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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 18, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________.
COMMISSION FILE NUMBER -
----------------
ADVANCE STORES COMPANY, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA 54-0118110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5673 AIRPORT ROAD 24012
ROANOKE, VIRGINIA (Zip Code)
(Address of Principal Executive Offices)
(540) 362-4911
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [_] No [_] (Not applicable at this time)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [_] No [_]
One share of Common Stock, $.01 par value, was outstanding (the only class
of common stock of the Company outstanding) on August 15, 1998.
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<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
TWELVE WEEKS ENDED JULY 18, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements of Advance Stores Company,
Incorporated and Subsidiaries (Unaudited)
Condensed Consolidated Balance Sheets as of July 18, 1998 and
January 3, 1998................................................... 1
Condensed Consolidated Statements of Income for the
Twelve Weeks Ended July 18, 1998 and July 12, 1997 and for the
Twenty-Eight Weeks Ended July 18, 1998 and July 12, 1997.......... 2
Condensed Consolidated Statements of Cash Flows for the Twenty-Eight
Weeks Ended July 18, 1998 and July 12, 1997....................... 3
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risks............. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 22
Item 2. Changes in Securities and Use of Proceeds.............................. 22
Item 3. Defaults Upon Senior Securities........................................ 22
Item 4. Submission of Matters to a Vote of Security Holders.................... 22
Item 5. Other Information...................................................... 23
Item 6. Exhibits and Reports on Form 8-K....................................... 23
SIGNATURE................................................................................. S-1
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements of Advance Stores Company,
Incorporated and Subsidiaries
(unaudited)
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS -- JULY 18, 1998, AND JANUARY 3, 1998
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
JULY 18, JANUARY 3,
ASSETS 1998 1998
---------- ------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 44,759 $ 7,447
Receivables, primarily from vendors 24,329 19,117
Trade receivables 5,325 3,359
Inventories 348,523 280,267
Prepaid expenses and other current assets 5,056 2,893
Refundable income taxes 3,087 168
--------- ---------
Total current assets 431,079 313,251
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED AMORTIZATION AND
DEPRECIATION OF $89,910 AND $77,940 143,176 134,896
OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION OF $607 AND $0 18,966 2,054
--------- ---------
$ 593,221 $ 450,201
========= =========
LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
----------------------------------------------
CURRENT LIABILITIES:
Bank overdrafts $ - $ 7,235
Borrowings secured by trade receivables 5,325 3,359
Current portion of deferred revenue 3,089 1,530
Accounts payable 216,832 157,096
Accrued expenses 53,449 27,762
Deferred income taxes 2,698 3,133
--------- ---------
Total current liabilities 281,393 200,115
--------- ---------
LONG-TERM DEBT 335,000 106,542
--------- ---------
DEFERRED REVENUE 1,638 693
--------- ---------
DEFERRED INCOME TAXES 14,168 12,839
--------- ---------
POST-RETIREMENT BENEFITS 1,092 843
--------- ---------
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 11,226 967
(Accumulated deficit) retained earnings (51,296) 128,202
--------- ---------
Total stockholder's (deficit) equity (40,070) 129,169
--------- ---------
$ 593,221 $ 450,201
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
1
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED
JULY 18, 1998, AND JULY 12, 1997
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
TWELVE WEEK PERIOD TWENTY-EIGHT WEEK
ENDED PERIOD ENDED
------------------------------ -------------------------------
JULY 18 JULY 12, JULY 18, JULY 12,
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
NET SALES $ 255,037 $ 196,729 $ 544,000 $ 435,880
COST OF SALES 156,448 121,338 332,825 268,198
--------- --------- --------- ---------
Gross profit 98,589 75,391 211,175 167,682
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 79,623 63,425 178,700 145,433
EXPENSES ASSOCIATED WITH THE
RECAPITALIZATION OF THE PARENT - - 14,005 -
--------- --------- --------- ---------
Operating income 18,966 11,966 18,470 22,249
OTHER INCOME (EXPENSE): --------- --------- --------- ---------
Interest expense, net (8,306) (1,844) (11,821) (4,382)
Other 235 (273) 119 (450)
--------- --------- --------- ---------
Total other expense,
net (8,071) (2,117) (11,702) (4,832)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 10,895 9,849 6,768 17,417
INCOME TAX EXPENSE 4,804 4,123 3,116 7,291
--------- --------- --------- ---------
NET INCOME $ 6,091 $ 5,726 $ 3,652 $ 10,126
