B Notes, the Indenture or the Subsidiary Guarantees or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Series B Notes, by accepting a Series B Note, waives and releases
all such liability. The waiver and release are part of the consideration for
issuance of the Series B Notes. 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
The Indenture will provide that the Company may, at its option and at any
time, elect to have all of its obligations and the obligations of the Guarantors
discharged with respect to the outstanding Series B Notes ("Legal Defeasance")
except for (i) the rights of Holders of outstanding Series B Notes to receive
payments in respect of the principal of, premium, if any, and interest and
Liquidated Damages on such Series B Notes when such payments are due from the
trust referred to below, (ii) the Company's obligations with respect to the
Series B Notes concerning issuing temporary Series B Notes, registration of
Series B Notes, mutilated, destroyed, lost or stolen Series B Notes 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 the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
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 Notes. 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 Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Series B Notes, 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 of, premium, if any, and interest and
Liquidated Damages on the outstanding Series B Notes on the stated maturity or
on the applicable redemption date, as the case may be, and the Company must
specify whether the Series B Notes are being defeased to maturity or to a
particular redemption date; (ii) in the case of Legal Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company 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 Notes will
not recognize income, gain or loss for federal income tax
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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, the Company 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 Notes 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 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 the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries is bound; (vi) the
Company 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) the Company shall have delivered to the
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Series B Notes over the
other creditors of the Company with the intent of defeating, hindering, delaying
or defrauding creditors of the Company or others; and (viii) the Company 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 Notes 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 the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Series B Note selected for redemption. Also, the Company is not required to
transfer or exchange any Series B Note for a period of 15 days before a
selection of Series B Notes to be redeemed.
The registered Holder of a Series B Note 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,
the Subsidiary Guarantees or the Series B Notes may be amended or supplemented
with the consent of the Holders of at least a majority in principal amount of
the Series B Notes then outstanding (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Series B Notes), and any existing default or compliance with any provision
of the Indenture, the Subsidiary Guarantees or the Series B Notes may be waived
with the consent of the Holders of a majority in principal amount of the then
outstanding Series B Notes (including consents obtained in connection with a
purchase of, or tender offer or exchange offer for, Series B Notes).
Without the consent of each Holder affected, an amendment or waiver may not
with respect to any Series B Notes held by a non-consenting Holder, (i) reduce
the principal amount of Series B Notes whose Holders must consent to an
amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Series B Note or alter the provisions with respect to the
redemption of the Series B Notes (other than provisions relating to the
covenants described above under the caption "--Repurchase at the Option of
Holders"), (iii) reduce the rate of or change the time for payment of interest
on any Series B Note, (iv) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the Series B Notes (except a
rescission of acceleration of the Series B Notes by the Holders of at least a
majority in aggregate principal amount of the Series B Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Series B
Note payable in money other than that stated in the Series B Notes, (vi) make
any change in the provisions of the
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Indenture relating to waivers of past Defaults or the rights of Holders of
Series B Notes to receive payments of principal of or premium, if any, or
interest on the Series B Notes, (vii) waive a redemption payment with respect to
any Series B Note (other than a payment required by one of the covenants
described above under the caption "--Repurchase at the Option of Holders"),
(viii) except as otherwise permitted by the Indenture release any Guarantor from
any of its obligations under its Subsidiary Guarantee or the Indenture, or amend
the provisions of the Indenture relating to the release of Guarantors, or (ix)
make any change in the foregoing amendment and waiver provisions. In addition,
any amendment to the provisions of Article 10 of the Indenture (which relate to
subordination) or the related definitions will require the consent of the Holder
of at least 75% in aggregate principal amount of the Series B Notes then
outstanding if such amendment would adversely affect the rights of Holders of
Series B Notes.
Notwithstanding the foregoing, without the consent of any Holder of Series
B Notes, the Company, the Guarantors and the Trustee may amend or supplement the
Indenture, the Subsidiary Guarantees or the Series B Notes to cure any
ambiguity, defect or inconsistency, to provide for uncertificated Series B Notes
in addition to or in place of certificated Series B Notes, to provide for the
assumption of the Company's or a Guarantor's obligations to Holders of Series B
Notes 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 Notes 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 or to allow any Guarantor to guarantee the Series B Notes.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, 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 of the then outstanding
Series B Notes 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 Notes, 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 Notes may be issued in the form of one or more global
securities (collectively, the "Global Series B Note"). The Global Series B Note
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 Note 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
Note 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 the Company 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
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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 the Company that pursuant to procedures established by
it, (i) upon deposit of the Global Series B Notes, DTC will credit the accounts
of Participants designated by the Initial Purchasers with portions of the
principal amount of the Global Series B Notes and (ii) ownership of such
interests in the Global Series B Notes 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 Notes).
Investors in the Global Series B Note 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 Note 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 Note 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 Notes, see "--Exchange
of Book-Entry Series B Notes for Certificated Series B Notes."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL SERIES B NOTES
WILL NOT HAVE SERIES B NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE
PHYSICAL DELIVERY OF SERIES B NOTES 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 Note 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, the Company and the Trustee will
treat the persons in whose names the Series B Notes, including the Global Series
B Notes, are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
of the Company, the Initial Purchasers, the Trustee nor any agent of the
Company, 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 Notes, 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 Notes, 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 the Company that its current practice, upon receipt of any
payment in respect of securities such as the Series B Notes (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 Notes will be governed by
standing instructions and customary practices and will not be the responsibility
of DTC, the Trustee or the Company. Neither the Company 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 Notes, and the Company 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 Notes for all
purposes.
Interests in the Global Series B Notes 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
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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 the Company that it will take any action permitted to be
taken by a holder of Series B Notes only at the direction of one or more
Participants to whose account with DTC interests in the Global Series B Notes
are credited and only in respect of such portion of the aggregate principal
amount of the Series B Notes 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 Notes for Certificated Series B Notes" occurs,
DTC reserves the right to exchange the Global Series B Notes for legended Series
B Notes in certificated form and to distribute such Series B Notes to its
Participants.
The information in this section concerning DTC and its book-entry system
has been obtained from sources that the Company believes to be reliable, but the
Company 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 Note 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 the Company, the
Initial Purchasers or the Trustee nor any agent of the Company, 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 Notes for Certificated Series B Notes
The Global Series B Note is exchangeable for definitive Series B Notes in
registered certificated form if (i) DTC (x) notifies the Company that it is
unwilling or unable to continue as depository for the Global Series B Note and
the Company thereupon fails to appoint a successor depository or (y) has ceased
to be a clearing agency registered under the Series B Act, (ii) the Company, at
its option, notifies the Trustee in writing that it elects to cause the issuance
of the Series B Notes 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
Notes. In all cases, certificated Series B Notes delivered in exchange for any
beneficial interests in the Global Series B Note 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 Notes 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 the Company 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.
"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)
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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 the
Company 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 the
Company and the issue or sale by any of the Restricted Subsidiaries of the
Company of Equity Interests of any of the Company'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 the Company to a Wholly Owned Subsidiary of the Company 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
the Company to the Company or to a Wholly Owned Subsidiary of the Company, (ii)
an issuance of Equity Interests by a Restricted Subsidiary of the Company to the
Company or to a Wholly Owned Subsidiary of the Company, (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 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
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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) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that (A) any "person" (as such term is
defined in Section 3(a)(9) of the Exchange Act), 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 the Company (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 33 1/3% of the Voting Stock of the Company (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 the Company than such other "person", (ii) the
first day on which a majority of the members of the Board of Directors of the
Company are not Continuing Directors or (iii) the Company consolidates with, or
merges with or into, any Person, or any Person consolidates with, or merges with
or into, the Company, in any such event pursuant to a transaction in which any
of the outstanding Voting Stock of the Company is converted into or exchanged
for cash, securities or other property, other than any such transaction where
(A) the Voting Stock of the Company 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) either (1) the
"beneficial owners" (as defined above) of the Voting Stock of the Company
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 or (2) if
immediately prior to such transaction the Company is a direct or indirect
subsidiary of any other Person (such other Person, the "Holding Company"), then
the "beneficial owners" (as defined above) of the Voting Stock of such Holding
Company immediately prior to such transaction own, directly or indirectly
through one or more subsidiaries not less than a majority of the 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 a
Restricted Subsidiary of such Person or secured by a Lien on assets of such
Person or one 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
for management and other employees of the Company and its subsidiaries in
connection with, and substantially concurrently with, the Recapitalization in an
amount not to exceed in the aggregate $11.5 million, 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
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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, (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 the Company or one of its
Restricted Subsidiaries.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company or any Holding Company of the Company
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 the Company 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 the Company 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.
"Designated Senior Debt" means (i) any Senior Debt outstanding under the
New Credit Facility and (ii) any other Senior Debt permitted under the Indenture
the principal amount of which is or under which the holders thereof are
committed to lend at least $25.0 million or more and that has been designated by
the Company in the instrument creating or evidencing such Senior Debt as
"Designated Senior Debt."
"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 Notes 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 the Company or 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) provided, that in the case of an Equity Offering by Holding, Holding
contributes to the common equity of the Company the portion of the net cash
proceeds thereof necessary to pay the aggregate redemption price of the Notes to
be redeemed in connection therewith.
"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 the
Company), 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 the Company 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 the
Company 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 the Company and approved by the Company'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 the Company and
approved by the Company'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
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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
the Company to the Holders, the Trustee and/or the Commission shall be prepared
in accordance with generally accepted accounting principles, 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 the
Company 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.
"Guarantors" means, initially, the Subsidiary of the Company on the Issue
Date and thereafter each of the Restricted Subsidiaries of the Company that
executes a Subsidiary Guarantee in accordance with the provisions of the
Indenture, and their respective successors and assigns.
"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.
"Holding" means Advance Holding Corporation, the corporate parent of the
Company, or its successors.
"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 the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Restricted Subsidiary of the Company, the Company
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 Notes 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).
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"Management Note" means any promissory note given by an employee of the
Company or any Affiliate thereof as part of the purchase price for Equity
Interests in the Company 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).
"Net Proceeds" means the aggregate cash proceeds received by the Company 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 the Company
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 the Company 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, securing or guaranteeing such Indebtedness.
"Pari Passu Indebtedness" means Indebtedness that ranks pari passu in right
of payment with the Notes.
"Permitted Asset Swap" means any transfer of properties or assets by the
Company 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 the Company) of the property or assets (including cash) being
transferred by the Company 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 the Company) of the property or assets (including
cash) received by the Company 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 the Company) of all property or assets
transferred by the Company 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 the
Company, as described or referred to in this Prospectus) by the Company 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 the Company are reasonably
related businesses, including reasonably related extensions or expansions
thereof.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company; (b) any Investment in Cash and Cash
Equivalents; (c) any Investment by the Company or any Restricted Subsidiary in a
Person, if as a result of such Investment (i) such Person becomes a Restricted
Subsidiary of the Company or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys
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substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary of the Company; (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 the Company;
(f) Hedging Obligations entered into in the ordinary course of the Company's or
its Restricted Subsidiaries' Businesses and otherwise in compliance with the
Indenture; (g) loans and advances to employees and officers of the Company 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 of reorganization or similar arrangement upon the bankruptcy or
insolvency of customers or other third parties; and (j) additional Investments
not to exceed $10.0 million at any one time outstanding.
"Permitted Junior Securities" means Equity Interests in the Company or debt
securities that are subordinated to all Senior Debt (and any debt securities
issued in exchange for Senior Debt) to substantially the same extent as, or to a
greater extent than, the Series B Notes are subordinated to Senior Debt pursuant
to the Indenture.
"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 securing Senior Debt or Guarantees of Senior Debt
permitted to be incurred under the Indenture;
(iii) Liens securing the Series B Notes and the Subsidiary
Guarantees;
(iv) Liens in favor of the Company or a Wholly Owned Restricted
Subsidiary on assets of any Restricted Subsidiary of the Company;
(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 the Company 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 the Company 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);
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(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 the Company 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 the Company or any Restricted Subsidiary of the Company other than the
property or assets of the Company or any Restricted Subsidiary of the Company
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 completion 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 the
Company 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 the
Company or a Restricted Subsidiary of the Company and were not granted in
connection with, or in anticipation of, the incurrence of such Acquired Debt by
the Company or a Restricted Subsidiary of the Company and (B) such Liens do not
extend to or cover any property or assets of the Company 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 the
Company or a Restricted Subsidiary of the Company and are not more favorable to
the lienholders than those securing the Acquired Debt prior to the incurrence of
such Acquired Debt by the Company or a Restricted Subsidiary of the Company;
(xviii) leases or subleases granted to others not interfering in any
material respect with the business of the Company or its Restricted
Subsidiaries;
(xix) Liens arising out of consignment or similar arrangements for
the sale of goods entered into by the Company 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
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(xxi) Liens on accounts receivable and any asset related thereto in
connection with a Qualified Receivables Transaction.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
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 the Company 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 Notes, 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 Notes on terms at least as
favorable to the Holders of Series B Notes 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
the Company 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 the Company or any Restricted
Subsidiary pursuant to which the Company 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 the
Company 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 the Company other than an
Unrestricted Subsidiary.
