<PAGE>
================================================================================
As filed with the Securities and Exchange Commission on October 6,
1998
Registration Nos. 333-56013 and 333-56013-01
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
AMENDMENT NO. 2
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.)
</TABLE>
5673 Airport Road
Roanoke, Virginia 24012
(540) 362-4911
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-----------
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>
I.R.S.
PRIMARY STANDARD 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
__________________
(1) Address, including zip code and telephone number, including 103 Foulk Road
area code, of principal executive office of co-registrant. Suite 200
Wilmington, Delaware 19803
(302) 427-0421
</TABLE>
<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 20 FOR INFORMATION THAT SHOULD BE CONSIDERED IN
CONNECTION WITH THIS EXCHANGE OFFER.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------------
THE DATE OF THIS PROSPECTUS IS , 1998.
<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.
i
(Continued on following page)
<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 July 18, 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 July 18, 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 July 18,
1998, had 909 stores in 17 states operating under the "Advance Auto Parts" name.
The Company has achieved significant growth through a focused store expansion
strategy of opening stores in new contiguous and selected existing markets.
Since accelerating its store expansion plan in 1992, the Company has grown from
the eighth largest to the second largest U.S. specialty retailer of automotive
parts (based on store count), increasing its store count from 223 to 909. From
fiscal 1992 through fiscal 1997, the Company increased net sales, net income and
EBITDA, as adjusted for the Recapitalization, by a compound annual growth rate
of 29.3%, 22.2% and 28.4%, respectively. See "--The Recapitalization" for a
description of the Recapitalization, footnote (4) to "--Summary Consolidated
Historical and Pro Forma Financial Data" for information with respect to EBITDA,
as adjusted for the Recapitalization and "--Summary Consolidated Historical and
Pro Forma Financial Data" for certain cash flow information. In addition, the
Company has aggressively implemented its commercial delivery program to
penetrate the "do-it-for me" ("DIFM") segment of the automotive aftermarket. The
Company, which it believes is the largest automotive retailer in a majority of
its markets based on store count, has expanded from its original geographic base
of North Carolina, South Carolina, Tennessee and Virginia to also operate in
Alabama, Arkansas, Delaware, Florida, Georgia, Indiana, Kentucky, Maryland,
Michigan, Mississippi, Ohio, Pennsylvania and West Virginia. For fiscal 1997,
net sales, net income and EBITDA, as adjusted for the Recapitalization, were
$848.1 million, $20.4 million and $68.2 million, respectively.
The Company believes that it has successfully established customer loyalty
in its markets by providing high levels of customer service, by offering an
extensive selection of brand name and quality private label products at
competitive prices and by creating strong name recognition, all of which are
reinforced by targeted regional advertising. In addition, the Company believes
that its size provides numerous competitive advantages over smaller retail
chains and independent operators, which make up a majority of its competition.
These advantages include: (i) greater product availability, (ii) purchasing
economies, (iii) economies of scale with respect to advertising, distribution
and warehousing, and (iv) a greater number of convenient locations with longer
store hours. The Company has expanded on these advantages by investing heavily
in employee training and information systems, which are designed to support the
Company's commitment to superior customer service.
The automotive aftermarket is a highly fragmented industry with the top 10
retail chains accounting for approximately 10% of the industry's approximately
$78.0 billion in annual sales. The Company believes that the industry is
consolidating as national and regional specialty retail chains gain market share
at the expense of smaller independent operators and less specialized mass
merchandisers. The Company primarily serves the approximately $34.0 billion
retail "do-it-yourself" ("DIY") segment of the automotive aftermarket, which the
Company believes has historically been characterized by stable, recession-
resistant demand. In addition, in 1996, the Company implemented a commercial
delivery program to capitalize on the approximately $44.0 billion commercial or
DIFM segment of the automotive aftermarket. The Company has aggressively
implemented this program in 494 stores and expects to add approximately 45
stores to the program in the remainder of 1998. The Company serves its
commercial delivery customers from its existing store base, which allows the
Company to leverage its existing fixed costs and in-store personnel with minimal
capital outlay.
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1
<PAGE>
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RECENT DEVELOPMENTS
On August 17, 1998, the Company and Holding entered into an agreement (the
"Acquisition Agreement") to acquire Western Auto Supply Company ("Western
Auto"), a Delaware corporation and wholly owned subsidiary of Sears, Roebuck and
Co. ("Sears"), for $175.0 million and approximately 40% of the Common Stock of
Holding (the "Acquisition"). The Acquisition Agreement provides that (i)
Western Auto will be merged into a subsidiary of the Company, with such
subsidiary to become the surviving corporation, (ii) the issued and outstanding
shares of Western Auto will be converted into the right to receive in the
aggregate (a) $175.0 million and (b) 11,474,606 shares of Holding's Class A
common stock, $.01 par value per share, constituting approximately 40% of the
outstanding Common Stock of Holding. FS&Co., Ripplewood, Nicholas F. Taubman
and the Taubman Trust (each as defined below) have committed to invest an
additional $70.0 million in equity to fund a portion of the cash purchase price
for Western Auto. Holding anticipates that $115.0 million of the cash purchase
price and certain transaction costs will be funded through bank debt.
Based in Kansas City, Missouri, Western Auto is a specialty retailer of
automotive parts and accessories and also maintains an extensive wholesale
dealer network. As of August 17, 1998, Western Auto operated 590 stores in the
U.S. under the "Parts America" name and 40 stores primarily in Puerto Rico under
the "Western Auto" name that provide service as well as parts sales and operated
four distribution centers.
The combined entity will operate domestic retail stores under the "Advance
Auto Parts" name in most markets. The wholesale dealer network and Puerto Rico
stores will continue to operate primarily under the "Western Auto" banner. The
Company and Western Auto together will operate over 1,500 retail stores in 37
states, Puerto Rico and the U.S. Virgin Islands and will supply through its
wholesale distribution center approximately 775 "dealer" stores in 48
states.
The Acquisition is expected to close by year end but there can be no
assurance that the Acquisition will be consummated. See "Unaudited Pro Forma
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and the
historical financial statements of Western Auto included elsewhere in this
Prospectus.