========= ========= ========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
2
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998 AND JULY 12, 1997
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
JULY 18, JULY 12,
1998 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,652 $ 10,126
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 13,508 11,263
Loss on sale of property and equipment 85 178
Amortization of deferred debt issuance costs 700 -
Provision for deferred income taxes 894 1,213
Net periodic postretirement benefit expense, net of payments made 249 215
Net (increase) decrease in:
Receivables, primarily from vendors (5,212) 2,896
Trade receivables (1,966) -
Inventories (68,256) (27,256)
Prepaid expenses and other assets (2,763) (2,145)
Refundable income taxes (2,919) -
Net increase in:
Accounts payable 59,736 23,200
Accrued expenses 25,457 8,232
--------- --------
Net cash provided by operating activities 23,165 27,922
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (26,028) (20,464)
Proceeds from sale of property and equipment 4,155 118
--------- --------
Net cash used in investing activities (21,873) (20,346)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in bank overdrafts (7,235) (5,777)
Proceeds from issuance of long-term debt 575 5,648
Payments on long-term debt (97,117) (8,567)
Borrowings under new credit facilities 325,000 -
Payment of debt issuance costs (17,335) -
Contributed capital from Advance Holding Corporation 10,259
Dividend paid to Advance Holding Corporation (183,150) -
Other 5,023 898
--------- --------
Net cash provided by (used in) financing activities 36,020 (7,798)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 37,312 (222)
--------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,447 6,932
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,759 $ 6,710
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 5,050 $ 4,891
Income taxes paid, net of refunds received 3,949 3,550
========= ========
NONCASH TRANSACTION:
Debt issuance costs accrued $ 230 $ -
========= ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998, AND JULY 12, 1997
(dollars in thousands, except per share data)
(unaudited)
1. BASIS OF PRESENTATION:
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 July 18, 1998 and the
consolidated statements of income for the 12-week and 28-week periods ended July
18, 1998, and July 12, 1997, and the statements of cash flows for the 28-week
periods ended July 18, 1998 and July 12, 1997, have been prepared by the Company
and have not been audited. In the opinion of management, all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the financial position of the Company, the results of its
operations and cash flows have been made.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's consolidated financial statements for the fiscal year ended January 3,
1998.
The results of operations for the 12-week and 28-week periods are not
necessarily indicative of the operating results for the full fiscal year.
4
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998, AND JULY 12, 1997
2. INVENTORIES:
Inventories are stated at the lower of cost or market using the last-in, first-
out (LIFO) method. An actual valuation of inventory under the LIFO method can
be made only at the end of each year based on the inventory levels and costs at
that time. Accordingly, interim LIFO calculations must necessarily be based on
management's estimates of expected year-end inventory levels and costs.
Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 18, JANUARY 3,
1998 1998
-------- --------
<S> <C> <C>
Replacement cost $347,023 $280,267
Reserve to state inventories at LIFO 4,524 2,274
-------- --------
Inventories at LIFO 351,547 282,541
Other reserves (3,024) (2,274)
-------- --------
$348,523 $280,267
======== ========
</TABLE>
3. OTHER ASSETS:
As of July 18, 1998, other assets include deferred debt issuance costs of
$16,845, net of accumulated amortization of $607. 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.
5
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998, AND JULY 12, 1997
5. RECAPITALIZATION:
On April 15, 1998, 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 affiliated company (the Parent, Note 6) and as a dividend to the Parent
for financial reporting purposes.
6
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998, AND JULY 12, 1997
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 income for the 12-week and 28-week periods ending July
18, 1998.
The Company has deferred $17,365 of debt issuance costs related to the new debt
incurred in connection with the Recapitalization.
As of July 18, 1998, accrued expenses include $318 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.
7
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998, AND JULY 12, 1997
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 18, JANUARY 3,
1998 1998
--------- ---------
<S> <C> <C>
Senior debt-
Delayed draw facilities $ - $ -
Revolving facility - -
Tranche B facility 125,000 -
Revolving 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 July 18,
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.