"Senior Debt" means (i) all Indebtedness of the Company or any Guarantor
under Credit Facilities and all Hedging Obligations with respect thereto, (ii)
other Indebtedness of the Company or any of its Guarantors permitted to be
incurred under the terms of the Indenture, unless the instrument under which
such Indebtedness is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Notes and (iii) all Obligations with
respect to the foregoing. Notwithstanding anything to the contrary in the
foregoing, Senior Debt will not include (w) any liability for federal, state,
local or other taxes owed or owing by the Company, (x) any Indebtedness of the
Company to any of its Restricted Subsidiaries or other Affiliates, (y) any trade
payables or (z) any Indebtedness that is incurred in violation of the Indenture.
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"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).
"Subsidiary Guarantees" means each of the Guarantees of the Company's
obligations under the Series B Notes and related obligations entered into by a
Guarantor.
"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 the Company's (or any
Restricted Subsidiary's) payments, if any, to be made thereunder is not less
favorable to the Company than as provided in such agreement as in effect on the
Issue Date, as determined in good faith by the Board of Directors of the
Company.
"Unrestricted Subsidiary" means any Subsidiary of the Company 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 the Company or any Restricted
Subsidiary unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted Subsidiary
than those that might be obtained at the time from Persons who are not
Affiliates of the Company; (c) is a Person with respect to which neither the
Company 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
the Company 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 the Company as of
such date. The Board of Directors of the Company 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 the Company 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, (ii) such Subsidiary
becomes a Guarantor, and (iii) 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
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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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DESCRIPTION OF HOLDING INDEBTEDNESS
The Debentures have been issued in an aggregate principal amount at
maturity of $112.0 million and will mature on April 15, 2009. The Debentures
have been issued under an Indenture dated as of April 15, 1998 (the "Holding
Indenture") between Holding and United States Trust Company of New York, as
trustee, and constitute senior unsecured obligations of Holding. Cash interest
will not accrue on the Debentures prior to April 15, 2003, and the principal of
the Debentures accretes at a rate of 12.875% per annum. Thereafter, cash
interest on the Debentures will accrue at the rate of 12.875% per annum and will
be payable semiannually in arrears on each April 15 and October 15 of each year,
commencing October 15, 2003, to the holders of record on the immediately
preceding April 1 and October 1, respectively.
On or after April 15, 2003, the Debentures may be redeemed at the option of
Holding, 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, if any, 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.............................. 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 use the net proceeds of one or more Equity Offerings (as defined in
the Holding Indenture) to redeem up to 35% of the Debentures at a redemption
price equal to 112.875% of the Accreted Value (as defined therein) thereof plus
accrued and unpaid interest and Liquidated Damages, if any, to the redemption
date; provided, however, that after any such redemption the aggregate principal
amount of the Debentures outstanding must equal at least 65% of the aggregate
principal amount of the Debentures originally issued; and provided further, that
such redemption shall occur within 90 days of the date of the closing of the
Equity Offering.
In the event of a Change of Control (as defined in the Holding Indenture),
each holder of Debentures has the right to require the repurchase of such
holder's Holding Senior Discount Debentures at a purchase price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
purchase date.
The Holding Indenture contains covenants that, among other things, limit
the ability of Holding to enter into certain mergers or consolidations and sell
assets and of Holding and its subsidiaries, incur additional indebtedness and
issue preferred stock, pay dividends or certain other distributions, engage in
transactions with affiliates, enter into new businesses, sell stock of
Restricted Subsidiaries, issue stock of subsidiaries, make certain investments,
repurchase stock and certain indebtedness and create or incur certain liens.
Under certain circumstances, Holding will be required to make an offer to
purchase Holding Senior Discount Debentures 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 Holding Indenture). The
Holding Indenture contains certain customary events of defaults, which will
include the failure to pay interest and principal, the failure to comply with
certain covenants in the Holding Senior Discount Debentures or the Holding
Indenture, a default under certain indebtedness, the imposition of certain final
judgments or warrants of attachment and certain events occurring under
bankruptcy laws.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax consequences
expected to result to Holders whose Series A Notes are exchanged for Series B
Notes in the Exchange Offer. This discussion is a summary for general
information only and does not consider all aspects of U.S. federal income
taxation that may be relevant to investors in light of such investor's personal
circumstances. This discussion also does not address the U.S. federal income tax
consequences of ownership of Series B Notes not held as capital assets within
the meaning of Section 1221 of the U.S. Internal Revenue Code of 1986, as
amended (the "Code"), or the U.S. federal income tax consequences to investors
subject to special treatment under the U.S. federal income tax laws, such as
dealers in securities or foreign currency, tax-exempt entities, financial
institutions, insurance companies, persons that hold the Series B Notes as part
of a "straddle," a "hedge," a "synthetic security," a "conversion transaction,"
or other integrated investment, persons that have a "functional currency" other
than the U.S. dollar, and investors in pass-through entities. In addition, this
discussion does not describe any tax consequences arising under U.S. federal
gift and estate taxes (except to the limited extent set forth below under "Non-
U.S. Holders") or under the tax laws of any state, local or foreign
jurisdiction.
This discussion is based upon the Code, existing regulations thereunder,
and current administrative rulings and court decisions. All of the foregoing is
subject to change, possibly on a retroactive basis, and any such change could
affect the continuing validity of this discussion.
HOLDERS OF THE SERIES A NOTES SHOULD CONSULT THEIR OWN ADVISORS AS TO HOW
THEIR OWN PARTICULAR TAX SITUATION MIGHT BE AFFECTED BY THE EXCHANGE OF SERIES A
NOTES FOR SERIES B NOTES AND THE OWNERSHIP AND DISPOSITION OF THEIR SERIES B
NOTES EXCHANGED THEREFOR.
U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a holder of a Series B Note that is (i) a citizen or
resident (as defined in Section 7701(b)(1) of the Code) of the United States,
(ii) a corporation organized under the laws of the United States or any
political subdivision thereof or therein, (iii) an estate, the income of which
is subject to U.S. federal income tax regardless of the source, (iv) a trust,
with respect to which a court within the United States is able to exercise
primary supervision over its administration and one or more United States
persons have the authority to control all its substantial decisions or (v) a
person whose worldwide income and gain is subject to U.S. federal income tax on
a net basis (a "U.S. Holder"). Certain U.S. federal income tax consequences
relevant to a holder other than a U.S. Holder are discussed separately below.
STATED INTEREST
Interest on a Series B Note 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.
SALE, EXCHANGE OR REDEMPTION OF THE SERIES B NOTES
Upon the disposition of a Series B Note by sale, exchange or redemption, a
U.S. Holder will generally recognize capital gain or loss equal to the
difference between (i) the amount realized on the disposition (other than
amounts attributable to accrued interest not yet taken into income) and (ii) the
U.S. Holder's tax basis in the Series B Note. A U.S. Holder's tax basis in a
Series B Note generally will equal the cost of the Series B Note to the U.S.
Holder increased by amounts includable in income as market discount (if the U.S.
Holder elects to include market discount on a current basis) and reduced by any
bond premium amortized by any U.S. Holder.
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EXCHANGE OFFER
The exchange of the Series A Notes for the Series B Notes pursuant to the
Exchange Offer should not constitute a taxable exchange. As a result, (i) a U.S.
Holder should not recognize taxable gain or loss as a result of exchanging the
Series A Notes for the Series B Notes pursuant to the Exchange Offer, (ii) the
holding period of the Series B Notes should include the holding period of the
Series A Notes exchanged therefor and (iii) the adjusted tax basis of the Series
B Notes should be the same as the adjusted tax basis of the Series A Notes
exchanged therefor immediately before the exchange.
The Company will be required to pay additional cash interest on the Series
A Notes if it fails to comply with certain of its obligations under the Exchange
Offer Registration Rights Agreement. Such additional interest should be taxable
to a U.S. Holder as ordinary income at the time it accrues or is received in
accordance with such holder's regular method of tax accounting. It is possible,
however, that the IRS may take a different position, in which case a U.S. Holder
might be required to include such additional interest in income as it accrues or
becomes fixed (regardless of such holder's regular method of tax accounting).
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under the Code, a U.S. Holder of a Series B Note may be subject, under
certain circumstances, to information reporting and or backup withholding at a
31% rate with respect to cash payments in respect of interest on, or the gross
proceeds from disposition of, a Series B Note thereof. This withholding applies,
only if a U.S. Holder (i) fails to furnish its social security or other taxpayer
identification number ("TIN") within a reasonable time after a request therefor,
(ii) furnishes an incorrect TIN, (iii) fails to report interest or dividends
properly, or (iv) fails, under certain circumstances to provide a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that it is not subject to backup withholding. Any amount withheld
from a payment to a U.S. Holder under the backup withholding rules is allowable
as a credit (and may entitle such holder to a refund) against such Holder's U.S.
federal income tax liability, provided that the required information is
furnished to the IRS. Certain persons are exempt from backup withholding,
including corporations and financial institutions. Holders of Series B Notes
should consult their tax advisors as to their qualification for exemption from
withholding and the procedure for obtaining such exemption.
NON-U.S. HOLDERS
The following discussion is limited to certain U.S. federal income and
estate tax consequences relevant to a holder of a Series B Note that is not (i)
a current or former citizen or resident of the United States, (ii) a corporation
organized under the laws of the United States or any political subdivision
thereof or therein, (iii) an estate the income of which is subject to U.S.
federal income tax regardless of the source or (iv) a trust, with respect to
which a court within the United States is able to exercise primary supervision
over its administration and one or more United States persons have the authority
to control all its substantial decisions (a "Non-U.S. Holder").
This discussion does not address all aspects of U.S. federal income and
estate taxation that may be relevant to any particular Non-U.S. Holder in light
of such Holder's personal circumstances, including holding the Series B Notes
through a partnership.
For purposes of the following discussion, interest and gain on the sale,
exchange or other disposition of the Series B Note will be considered "U.S.
trade or business income" if such interest or gain is (i) effectively
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connected with the conduct of a U.S. trade or business or (ii) in the case of a
treaty, resident, attributable to a U.S. permanent establishment (or to a fixed
base) in the United States.
STATED INTEREST
Generally, interest paid to a Non-U.S. Holder of a Series B Note that is
not U.S. trade or business income will not be subject to U.S. federal income or
withholding tax if the interest qualifies as "portfolio interest." Interest on
the Series B Notes will qualify as portfolio interest if (i) the Non-U.S. Holder
does not actually or constructively own 10% or more of the total voting power of
all voting stock of the Company and is not a "controlled foreign corporation"
with respect to which the Company is a "related person" within the meaning of
the Code, and (ii) the Non-U.S. Holder, under penalties of perjury, certifies
that the Non-U.S. Holder is not a U.S. person and such certificate provides the
Non-U.S. Holder's name and address.
The gross amount of payments to a Non-U.S. Holder of interest that do not
qualify for the portfolio interest exception and that are not U.S. trade or
business income will be subject to U.S. withholding tax at the rate of 30%,
unless a U.S. income tax treaty applies to reduce or eliminate withholding. U.S.
trade or business income will be taxed at regular U.S. federal income tax rates
rather than the 30% or lower treaty rate. To claim the benefit of a tax treaty
or to claim exemption from withholding because the income is U.S. trade or
business income, the Non-U.S. Holder must provide a properly executed Form 1001
or 4224 (or such successor forms as the IRS designates), as applicable, prior to
payment of interest. These forms must be periodically updated. On October 6,
1997, the Treasury Department issued final regulations relating to withholding,
information reporting and backup withholding that unify current certification
procedures and forms and clarify reliance standards (the "Final Regulations").
The Final Regulations generally will be effective with respect to payments made
after December 31, 1999. Under the Final Regulations, the Forms 1001 and 4224
will be replaced by Form W-8. Also under the Final Regulations, a Non-U.S.
Holder who is claiming the benefits of a tax treaty may be required to obtain a
U.S. taxpayer identification number and to provide certain documentary evidence
issued by foreign governmental authorities to prove residence in the foreign
country. Certain special procedures are provided in the Final Regulations for
payments through qualified intermediaries.
SALE, EXCHANGE OR REDEMPTION OF SERIES B NOTES
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange or
redemption of a Series B Note generally will not be subject to U.S. federal
income tax, unless (i) such gain is U.S trade or business income, (ii) subject
to certain exceptions, the Non-U.S. Holder is an individual who holds the Series
B Note as a capital asset and is present in the United States for 183 days or
more in the taxable year of the disposition or (iii) the Non-U.S. Holder is
subject to tax pursuant to the provisions of the United States federal income
tax laws applicable to certain U.S. expatriates.
FEDERAL ESTATE TAX
Series B Notes held (or treated as held) by an individual who is a Non-U.S.
Holder at the time of his or her death will not be subject to U.S. federal
estate tax, provided that the individual did not actually or constructively own
10% or more of the total voting power of all voting stock of the Company, and
income on the Series B Notes was not U.S. trade or business income.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-U.S. Holder any
interest that is subject to U.S. withholding tax or that is exempt from
withholding pursuant to a tax treaty or the portfolio interest exception. Copies
of these information returns may also be made available under the provisions of
a specific treaty or agreement to the tax authorities of the country in which
the Non-U.S. Holder resides.
The regulations provide that backup withholding and information reporting
will not apply to payments of principal on the Series B Notes by the Company to
a Non-U.S. Holder, if the Holder certifies as to its non-U.S. status under
penalties of perjury or otherwise establishes an exemption from backup
withholding and information reporting, provided that neither the Company nor its
paying agent has actual knowledge that the Holder is not a Non-U.S. Holder or
that the conditions of any other exemption are not, in fact, satisfied.