OPERATING STRATEGY
The Company's operating strategy focuses on serving its customers and
capitalizing on its position as a leading automotive aftermarket retailer. The
Company's key operating objectives are to:
Provide Superior Customer Service. The Company believes that its customers
place significant value on technical knowledge and service. Due to increased
vehicle diversity and automotive parts proliferation, customers increasingly
rely on well-trained sales associates to offer knowledgeable assistance in
product selection and use. To serve this need, Company employees participate in
continuous training programs, including formal classroom workshops, seminars and
Automotive Service Excellence ("ASE") certification to build technical,
managerial and customer service skills. In addition, the Company has customer
service measurement systems and recognition programs for division managers,
store managers, sales associates and other employees to measure and encourage
overall customer satisfaction.
Offer Broad Selection of Quality Products. The Company offers a broad
selection of brand name and quality private label automotive parts and other
products designed to cover a wide range of vehicles. At the end of fiscal 1997,
substantially all of the Company's stores offered between 15,000 to 16,000 in-
store stock keeping units ("SKUs") supplemented by approximately 36,000 SKUs
available on a next-day delivery basis to substantially all of its stores
through the Company's Parts Delivered Quickly ("PDQ(R)") system. The Company is
currently implementing an SKU expansion strategy such that, by the end of 1998,
the Company will offer to its customers on a same day basis a range of 20,000 to
21,000 SKUs in substantially all of its stores and approximately 100,000 SKUs
through its PDQ(R) system. The store SKU expansion will be supported by (i) the
roll-out of "hub"
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2
<PAGE>
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stores with approximately 4,000 additional SKUs, which will generally be
available on an immediate or same day basis to other area stores, and (ii) daily
restocking of these additional SKUs. In addition, the Company has expanded the
PDQ(R) system with the opening of a master PDQ(R) facility which provides
approximately 70,000 SKUs and has the capacity to offer up to 200,000 SKUs. The
majority of the expanded SKUs will be replacement parts which generally have
higher gross margins than accessories and other products. The Company believes
that the SKU expansion program will be an important competitive advantage,
particularly with respect to the commercial delivery program.
Capitalize on Strong Vendor Relationships and Merchandising Expertise. The
Company has consistently been able to negotiate lower product costs and improved
purchasing terms due to its ability to successfully grow its store base and
existing business. These favorable purchasing relationships enable the Company
to employ an everyday low price strategy with an emphasis on being a price
leader in replacement parts. The Company purchases from over 200 different
vendors with no single vendor accounting for 10% or more of purchases. The
Company's merchandising staff focuses on offering customers a broad selection of
products displayed in a manner designed to enhance sales. The Company
continually measures store productivity and is able to rapidly roll out sales
enhancing displays or other merchandising changes to all of its stores.
Employ Advanced Information Technology and Logistics Systems. Since
1992, the Company has invested significantly in its information technology and
logistics systems to facilitate its rapid growth by enhancing customer service,
increasing in-stock SKUs and providing for a broad product selection with same
day or next day delivery. Use of these systems has helped to increase the
Company's average customer sale from $10.86 in fiscal 1992 to $14.28 in fiscal
1997. In addition, these systems facilitate rapid expansion of the Company's
store base by improving operating efficiencies. The Company has nearly
completed converting its distribution centers from a labor intensive system to a
technologically advanced, fully integrated system with real time software and
modern material handling equipment. With these technological enhancements and
the opening of a fourth distribution center to be completed by early 1999, the
Company will be able to service over 1,600 stores.
GROWTH STRATEGY
As the Company pursues its expansion plan, management believes it will
continue to benefit from greater purchasing economies and an increased ability
to leverage advertising and logistics expenses. The Company will continue to
focus on the following key areas in implementing its growth strategy.
Continue New Store Growth. The Company's new store growth strategy is
focused on penetrating targeted new geographic areas with multiple store
openings, while continuing to open additional stores in selected existing
territories to increase its market share. The Company believes that the highly
fragmented nature of the retail automotive aftermarket industry allows it to
quickly establish itself in new markets and to increase its market penetration
in existing markets. The Company opened 170 stores in 1997, 96 stores in 1998
and plans to open approximately 70 stores in the remainder of fiscal 1998. To
further support its growth, the Company expects to begin television advertising
on a national basis in 1999. The Company believes that its proven ability to
effectively select new markets and store locations and quickly open new stores
will allow it to substantially increase its store base in approximately five
years.
Pursue Acquisitions. To augment its store growth strategy, the Company
intends to continue to pursue growth opportunities through selected acquisitions
where such acquisitions provide a quicker and more economic alternative to new
store openings. The fragmented nature of the automotive aftermarket industry
creates significant acquisition opportunities in existing and new markets. The
Company believes it can increase revenues and profitability of acquired stores
by leveraging its established infrastructure and improving stocking levels,
merchandising and customer service. Since 1994, acquisitions have accounted for
approximately 10% of the Company's new store openings. See "--Recent
Developments" for a description of the pending Acquisition.
3
<PAGE>
- --------------------------------------------------------------------------------
Increase Commercial Sales. In 1996, the Company focused its marketing
efforts on expanding sales to the DIFM segment of the automotive aftermarket,
which the Company believes represents approximately 56% of the automotive
aftermarket. Since 1996, the Company has added its commercial delivery program
to 494 stores. Due to its success in rapidly building its commercial sales
program, which currently represents approximately 10% of sales, the Company will
continue to expand this program, including adding approximately 45 stores in the
remainder of 1998. The Company serves its commercial delivery customers through
its existing store base which allows the Company to effectively leverage its
store-level costs. Commercial delivery customers order parts via a telephone
call to a Company store, and orders are delivered usually in less than an hour
in a Company truck. The Company's experience and market research indicate that
its broad selection of quality parts at competitive prices, knowledgeable sales
assistance, quick, accurate delivery, and the availability of credit are
important competitive advantages in serving the commercial delivery
customer.
Grow Same Store Sales. The Company believes that it can grow its same
store sales by (i) expanding product availability at the store level and through
the Company's PDQ(R) distribution system; (ii) continuing to implement its
commercial delivery program (as described above); and (iii) increasing name
recognition. The Company believes that expanding its product offerings through
increased SKU availability will enhance sales by (a) decreasing the likelihood
of a lost sale due to not stocking an item and (b) attracting customers,
particularly commercial delivery customers, who require hard to find replacement
parts and brand names. In addition, the Company believes that its market
penetration strategy and regional advertising will continue to build broad name
recognition and increase sales.