8
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998, AND JULY 12, 1997
The Delayed Draw Facilities mature April 2004. The Tranche B Facility matures
in April 2006. These term facilities provide for nominal annual amortization in
the first five years and amortization of $149.0 million in 2004, $60.0 million
in 2005 and $30.0 million in 2006. The Revolving Facility will mature in April
2004.
Borrowings under the New Credit Facility are required to be prepaid, subject to
certain exceptions, with (a) 50% of Excess Cash Flow (as defined), (b) the net
cash proceeds of all asset sales or other dispositions of property (as defined),
(c) the net proceeds of issuances of debt obligations and, (d) the net proceeds
of issuance of equity securities. Excess Cash Flow is defined as the excess of
(A) the sum of (i) consolidated net income (excluding certain gains or losses
and restricted payments made to the Parent), (ii) depreciation, amortization and
other non-cash charges, (iii) any decrease in Net Working Capital (as defined),
(iv) increases in deferred revenues, and (v) proceeds of certain indebtedness
incurred, over (B) the sum of (a) any non-cash gains, (b) any increases in Net
Working Capital, (c) decreases in consolidated deferred revenues, (d) capital
expenditures, and (e) repayments of indebtedness (subject to certain
exceptions).
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 July
18, 1998). A commitment fee of 0.50% per annum will be charged on the unused
portion of the New Credit Facility.
The New Credit Facility is 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.
9
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998, AND JULY 12, 1997
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 July 18, 1998.
10
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998, AND JULY 12, 1997
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 July 18, 1998, were as follows:
<TABLE>
<CAPTION>
INITIAL
NUMBER OF EXERCISE
SHARES PRICE
----------- -----------
<S> <C> <C>
Variable Price Service Options 397,085 $10
Performance Options 397,085 10
Fixed Price Service Options 104,580 10
--------
898,750
========
</TABLE>
No options were exercisable at July 18, 1998.
The Company has elected to account for employee stock option grants under APB 25
and, at year-end, is required to provide pro forma disclosures of what net
income would have been had the Company adopted the new fair value method for
recognition purposes under Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation". Under APB 25, the Company did not
recognize compensation expense on the issuance of its stock options because the
exercise price equaled the fair market value of the underlying stock on the
grant date. Fair market value is determined by the Board of Directors of the
Parent. The fair market value, as determined by the Board, did not change from
the grant date to July 18, 1998.
11
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998, AND JULY 12, 1997
8. STOCKHOLDER'S (DEFICIT) EQUITY:
Changes in stockholder's (deficit) equity for the 28-week period ended July 18,
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 - - (183,150) (183,150)
Contributed Capital from Parent - 10,259 - 10,259
Net income - - 3,652 3,652
------ -------- --------- ---------
Balance, July 18, 1998 $- $ 11,226 $ (51,296) $ (40,070)
====== ======== ========= =========
</TABLE>
9. RELATED-PARTY TRANSACTIONS:
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.
12
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998, AND JULY 12, 1997
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. The
guarantee is joint and several in addition to full and unconditional. LARALEV,
INC. holds certain trademarks, tradenames and other intangible assets for which
it receives royalty income from the Company. 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>
TWELVE WEEK PERIOD TWENTY-EIGHT WEEK PERIOD
ENDED ENDED
------------------------- ----------------------------
JULY 18, JULY 12, JULY 18, JULY 12,
1998 1997 1998 1997
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Royalty income from the Company $5,101 $3,935 $10,880 $ 8,718
Other income 645 446 1,443 976
Income from operations 5,742 4,297 12,312 9,598
Net income 3,821 8,606 8,060 12,024
</TABLE>
<TABLE>
<CAPTION>
JULY 18, 1998
------------------------------------------------------------
<S> <C>
Current assets $ 6,609
Noncurrent assets 39,413
Current liabilities 346
Noncurrent liabilities 0
</TABLE>
At July 18, 1998, current and noncurrent assets include $44,894 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 that provide severance pay benefits
under certain circumstances.
Three lawsuits were filed against the Company on July 28, 1998, for wrongful
death relating to an automobile accident involving an employee of the Company.
Management believes that the financial exposure is covered by insurance and,
accordingly, believes that the ultimate resolution of these matters will not
materially affect the Company's financial position or results of operations.