The payment of the proceeds from the disposition of Series B Notes to or
through the U.S. office of any broker, U.S. or foreign, will be subject
to information reporting and possible backup withholding unless the
92
<PAGE>
Non-U.S. Holder certifies as to its non-U.S. status under penalties of perjury
or otherwise establishes an exemption from such information reporting and backup
withholding, provided that the broker does not have actual knowledge that the
holder is a U.S. Holder or that the conditions of any other exemption are not,
in fact, satisfied.
The payment of proceeds from the disposition of a Series B Note to or
through a non-U.S. office of a broker that is (i) a U.S. person, (ii) a
"controlled foreign corporation" for U.S federal income tax purposes, (iii) a
foreign person 50% or more of whose gross income from all sources for the three-
year period ending with the close of its taxable year preceding the payment (or
for such part of the period that the broker has been in existence) is derived
from activities that are effectively connected with the conduct of a U.S. trade
or business) or (iv) after December 31, 1999, a foreign partnership if either
(A) more than 50% of the income or capital interest is owned by U.S. Holders or
(B) such partnership has certain connections to the United States, will be
subject to information reporting, unless the broker has documentary evidence in
its files that the Non-U.S. Holder is a non-U.S. person and the broker has no
actual knowledge to the contrary. Before January 1, 2000, the payment of the
proceeds from the disposition of Series B Notes to or through a non-U.S. office
of a broker generally will not be subject to backup withholding. After December
31, 1999, such payment will be subject to backup withholding if information
reporting is required.
After December 31, 1999, payments through a non-U.S. intermediary
satisfying certain requirements will not be subject to either backup withholding
or information reporting. Prospective investors should consult with their own
tax advisors regarding these rules.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided the required information is
furnished to the IRS.
93
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives Series B Notes 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 Notes. 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 Notes received in
exchange for Series A Notes where such Series A Notes were acquired as a result
of market-making activities or other trading activities. A broker-dealer who
acquired Series A Notes directly from the Company 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 Notes, unless such sale or transfer is made pursuant to an exemption
from such requirements. The Company has agreed that for a period of 180 days
after the Expiration Date or such shorter period as will terminate when all
Series B Notes 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 Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Series B Notes
by broker-dealers. Series B Notes 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 Notes 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 Notes. Any broker-dealer
that resells Series B Notes 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 Notes may be deemed to be an "underwriter" within
the meaning of the Securities Act, and any profit on any such resale of Series B
Notes 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, the Company 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. The Company has agreed to pay the expenses
incident to the Exchange Offer and to the Company'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 Notes 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 the Company 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 the
Company 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 Securities Inc. is a limited partner of certain investment
funds organized by FS&Co. See "Description of the New Credit Facility."
94
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the legality of the Series B Notes
offered hereby will be passed upon for the Company 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.
95
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADVANCE STORES COMPANY, INCORPORATED 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 Stockholder's 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 - April 25, 1998, and January 3, 1998..................... F-21
Condensed Consolidated Statements of Operations for the Sixteen-week Periods Ended
April 25, 1998, and April 19, 1997............................................................ F-22
Condensed Consolidated Statements of Cash Flows for the Sixteen-week Periods Ended
April 25, 1998, and April 19, 1997........................................................... F-23
Notes to Unaudited Condensed Consolidated Financial Statements for the Sixteen-Week Periods
Ended April 25, 1998 and April 19, 1997....................................................... F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
Advance Stores Company, Incorporated:
We have audited the accompanying consolidated balance sheets of Advance Stores
Company, Incorporated (a Virginia company) and subsidiaries (the Company, and a
wholly owned subsidiary of Advance Holding Corporation), as of January 3, 1998,
and December 28, 1996, and the related consolidated statements of income,
changes in stockholder's 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 Stores
Company, Incorporated 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 matter discussed
in Note 11, as to which the date
is March 18, 1998).
F-2
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JANUARY 3, 1998, AND DECEMBER 28, 1996
<TABLE>
<CAPTION>
ASSETS JANUARY 3, DECEMBER 28,
------
1998 1996
---------- ------------
(dollars in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,447 $ 6,932
Receivables, primarily from vendors 19,117 14,355
Trade Receivables 3,359 -
Inventories 280,267 252,544
Prepaid expenses and other current assets 2,893 1,948
Refundable income taxes 168 -
------- -------
Total current assets 313,251 275,779
PROPERTY AND EQUIPMENT, NET 134,896 108,452
OTHER ASSETS 2,054 389
-------- --------
$450,201 $384,620
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Current liabilities:
Bank overdrafts $ 7,235 $ 14,267
Borrowings secured by trade receivables 3,359 -
Current portion of long-term debt - 1,850
Current portion of deferred revenue 1,530 1,602
Accounts payable 157,096 130,024
Accrued expenses 27,762 22,911
Deferred income taxes 3,133 3,168
-------- --------
Total current liabilities 200,115 173,822
-------- --------
LONG-TERM DEBT, primarily to affiliates 106,542 91,803
-------- --------
DEFERRED REVENUE 693 426
-------- --------
DEFERRED INCOME TAXES 12,839 9,316
-------- --------
OTHER LONG-TERM LIABILITIES 843 456
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 3,
6, 7, 8 and 9)
STOCKHOLDER'S EQUITY:
Common stock, Class A, voting, $100
par value; 5,000 shares authorized, 1
share issued and outstanding - -
Additional paid-in capital 967 967
Retained earnings 128,202 107,830
-------- --------
Total stocholder's equity 129,169 108,797
-------- --------
$450,201 $384,620
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED 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 279,924 228,049 196,153
------------ ----------- -----------
Operating income 43,598 40,319 36,444
------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (7,732) (6,221) (6,327)
Interest income 23 275 392
Losses on sales of property and equipment, net (362) (97) (1,905)
Other, net (485) (329) (251)
------------ ----------- -----------
Total other income (expense), net (8,556) (6,372) (8,091)
------------ ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 35,042 33,947 28,353
PROVISION FOR INCOME TAXES 14,670 13,735 11,648
------------ ----------- -----------
NET INCOME $ 20,372 $ 20,212 $ 16,705
============ =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED JANUARY 3, 1998,
DECEMBER 28, 1996, AND DECEMBER 30, 1995
<TABLE>
<CAPTION>
COMMON ADDITIONAL TOTAL
STOCK PAID-IN RETAINED STOCKHOLDER'S
CLASS A CAPITAL EARNINGS EQUITY
--------- ----------- ---------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 $- $967 $ 70,913 $ 71,880
Net income - - 16,705 16,705
---- ----- -------- --------
BALANCE, December 30, 1995 - 967 87,618 88,585
Net income - - 20,212 20,212
---- ----- -------- --------
BALANCE, December 28, 1996 - 967 107,830 108,797
Net income - - 20,372 20,372
---- ----- -------- --------
BALANCE, January 3, 1998 $- $967 $128,202 $129,169
==== ===== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED 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 $ 20,372 $ 20,212 $ 16,705
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 4,211 5,250 1,913
Net periodic postretirement benefit expense, net of payments made 387 245 211
Net (increase) decrease in:
Receivables, primarily from vendors (4,762) (5,604) (2,531)
Trade receivables (3,359) - -
Inventories (27,723) (72,645) (24,670)
Prepaid expenses and other assets (837) 517 (1,177)
Refundable income taxes (168) - 1,113
Net increase (decrease) in:
Accounts payable 27,072 58,589 9,577
Accrued expenses 4,128 (1,169) 9,009
--------- -------- --------
Net cash provided by operating activities 41,484 22,991 26,854
--------- -------- --------
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 (7,032) 817 4,749
Proceeds from issuance of long-term debt 13,121 16,116 19,572
Principal payments on long-term debt (232) (1,740) (350)
Borrowings secured by trade receivables 3,359 - -
Restricted escrow funds (1,773) - -
Increase (decrease) in deferred revenue 195 (1,416) (1,046)
--------- -------- --------
Net cash provided by financing activities 7,638 13,777 22,925
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 515 (7,353) 9,924
CASH AND CASH EQUIVALENTS, beginning of year 6,932 14,285 4,361
--------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 7,447 $ 6,932 $ 14,285
========= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 8,440 $ 6,354 $ 6,024
Income taxes paid, net of refunds received 12,454 11,212 3,581
========= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED 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 Stores Company, Incorporated and subsidiaries (the Company), a wholly
owned subsidiary of Advance Holding Corporation (the Parent), 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 with original maturities of three months or less.
F-7
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
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.
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.
F-8
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
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 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.
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.
F-9
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
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, receivables, accounts payable, bank overdrafts 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 STORES COMPANY, INCORPORATED 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. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28, ESTIMATED
1998 1996 USEFUL 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 5).
The Company capitalized $169 and $235 of interest incurred on funds used to
construct buildings and improvements during fiscal 1997 and 1996, respectively.
No interest was capitalized during fiscal 1995.
At January 3, 1998, the Company had contractual commitments of approximately
$4,188 to construct facilities or purchase equipment.
4. 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 11,750 9,778
---------- ------------
Total accrued expenses $27,762 $22,911
========== ============
</TABLE>
F-11
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
5. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
---------- -----------
<S> <C> <C>
Revolving note, due December 31, 1999, interest payable quarterly
at the prime rate (8.5% at January 3, 1998) unsecured, payable
to affiliated company $ 46,856 $45,600
Revolving note, due December 31, 1999, interest payable quarterly
at the 90-day LIBOR rate plus 150 basis points (7.4% at January
3, 1998) unsecured, payable to affiliated company 47,764 46,203
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 -
Other notes, payable to affiliated company 1,922 1,850
-------- -------
Total long-term debt 106,542 93,653
Less - Current portion of long-term debt - 1,850
-------- -------
Long-term debt, excluding current portion $106,542 $91,803
======== =======
</TABLE>
At January 3, 1998, the Parent has outstanding borrowings of $91,167 under
revolving credit arrangements and $2,959 under lines of credit in aggregate from
four banks. The Company has guaranteed the Parent's repayment of outstanding
amounts under these arrangements.
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-12
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED 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 cannot 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 cannot 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 aggregate future annual maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998 $ -
1999 96,986
2000 -
2001 -
2002 10,000
--------
$106,986
========
</TABLE>
F-13
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
6. INCOME TAXES:
Provision for income taxes for fiscal 1997, fiscal 1996 and fiscal 1995 consists
of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
1997-
Federal $ 9,037 $3,737 $12,774
State 1,422 474 1,896
------- ------ -------
$10,459 $4,211 $14,670
======= ====== =======
1996-
Federal $ 7,657 $4,645 $12,302
State 828 605 1,433
------- ------ -------
$ 8,485 $5,250 $13,735
======= ====== =======
1995-
Federal $ 8,556 $1,668 $10,224
State 1,179 245 1,424
------- ------ -------
$ 9,735 $1,913 $11,648
======= ====== =======
</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 3.5 2.7 3.3
Other, net 3.4 2.8 2.8
---- ---- ----
Effective income tax rate 41.9% 40.5% 41.1%
==== ==== ====
</TABLE>
F-14
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
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 $ 5,705 $ 3,272
Deferred tax liabilities (21,677) (15,756)
---------- ----------
Net deferred taxes $(15,972) $(12,484)
========== ==========
</TABLE>
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 DECEMBER 28,
3, 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 236 41
--------- --------
Total current deferred income taxes $ (3,133) $ (3,168)
========= ========
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>
For federal and Virginia state income tax reporting purposes, the taxable income
of the Company is included in the consolidated income tax returns of the Parent.
Accordingly, any current and deferred federal and Virginia state income taxes,
computed on a separate company basis, are payable to or receivable from the
Parent.
The Parent currently has two years that are open to audit by the Internal
Revenue Service. The Parent has also received notices from a certain state's
Department of Revenue asserting income tax deficiencies for 1993 through 1995.
In addition, various Parent and Company 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.
F-15
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED 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. 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 10). The
Company accounts for these leases as operating leases.
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 $44,704 $36,675 $29,650
Contingent facility rentals 413 357 442
Equipment rentals 1,523 1,242 1,092
Vehicle rentals 1,658 331 -
------- ------- -------
$48,298 $38,605 $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.
F-16
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED 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. 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.
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.
F-17
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
9. 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.
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>
F-18
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED 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 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.
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.
10. 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 7).
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."
The Company allocated certain payroll and insurance costs to the Parent in
fiscal 1997, resulting in a $1,017 reduction in selling, general and
administrative expenses in the accompanying fiscal 1997 statement of income. No
such allocations were made in fiscal 1996 and 1995.
F-19
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
11. SUBSEQUENT EVENT:
The Parent entered into an agreement and plan of merger on March 4, 1998, which
provides for the recapitalization of the Parent. In connection with this
transaction, (1) all common and preferred stock of the Parent 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 of the Parent, except for the McDuffie County Authority taxable
industrial revenue bonds discussed in Note 5, will be repaid, (4) new debentures
of $60,000 will be issued by the Parent, (5) new notes of $200,000 will be
issued by the Company and (6) a new term loan and revolving credit facility will
be entered into by the Company and guaranteed by the Parent with aggregate
borrowing availability of $375,000. Proceeds from the new credit arrangements
entered into by the Company will be used to pay existing debt to the Parent and
to pay dividends to the Parent in amounts sufficient for the Parent to fund the
recapitalization. The Company intends to account for the transactions effecting
the Company as the issuance of debt, the repayment of intercompany debt to
an affiliated company (the Parent, Note 5) and as a dividend to the Parent for
financial reporting purposes.