The Company is incorporated in the Commonwealth of Virginia. Its executive
offices are located at 5673 Airport Road, Roanoke, Virginia 24012 and its
telephone number is (540) 362-4911.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
THE RECAPITALIZATION
On April 15, 1998, Holding consummated its recapitalization pursuant to an
Agreement and Plan of Merger dated as of March 4, 1998 (the "Merger Agreement").
Nicholas F. Taubman and the Taubman Trust (the "Continuing Stockholders") and
certain Taubman family members were the only stockholders of Holding prior to
the Recapitalization. The Continuing Stockholders initiated and controlled the
transaction process throughout the period prior to the Recapitalization.
Holding engaged in the Recapitalization in order to attract additional investors
while allowing the Continuing Stockholders to retain an equity interest in
Holding. The Company engaged in actions that facilitated the Recapitalization
because it is a wholly owned subsidiary of Holding. Management, other than
Nicholas F. Taubman, supported the transaction process as directed by the
Continuing Stockholders and the Board of Directors of the Company. Prior to the
Recapitalization, the Company's management had no equity stake in Holding.
Pursuant to the Merger Agreement, AHC Corporation ("AHC"), a corporation
wholly owned by an investment fund organized by Freeman Spogli & Co.
Incorporated ("FS&Co."), merged into Holding (the "Merger"), with Holding as the
surviving corporation. In the Merger, a portion of the common stock (the
"Holding Common Stock") and all of the preferred stock of Holding held by the
Continuing Stockholders and certain Taubman family members were converted into
the right to receive in the aggregate approximately $351.0 million in cash and
certain options to purchase shares of Holding Common Stock. Certain shares held
by Nicholas F. Taubman and the Arthur Taubman Trust dated July 13, 1964 (the
"Taubman Trust"), having an aggregate value of approximately $17.5 million,
remained outstanding. Such shares represented approximately 14% of the
outstanding Holding Common Stock upon consummation of the Merger. Immediately
prior to the Merger, FS&Co. and Ripplewood Partners, L.P. and its affiliates
("Ripplewood") purchased approximately $80.5 million and approximately $20.0
million, respectively, of the common stock of AHC, which were converted in the
Merger into approximately 64% and approximately 16%, respectively, of the
outstanding Holding Common Stock (the investments by FS&Co. and Ripplewood are
collectively referred to herein as the "Equity Investment"). In connection with
the Merger, management of the Company purchased approximately $8.0 million, or
approximately 6.4%, of the outstanding Holding Common Stock. See "Management--
Stock Subscription Plans." The Company continued as 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 on April 15, 2004. At
the closing of the Merger, $125.0 million was borrowed under one of the term
loan facilities to fund the Company Distribution (as defined below). The
balance of the funds under the revolving credit facility and the term loan
facilities is available to fund the Company's expansion. The New Credit
Facility has availability for letter of credit usage, is secured by
substantially all of the assets of the Company and is guaranteed by the
Guarantors. See "Description of the New Credit Facility."
Substantially all of Holding's funded debt obligations existing immediately
before the consummation of the Recapitalization were repaid (the "Debt
Retirement"). In connection with the Recapitalization, the Company repaid its
intercompany obligations to Holding (approximately $91.1 million) and paid a
dividend to Holding (approximately $183.0 million) (the "Company Distribution")
which amounts were, together with the proceeds of the sale of the 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 the Debentures are not obligations of, or guaranteed
by, the Company. See "Description of Holding Indebtedness." The transactions
constituting the Recapitalization affecting the Company
5
<PAGE>
- --------------------------------------------------------------------------------
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 and
certain Taubman family members in connection with the Merger................................. $351.0
Repayment of existing indebtedness (b)........................................................ 81.3
Transaction fees and expenses and other transaction payments (c).............................. 22.8
Loans to management investors................................................................. 2.6
Excess cash................................................................................. 35.8
------
Total uses................................................................................. $493.5
======
</TABLE>
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 (c)............................................................. 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).
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
(c) Consists of (i) legal, accounting and other professional fees, (ii) fees
paid and costs incurred in connection with the New Credit Facility and other
debt issuances, and (iii) fees paid to FS&Co. and Ripplewood. The
additional $3.2 million in transaction payments made by Holding represents
additional expenses associated with the Equity Investment and the Debentures
Offering. See "Certain Transactions--Certain Payments."
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 20 under "Risk Factors" before tendering the Series A Notes in
exchange for the Series B Notes.
- --------------------------------------------------------------------------------
7
<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 July 18, 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. Indebtedness
incurred in connection with the Acquisition will
also constitute Senior Debt. In connection with the
Acquisition, the Company intends to borrow an
aggregate of $115.0 million, consisting primarily of
an additional term loan facility under the New
Credit Facility with the balance, if any, to be
drawn from an existing facility under the New Credit
Facility. 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
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
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
of Control of the Company or Holding and (ii) the
occurrence of an event of default under 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 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.
Upon the consummation of the Acquisition, Advance
Acquisition Corporation, the corporation into which
Western Auto will be merged, will become a
Subsidiary of the Company and a Guarantor of the
Series B Notes.
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
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
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.
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
- --------------------------------------------------------------------------------
10
<PAGE>
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
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 September 1, 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
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
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 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."
Material Tax
Considerations....... The exchange pursuant to the Exchange Offer will not
be a taxable event for Federal income tax purposes.
See "Material Federal Income Tax Considerations."
Exchange Agent......... United States Trust Company of New York is serving
as Exchange Agent in connection with the Exchange
Offer.
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
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 "Material Federal Income Tax Considerations."
- --------------------------------------------------------------------------------
13
<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 twenty-eight weeks ended July 12, 1997 and July 18, 1998 is derived from
financial statements that are unaudited and include, in the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the data for such periods, and are not necessarily
indicative of the results expected for a full fiscal year or for any future
period. The following summary consolidated historical and pro forma financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Consolidated Financial
Statements of the Company and notes thereto, the Consolidated Financial
Statements of Western Auto and notes thereto, and the Unaudited Pro Forma
Consolidated Financial Data and notes thereto included elsewhere in this
Prospectus.