13
<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998, AND JULY 12, 1997
12. SUBSEQUENT EVENT - ACQUISITION:
On August 16, 1998, the Company and its Parent entered into an agreement and
plan of merger with Sears, Roebuck and Co. (Sears) to acquire Western Auto
Supply Company (Western), a wholly owned subsidiary of Sears. Western will be
acquired by a newly formed, wholly owned subsidiary of the Company for $175,000
in cash and 11,474,606 shares of the Parent's common stock. In connection with
the transaction, the Parent will sell 4,161,712 shares of common stock to
certain current stockholders (after the Recapitalization) for $70,000 and the
Company intends to incur up to $125,000 in debt financing. Upon consummation of
the transaction, Sears will own approximately 40.6% of the Parent's issued and
outstanding common stock. The agreement may be terminated by mutual written
agreement of the parties and is subject to certain regulatory filings and
approvals.
The Company has received a commitment letter to amend and restate the existing
credit facilities and related covenants (Note 6) for the effects of the
acquisition.
Based on the sales price per share in connection with the sale of the 4,161,712
shares referred to above, the Company estimates that it will recognize
compensation expense under its Parent's stock option plans (Note 7) of
approximately $700, in the remainder of fiscal 1998.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Advance Stores Company, Incorporated (the "Company"), a wholly-owned
subsidiary of Advance Holding Corporation ("Holding"), is the second largest
retailer of automotive parts and accessories in the United States (based on
store count) with 909 stores operating under the "Advance Auto Parts" name in 17
states as of July 18, 1998. Based on store count, the Company believes it is
the largest automotive retailer in a majority of its markets. The Company
serves the "do it yourself" market as well as the "do it for me" market through
its commercial delivery program. The following discussion of the consolidated
historical results of operations and financial condition of the Company should
be read in conjunction with the consolidated financial statements of the Company
and the notes thereto included elsewhere in this Form 10-Q. The following
discussion and analysis covers periods before completion of the
Recapitalization, as described below. The Company's first quarter consists of
16 weeks and its second quarter consists of 12 weeks.
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this quarterly report contain
certain "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. These statements include without limitation the
words "believes," "anticipates," intends," "expects," and words of similar
import. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of Holding and the Company or the retail industry to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements.
These potential risks and uncertainties include, among others, the
following: general economic and business conditions; Holding's and the Company's
substantial leverage and debt service obligations; restrictions on Holding's and
the Company's ability to pursue its business strategies imposed by restrictive
loan covenants; changes in business strategy or development plans; competition;
weather conditions; integration of Western Auto (as defined below); extent of
the market demand for auto parts; availability of inventory supply; adequacy and
perception of customer service, product quality and defect experience;
availability of and ability to take advantage of vendor pricing programs and
incentives; rate of new store openings; cannibalization of store sites; mix and
types of merchandise sold; governmental regulation of products; new store
development; performance of information systems; effectiveness of deliveries
from distribution centers; ability to hire, train and retain qualified
employees; and environmental risks. Forward-looking statements regarding
revenues, 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.
THE RECAPITALIZATION
On April 15, 1998, Holding consummated its Recapitalization pursuant to an
Agreement and Plan of Merger dated as of March 4, 1998. See Note 5 of Part I,
Item 1 for a detailed description of the Recapitalization.
15
<PAGE>
RECENT DEVELOPMENTS
On August 17, 1998, the Company and Holding entered into an agreement (the
"Merger Agreement") to acquire Western Auto Supply Company ("Western Auto"), a
Delaware corporation and wholly-owned subsidiary of Sears, Roebuck and Co.
("Sears"), for $175.0 million and approximately 40% of the Common Stock of
Holding (the "Acquisition"). The Merger Agreement provides that (i) Western
Auto be merged with and into a subsidiary of the Company, with such subsidiary
to become the surviving corporation, (ii) the issued and outstanding shares of
Western Auto be converted into the right to receive in the aggregate (a) $175.0
million and (b) 11,474,606 shares of Holding's Class A common stock, $.01 par
value per share, constituting approximately 40% of the outstanding Common Stock
of Holding. FS&Co., Ripplewood Partners, Nicholas F. Taubman and the Taubman
Trust have committed to invest an additional $70.0 million in equity to fund a
portion of the cash purchase price for Western Auto. The remainder of the cash
purchase price and certain transaction costs will be funded though bank debt.