12. CONSOLIDATED SUBSIDIARY:
The Company has a wholly owned subsidiary, LARALEV, INC., that is expected to
become a full and unconditional guarantor of the new notes, new term loan and
revolving credit facility that the Company will enter into as part of the
recapitalization discussed in Note 11 above. LARALEV, INC. holds certain
trademarks, tradenames, and other intangible assets for which it receives
royalty income from the Company. Unaudited summarized financial information for
this wholly owned subsidiary is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current assets $ 4,566 $ 3,507 $ 2,897
Noncurrent assets 33,342 22,084 12,945
Current liabilities 293 0 38
Noncurrent liabilities 0 0 0
Royalty income from the Company 16,962 14,120 12,051
Other income 2,064 1,231 692
Income from operations 18,913 15,163 12,633
Net income 12,024 9,788 8,140
====== ====== ======
</TABLE>
Current and noncurrent assets include $37,651, $25,466 and $15,761 of
receivables from the Company at January 3, 1998, December 28, 1996 and December
30, 1995, respectively.
F-20
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - APRIL 25, 1998, AND JANUARY 3, 1998
<TABLE>
<CAPTION>
APRIL 25, JANUARY 3,
ASSETS 1998 1998
------ --------- ----------
(Unaudited)
(dollars in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 36,540 $ 7,447
Receivables, primarily from vendors 22,740 19,117
Trade receivables 4,857 3,359
Inventories 333,083 280,267
Prepaid expenses and other current assets 3,646 2,893
Refundable income taxes 3,758 168
--------- ---------
Total current assets 404,624 313,251
PROPERTY AND EQUIPMENT, NET 139,056 134,896
OTHER ASSETS 19,295 2,054
--------- ---------
$562,975 $450,201
========= =========
LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
----------------------------------------------
CURRENT LIABILITIES:
Bank overdrafts $ - $ 7,235
Borrowings secured by trade receivables 4,857 3,359
Current portion of deferred revenue 1,916 1,530
Accounts payable 219,907 157,096
Accrued expenses 38,933 27,762
Deferred income taxes 2,698 3,133
--------- ---------
Total current liabilities 268,311 200,115
--------- ---------
LONG-TERM DEBT 335,000 106,542
--------- ---------
DEFERRED REVENUE 1,638 693
--------- ---------
DEFERRED INCOME TAXES 13,311 12,839
--------- ---------
POST-RETIREMENT BENEFITS 985 843
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S (DEFICIT) EQUITY:
Common stock, Class A, voting $100 par value; 5,000 shares authorized; 1
share issued and outstanding - -
Additional paid-in capital 967 967
(Accumulated deficit) retained earnings (57,237) 128,202
--------- ---------
Total stockholder's (deficit) equity (56,270) 129,169
--------- ---------
$562,975 $450,201
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-21
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIXTEEN-WEEK PERIODS ENDED APRIL 25, 1998, AND APRIL 19, 1997
<TABLE>
<CAPTION>
SIXTEEN-WEEK PERIOD
ENDED
-----------------------------
APRIL 25, APRIL 19,
1998 1997
------------- -------------
(Unaudited) (Unaudited)
(dollars in thousands)
<S> <C> <C>
Net sales $ 288,963 $ 239,151
Cost of sales 176,377 146,860
---------- ----------
Gross profit 112,586 92,291
Selling, general and administrative expenses 99,178 82,008
Expenses associated with the recapitalization of the Parent 14,005 -
---------- ----------
Operating income (597) 10,283
---------- ----------
Other income (expense):
Interest expense (3,414) (2,538)
Other (116) (177)
---------- ----------
Total other expense, net (3,530) (2,715)
---------- ----------
(Loss) income before income taxes (4,127) 7,568
Income tax (benefit) expense (1,688) 3,168
---------- ----------
Net (loss) income $ (2,439) $ 4,400
========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-22
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIXTEEN-WEEK PERIODS ENDED APRIL 25, 1998 AND APRIL 19, 1997
<TABLE>
<CAPTION>
APRIL 25, APRIL 19,
1998 1997
----------- ------------
(Unaudited) (Unaudited)
(dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (2,439) $ 4,400
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization of property and equipment 7,486 6,295
Loss on sale of property and equipment 26 35
Amortization of deferred debt issuance costs 101 -
Provision for deferred income taxes 37 516
Net periodic postretirement benefit expense, net of payments made 142 123
Net (increase) decrease in:
Receivables, primarily from vendors (3,623) 903
Trade receivables (1,498) -
Inventories (52,816) (37,733)
Prepaid expenses and other assets (1,388) (1,044)
Refundable income taxes (3,590) -
Net increase in:
Accounts payable 62,811 31,877
Accrued expenses 9,993 7,063
----------- ------------
Net cash provided by operating activities 15,242 12,435
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (15,813) (9,658)
Proceeds from sale of property and equipment 4,141 55
----------- ------------
Net cash used in investing activities (11,672) (9,603)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in bank overdrafts (7,235) (4,783)
Proceeds from issuance of long-term debt 575 638
Payments on long-term debt (97,117) -
Borrowings under new credit facilities 325,000 -
Payment of debt issuance costs (16,082) -
Dividend paid to Advance Holding Corporation (183,000) -
Other 3,382 769
----------- ------------
Net cash provided by (used in) financing activities 25,523 (3,376)
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 29,093 (544)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,447 6,932
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 36,540 $ 6,388
=========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 3,372 $ 3,036
Income taxes paid, net of refunds received 1,933 1,850
=========== ============
NONCASH TRANSACTION:
Debt issuance costs accrued $ 1,178 $ -
=========== ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-23
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIXTEEN-WEEK PERIODS ENDED APRIL 25, 1998, AND APRIL 19, 1997
(dollars in thousands, except per share data)
(unaudited)
1. BASIS OF PRESENTATION:
Advance Stores Company, Incorporated is a wholly owned subsidiary of Advance
Holding Corporation (the Parent). The accompanying unaudited condensed
consolidated financial statements include the accounts of Advance Stores
Company, Incorporated 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 April 25, 1998 and the
consolidated statements of operations and cash flows for the 16-week periods
ended April 25, 1998, and April 19, 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 16-week periods are not necessarily indicative
of the operating results for the full fiscal year.
F-24
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIXTEEN-WEEK PERIODS ENDED APRIL 25, 1998, AND APRIL 19, 1997
(dollars in thousands, except per share data)
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>
APRIL 25, JANUARY 3,
1998 1998
-------- ----------
<S> <C> <C>
Replacement cost $332,333 $280,267
Reserve to state inventories at LIFO 3,774 2,274
-------- ---------
Inventories at LIFO 336,107 282,541
Other reserves (3,024) (2,274)
-------- ---------
$333,083 $280,267
======== =========
</TABLE>
3. OTHER ASSETS:
As of April 25, 1998, other assets include deferred debt issuance costs of
$17,083, net of accumulated amortization of $64. Such costs are being amortized
over the term of the related debt (6 to 10 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
on accounting for its employees' participation in the Parent's employee stock
options and awards. Under APB 25, compensation expense of stock options is
measured as the excess, if any, of the fair market value of the Parent's common
stock at the measurement date over the exercise price.
F-25
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIXTEEN-WEEK PERIODS ENDED APRIL 25, 1998, AND APRIL 19, 1997
(dollars in thousands, except per share data)
5. RECAPITALIZATION:
On April 15, 1998, Advance Holding Corporation (the Parent) consummated its
recapitalization pursuant to an Agreement and Plan of Merger dated March 4, 1998
(the Merger Agreement). In connection with the Merger, the Parent's Board of
Directors authorized a 12,500 to 1 split of the Parent's common stock and a
change in the par value of the Parent's common stock from $100 to $.01 per
share. Pursuant to the Merger Agreement, AHC Corporation (AHC), a corporation
controlled by an investment fund organized by Freeman Spogli & Co. Incorporated
(FS&Co.), merged into the Parent (the Merger), with the Parent as the surviving
corporation. In the Merger, a portion of the Parent's common stock and all its
preferred stock were converted into the right to receive in the aggregate
approximately $351,000 in cash and certain stock options for 500,000 shares of
the Parent's common stock. Certain shares representing approximately 14% of the
Parent's outstanding Class A common stock remained outstanding upon consummation
of the Merger. Immediately prior to the Merger, FS&Co. purchased approximately
$80,500 of the common stock of AHC which was converted in the Merger into
approximately 64% of the Parent's outstanding common stock and Ripplewood
Partners, L.P. and its affiliates (Ripplewood) purchased approximately $20,000
of the common stock of AHC which was converted in the merger into approximately
16% of the Parent's outstanding common stock. In connection with the Merger,
management purchased approximately $8,000, or approximately 6%, of the Parent's
outstanding common stock.
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 the Parent issued approximately $60,000 of senior
discount debentures. Proceeds from the new bank facility and senior subordinated
notes were used to pay a $183,000 dividend to the Parent and to extinguish a
substantial portion of the Company's long-term debt.
The Merger, the dividend, the retirement of debt, borrowings under the new bank
credit facility, the Parent's issuance of the senior discount debentures and the
Company's issuance of the senior subordinated notes collectively represent the
"Recapitalization". The Recapitalization transactions effecting the Company
have been accounted for as the issuance of debt, the repayment of intercompany
debt to an affiliated company (the Parent, Note 6) and as a dividend to the
Parent for financial reporting purposes.
F-26
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIXTEEN-WEEK PERIODS ENDED APRIL 25, 1998, AND APRIL 19, 1997
(dollars in thousands, except per share data)
Concurrent with the Recapitalization, the Company paid $11,500 in bonuses to
certain employees, including executive officers. In addition, the Company
incurred expenses of $2,505, primarily professional services, related to the
Recapitalization, of which $1,600 has been allocated to the Company by the
Parent for expenses incurred by the Parent on behalf of the Company. Such
bonuses and expenses are presented as expenses associated with the
Recapitalization of the Parent in the accompanying unaudited condensed
consolidated statement of operations for the 16-week period ending April 25,
1998.
The Company has deferred $17,060 of debt issuance costs related to the new debt
incurred in connection with the Recapitalization.
As of April 25, 1998, accrued expenses include $2,267 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. Approximately $3,935 of the fee has been recorded by the Company, with
$2,935 classified as deferred debt issuance costs and $1,000 charged to expenses
associated with the Recapitalization of the Parent. Approximately $1,065 of the
fee has been recorded by the Parent.
As of April 25, 1998, receivables, primarily from vendors includes a $775
receivable from the Parent for reimbursement of certain Recapitalization related
costs.
F-27
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIXTEEN-WEEK PERIODS ENDED APRIL 25, 1998, AND APRIL 19, 1997
(dollars in thousands, except per share data)
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 25, JANUARY 3,
1998 1998
-------- ---------
<S> <C> <C>
Senior debt-
Delayed draw facilities $ - $ -
Revolving facility - -
Tranche B facility 125,000 -
Revolving notes payable to affiliated company, repaid in April 1998 - 46,856
Revolving note payable to affiliated company, repaid in April 1998 - 47,764
McDuffie County Authority taxable industrial development revenue bonds,
interest at an adjustable rate (5.55% at April 25, 1998) 10,000 10,000
Other notes payable to affiliated company, repaid in April 1998 - 1,922
Subordinated Debt-
Subordinated notes payable, interest due semi-annually at 10.25%,
commencing on October 15, 1998, due April 2008 200,000 -
--------- --------
Total long-term debt 335,000 106,542
Less - Current portion of long-term debt - -
--------- --------
Long-term debt, excluding current portion $335,000 $106,542
========= ========
</TABLE>
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.
F-28
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIXTEEN-WEEK PERIODS ENDED APRIL 25, 1998, AND APRIL 19, 1997
(dollars in thousands, except per share data)
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.
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 Company's trailing Total Debt to EBITDA ratio, as defined.
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 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 April
25, 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 guaranteed by the Parent and is secured by
substantially all of the assets of the Parent and the Company.
The New Credit Facility contains covenants restricting the ability of the
Company 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 the Parent 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.
F-29
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIXTEEN-WEEK PERIODS ENDED APRIL 25, 1998, AND APRIL 19, 1997
(dollars in thousands, except per share data)
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.
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, LARALEV, INC. which holds
certain trademarks and tradenames and other intangible assets for which it
receives royalty income from the Company. The Notes contain certain covenants
that limit, among other things, the ability of the Company 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 the Company from
engaging in certain mergers or consolidations and selling assets.
7. STOCK OPTIONS:
The Parent 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
Parents 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 April 25, 1998.
F-30
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIXTEEN-WEEK PERIODS ENDED APRIL 25, 1998, AND APRIL 19, 1997
(dollars in thousands, except per share data)
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.
Options outstanding at April 25, 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
--------
898,750
========
</TABLE>
No options were exercisable at April 25, 1998.
The Company has elected to account for 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.
The fair market value did not change from the grant date to April 25, 1998.