- --------------------------------------------------------------------------------
14
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR(1)
------------------------------------------------------------
PRO FORMA
RECAPITALIZATION PRO FORMA
FISCAL FISCAL
1993 1994 1995 1996 1997 1997(2) 1997(2)
-------- -------- -------- -------- -------- ---------------- -----------
(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 $848,108 $2,122,019
Gross profit................. 137,491 184,903 232,597 268,368 323,522 323,522 714,171
Selling, general and
administrative expenses.... 117,733 155,457 196,153 228,049 279,924 279,924 691,174
Expenses associated with
Recapitalization........... -- -- -- -- -- -- --
Expenses associated with
restructuring.............. -- -- -- -- -- -- 38,441
Operating income (loss)...... 19,758 29,446 36,444 40,319 43,598 43,598 (15,444)
Net income (loss)(3)......... 10,964 22,832 16,705 20,212 20,372 4,397 (42,099)
OTHER DATA:
EBITDA(4).................... $ 28,953 $ 42,694 $ 51,243 $ 57,818 $ 65,399
EBITDAR(5)................... 44,792 64,893 82,427 96,423 113,697
Pro forma cash interest
expense(6)................. 31,938 40,800
<CAPTION>
TWENTY-EIGHT WEEKS ENDED
---------------------------------------------------------
PRO FORMA
RECAPITALIZATION PRO FORMA
JULY 12, JULY 18, JULY 18, JULY 18,
1997 1998 1998(2) 1998(2)
-------- -------- ---------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $435,880 $544,000 $544,000 $1,111,262
Gross profit................. 167,682 211,175 211,175 397,561
Selling, general and
administrative expenses.... 145,433 178,700 178,700 361,575
Expenses associated with
Recapitalization........... -- 14,005 14,005 14,005
Expenses associated with
restructuring.............. -- -- -- --
Operating income (loss)...... 22,249 18,470 18,470 21,981
Net income (loss)(3)......... 10,126 3,652 (1,029) (3,114)
OTHER DATA:
EBITDA(4).................... $ 33,512 $ 31,978
EBITDAR(5)................... 58,026 63,252
Pro forma cash interest
expense(6)................. 18,244 23,020
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR(1)
------------------------------------------------------------
PRO FORMA
RECAPITALIZATION PRO FORMA
FISCAL FISCAL
1993 1994 1995 1996 1997 1997(2) 1997(2)
-------- -------- -------- -------- -------- ---------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Capital expenditures............ 25,316 25,781 42,939 44,264 48,864
Ratio of earnings to fixed
charges(7)..................... 3.43x 4.29x 2.70x 2.78x 2.47x 1.17x
Percentage increase in
comparable store sales(8)...... 17.3% 9.5% 1.7% 1.1% 5.1%
Net cash provided by (used
in) operating activities....... 6,697 (5,358) 26,854 22,991 41,484
Net cash used in investing
activities..................... (25,275) (14,201) (39,855) (44,121) (48,607)
Net cash provided by (used in)
financing activities........... 18,578 19,559 22,925 13,777 7,638
SELECTED STORE DATA:
New stores...................... 81 90 104 115 170
Number of stores (end of
period)........................ 352 437 536 649 814
Stores with commercial delivery
program (end of period)........ -- -- -- 213 421
Total store square footage (000s)
(end of period)(9)............. 2,408 3,150 3,939 4,710 5,857
<CAPTION>
TWENTY-EIGHT WEEKS ENDED
---------------------------------------------------------
PRO FORMA
RECAPITALIZATION PRO FORMA
JULY 12, JULY 18, JULY 18, JULY 18,
1997 1998 1998(2) 1998(2)
-------- -------- ---------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Capital expenditures............ 20,464 26,028
Ratio of earnings to fixed
charges(7)..................... 2.39x 1.30x --
Percentage increase in
comparable store sales(8)...... 6.6% 6.4%
Net cash provided by (used
in) operating activities....... 27,922 23,165
Net cash used in investing
activities..................... (20,346) (21,873)
Net cash provided by (used in)
financing activities........... (7,798) 36,020
SELECTED STORE DATA:
New stores...................... 73 96
Number of stores (end of
period)........................ 720 909
Stores with commercial delivery
program (end of period)........ 420 494
Total store square footage (000s)
(end of period)(9)............. 5,239 6,485
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
AT JULY 18, 1998 PRO FORMA JULY 18, 1998
---------------- -----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................ $ 44,759 $ 50,759
Net working capital(10).......................................................... 149,686 289,774
Net working capital, as adjusted(11)............................................. 104,927 239,015
Total assets..................................................................... 593,221 1,253,633
Total long-term debt............................................................. 335,000 450,000
Stockholder's (deficit) equity................................................... (40,070) 222,430
</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 1997, which consists of 53 weeks. The Company's first fiscal quarter
consists of 16 weeks and the other three fiscal quarters consist of 12
weeks.
(2) The pro forma -- Recapitalization data for fiscal 1997 and the twenty-eight
weeks ended July 18, 1998 sets forth the financial data of the Company to
give effect to the pro forma adjustments relating to only the
Recapitalization. The pro forma data for fiscal 1997 and the twenty-eight
weeks ended July 18, 1998 sets forth the financial data of the Company to
give effect to the pro forma adjustments relating to both the
Recapitalization and Acquisition. See "Use of Proceeds," "Capitalization,"
"Unaudited Pro Forma Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Fiscal 1994 includes a net after-tax gain of $6,700 on the sale of
equity securities of TBC Corporation, a distributor of automotive products
in which the Company held a minority equity ownership interest.
(4) EBITDA represents operating income plus depreciation and amortization
included in operating income. EBITDA is not intended to represent
cash flow from operations as defined by generally accepted accounting
principles ("GAAP") and should not be considered as a substitute for net
income as an indicator of operating performance or as an alternative to cash
flow (as measured by GAAP) as a measure of liquidity. 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 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.
EBITDA does not reflect certain adjustments which management believes (a)
will result from the Recapitalization and (b) are relevant to evaluating the
future operating performance of the Company. The following additional
information reflects certain adjustments which management believes would
have been realized as a result of the Recapitalization
- --------------------------------------------------------------------------------
17
<PAGE>
if the Recapitalization had been consummated and was effective as of
December 29, 1996.
The following table reflects the effect of these items:
<TABLE>
<CAPTION>
TWENTY-EIGHT
WEEKS ENDED
FISCAL 1997 JULY 18, 1998
------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
EBITDA....................................................................... $65,399 $31,978
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
------- -------
EBITDA, as adjusted for the Recapitalization................................. $68,166 $46,720
======== =======
</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.