After the Acquisition, Sears will have the right under an amended stockholders'
agreement to designate three of the nine directors of Holding.
Based in Kansas City, Missouri, Western Auto is a specialty retailer of
automotive parts and accessories and also maintains an extensive wholesale
dealer network. As of August 17, 1998, Western Auto operated 590 stores in the
U.S. under the "Parts America" name and 40 stores primarily in Puerto Rico under
the "Western Auto" name that provide service as well as parts sales.
The combined entity will operate domestic retail stores under the "Advance
Auto Parts" name in most markets. The wholesale dealer network and Puerto Rico
stores will continue to operate primarily under the "Western Auto" banner. The
Company and Western Auto together will operate over 1,500 retail stores in 36
states, Puerto Rico and the U.S. Virgin Islands and will supply through its
wholesale distribution center nearly 800 "dealer" stores in 48 states.
In connection with the Merger Agreement, at the request of the Company,
Sears will attempt to sell the Parts America and Western Auto credit card
portfolios to a third party buyer. The Company has agreed to participate in any
losses incurred as a result of the sale, but its share of such losses will not
exceed $10.0 million. The Acquisition is expected to close by year end, subject
to certain regulatory approvals.
RESULTS OF OPERATIONS
The following tables set forth the statement of operations data for the
Company expressed in dollars and as a percentage of net sales for the periods
indicated.
16
<PAGE>
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-EIGHT WEEKS ENDED
(UNAUDITED) (UNAUDITED)
--------------------- -------------------------
JULY 12, JULY 18, JULY 12, JULY 18,
1997 1998 1997 1998
--------- -------- ---------- -----------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Net sales $196,729 $255,037 $435,880 $544,000
Cost of sales 121,338 156,448 268,198 332,825
-------- -------- -------- --------
Gross profit 75,391 98,589 167,682 211,175
Selling, general and administrative expenses 63,425 79,623 145,433 178,700
Expenses associated with recapitalization -- -- -- 14,005
-------- -------- -------- --------
Operating profit 11,966 18,966 22,249 18,470
Interest expense 1,844 8,306 4,382 11,821
Other expense, net 273 (235) 450 (119)
Income tax expense 4,123 4,804 7,291 3,116
-------- -------- -------- --------
Income $ 5,726 $ 6,091 $ 10,126 $ 3,652
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-EIGHT WEEKS ENDED
(UNAUDITED) (UNAUDITED)
--------------------- -------------------------
JULY 12, JULY 18, JULY 12, JULY 18,
1997 1998 1997 1998
--------- -------- ---------- -----------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 61.7 61.3 61.5 61.2
--------- -------- ---------- -----------
Gross profit 38.3 38.7 38.5 38.8
Selling, general and administrative expenses 32.2 31.2 33.4 32.8
Expenses associated with recapitalization -- -- -- 2.6
--------- -------- ---------- -----------
Operating profit 6.1 7.5 5.1 3.4
Interest expense 1.0 3.3 1.0 2.2
Other expense, net 0.1 (0.1) 0.1 (0.1)
Income tax expense 2.1 1.9 1.7 0.6
-------- -------- -------- --------
Income 2.9% 2.4% 2.3% 0.7%
========= ======== ========== ===========
</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
17
<PAGE>
related benefits of corporate employees, administrative office expenses, data
processing, professional expenses and other related expenses.
Twelve Weeks Ended July 18, 1998 Compared to Twelve Weeks Ended July 12, 1997
Net sales for the twelve weeks ended July 18, 1998 increased by $58.3
million, or 29.6%, to $255.0 million as compared to $196.7 million, for the
comparable twelve weeks ended July 12, 1997. This increase was due to an
increase in comparable store net sales of 9.4%, or $17.8 million, an increase in
net sales from stores opened in fiscal 1997 of $27.3 million, the contribution
of $13.2 million in net sales from stores opened in fiscal 1998. During the
twelve weeks ended July 18, 1998, the Company opened 46 new stores, relocated
two stores, and remodeled nine stores. As of July 18, 1998, the Company
operated 909 stores as compared to 720 stores at July 12, 1997.