F-31
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIXTEEN-WEEK PERIODS ENDED APRIL 25, 1998, AND APRIL 19, 1997
(dollars in thousands, except per share data)
8. STOCKHOLDER'S (DEFICIT) EQUITY:
Changes in stockholder's (deficit) equity for the 16-week period ended April 25,
1998, are as follows:
<TABLE>
<CAPTION>
(ACCUMULATED TOTAL
COMMON ADDITIONAL DEFICIT) STOCKHOLDER'S
STOCK PAID-IN RETAINED (DEFICIT)
CLASS A CAPITAL EARNINGS EQUITY
------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, January 3, 1998 $ - $967 $ 128,202 $ 129,169
Dividend to Parent - - (183,000) (183,000)
Net loss - - (2,439) (2,439)
------ ------- ---------- ----------
Balance, April 25, 1998 $ - $967 $ (57,237) $ (56,270)
====== ======= ========== ==========
</TABLE>
9. RELATED-PARTY TRANSACTION:
In April, 1998, the Company sold its airplane to its Chairman of the Board, an
existing stockholder, for its net book value of approximately $4,100, which
approximated fair value.
Subsequent to April 25, 1998, the Parent made a $8,300 contribution of equity to
the Company.
10. CONSOLIDATED SUBSIDIARY:
The Company has a wholly owned subsidiary LARALEV, INC., that is a full and
unconditional guarantor of the new notes, new term loan and revolving credit
facility that the Company entered into as part of the Recapitalization. LARALEV,
INC. holds certain trademarks, tradenames and other intangible assets for which
it receives royalty income from the Company. LARALEV, INC. comprises all direct
and indirect subsidiaries, other than inconsequential subsidiaries, of the
Company. The Company has not presented separate financial statements for
LARALEV, INC. because management has determined that such information is not
material to investors. Unaudited summarized financial information for this
wholly-owned subsidiary is as follows:
<TABLE>
<CAPTION>
APRIL 25, APRIL 19,
1998 1997
--------- ------------
<S> <C> <C>
Royalty income from the Company $5,779 $ 4,783
Other income 798 530
Income from operations 6,570 5,301
Net income 4,239 3,418
====== =======
APRIL 25, 1998
-------------------------
Current assets $ 6,300
Noncurrent assets 36,463
Current liabilities 909
Noncurrent liabilities 0
=======
</TABLE>
At April 25, 1998, current and noncurrent assets include $42,599 of receivables
from the Company.
11. CONTINGENCIES:
The employment agreements which existed at January 3, 1998 have been terminated.
The Company entered into new agreements with certain employees that provide
severance pay benefits under certain circumstances.
F-32
<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 THE COMPANY 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 SELL 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.............................................................. 13
Use of Proceeds........................................................... 18
Capitalization............................................................ 19
The Exchange Offer........................................................ 20
Unaudited Pro Forma Consolidated Financial
Data..................................................................... 27
Selected Consolidated Financial Data...................................... 31
Management's Discussion and Analysis
of Financial Condition and
Results of Operations.................................................... 33
Business.................................................................. 39
Management................................................................ 50
Certain Transactions...................................................... 55
Description of the New Credit Facility.................................... 57
Description of Series B Notes............................................. 59
Description of Holding Indebtedness....................................... 89
Certain Federal Income Tax Considerations................................. 90
Plan of Distribution...................................................... 94
Legal Matters............................................................. 95
Index to Consolidated Financial Statements................................ F-1
</TABLE>
$200,000,000
ADVANCE STORES COMPANY,
INCORPORATED
10.25% SENIOR SUBORDINATED
NOTES DUE 2008
, 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 Articles of Incorporation
of the Registrant, as amended, 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
Advance Holding Corporation ("Holding") 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 Holding, its officers, directors and agents
and each person controlling Holding 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 between Nicholas F.
Taubman and Holding (attached as Exhibit 10.26 to this Registration Statement)
which provides for indemnification by Holding of Mr. Taubman to the fullest
extent permitted by law. Holding 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>
Pursuant to Section 145 of the Delaware General Corporation Law, Article
FIFTH of the Certificate of Incorporation of the Co-Registrant, as amended, a
copy of which is filed as Exhibit 3.1 to the Registration Statement (the
"Certificate of Incorporation"), provides that to the fullest extent permitted
by the Delaware General Corporation Law, each director of the Co-Registrant
shall incur no personal liability to the Co-Registrant or its stockholders for
monetary damages for any breach of fiduciary duty as a director.
Article SIXTH of the Certificate of Incorporation and Article VIII((S)5) of
the Bylaws of the Co-Registrant provide that to the fullest extent permitted by
Delaware General Corporation Law, each director, officer, employee and agent of
the Co-Registrant shall be indemnified and held harmless by the Co-Registrant.
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.
II-2
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
1.1* Purchase Agreement dated as of April 7, 1998 among Advance Stores Company,
Incorporated (the "Company"), Donaldson, Lufkin & Jenrette Securities Corporation and
Chase Securities Inc. (the "Initial Purchasers").
2.1* Merger Agreement dated as of March 4, 1998 among AHC Corporation and Advance
Holding Corporation ("Holding") with FS Equity Partners III, L.P., FS Equity Partners IV,
L.P. ("FSEP IV"), and FS Equity Partners International, L.P.
3.1* Articles of Incorporation of the Company, as amended to date.
3.2* Bylaws of the Company, as amended to date.
3.3* Certificate of Incorporation of LARALEV, INC. ("LARALEV"), as amended to date.
3.4* Bylaws of LARALEV.
4.1* Indenture dated as of April 15, 1998 among the Company, LARALEV, as guarantor, and
United States Trust Company of New York, as Trustee, with respect to the 10.25% Senior
Subordinated Notes due 2008 (including the form of 10.25% Senior Subordinated Note due
2008).
4.2* Registration Rights Agreement dated as of April 15, 1998 among the Company and the Initial
Purchasers.
5.1 Opinion of Riordan & McKinzie as to the legality of securities registered hereunder.
10.1* Stockholders' Agreement dated 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 Common Stock).
10.2* Credit Agreement dated as of April 15, 1998 among Holding, the Company, as borrower,
the lenders party thereto, and the Chase Manhattan Bank ("Chase"), as administrative agent.
10.3* Pledge Agreement dated as of April 15, 1998 among the Company, Holding, LARALEV,
and Chase, as collateral agent.
10.4* Guarantee Agreement dated as of April 15, 1998 among Holding and LARALEV, as
guarantors, and Chase, as collateral agent.
10.5* Indemnity, Subrogation and Contribution Agreement dated as of April 15, 1998 among the
Company, Holding, LARALEV and Chase, as collateral agent.
10.6* Security Agreement dated as of April 15, 1998 among the Company, Holding, LARALEV
and Chase, as collateral agent.
10.7* Lease Agreement dated as of March 16, 1995 between Ki, L.C. and the Company for the
Company's headquarters located at 5673 Airport Road, Roanoke, Virginia, as amended.
10.8* Lease Agreement dated as of January 1, 1997 between Nicholas F. Taubman and the
Company for the distribution center located at 1835 Blue Hills Drive, N.E., Roanoke,
Virginia, as amended.
10.9* Trust Indenture dated as of December 1, 1997 among McDuffie County Development
Authority, First Union National Bank, as trustee, and Branch Banking and Trust Company,
as credit facility trustee, relating to the $10,000,000 Taxable Industrial Development
Revenue Bonds (Advance Stores Company, Incorporated Project) Series 1997 (the "IRB").
10.10* Lease Agreement dated as of December 1, 1997 between Development Authority of
McDuffie County and the Company relating to the IRB.
10.11* Letter of Credit and Reimbursement Agreement dated as of December 1, 1997 among the
Company, Holding and First Union National Bank relating to the IRB.
10.12* Advance Holding Corporation 1998 Senior Executive Stock Option Plan.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.13* Form of Advance Holding Corporation 1998 Senior Executive Stock Option Agreement.
10.14* Advance Holding Corporation 1998 Executive Stock Option Plan.
10.15* Form of Advance Holding Corporation 1998 Stock Option Agreement.
10.16* Advance Holding Corporation 1998 Senior Executive Stock Subscription Plan.
10.17* Form of Advance Holding Corporation Senior Executive Stock Subscription Agreement.
10.18* Advance Holding Corporation 1998 Employee Stock Subscription Plan.
10.19* Form of Advance Holding Corporation Employee Stock Subscription Agreement.
10.20* Form of Secured Promissory Note.
10.21* Form of Stock Pledge Agreement.
10.22* Form of Employment and Non-Competition Agreement between Childs, Cox, Dickerson,
Gearhart, Gray, Gregory, Hale, Helms, Jeter, Knighten, Kyle, Livesay, McDaniel,
Miley, Quinn, Rakes, Richardson, Smith, Turner and Williams and the Company
(one-year agreement).
10.23* 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).
10.24* Form of Indemnity Agreement between each of the directors of Holding (other than Nicholas
F. Taubman) and Holding.
10.25* Form of Consulting and Non-Competition Agreement among Nicholas F. Taubman, Holding
and the Company.
10.26* Indemnity Agreement dated as of April 15, 1998 between Nicholas F. Taubman and
Holding.
10.27* Option Agreement dated as of April 15, 1998 between Nicholas F. Taubman and Holding.
10.28* Option Agreement dated as of April 15, 1998 between Arthur Taubman Trust dated July 13,
1968 and Holding.
10.29* Form of Employment and Non-Competition Agreement among Garnett E. Smith, Holding
and the Company.
10.30* Form of Series B Note.
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.
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
(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
II-4
<PAGE>
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. 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 Amendment No. 1 to this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Roanoke, Commonwealth of Virginia, on July 27, 1998.
ADVANCE STORES COMPANY, INCORPORATED
By: /s/ J. O'Neil Leftwich
--------------------------------
J. O'Neil Leftwich
Senior Vice President and
Chief Financial Officer,
Secretary and Treasurer
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, Amendment No. 1 to this Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
By: * President and Chief Executive Officer July 27, 1998
----------------------
Garnett E. Smith and Director (Principal Executive Officer)
By: /s/ J. O'Neil Leftwich Senior Vice President and Chief July 27, 1998
----------------------
J. O'Neil Leftwich Financial Officer, Secretary and
Treasurer (Principal Financial and
Accounting Officer)
By: * Chairman of the Board and Director July 27, 1998
----------------------
Nicholas F. Taubman
By: * Director July 27, 1998
----------------------
Mark J. Doran
By: * Director July 27, 1998
----------------------
John M. Roth
By: * Director July 27, 1998
----------------------
J. Frederick Simmons
By: * Director July 27, 1998
----------------------
Ronald D. Spogli
By: * Director July 27, 1998
----------------------
Timothy C. Collins
*By: /s/ J. O'Neil Leftwich July 27, 1998
----------------------
J. O'Neil Leftwich
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused Amendment No. 1 to this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Wilmington, State of Delaware, on July 27, 1998.
LARALEV, INC.
By: /s/ David C. Eppes
-----------------------------------
David C. Eppes
President
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, Amendment No. 1 to this Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
By /s/ David C. Eppes President and Director July 27, 1998
-----------------------
David C. Eppes (Principal Executive Officer)
By * Secretary and Treasurer (Principal July 27, 1998
-----------------------
Andrew T. Panaccione Financial and Accounting Officer)
By * Director July 27, 1998
-----------------------
J. O'Neil Leftwich
</TABLE>
* By: /s/ David C. Eppes
--------------------
David C. Eppes
Attorney-in-Fact
II-7
<PAGE>
EXHIBIT 5.1
RIORDAN & McKINZIE
300 South Grand Avenue, Suite 2900
Los Angeles, California 90071
July 28, 1998
Advance Stores Company, Incorporated
5673 Airport Road
Roanoke, Virginia 24012
LARALEV, INC.
103 Foulk Road
Suite 200
Wilmington, Delaware 19803
Re: Advance Stores Company, Incorporated -- 10.25% Series B Senior
Subordinated Notes due April 15, 2008 -- Registration Statement
on Form S-4
---------------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Advance Stores Company, Incorporated, a
Virginia corporation (the "Company"), and LARALEV, INC., a Delaware corporation
(the "Guarantor"), in connection with the registration under the Securities Act
of 1933, as amended (the "Securities Act") of, and the offer to exchange, the
Company's 10.25% Series B Senior Subordinated Notes due April 15, 2008 to be
registered with the Securities and Exchange Commission (the "Commission") (the
"Series B Notes"), for its outstanding 10.25% Series A Senior Subordinated Notes
due April 15, 2008. This opinion is delivered to you in connection with the
Registration Statement on Form S-4 (the "Registration Statement") for the
aforementioned Series B Notes and exchange offer, filed as of the date hereof
with the Commission under the Securities Act. Capitalized terms used herein
without definition shall have the meanings given to them in the Registration
Statement.
In rendering this opinion, we have examined copies identified to our
satisfaction as being copies of the Indenture, attached as an exhibit to the
Registration Statement, and originals, counterparts or copies identified to our
satisfaction as being true
<PAGE>
Advance Stores Company, Incorporated
LARALEV, INC.
July 28, 1998
Page 2
copies of such other documents as we have deemed necessary or appropriate to
render the opinions given below. We have assumed the authenticity of all
documents submitted to us as originals and the conformity to authentic original
documents of all documents submitted to us as certified, conformed or
photostatic copies.