(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
operation performance among industry competitors. The Company leases
substantially all of its stores.
(6) Pro forma cash interest expense represents total interest expense,
excluding amortization of deferred debt issuance costs.
(7) 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 for the Recapitalization
has not been computed on a pro forma basis for the twenty-eight weeks ended
July 18, 1998 since earnings were not sufficient to cover fixed charges.
The coverage deficiency was $1,034.
(8) Comparable store net sales data is calculated based on the change in net
sales of all stores opened as of the beginning of the preceding fiscal
year. New stores become part of the comparable store base on the first day
of their second full fiscal year in operation. Relocations are included in
comparable store net sales from the date of opening. Increases for fiscal
1997 have been adjusted to exclude the effect of the fifty-third week.
- --------------------------------------------------------------------------------
18
<PAGE>
(9) Total store square footage is based on the Company's actual store formats
and includes normal selling, office, stockroom and receiving space.
(10) Net working capital represents total current assets less total current
liabilities.
(11) Net working capital, as adjusted, represents total current assets excluding
cash 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.
19
<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 July 18, 1998, (i) the Company and its
subsidiaries had $135.0 million of indebtedness that constituted Senior Debt,
$200 million of Series A Notes and $270.3 million of trade payables and other
accrued liabilities, (ii) the Company had a stockholder's deficit of $40.1
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
$240.0 million under the New Credit Facility which, if borrowed, would be senior
to the Series B Notes. In connection with the Acquisition, the Company intends
to borrow an aggregate of $115.0 million, consisting primarily of an additional
term facility to be added to the New Credit Facility, with the balance, if any,
to be drawn from an existing facility under the New Credit Facility. See
"Description of Series B 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, including indebtedness
incurred in connection with the Acquisition. 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.
20
<PAGE>
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 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. In particular,
there can be no assurance that the Company will consummate the Acquisition or
will be successful in integrating the operations and personnel of Western Auto
into its business or in overcoming the general risks described herein or other
problems that may be
21
<PAGE>
encountered with the integration of Western Auto. See "Business--Store Location
and Development Strategy" and "Business--Recent Developments."
COMPETITION
The retail sale of automotive parts and accessories is highly competitive.
The Company competes primarily with national and regional retail automotive
parts chains, wholesalers or jobber stores (some of which are associated with
national automotive parts distributors or associations), independent operators,
automobile dealers that supply original equipment manufacturer parts and mass
merchandisers that carry automotive replacement parts and accessories. Some of
the Company's competitors are larger and have greater financial, marketing and
other resources than the Company. See "Business--Competition."
DEPENDENCE ON VENDOR RELATIONSHIPS
The Company's business is dependent upon developing and maintaining close
relationships with its vendors and upon its ability to purchase products from
these vendors on favorable price and other terms. A disruption of these vendor
relationships could have a material adverse effect on the Company's business.
See "Business-- Purchasing."
DEPENDENCE ON CERTAIN KEY PERSONNEL
The Company is dependent upon the services and experience of its executive
officers and senior management team and there can be no assurance that the
Company's business would not be affected if one or more of these individuals
left the Company. The Company has entered into an employment agreement with
Garnett Smith, the Chief Executive Officer of the Company. See "Management--
Executive Employment Contracts."
ECONOMIC AND WEATHER CONDITIONS
The Company's business is sensitive to the economic and weather conditions
of the regions in which it operates. In recent years, certain of these regions
have experienced economic recessions and extreme weather conditions.
Temperature extremes tend to enhance sales by causing a higher incidence of
parts failure and increasing sales of seasonal products. However, unusually
inclement weather can reduce sales by causing deferral of elective maintenance.
No prediction can be made as to future economic or weather conditions in the
regions in which the Company operates or the effect such conditions may have on
the business or results of operations of the Company.
CONTROL OF COMPANY
Through ownership of Holding Common Stock and an irrevocable proxy granted
to it by Ripplewood, FS&Co. beneficially owns approximately 79.7% of the
outstanding voting securities of Holding and, after the Acquisition, will
beneficially own approximately 49.3% of the outstanding voting securities of
Holding and will have the right to designate three of Holding's nine directors.
As a result, prior to consummation of the Acquisition, FS&Co. has the ability to
control Holding's, and thus the Company's, management, policies and financing
decisions. See "Management." After consummation of the Acquisition, Sears will
own 40.6% of the outstanding voting securities of Holding and will have the
right to designate three of Holding's directors.
POSSIBLE INABILITY TO PURCHASE SERIES B 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
22
<PAGE>
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 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
23
<PAGE>
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 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
24
<PAGE>
development plans; competition; the loss of key personnel; weather conditions;
the Company's ability to deal with Year 2000 issues; and other factors
referenced in this Prospectus, including, without limitation, under the captions
"Summary," "Risk Factors," "Unaudited Pro Forma Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Forward-looking statements regarding revenues,
EBITDA and EBITDAR are particularly subject to a variety of assumptions, some or
all of which may not be realized. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. 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.
25
<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 as a dividend to Holding ($183.0
million), 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. At April 15, 1998, the aggregate
principal amount of the Company's intercompany indebtedness was approximately
$91.1 million at an interest rate of approximately 7.2% per annum, maturing on
December 31, 1998 and December 31, 1999. See "Summary--The Recapitalization."
26
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of July 18, 1998. 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
JULY 18,
1998(1)
------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Cash and cash equivalents................................. $ 44,759(2)
========
Debt:
Industrial Development Revenue Bonds...................... $ 10,000
New Credit Facility....................................... 125,000
Notes Offering............................................ 200,000
--------
Total debt................................................ 335,000
Stockholder's deficit..................................... (40,070)
--------
Total capitalization...................................... $294,930
========
</TABLE>
_____________________
(1) Amounts do not reflect the Acquisition. See "Unaudited Pro Forma
Consolidated Financial Data" for financial information as adjusted for the
Acquisition.
(2) Amount reflects unused proceeds from the Recapitalization that are
available for working capital needs.
27
<PAGE>
THE EXCHANGE OFFER
PURPOSES OF THE EXCHANGE OFFER
The Series A 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.