Gross profit for the twelve weeks ended July 18, 1998 was $98.6 million, or
38.7% of net sales, compared with $75.4 million, or 38.3% of net sales, for the
twelve weeks ended July 12, 1997. The increase in the gross profit percentage
was primarily due to decreased warehouse and delivery expenses.
Selling, general and administrative expenses, for the twelve weeks ended
July 18, 1998, increased by $16.2 million, as compared to the twelve weeks ended
July 12, 1997, and, as a percentage of net sales, decreased from 32.2% to 31.2%.
This decrease, as a percent of sales, is due to the reduction in certain private
company expenses which were eliminated after the Recapitalization and the
elimination of an unusual medical claim which occurred in the twelve weeks ended
July 12, 1997.
Operating profit for the twelve weeks ended July 18, 1998 increased by $7.0
million, or 58.5% to $19.0 million, or 7.5% of net sales, as compared to $12.0
million, or 6.1% of net sales for the comparable twelve weeks ended July 12,
1997.
Interest expense, for the twelve weeks ended July 18, 1998, was $8.3
million compared to $1.8 million for the twelve weeks ended July 12, 1997. The
increase is due to increased debt associated with the Recapitalization and
related higher interest rates.
Income tax expense for the twelve weeks ended July 18, 1998 was $4.8
million as compared to $4.1 million for the twelve weeks ended July 12, 1997,
with effective tax rates of 44.1% and 41.9%, respectively. This increase is the
result of increased permanent adjustments and lower pretax earnings due to the
Recapitalization.
As a result of the above factors, the Company reported net income of $6.1
million, for the twelve weeks ended July 18, 1998, as compared to $5.7 million,
for the twelve weeks ended July 12, 1997. As a percentage of sales, net income
for the twelve weeks ended July 18, 1998 was 2.4% as compared to 2.9%, for the
twelve weeks ended July 12, 1997.
Twenty-Eight Weeks Ended July 18, 1998 Compared to Twenty-Eight Weeks Ended July
12, 1997
Net sales for the twenty-eight weeks ended July 18, 1998 increased by
$108.1 million, or 24.8%, to $544.0 million as compared to $435.9 million, for
the comparable twenty-eight weeks ended July 12, 1997. This increase was due to
an increase in comparable store net sales of 6.4%, or $27.0 million, an increase
in net sales from stores opened in fiscal 1997 of $62.8 million, the
contribution of $19.1 million in net sales from stores opened in fiscal 1998,
and a decrease in miscellaneous net sales of $0.8 million. During the twenty-
eight weeks ended July 18, 1998, the Company opened 96 new stores, relocated
four stores,
18
<PAGE>
remodeled 25 stores, and closed one store. As of July 18, 1998, the Company
operated 909 stores as compared to 720 stores at July 12, 1997.
Gross profit for the twenty-eight weeks ended July 18, 1998 was $211.2
million, or 38.8% of net sales, compared with $167.7 million, or 38.5% of net
sales, for the twenty-eight weeks ended July 12, 1997. The increase in the gross
profit percentage was primarily due to decreased warehouse and delivery
expenses.
Selling, general and administrative expenses, for the twenty-eight weeks
ended July 18, 1998, increased by $33.3 million, as compared to the twenty-eight
weeks ended July 12, 1997, and, as a percentage of net sales, decreased from
33.4% to 32.8%. This decrease, as a percent of sales, is due to the reduction
in certain private company expenses which were eliminated after the
Recapitalization and the elimination of an unusual medical claim which occurred
in the twelve weeks ended July 12, 1997.
As part of the Recapitalization, $14.0 million in expenses were incurred
which related to the Recapitalization. This expense consisted of $11.5 million
of bonuses paid to certain employees for past performances, $0.2 million in
related employment taxes and $2.3 million for non-recurring expenses which
consisted primarily of professional fees.
Operating profit decreased from $22.2 million, or 5.1% of net sales to
$18.4 million, or 3.4% of net sales for the comparable time period due to the
expenses incurred with the Recapitalization. Excluding the $14.0 million in
transaction expenses, operating profit increased by $10.2 million, or 46.0%, to
$32.4 million, or, 6.0% of net sales, for the twenty-eight weeks ended July 18,
1998, compared to $22.2 million for the twenty-eight weeks ended July 12, 1997,
due to the factors cited above.