We have investigated such questions of law for the purpose of
rendering this opinion as we have deemed necessary. We express no opinion with
respect to compliance with state securities laws or with respect to any state or
federal fraudulent conveyance statutes.
Based upon the foregoing and subject to the qualifications, exceptions
and limitations set forth herein, we are of the opinion that, when the Indenture
shall become qualified under the Trust Indenture Act of 1939, as amended, and
when the Series B Notes and the Subsidiary Guarantee shall have been executed,
authenticated and delivered in accordance with the Indenture and the exchange
offer contemplated by the Registration Statement, the Series B Notes and the
Subsidiary Guarantee will be legally issued and fully paid and constitute the
legally valid and binding obligations of the Company and the Guarantor,
respectively.
To the extent that the obligations of the Company under the Indenture
may be dependent upon such matters, we assume for purposes of this opinion that
the Trustee is duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization; that the Trustee is duly qualified to
engage in the activities contemplated by the Indenture; that the Indenture has
been duly authorized, executed and delivered by the Trustee and constitutes the
valid, binding and enforceable obligation of the Trustee; that the Trustee is in
compliance, generally and with respect to acting as a trustee under the
Indenture, with all applicable laws and regulations; and that the Trustee has
the requisite corporate and legal power and authority to perform its obligations
under the Indenture.
We advise you that certain members of this firm own interests,
directly or indirectly, in a partnership which owns a majority of the stock of
the parent of the Company.
<PAGE>
Advance Stores Company, Incorporated
LARALEV, INC.
June 4, 1998
Page 3
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus which is a part of the Registration Statement.
Very truly yours,
/s/ Riordan & McKinzie
<PAGE>
EXHIBIT 12.1
ADVANCE STORES COMPANY, INCORPORATED
SCHEDULE OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Historical
------------------------------------------------------------------------
Sixteen
Weeks
Ended
Fiscal Year Ended April 25,
------------------------------------------------------------
1993 1994 1995 1996 1997 1998
------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes $17,754 $36,285 $28,353 $33,947 $35,042 ($4,127)
------------------------------------------------------------------------
Fixed charges:
Interest expense 2,031 3,633 6,327 6,221 7,732 3,414
Interest portion of rentals 5,280 7,400 10,395 12,868 16,099 5,806
------------------------------------------------------------------------
Total fixed charges 7,311 11,033 16,722 19,089 23,831 9,220
------------------------------------------------------------------------
Earnings before income taxes and fixed charges $25,065 $47,318 $45,075 $53,036 $58,873 $5,093
=======================================================================
Ratio of earnings to fixed charges (2) 3.43 4.29 2.70 2.78 2.47 --
=======================================================================
<CAPTION>
Proforma (1)
----------------------------
Sixteen
Weeks
Ended
Fiscal Yr April 25,
1997 1998
----------------------------
<S> <C> <C>
Income (loss) before income taxes $ 8,417 $(11,929)
----------------------------
Fixed charges:
Interest expense $34,357 11,216
Interest portion of rentals 16,099 5,806
-----------------------------
Total fixed charges 50,456 17,022
-----------------------------
Earnings before income taxes and fixed charges $58,873 $ 5,093
=============================
Ratio of earnings to fixed charges (2) 1.17 --
=============================
</TABLE>
(1) Adjusted to reflect impact of recapitalization of the Parent.
(2) Ratio of earnings to fixed charges has not been computed since earnings were
not sufficient to cover fixed changes. The coverage deficiency was $4,127
for the historical sixteen weeks ended April 25, 1998 and $11,929 for the
pro forma sixteen weeks ended April 25, 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.
ARTHUR ANDERSEN LLP
Greensboro, North Carolina
July 27, 1998
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
_______________________________________________________________________________
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON ________, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE").
_______________________________________________________________________________
ADVANCE STORES COMPANY, INCORPORATED
LETTER OF TRANSMITTAL
10.25% SENIOR SUBORDINATED NOTES DUE 2008
<TABLE>
<CAPTION>
To: U.S. Trust Company of New York, The Exchange Agent
<S> <C>
By Mail: By Overnight Courier:
United States Trust Company of New York United States Trust Company of New York
P.O. Box 844 770 Broadway, 13th Floor
Cooper Station New York, New York 10003
New York, New York 10276-0844 Attention: Corporate Trust Operations Department
(registered or certified mail recommended)
By Hand: By Facsimile:
United States Trust Company of New York (212) 780-0592
111 Broadway, Lower Level (For Eligible Institutions Only)
New York, New York 10006
Attention: Corporate Trust Services Confirm by telephone:
(800) 548-6565
</TABLE>
Delivery of this instrument to an address other than as set forth above or
transmission of instructions via a facsimile transmission to a number other than
as set forth above will not constitute a valid delivery. The instructions
accompanying this Letter of Transmittal should be read carefully before this
Letter of Transmittal is completed.
The undersigned acknowledges that he or she has received the Prospectus
dated ___________, 1998, (the "Prospectus") of Advance Stores Company,
Incorporated (the "Company") and this Letter of Transmittal (the "Letter of
Transmittal"), which together constitute the Company's offer (the "Exchange
Offer") to exchange $1,000 principal amount of its 10.25% Series B Senior
Subordinated Notes due 2008 (the "Series B Notes") which have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
a Registration Statement of which the Prospectus is a part, for each $1,000
principal amount of its outstanding 10.25% Series A Senior Subordinated Notes
due 2008 (the "Series A Notes"), of which $200,000,000 principal amount is
outstanding. Other capitalized terms used but not defined herein have the
meaning given to them in the Prospectus.
The Letter of Transmittal is to be used by Holders of Series A Notes (i) if
certificates representing the Series A Notes are to be physically delivered
herewith; or (ii) if tender of Series A Notes is to be made by book-entry
transfer to the Exchange Agent's account at The Depository Trust Company
("DTC"), pursuant to the procedures set forth in the Prospectus under "The
Exchange Offer - Procedures for Tendering" by any financial institution that is
a participant in DTC and whose name appears on a security position listing as
the owner of Series A Notes; or (iii) if tender of Series A Notes is to be made
according to the guaranteed delivery procedures set forth in the Prospectus
under "The Exchange Offer - Guaranteed Delivery Procedures." Delivery of
documents to DTC does not constitute delivery to the Exchange Agent.
The term "Holder" with respect to the Exchange Offer means any person (i)
in whose name Series A Notes are registered on the books of the Company or any
other person who has obtained a properly completed bond power from the
registered holder; or (ii) whose Series A Notes are held of record by DTC who
desires to deliver such Series A Notes by book-entry transfer at DTC. The
undersigned has completed, executed and delivered this Letter of Transmittal to
indicate the action the undersigned desires to take with respect to the Exchange
Offer. Holders who wish to tender their Series A Notes must complete this
letter in its entirety.
<PAGE>
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE CHECKING ANY BOX BELOW
<TABLE>
<CAPTION>
__________________________________________________________________________________________________________________________________
DESCRIPTION OF 10.25% SERIES A SENIOR SUBORDINATED NOTES DUE 2008 ("SERIES A NOTES"):
__________________________________________________________________________________________________________________________________
<S> <C> <C>
PRINCIPAL AMOUNT TENDERED (MUST
NAME(S) AND ADDRESS(ES) OF AGGREGATE PRINCIPAL AMOUNT BE IN INTEGRAL MULTIPLE OF
REGISTERED HOLDER(S) REPRESENTED BY CERTIFICATE(S) $1,000)*
(PLEASE FILL IN, IF BLANK)
__________________________________________________________________________________________________________________________________
_____________________________ ______________________________
_____________________________ ______________________________
_____________________________ ______________________________
_____________________________ ______________________________
Total
__________________________________________________________________________________________________________________________________
* Unless indicated in the column labeled "Principal Amount Tendered," any tendering Holder of Series A Notes will be
deemed to have tendered the entire aggregate principal amount represented by the column labeled "Aggregate Principal Amount
Represented by Certificate(s)."
If the space provided above is inadequate, list the principal amounts on a separate signed schedule and affix the list to
this Letter of Transmittal.
The minimum permitted tender is $1,000 in principal amount of Series A Notes. All other tenders must be in integral
multiples of $1,000.
__________________________________________________________________________________________________________________________________
</TABLE>
________________________________________________________________________________
SPECIAL PAYMENT INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5 AND 6)
To be completed ONLY if certificates for Series A Notes in a principal amount
not tendered or not accepted for exchange, or Series B Notes issued in
exchange for Series A Notes accepted for exchange, are to be issued in the
name of someone other than the undersigned, or if the Series A Notes tendered
by book-entry transfer that are not accepted for exchange are to be credited
to an account maintained by DTC.
ISSUE CERTIFICATE(S) TO:
Name______________________________________
(Please Print)
Address___________________________________
__________________________________________
(Include Zip Code)
__________________________________________
(Tax Identification or Social Security No.)
________________________________________________________________________________
________________________________________________________________________________
SPECIAL DELIVERY INSTRUCTIONS
(SEE EXCHANGE INSTRUCTIONS 4, 5 AND 6)
To be completed ONLY if certificates for Series A Notes in a principal amount
not tendered or not accepted for exchange, or Series B Notes issued in
exchange for Series A Notes accepted for exchange, are to be sent to someone
other than the undersigned, or to the undersigned at an address other than
that shown above.
MAIL TO:
Name_____________________________________
(Please Print)
Address___________________________________
__________________________________________
(Include Zip Code)
__________________________________________
(Tax Identification or Social Security No.)
________________________________________________________________________________
[_] CHECK HERE IF TENDERED SERIES A NOTES ARE BEING DELIVERED BY DTC TO THE
EXCHANGE AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution: ____________________________________________
DTC Book-Entry Account No.: ____________________________________________
Transaction Code No.: ____________________________________________________
[_] CHECK HERE IF YOU ARE A BROKER-DEALER.
Name: __________________________________________________________________
Address: __________________________________________________________________
__________________________________________________________________
[_] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
2
<PAGE>
LADIES AND GENTLEMEN:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Company the principal amount of Series A Notes indicated
above. Subject to and effective upon the acceptance for exchange of the
principal amount of Series A Notes tendered in accordance with this Letter of
Transmittal, the undersigned sells, assigns and transfers to, or upon the order
of, the Company all right, title and interest in and to the Series A Notes
tendered hereby. The undersigned hereby irrevocably constitutes and appoints
the Exchange Agent its agent and attorney-in-fact (with full knowledge that the
Exchange Agent also acts as the agent of the Company) with respect to the
tendered Series A Notes with full power of substitution to (i) deliver
certificates for such Series A Notes to the Company, or transfer ownership of
such Series A Notes on the account books maintained by DTC, and deliver all
accompanying evidences of transfer and authenticity to, or upon the order of,
the Company; and (ii) present such Series A Notes for transfer on the books of
the Company and receive all benefits and otherwise exercise all rights of
beneficial ownership of such Series A Notes, all in accordance with the terms of
the Exchange Offer. The power of attorney granted in this paragraph shall be
deemed irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that he or she has full
power and authority to tender, sell, assign and transfer the Series A Notes
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim, when the same are acquired by the Company.
THE UNDERSIGNED HEREBY FURTHER REPRESENTS THAT ANY SERIES B NOTES ACQUIRED IN
EXCHANGE FOR SERIES A NOTES TENDERED HEREBY WILL HAVE BEEN ACQUIRED IN THE
ORDINARY COURSE OF BUSINESS OF THE HOLDER RECEIVING SUCH SERIES B NOTES, WHETHER
OR NOT THE UNDERSIGNED, THAT NEITHER THE HOLDER NOR ANY SUCH OTHER PERSON HAS AN
ARRANGEMENT WITH ANY PERSON TO PARTICIPATE IN THE DISTRIBUTION OF SUCH SERIES B
NOTES AND THAT NEITHER THE HOLDER NOR ANY SUCH OTHER PERSON IS AN "AFFILIATE,"
AS DEFINED UNDER RULE 405 OF THE SECURITIES ACT, OF THE COMPANY OR ANY OF ITS
SUBSIDIARIES. If the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of Series B Notes. If the undersigned is a broker-dealer that will
receive Series B Notes, it represents that the Series A Notes to be exchanged
for Series B Notes were acquired as a result of market-making activities or
other trading activities and not acquired directly from the Company, and it
acknowledges that it will deliver a prospectus in connection with any resale of
such Series B Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. IF THE UNDERSIGNED IS A
BROKER-DEALER, IT ACKNOWLEDGES THAT IT MAY NOT USE THE PROSPECTUS IN CONNECTION
WITH RESALES OF SERIES B NOTES RECEIVED IN EXCHANGE FOR SERIES A NOTES THAT WERE
ACQUIRED DIRECTLY FROM THE COMPANY. The undersigned will, upon request, execute
and deliver any additional documents deemed by the Exchange Agent or the Company
to be necessary or desirable to complete the assignment, transfer and purchase
of the Series A Notes tendered hereby.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Series A Notes when, as and if the Company has given
oral or written notice thereof to the Exchange Agent.