28
<PAGE>
TERMS OF THE EXCHANGE OFFER
General
Upon the terms and subject to the conditions of the Exchange Offer set
forth in this Prospectus and in the Letter of Transmittal, 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
29
<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.
30
<PAGE>
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Series A 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:
31
<PAGE>
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the Holder of the Series A 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
32
<PAGE>
(b) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer which, in
the sole judgment of 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>
<CAPTION>
By Mail: By Overnight Courier:
<S> <C>
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
33
<PAGE>
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of the Prospectus and related documents to
the beneficial owners of the Series A 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.
34
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data (the "Pro
Forma Financial Data") has been prepared by the Company's management by the
application of pro forma adjustments to the historical consolidated financial
statements of the Company and Western Auto and the notes thereto included
elsewhere in this Prospectus. The pro forma adjustments, which are based upon
available information and upon certain assumptions that management believes are
reasonable, are described in the accompanying notes. The unaudited pro forma
consolidated balance sheet as of July 18, 1998 was prepared as if the
Acquisition had occurred on such date. In connection with the Acquisition,
Holding will sell $70.0 million of Holding Common Stock to certain existing
stockholders representing 4,161,712 shares and the Company will incur up to
$115.0 million of borrowings under the New Credit Facility and a new term loan
facility that will become part of the New Credit Facility. The Company will
receive 100% of the outstanding common stock of Western Auto in exchange for
$175.0 million of cash and 11,474,606 shares of Holding Common Stock. The
unaudited pro forma consolidated statements of operations for the fiscal year
ended January 3, 1998 and the twenty-eight weeks ended July 18, 1998 reflect
adjustments as if the Recapitalization and Acquisition had been consummated and
were effective as of December 29, 1996. In connection with the Recapitalization
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 ($91.1 million) and to make a dividend
to Holding ($183.0 million). See "Summary--The Recapitalization" and "Summary--
Recent Developments." The unaudited consolidated pro forma statements of
operations give effect to the changes in interest expense that result from the
issuance of new debt and repayment of existing debt and the pro forma purchase
accounting adjustments relating to the Recapitalization and the
Acquisition.
The Acquisition will be accounted for under the purchase method of
accounting. The unaudited pro forma consolidated balance sheet as of July 18,
1998 reflects a pro forma allocation of purchase price for the Acquisition to
the tangible and intangible assets and liabilities acquired. The final
allocation of such purchase price, and the resulting depreciation and
amortization expense, will differ from the estimates contained herein due to the
final allocation being based on: (a) actual amounts of assets and liabilities on
the closing date; (b) final purchase price adjustments, including reserves that
may be recognized for additional exit costs; (c) final determination of values
of property and equipment and other assets; (d) actuarial valuations of certain
liabilities; and (e) resolution of the Credit Card Liability (as defined
herein). The actual allocation of the purchase price, and the resulting effect
on income from operations may differ significantly from the pro forma amounts
included herein.
The financial effects to the Company of the Recapitalization and
Acquisition as presented in the pro forma consolidated financial data are not
necessarily indicative of the Company's or the consolidated financial position
or results of operations which would have been obtained had the Recapitalization
and Acquisition actually occurred on the dates described above, nor are they
necessarily indicative of the results of future operations. The pro forma
consolidated financial data should be read in conjunction with the notes
thereto, which are an integral part thereof, the consolidated financial
statements of the Company and Western Auto and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
35
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
STORES
HISTORICAL WESTERN AUTO
JULY 18, HISTORICAL TOTAL FINAL
1998 JULY 4, 1998 ADJUSTMENTS PRO FORMA
---------- ------------ ----------- ---------
Assets (dollars in thousands)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 44,759 $ 27,313 $ (21,313)(3) $ 50,759
Receivables, primarily from vendors.......... 24,329 -- -- 24,329
Trade receivables........................... 5,325 82,073 (37,425)(2) 49,973
Inventories.................................. 348,523 347,919 -- 696,442
Deferred Income Taxes........................ -- 45,391 (45,391)(1) --
Prepaid expenses and other current assets... 5,056 17,133 -- 22,189
Refundable income taxes...................... 3,087 56,858 (56,858)(1) 3,087
-------- ---------- --------- ----------
Total current assets....................... 431,079 576,687 (160,987) 846,779
Property and equipment, net.................... 143,176 350,234 (116,636)(5) 376,774
Goodwill....................................... -- 114,555 (114,555)(4) --
Other assets................................... 18,966 9,114 2,000 (6) 30,080
-------- ---------- --------- ----------
Total assets............................... $593,221 $1,050,590 $(390,178) $1,253,633
======== ========== ========= ==========
Liabilities and stockholder's equity (deficit)
Current liabilities:
Borrowings secured by trade receivables...... $ 5,325 $ 35,500 $ (35,500)(2) $ 5,325
Current portion of deferred revenue.......... 3,089 -- -- 3,089
Accounts payable............................. 216,832 159,133 -- 375,965
Accrued expenses............................ 53,449 96,610 8,869 (7) 158,928
Due to Sears, net............................ -- 247,880 (247,880)(1) --
Deferred income taxes........................ 2,698 -- 11,000 (9) 13,698
-------- ---------- --------- ----------
Total current liabilities.................. 281,393 539,123 (263,511) 557,005
Long-term debt................................. 335,000 -- 115,000 (11) 450,000
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Long-term debt--Sears.......................... -- 140,802 (140,802)(1) --
Other long-term liabilities.................... 1,638 -- -- 1,638
Post-retirement benefits....................... 1,092 39,720 (18,420)(4) 22,392
Deferred income taxes.......................... 14,168 12,897 (26,897)(10) 168
-------- ---------- --------- ----------
Total non-current liabilities................ 351,898 193,419 (71,119) 474,198
Stockholder's equity (deficit)................. (40,070) 318,048 (55,548)(8) 222,430
-------- ---------- --------- ----------
Total liabilities and stockholder's equity
(deficit).................................. $593,221 $1,050,590 $(390,178) $1,253,633
======== ========== ========= ==========
(Footnotes on subsequent page)
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(dollars in thousands)
The Unaudited Pro Forma Consolidated Balance Sheet reflects the Acquisition
as if it occurred as of July 18, 1998 (actual amounts may differ significantly
from the pro forma amounts estimated below).