Interest expense, for the twenty-eight weeks ended July 18, 1998, was $11.8
million compared to $4.4 million for the twelve weeks ended July 12, 1997. The
increase is due to increased debt associated with the Recapitalization and
related higher interest rates.
Income tax expense for the twenty-eight weeks ended July 18, 1998, was $3.1
million as compared to $7.3 million for the twenty-eight weeks ended July 12,
1997, with effective tax rates of 46.0% and 41.9%, respectively. This increase
is the result of increased permanent adjustments and lower pretax earnings due
to the Recapitalization.
As a result of the above factors, net income of $3.7 million, for the
twenty-eight weeks ended July 18, 1998, as compared to net income of 10.1
million, for the twenty-eight weeks ended July 12, 1997. As a percentage of
sales, net income for the twenty-eight weeks ended July 18, 1998, was 0.7% as
compared to net income of 2.3%, for the twenty-eight weeks ended July 12, 1997.
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. The Company
has financed its growth through a combination of internally generated funds and
borrowings.
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.
19
<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.
For the twenty-eight weeks ended July 18, 1998, net cash provided by
operating activities was $23.2 million, which consisted primarily of net working
capital of $5.3 million, depreciation and amortization of $14.2 million, and a
net income of $3.7 million. Net cash used for investing activities was $21.9
million and consisted primarily of $26.0 million for capital expenditures,
offset by proceeds of $4.1 million from the sale of a corporate airplane. Net
cash provided by financing activities was $36.0 million and was primarily the
result of the Recapitalization. See "--The Recapitalization."
The Company intends to fund the Acquisition with the issuance to Sears of
11,474,606 shares of Holding's Class A Common Stock, additional borrowings of
$125.0 million under a new term loan facility under the Credit Facility and the
sale of approximately $70.0 million of Holding Common Stock to existing
stockholders of Holding. The new term loan facility will mature on April 15,
2006 and will have nominal amortization until 2004, with amortization of $30.0
million in 2004, $60.0 million in 2005 and $30.0 million in 2006.
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, borrowings of $135.0 million under the New Credit Facility and
the IRB. Holding has outstanding $62.0 million of Debentures. 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. 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. Borrowings under the New
Credit Facility are required to be prepaid, subject to certain exceptions, with
(a) 50% of defined excess cash flow, (b) 100% of the net cash proceeds of all
asset sales or other dispositions of property by the Company and its
subsidiaries (including certain insurance and condemnation proceeds), subject to
certain exceptions (including exceptions for (i) reinvestment of certain asset
sale proceeds within 360 days of such sale and (ii) certain sale-leaseback
transactions), (c) 100% of the net proceeds of issuances of debt obligations of
the
20
<PAGE>
Company and its subsidiaries, and (d) 100% of the net proceeds of issuance of
equity of the Company and its subsidiaries. Because increases in net working
capital, capital expenditures and debt repayments are deducted in calculating
excess cash flow, the Company does not anticipate that the prepayment obligation
under the New Credit Facility in respect thereof will have a material effect on
its operating strategy. With respect to growth through acquisitions, the
operation of this covenant may result in the application of cash resources for
prepayments which would require the Company to secure additional equity or debt
financing to fund an acquisition, but while no assurance can be given, the
Company does not anticipate that this would have a material effect on its
ability to finance acquisitions in the future.
The Company's business is somewhat seasonal in nature, with the highest
sales occurring in the spring and summer months. In addition, the Company's
business is affected by weather conditions. While unusually heavy precipitation
tends to soften sales as elective maintenance is deferred during such periods,
extremely hot and cold weather tends to enhance sales by causing parts to fail.
YEAR 2000 CONVERSION
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 four phase approach of assessment, remediation, testing, and
contingency planning. The scope of the project includes all internal software,
hardware, operating systems, and assessment of risk to the business from vendors
and other partners' Year 2000 issues. The assessment of all internal systems
has been completed, the remediation and testing phases are in progress, and
contingency planning for certain information technology systems has begun. The
Company believes that this approach of assessment (including prioritization by
business risk), remediation (including conversions to new software), testing of
necessary changes, and contingency planning will minimize the business risk of
year 2000 from internal systems.