If any tendered Series A Notes are not accepted for exchange pursuant to
the Exchange Offer for any reason, certificates for any such unaccepted Series A
Notes will be returned (except as noted below with respect to tenders through
DTC), without expense, to the undersigned at the address shown below or at a
different address as may be indicated herein under "Special Payment
Instructions" as promptly as practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
The undersigned understands that tenders of Series A Notes pursuant to the
procedures described under the caption "The Exchange Offer - Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer.
Unless otherwise indicated under "Special Payment Instructions," please
issue the certificates representing the Series B Notes issued in exchange for
the Series A Notes accepted for exchange and return any Series A Notes not
tendered or not exchanged, in the name(s) of the undersigned (or in either such
event in the case of Series A Notes tendered by DTC, by credit to the
undersigned's account at DTC). Similarly, unless otherwise indicated under
"Special Delivery Instructions," please send the certificates representing the
Series B Notes issued in exchange for the Series A Notes accepted for exchange
and any certificates for Series A Notes not tendered or not exchanged (and
accompanying documents, as appropriate) to the undersigned at the address shown
below the undersigned's signature(s), unless, in either event, tender is being
made through DTC. In the event that both "Special Payment Instructions" and
"Special
3
<PAGE>
Delivery Instructions" are completed, please issue the certificates representing
the Series B Notes issued in exchange for the Series A Notes accepted for
exchange and return any Series A Notes not tendered or not exchanged in the
name(s) of, and send said certificates to, the person(s) so indicated. The
undersigned recognizes that the Company has no obligation pursuant to the
"Special Payment Instructions" and "Special Delivery Instructions" to transfer
any Series A Notes from the name of the registered holder(s) thereof if the
Company does not accept for exchange any of the Series A Notes so tendered.
Holders of Series A Notes who wish to tender their Series A Notes and (i)
whose Series A Notes are not immediately available, or (ii) who cannot deliver
their Series A Notes, this Letter of Transmittal or any other documents required
hereby to the Exchange Agent, or cannot complete the procedure for book-entry
transfer, prior to the Expiration Date, may tender their Series A Notes
according to the guaranteed delivery procedures set forth in the Prospectus
under the caption "The Exchange Offer - Guaranteed Delivery Procedures". See
Instruction 1 regarding the completion of the Letter of Transmittal printed
below.
PLEASE SIGN HERE WHETHER OR NOT
SERIES A NOTES ARE BEING PHYSICALLY TENDERED HEREBY
X
__________________________________________ ________
DATE
X
__________________________________________ ________
SIGNATURE(S) OF REGISTERED HOLDER(S) DATE
OR AUTHORIZED SIGNATORY
AREA CODE AND TELEPHONE NUMBER: _________________________
THE ABOVE LINES MUST BE SIGNED BY THE REGISTERED HOLDER(S) OF SERIES A
NOTES AS THEIR NAME(S) APPEAR(S) ON THE SERIES A NOTES OR, IF THE SERIES A NOTES
ARE TENDERED BY A PARTICIPANT IN DTC, AS SUCH PARTICIPANT'S NAME APPEARS ON A
SECURITY POSITION LISTING AS THE OWNER OF THE SERIES A NOTES, OR BY PERSON(S)
AUTHORIZED TO BECOME REGISTERED HOLDER(S) BY A PROPERLY COMPLETED BOND POWER
FROM THE REGISTERED HOLDER(S), A COPY OF WHICH MUST BE TRANSMITTED WITH THIS
LETTER OF TRANSMITTAL. IF SERIES A NOTES TO WHICH THIS LETTER OF TRANSMITTAL
RELATES ARE HELD OF RECORD BY TWO OR MORE JOINT HOLDERS, THEN ALL SUCH HOLDERS
MUST SIGN THIS LETTER OF TRANSMITTAL. IF SIGNATURE IS BY A TRUSTEE, EXECUTOR,
ADMINISTRATOR, GUARDIAN, ATTORNEY-IN-FACT, OFFICER OF A CORPORATION OR OTHER
PERSON ACTING IN A FIDUCIARY OR REPRESENTATIVE CAPACITY, SUCH PERSON MUST (i)
SET FORTH HIS OR HER FULL TITLE BELOW AND (ii) UNLESS WAIVED BY THE COMPANY,
SUBMIT EVIDENCE SATISFACTORY TO THE COMPANY OF SUCH PERSON'S AUTHORITY SO TO
ACT. SEE INSTRUCTION 4 REGARDING THE COMPLETION OF THIS LETTER OF TRANSMITTAL
PRINTED BELOW.
NAME(S): ____________________________________________________________________
____________________________________________________________________
(PLEASE PRINT)
CAPACITY: ____________________________________________________________________
ADDRESS: ____________________________________________________________________
____________________________________________________________________
(INCLUDE ZIP CODE)
SIGNATURE(S) GUARANTEED BY AN ELIGIBLE INSTITUTION:
(IF REQUIRED BY INSTRUCTION 4)
____________________________________________________________________
(AUTHORIZED SIGNATURE)
____________________________________________________________________
(TITLE)
____________________________________________________________________
(NAME OF FIRM)
DATED:___________________________________, 199_
4
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND SERIES A NOTES. The
tendered Series A Notes (or a confirmation of a book-entry transfer into the
Exchange Agent's account at DTC of all Series A Notes delivered electronically),
as well as a properly completed and duly executed copy of this Letter of
Transmittal or facsimile hereof and any other documents required by this Letter
of Transmittal, 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. The
method of delivery of the tendered Series A Notes, this Letter of Transmittal
and all other required documents to the Exchange Agent is at the election and
risk of the Holder and, except as otherwise provided below, the delivery will be
deemed made only when actually received by the Exchange Agent. Instead of
delivery by mail, it is recommended that the Holder use an overnight or hand
delivery service. In all cases, sufficient time should be allowed to assure
timely delivery. No Letter of Transmittal or Series A Notes should be sent to
the Company.
Holders who wish to tender their Series A Notes and (i) whose Series A
Notes are not immediately available; or (ii) who cannot deliver their Series A
Notes, this Letter of Transmittal or any other documents required hereby to the
Exchange Agent, or cannot complete the procedure for book-entry transfer, prior
to 5:00 P.M., New York City time, on the Expiration Date must tender their
Series A Notes according to the guaranteed delivery procedures set forth in the
Prospectus. Pursuant to such procedures: (i) such tender must be made by or
through 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 or an institution
which falls within the definition of "Eligible Guarantor Institution" contained
in Regulation 17Ad-15 promulgated by the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended (each, an "Eligible
Institution"); (ii) prior to the Expiration Date, the Exchange Agent must have
received from the 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 Notes and the
principal amount of Series A Notes tendered, stating that the tender is being
made thereby and guaranteeing that, within five New York Stock Exchange trading
days after the Expiration Date, this Letter of Transmittal (or facsimile hereof)
together with the certificate(s) representing the Series A Notes (or a
confirmation of electronic delivery of book-entry delivery into the Exchange
Agent's account at DTC) and any other required documents will be deposited by
the Eligible Institution with the Exchange Agent; and (iii) such properly
completed and executed Letter of Transmittal (or facsimile hereof), as well as
all other documents required by this Letter of Transmittal and the
certificate(s) representing all tendered Series A Notes in proper form for
transfer (or a confirmation of electronic delivery of book-entry delivery into
the Exchange Agent's account at DTC), must be received by the Exchange Agent
within five New York Stock Exchange trading days after the Expiration Date, all
as provided in the Prospectus under the caption "Exchange Offer - Guaranteed
Delivery Procedures." Any Holder of Series A Notes who wishes to tender his or
her Series A Notes pursuant to the guaranteed delivery procedures described
above must ensure that the Exchange Agent receives the Notice of Guaranteed
Delivery prior to 5:00 P.M., New York City time, on 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 Notes according to the guaranteed
delivery procedures set forth above.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Series A Notes and withdrawal of tendered
Series A Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Series A Notes not properly tendered or any Series A
Notes the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any defects
or irregularities or conditions of tender as to the Exchange Offer and/or
particular Series A Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in this Letter of
Transmittal) shall be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Series A Notes must be
cured within such time as the Company shall determine. Neither the Company, 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 Notes, nor
shall any of them incur any liability for failure to give such notification.
Tenders of Series A Notes will not be deemed to have been made until such
defects or irregularities have been cured or waived. Any Series A Notes
received by the Exchange
5
<PAGE>
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 Notes, unless otherwise provided in
this Letter of Transmittal, as soon as practicable following the Expiration
Date.
2. TENDER BY HOLDER. Only a Holder of Series A Notes may tender such
Series A Notes in the Exchange Offer. Any beneficial holder of Series A Notes
who is not the registered holder and who wishes to tender should arrange with
the registered holder to execute and deliver this Letter of Transmittal on his
or her behalf or must, prior to completing and executing this Letter of
Transmittal and delivering his or her Series A Notes, either make appropriate
arrangements to register ownership of the Series A Notes in such Holder's name
or obtain a properly completed bond power from the registered holder.
3. PARTIAL TENDERS. Tenders of Series A Notes will be accepted only in
integral multiples of $1,000. If less than the entire principal amount of any
Series A Notes is tendered, the tendering Holder should fill in the principal
amount tendered in the third column of the box entitled "Description of 10.25%
Series A Senior Subordinated Notes due 2008 ("Series A Notes")" above. The
entire principal amount of Series A Notes delivered to the Exchange Agent will
be deemed to have been tendered unless otherwise indicated. If the entire
principal amount of all Series A Notes is not tendered, then Series A Notes for
the principal amount of Series A Notes not tendered and a certificate or
certificates representing Series B Notes issued in exchange for any Series A
Notes accepted will be sent to the Holder at his or her registered address,
unless a different address is provided in the appropriate box on this Letter of
Transmittal, promptly after the Series A Notes are accepted for exchange.
4. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal (or
facsimile hereof) is signed by the record Holder(s) of the Series A Notes
tendered hereby, the signature must correspond with the name(s) as written on
the face of the Series A Notes or, if the Series A Notes are tendered by a
participant in DTC, as such participant's name appears on a security position
listing as the owner of the Series A Notes, without alteration, enlargement or
any change whatsoever.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder or Holders of Series A Notes tendered and the certificate or
certificates for Series B Notes issued in exchange therefor are to be issued (or
any untendered principal amount of Series A Notes is to be reissued) to the
registered Holder, the said Holder need not and should not endorse any tendered
Series A Notes, nor provide a separate bond power. In any other case, such
Holder must either properly endorse the Series A Notes tendered or transmit a
properly completed separate bond power with this Letter of Transmittal, with the
signatures on the endorsement or bond power guaranteed by an Eligible
Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a person
other than the registered Holder or Holders of any Series A Notes listed, such
Series A Notes must be endorsed or accompanied by appropriate bond powers signed
as the name of the registered Holder or Holders appears on the Series A Notes.
If this Letter of Transmittal (or facsimile hereof) or any Series A Notes
or bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact or officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
unless waived by the Company, evidence satisfactory to the Company of their
authority so to act must be submitted with this Letter of Transmittal.
Endorsements on Series A Notes or signatures on bond powers required by
this Instruction 4 must be guaranteed by an Eligible Institution.
Except as otherwise provided below, all signatures on this Letter of
Transmittal (or facsimile hereof) must be guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal need not be guaranteed if (i) this
Letter of Transmittal is signed by the registered Holder(s) of the Series A
Notes tendered herewith and such Holder(s) have not completed the box set forth
herein entitled "Special Payment Instructions" or the box entitled "Special
Delivery Instructions;" or (ii) such Series A Notes are tendered for the account
of an Eligible Institution.
5. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. Tendering Holders should
indicate, in the applicable box or boxes, the name and address to which Series B
Notes or substitute Series A Notes for principal amounts not
6
<PAGE>
tendered or not accepted for exchange are to be issued or sent, if different
from the name and address of the person signing this Letter of Transmittal (or
in the case of tender of Series A Notes through DTC, if different from DTC). In
the case of issuance in a different name, the taxpayer identification or social
security number of the person named must also be indicated.
6. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a
Holder whose offered Series A Notes are accepted for exchange must provide the
Company (as payor) with his, her or its correct Taxpayer Identification Number
("TIN"), which, in the case of an exchanging Holder who is an individual, is his
or her social security number. If the Company is not provided with the correct
TIN or an adequate basis for exemption, such Holder may be subject to a $50
penalty imposed by the Internal Revenue Service (the "IRS"). In addition,
delivery to such Holder of Series B Notes may be subject to backup withholding
in an amount equal to 31% of the gross proceeds resulting from the Exchange
Offer. If withholding results in an overpayment of taxes, a refund may be
obtained from the IRS by the Holder. Exempt Holders (including, among others,
all corporations and certain foreign individuals) are not subject to these
backup withholding and reporting requirements. See instructions to the enclosed
Form W-9.
To prevent backup withholding, each exchanging Holder must provide his, her
or its correct TIN by completing the Form W-9 enclosed herewith, certifying that
the TIN provided is correct (or that such Holder is awaiting a TIN) and that (i)
the Holder is exempt from backup withholding; (ii) the Holder has not been
notified by the IRS that he, she or it is subject to backup withholding as a
result of a failure to report all interest or dividends; or (iii) the IRS has
notified the Holder that he, she or it is no longer subject to backup
withholding. In order to satisfy the Exchange Agent that a foreign individual
qualifies as an exempt recipient, such Holder must submit a statement signed
under penalty of perjury attesting to such exempt status. Such statements may
be obtained from the Exchange Agent. If the Series A Notes are in more than one
name or are not in the name of the actual owner, consult the Form W-9 for
information on which TIN to report. If you do not provide your TIN to the
Company within 60 days, backup withholding will begin and continue until you
furnish your TIN to the Company.