(1) Per the Acquisition Agreement, all intercompany accounts between Western
Auto and Sears will be settled prior to the Acquisition. This has been
reflected as a reclassification of all intercompany accounts in Western
Auto's historical consolidated balance sheet as of July 4, 1998 to equity
as follows:
<TABLE>
<CAPTION>
(dollars
in thousands)
<S> <C>
Deferred income taxes................................... $(45,391)
Income taxes receivable - Sears......................... (56,858)
Due to Sears, net....................................... 247,880
Deferred income taxes - Sears (See (9) below)........... 12,897
</TABLE>
37
<PAGE>
<TABLE>
<S> <C>
Long-term debt - Sears................................. 140,802
Impact on stockholder's equity (deficit)............... 299,330
</TABLE>
(2) Reflects Western Auto assets and liabilities as of July 4, 1998 that will
be retained by Sears in accordance with the Acquisition Agreement:
<TABLE>
<CAPTION>
(dollars
in thousands)
<S> <C>
Cash(a) (See (3) below)............................ $(21,313)
Trade receivables(b)............................... (37,425)
Property and equipment, net(c) (See (5) below)..... (11,079)
Accrued expenses(d) (See (7) below)................ 4,131
Borrowings secured by trade receivables(b)......... 35,500
--------
Impact on stockholder's equity (deficit)........... $(30,186)
</TABLE>
38
<PAGE>
(a) The Acquisition Agreement provides that Western Auto will have at
least $6,000 in cash and a minimum level of Retained Working Capital
on the closing date; any excess amount will be distributed to Sears.
(See (3) below).
(b) The Acquisition Agreement provides that Sears will retain certain
assets and liabilities related to certain private label credit card
programs, as well as associated secured borrowings.
(c) The Acquisition Agreement provides that Sears will retain all tire
store properties, which are included in the historical balance sheet
of Western Auto as of July 4, 1998 but are excluded from Western
Auto's operations to be acquired. (See (5) below).
(d) The Acquisition Agreement provides that Sears will retain all accrued
liabilities associated with the tire store properties, as well as any
accrued liabilities not associated with operations acquired from
Sears. (See (7) below).
(3) Reflects increases and decreases in cash resulting from pro forma
adjustments:
<TABLE>
<CAPTION>
(dollars in
thousands)
-----------
<S> <C>
Cash increases:
Proceeds from issuance of 263 new shares of Company
common stock to Holding.................................... $ 263,000
Proceeds from issuance of long-term debt under the New
Credit Facility and a new term loan facility that will
become part of the New Credit Facility..................... 115,000
---------
Total cash inflows......................................... 378,000
---------
Cash decreases:
Cash retained by Sears (See (2) above)....................... (21,313)
Purchase of Holding common stock (11,474,606 shares
valued @ $16.82 per share)................................. (193,000)
Cash portion of purchase price for acquisition............... (175,000)
Estimated debt issuance costs(a) (See (6) below)............. (6,500)
Estimated stock issuance costs(a) (See (8) below)............ (500)
Estimated acquisition related costs(a) (See (4) below)....... (3,000)
---------
Total cash outflows........................................ (399,313)
---------
Net impact on cash........................................... $ (21,313)
---------
</TABLE>
______________________
(a) See "Certain Transactions--Certain Payments."
(4) The Acquisition will be accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations." The
pro forma purchase price is being allocated first to the tangible and
identifiable intangible assets and liabilities of Western Auto based upon
preliminary estimates of their fair market values, assuming the Acquisition
had occurred on July 18, 1998, with the excess of the estimated fair market
value of the net assets acquired over the purchase price allocated to a
reduction in property and equipment for pro forma purposes as follows:
39
<PAGE>
<TABLE>
<CAPTION>
(dollars
Components of purchase price: in thousands)
<S> <C>
Cash to Sears......................................................... $ 175,000
Holdings common stock to Sears (11,474,606 shares
valued @ $16.82 per share).......................................... 193,000
Estimated acquisition related costs................................... 3,000
---------
Total purchase price.................................................... 371,000
Historical book value of Western Auto's net assets...................... (318,048)
Adjustment to book value of net assets acquired for
elimination of intercompany accounts between Western
Auto and Sears (See (1) above)........................................ (299,330)
Adjustment to book value of net assets acquired for assets
and liabilities retained by Sears in the Acquisition
(See (2) above)....................................................... 30,186
Adjustments to recognize liabilities in purchase accounting:
Reserve for severance and relocation, net of $4,900 of
deferred income tax asset (See (9) below)........................... 8,100
Net additional deferred income tax liability (See (9) below).......... 1,900
Adjustments to reflect fair market value of net assets acquired:
Elimination of net book value of goodwill acquired.................... 114,555
Decrease in book value of intangible assets acquired
(See (6) below)..................................................... 4,500
Adjustments to liabilities for post-retirement costs.................. (18,420)
---------
Decrease to book value of property and equipment
(See (5) below)........................................................ $(105,557)
=========
</TABLE>
The foregoing pro forma purchase price allocation is based on available
information and certain assumptions the Company believes are reasonable. In
connection with the Acquisition Agreement, Sears has agreed to evaluate the
sale of certain private label credit card programs to a third party buyer.
The Company has agreed to share any losses incurred as a result of the
sale, or as a result of continuing the credit card programs, up to a
maximum amount of $10,000. Any amounts due under the Credit Card Liability
will be reflected as additional purchase price when payment becomes
probable and the amount can be estimated. The Company is currently
evaluating certain exit costs that may be incurred in connection with the
Acquisition and may establish additional reserves, not reflected in the
accompanying pro forma statements, at closing based on the results of its
evaluation. Any reserves established will result in an increase in property
and equipment, resulting in additional provisions for depreciation and
amortization expense. The final purchase price allocation will be based on
the outcome of the matters referred to above, final determination of the
fair values of the net assets acquired at the date of the Acquisition as
determined by appraisal, actuarial valuation or other methods and actual
amounts of assets and liabilities on the closing date. The final purchase
price allocation may differ significantly from the pro forma allocation.