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 no later than June 30, 1999. The total cost of the Year
2000 project is estimated at $3.7 million. Of the total project cost,
approximately $1.0 million represents the purchase of new software and hardware
which will be capitalized. The remaining will be expensed as incurred during
1998 and 1999. As of the end of the Company's second quarter, the Company has
spent approximately $0.9 million on the Year 2000 project.
Ongoing communications have been established with almost all vendors and
other partners to monitor their progress in resolving Year 2000 issues, most of
which the Company believes, are making substantial progress. However, 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.
The Company has already begun to develop contingency plans in the event a
business interruption caused by Year 2000 problems should occur. For certain,
but not all, information technology systems, contingency plans are in place.
Elements of the Company's contingency plans will include: switching of vendors,
back-up systems that do not rely on computers, and the stockpiling of certain
products in the months before the Year 2000.
21
<PAGE>
The cost and time estimated for 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. Risks factors include, but
are not limited to, the retention of internal and external resources dedicated
to the project, the timely delivery of software corrections from external
vendors, and the successful completion of key business partners' Year 2000
projects.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not Applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 5, 1997, Joe C. Proffitt, Jr. on behalf of himself and all
others in the States of Alabama, California, Georgia, Kentucky, Michigan, North
Carolina, Ohio, South Carolina, Tennessee, Texas, Virginia and West Virginia who
purchased batteries from the Company from November 1, 1991 to November 5, 1997,
filed a class action complaint and motion of class certification against the
Company in the circuit court for Jefferson County, Tennessee at Dandridge,
alleging the sale by the Company of used, old or out-of-warranty automotive
batteries as new. The complaint seeks compensatory and punitive damages.
An appeal has been taken in connection with the November 1996 and 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
22
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCE STORES COMPANY, INCORPORATED,
a Virginia corporation
September 1, 1998 By: /s/ J. O'Neil Leftwich
----------------------
J. O'Neil Leftwich
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
S-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF ADVANCE STORES COMPANY, INCORPORATED AS OF JULY 18,
1998, JANUARY 3, 1998, AND DECEMBER 28, 1996 AND FOR THE TWENTY-EIGHT WEEK
PERIOD ENDED JULY 18, 1998, AND THE FISCAL YEARS ENDED JANUARY 3, 1998 (53 WKS),
DECEMBER 28, 1996 (52 WKS) AND DECEMBER 30, 1995 (52 WKS), AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> OTHER OTHER YEAR YEAR
<FISCAL-YEAR-END> JUL-18-1998 JAN-03-1998 DEC-28-1996 DEC-30-1995
<PERIOD-END> JUL-18-1998 JAN-03-1998 DEC-28-1996 DEC-30-1995
<CASH> 44,759 7,447 6,932 14,285
<SECURITIES> 0 0 0 0
<RECEIVABLES> 5,325 3,359 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 348,523 280,267 252,544 179,899
<CURRENT-ASSETS> 431,079 313,251 275,779 204,532
<PP&E> 233,086 212,836 166,256 122,933
<DEPRECIATION> (89,910) (77,940) (57,804) (41,006)
<TOTAL-ASSETS> 593,221 450,201 384,620 287,716
<CURRENT-LIABILITIES> 281,393 200,115 173,822 111,833
<BONDS> 335,000 106,542 93,653 79,277
0 0 0 0
0 0 0 0
<COMMON> 0 0 0 0
<OTHER-SE> (40,070) 129,169 108,797 88,585
<TOTAL-LIABILITY-AND-EQUITY> 593,221 450,201 384,620 287,716
<SALES> 544,000 848,108 705,983 602,559
<TOTAL-REVENUES> 544,000 848,108 705,983 602,559
<CGS> 332,825 524,586 437,615 369,962
<TOTAL-COSTS> 332,825 524,586 437,615 369,962
<OTHER-EXPENSES> 192,705 279,924 228,049 196,153
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 11,821 7,732 6,221 6,327
<INCOME-PRETAX> 6,768 35,042 33,947 28,353
<INCOME-TAX> 3,116 14,670 13,735 11,648
<INCOME-CONTINUING> 3,652 20,372 20,212 16,705
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 3,652 20,372 20,212 16,705
<EPS-PRIMARY> 0.00 0.00 0.00 0.00
<EPS-DILUTED> 0.00 0.00 0.00 0.00
</TABLE>