7. TRANSFER TAXES. The Company will pay all transfer taxes, if any,
applicable to the exchange of Series A Notes pursuant to the Exchange Offer.
If, however, certificates representing Series B Notes or Series A Notes 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 Notes tendered hereby, or if tendered Series A
Notes are registered in the name of any person other than the person signing
this Letter of Transmittal, or if a transfer tax is imposed for any reason other
than the exchange of Series A Notes pursuant to the Exchange Offer, then the
amount of any such transfer taxes (whether imposed on the registered Holder or
on 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
this Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering Holder.
Except as provided in this Instruction 7, it will not be necessary for
transfer tax stamps to be affixed to the Series A Notes listed in this Letter of
Transmittal.
8. WAIVER OF CONDITIONS. The Company reserves the absolute right to
amend, waive or modify specified conditions in the Exchange Offer in the case of
any Series A Notes tendered.
9. MUTILATED, LOST, STOLEN OR DESTROYED NOTES. Any tendering Holder
whose Series A Notes have been mutilated, lost, stolen or destroyed should
contact the Exchange Agent at the address indicated herein for further
instructions.
7
<PAGE>
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and
requests for assistance and requests for additional copies of the Prospectus or
this Letter of Transmittal may be directed to the Exchange Agent at the address
specified in the Prospectus. Holders may also contact their broker, dealer,
commercial bank, trust company or other nominee for assistance concerning the
Exchange Offer.
(DO NOT WRITE IN SPACE BELOW)
<TABLE>
<CAPTION>
________________________________________________________
CERTIFICATE SERIES A NOTES SERIES A NOTES
SURRENDERED TENDERED ACCEPTED
________________________________________________________
<S> <C> <C>
________________________________________________________
________________________________________________________
</TABLE>
Delivery Prepared by_________________________________ Checked By________________
Date__________________
8
<PAGE>
<TABLE>
<S> <C>
____________________________________________________________________________________________________________________
Name (If joint names, see attached guidelines)
____________________________________________________________________________________________________________________
Business name (Sole proprietors, see attached guidelines)
____________________________________________________________________________________________________________________
Please check appropriate box:[ ] Individual/Sole Proprietor [ ] Corporation [ ] Partnership [ ] Other
____________________________________________________________________________________________________________________
Address (number, street, and apt. or suite no.)
____________________________________________________________________________________________________________________
City, state, and ZIP code
____________________________________________________________________________________________________________________
</TABLE>
_______________________________________________________________________________
SUBSTITUTE
Form W-9
Department of the Treasury
Internal Revenue Service
Payer's Request for Taxpayer
Identification Number (TIN)
_______________________________________________________________________________
_______________________________________________________________________________
PART I -- TAXPAYER IDENTIFICATION NO.
Enter your taxpayer identification
number in the appropriate box. For most individuals, this is your social
security number. If you do not have a number, see How to Obtain a "TIN" in the
enclosed Guidelines.
______________________
Social Security Number
_______________________
Employer Identification
Number
Note: If the account is more than one name, see the chart in enclosed
Guidelines to determine what number to give.
_______________________________________________________________________________
_______________________________________________________________________________
PART II -- FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING
(SEE ENCLOSED GUIDELINES)
_______________________________________________________________________________
_______________________________________________________________________________
PART III -- CERTIFICATION -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification
Number (or I am waiting for a number to be issued to me), and
(2) I am not subject to backup withholding because (a) I am exempt from
backup withholding, or (b) I have not been notified by the Internal
Revenue Service ("IRS") that I am subject to backup withholding as a
result of a failure to report all interest or dividends, or (c) the IRS
has notified me that I am no longer subject to backup withholding.
Certification Instructions. -- You must cross out item (2) above if you have
been notified by the IRS that you are subject to backup withholding because of
under-reporting interest or dividends on your tax return. However, if after
being notified by the IRS that you are subject to backup withholding, you
received another notification from the IRS that you are no longer subject to
backup withholding, do not cross out item (2).
_______________________________________________________________________________
SIGNATURE_______________________________ DATE ____________ , 1998
_______________________________________________________________________________
NOTE: FAILURE TO COMPLETE THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF
ANY PAYMENTS MADE TO YOU. PLEASE REVIEW ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9
FOR ADDITIONAL DETAILS.
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
WHAT IS BACKUP WITHHOLDING? -- Persons making certain payments to you are
required to withhold and pay to IRS 31% of such payments under certain
conditions. This is called "backup withholding." Payments that could be
subject to backup withholding include interest, dividends, broker and barter
exchange transactions, rents, royalties, nonemployee compensation, and certain
payments from fishing boat operators, but do not include real estate
transactions.
If you give the requester your correct TIN, make the appropriate
certifications, and report all your taxable interest and dividends on your tax
return, your payments will not be subject to backup withholding. Payments you
receive will be subject to backup withholding if:
(1) You do not furnish your TIN to the requester, or
(2) IRS notifies the requester that you furnished an incorrect TIN, or
(3) You are notified by IRS that you are subject to backup withholding
because you failed to report all your interest and dividends on your tax return
(for interest and dividend accounts only), or
(4) You fail to certify to the requester that you are not subject to
backup withholding under (3) above (for interest and dividend accounts opened
after 1983 only), or
(5) You fail to certify your TIN. This applies only to interest,
dividend, broker or barter exchange accounts opened after 1983, or broker
accounts considered inactive in 1983.
For other payments, you are subject to backup withholding only if (1) or
(2) above applies.
Certain Payees and payments are exempt from backup withholding and
information reporting. See payees and Payments Exempt From Backup Withholding,
below, and Exempt Payees and Payments under Specific Instructions below if you
are an exempt payee.
PAYEES AND PAYMENTS EXEMPT FROM BACKUP WITHHOLDING. -- The following is a list
of payees exempt from backup withholding and for which no information reporting
is required. For interest and dividends, all listed payees are exempt except
item (9). For broker transactions, payees listed in (1) through (13), and a
person registered under the Investment Advisers Act of 1940 who regularly acts
as a broker are exempt. Payments subject to reporting under sections 6041 and
6041A are generally exempt from backup withholding only if made to payees
described in items (1) through (7), except that a corporation that provides
medical and health care services or bills and collects payments for such
services is not exempt from backup withholding or information reporting. Only
payees described in items (2) through (6) are exempt from backup withholding for
barter exchange transactions, patronage dividends, and payments by certain
fishing boat operators.
11. A corporation.
12. An organization exempt from tax under section 501(a), or an
individual retirement plan (IRA), or a custodial account under 403(b)(7).
13. The United States or any of its agencies or instrumentalities.
14. A state, the District of Columbia, a possession of the United
States, or any of their political subdivisions or instrumentalities.
15. A foreign government or any of its political subdivisions, agencies
or instrumentalities.
16. An international organization or any of its agencies or
instrumentalities.
17. A foreign central bank of issue.
18. A dealer in securities or commodities required to register in the
U.S. or a possession of the U.S.
19. A futures commission merchant registered with the Commodity Futures
Trading Commission.
20. A real estate investment trust.
21. An entity registered at all times during the tax year under the
Investment Company Act of 1940.
22. A common trust fund operated by a bank under section 584(a).
23. A financial institution.
24. A middleman known in the investment community as a nominee or listed
in the most recent publication of the American Society of Corporate Securities,
Inc., Nominee List.
25. A trust exempt from tax under section 664 or described in section
4947.
Payments of dividends and patronage dividends generally not subject to
backup withholding also include the following:
. Payments to nonresident aliens subject to withholding under section 1441.
. Payments to partnerships not engaged in a trade or business in the U.S. and
that have at least one nonresident partner.
Payments of interest generally not subject to backup withholding include
the following:
. Payments of interest on obligations issued by individuals.
NOTE: You may be subject to backup withholding if this interest is $600 or more
and is paid in the course of the payer's trade or business and you have not
provided your correct TIN to the payer.
Payments that are not subject to information reporting are also not
subject to backup withholding. For details, see sections 6041, 6041A(a), 6042,
6044, 6045, 6049, 6050A, and 6050N, and the regulations under such sections.
PENALTIES
FAILURE TO FURNISH TIN. -- If you fail to furnish your TIN to a requester, you
are subject to a penalty of $50 for each such failure unless your failure is due
to reasonable cause and not to willful neglect.
MISUSE OF TINS. -- If the requester discloses or uses TINs in violation of
Federal laws, the requester may be subject to civil and criminal penalties.
CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you make
a false statement with no reasonable basis that results in no imposition of
backup withholding, you are subject to a penalty of $500.
CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
SPECIFIC INSTRUCTIONS
NAME. -- If you are an individual, generally provide the name shown on your
social security card. However, if you have changed your last name, for
instance, due to marriage, without informing the Social Security Administration
of the name change, please enter your first name and both the last name shown on
your social security card and your new last name.
SIGNING THE CERTIFICATION. --
(1) INTEREST, DIVIDEND, AND BARTER EXCHANGE ACCOUNTS OPENED BEFORE 1984 AND
BROKER ACCOUNTS THAT WERE CONSIDERED ACTIVE DURING 1983. -- You are not required
to sign the certification; however, you may do so. You are required to provide
your correct TIN.
(2) INTEREST, DIVIDEND, BROKER AND BARTER EXCHANGE ACCOUNTS OPENED AFTER 1983
AND BROKER ACCOUNTS THAT WERE CONSIDERED INACTIVE DURING 1983. -- You must sign
the certification or backup withholding will apply. If you are subject to
backup withholding and you are merely providing your correct TIN to the
requester, you must cross out item (2) in the certification before signing the
form.
(3) OTHER PAYMENTS. -- You are required to furnish your correct TIN, but you
are not required to sign the certification unless you have been notified of an
incorrect TIN. Other payments include payments made in the course of the
requestor's trade or business for rents, royalties, goods (other than bills for
merchandise), medical and health care services, payments to a nonemployee for
services (including attorney and accounting fees), and payments to certain
fishing boat crew members.
(4) EXEMPT PAYEES AND PAYMENTS -- If you are exempt from backup withholding,
you should complete this form to avoid possible erroneous backup withholding.
Enter your correct TIN in Part I, write "EXEMPT" in the block in Part II, sign
and date the form. If you are a nonresident alien or foreign entity not subject
to backup withholding, give the requester a completed FORM W-8, Certificate of
Foreign Status.
(5) TIN "APPLIED FOR." -- Follow the instructions under How To Obtain a TIN, on
page 1, sign and date this form.
SIGNATURE.-- For a joint account, only the person whose TIN is shown in Part I
should sign the form.
PRIVACY ACT NOTICE. -- Section 6109 requires you to furnish your correct
taxpayer identification number (TIN) to persons who must file information
returns with IRS to report interest, dividends, and certain other income paid to
you, mortgage interest you paid, the acquisition or abandonment of secured
property, or contributions you made to an individual retirement arrangement
(IRA). IRS uses the numbers for identification purposes and to help verify the
accuracy of your tax return. You must provide your TIN whether or not you are
required to file a tax return. Payers must generally withhold 20% of taxable
interest, dividend, and certain other payments to a payee who does not furnish a
TIN to a payer. Certain penalties may also apply.
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER (TIN) ON SUBSTITUTE FORM W-9
(SECTION REFERENCES ARE TO THE INTERNAL REVENUE CODE)
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER.
- -- Social Security numbers have nine digits separated by two hyphens: i.e. 000-
00-0000. Employer identification numbers have nine digits separated by only one
hyphen: i.e. 00-0000000. The table below will help determine the number to give
the payer.
<TABLE>
<CAPTION>
_______________________________________________________________________________
GIVE THE
FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY
NUMBER OF --
_______________________________________________________________________________
<S> <C>
1. An individual's account The individual
2. Two or more individuals The actual owner of the
(joint account) account or, if combined
funds, any one of the
individuals (1)
3. Custodian account of a minor The minor (2)
(Uniform Gift to Minors Act)
4. a. The usual revocable savings trust The grantor-trustee (1)
account (grantor is also trustee)
b. So-called trust account that is not The actual owner (1)
a legal or valid trust under State
law
5. Sole proprietorship account The owner (3)
6. Sole Proprietorship The owner (3)
<CAPTION>
__________________________________________________________________________________________________
GIVE THE
FOR THIS TYPE OF ACCOUNT: EMPLOYER
IDENTIFICATION
NUMBER OF --
__________________________________________________________________________________________________
<S> <C>
7. A valid trust, estate, or pension The legal entity (5)
trust
8. Corporate account The corporation
9. Association, club, religious, The organization
charitable, educational or other tax-
exempt organization account
10. Partnership account held in the The partnership
name of the business
11. A broker or registered nominee The broker or nominee
12. Account with the Department of The public entity
Agriculture in the name of a public
entity (such as a State or local
government, school district, or
prison) that receives agricultural
program payments
__________________________________________________________________________________________________
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Show the name of the owner.
(5) List first and circle the name of the valid trust, estate, or pension
trust. (Do not furnish the identifying number of the personal
representative or trustee unless the legal entity itself is not
designated in the account title)
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