(5) Reflects the following:
<TABLE>
<CAPTION>
(dollars in
thousands)
<S> <C>
Property retained by Sears (See (2) above)........... $ (11,079)
Purchase accounting adjustment (See (4) above)....... (105,557)
---------
$(116,636)
=========
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
(6) Reflects the following:
(DOLLARS IN
THOUSANDS)
<S> <C>
Purchase accounting adjustment (See (4) above)........... $(4,500)
Deferred debt issuance costs (See (3) above)............. 6,500
---------
$ 2,000
=========
(7) Reflects the following:
(DOLLARS IN
THOUSANDS)
Accrued expenses retained by Sears (See (2) above)....... $(4,131)
Reserve for severance and relocation (See (4) above)..... 13,000
---------
$ 8,869
=========
(8) Reflects the following:
(DOLLARS IN
THOUSANDS)
Issuance of 263 new shares of Company common stock to
Holding, for cash (See (3) above)...................... $263,000
Estimated stock issuance costs (See (3) above).......... (500)
Elimination of historical Western Auto stockholder's
equity, as adjusted.................................... (318,048)
--------
$(55,548)
========
(9) The Company anticipates that the Acquisition will be accounted for as the
purchase of assets for income tax purposes resulting in an allocation of
the purchase price to the income tax basis of the assets and liabilities
acquired. Pro forma adjustments to deferred income tax assets
(liabilities):
(DOLLARS IN
THOUSANDS)
Deferred tax on severance and relocation accrual (See
(4) above)............................................. $ 4,900
Net additional deferred tax liability(a) (See (4) above) (1,900)
-------
Net pro forma change in deferred taxes................. $ 3,000
=======
Components of net pro forma change in deferred taxes:
Current deferred tax liability.......................... (11,000)
Non-current deferred tax liability (See (10) below)..... 14,000
-------
$ 3,000
=======
- -------------------
</TABLE>
41
<PAGE>
(a) Represents $4,900 deferred income tax liability related to property
and equipment, net of $3,000 net deferred income tax assets relating
to a wholly owned subsidiary of Western Auto.
<TABLE>
<CAPTION>
(10) Reflects the following:
(DOLLARS
IN
THOUSANDS)
<S> <C>
Elimination of Western Auto's deferred tax liability
to Sears (See (1) above)............................. $12,897
Adjustment to non-current deferred tax liability
(See (9) above)...................................... 14,000
---------
$26,897
=========
</TABLE>
(11) Reflects borrowings of $115,000 under the New Credit Facility to be
comprised of borrowings under a new term loan facility that will become
part of the New Credit Facility as well as an existing facility
thereunder.
42
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 3, 1998
-------------------------------------------------------------------------------------
RECAPITALIZATION ACQUISITION
------------------------ -------------------------
COMPANY WESTERN AUTO TOTAL
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ------------ ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales................................... $848,108 $ -- $848,108 $1,319,811 $(45,900)(3) $2,122,019
Cost of sales............................... 524,586 -- 524,586 883,262 -- 1,407,848
-------- -------- -------- ---------- -------- ----------
Gross profit................................ 323,522 -- 323,522 436,549 (45,900) 714,171
Selling, general and
administrative expenses.................... 279,924 -- 279,924 475,037 (63,787)(4) 691,174
Restructuring............................... -- -- -- 38,441 -- 38,441
-------- -------- -------- ---------- -------- ----------
Income (loss) from operations............... 43,598 -- 43,598 (76,929) 17,887 (15,444)
Total interest expense...................... (7,732) (26,625)(1) (34,357) (15,379) 5,335 (5) (44,401)
Other income (expense), net................. (824) -- (824) (6) -- (830)
-------- -------- -------- ---------- -------- ----------
Income (loss) before
provision for taxes........................ 35,042 (26,625) 8,417 (92,314) 23,222 (60,675)
Provision (benefit) for income taxes........ 14,670 (10,650)(2) 4,020 (31,885) 9,289 (2) (18,576)
-------- -------- -------- ---------- -------- ----------
Net income (loss)........................... $ 20,372 $(15,975) $ 4,397 $ (60,429) $ 13,933 $ (42,099)
======== ======== ======== ========== ======== =========
</TABLE>
(Footnotes on subsequent page)
43
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TWENTY-EIGHT WEEKS ENDED TWENTY-SIX WEEKS ENDED
JULY 18, 1998 JULY 4, 1998
-------------------------------------- ------------------------------
RECAPITALIZATION ACQUISITION
------------------------- ------------------------------
WESTERN
COMPANY AUTO TOTAL
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net sales..................... $544,000 $ -- $544,000 $586,194 $(18,932)(3) $1,111,262
Cost of sales................. 332,825 -- 332,825 380,876 -- 713,701
-------- ------- -------- -------- -------- ----------
Gross profit.................. 211,175 -- 211,175 205,318 (18,932) 397,561
Selling, general and
administrative expenses....... 178,700 -- 178,700 209,017 (26,142)(4) 361,575
Costs associated with the
recapitalization............. 14,005 -- 14,005 -- -- 14,005
-------- ------- -------- -------- -------- ----------
Income (loss) from
operations................... 18,470 -- 18,470 (3,699) 7,210 21,981
Total interest expense........ (11,821) (7,802) (1) (19,623) (11,218) 5,805(5) (25,036)
Other income (expense), net... 119 -- 119 1 -- 120
Income (loss) before
provision (benefit) for
income taxes................. 6,768 (7,802) (1,034) (14,916) 13,015 (2,935)
Provision (benefit) for
income taxes................. 3,116 (3,121) (2) (5) (5,022) 5,206(2) 179
-------- ------- -------- -------- -------- ----------
Net income (loss)............. $ 3,652 $(4,681) $ (1,029) $ (9,894) $ 7,809 $ (3,114)
======== ======= ======== ======== ======== ==========
</TABLE>
(Footnotes on subsequent page)
44
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(dollars in thousands)
The Pro Forma Consolidated Statements of Operations reflect the Recapitalization
and Acquisition as if they had occurred on December 29, 1996.
(1) Gives effect to the increase in estimated interest expense from the use of
borrowings to finance the Recapitalization:
<TABLE>
<CAPTION>
FISCAL YEAR TWENTY-EIGHT
ENDED WEEKS
JANUARY 3, ENDED
1998 JULY 18, 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 $125,000 on the New Credit Facility and
10.25% per annum on borrowings of $200,000 on the Series A Notes and (ii)
commitment fees on unused borrowings of $250,000 related to the New Credit
Facility using a rate of 0.5% per annum. The interest rates on the New Credit
Facility 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 $200 and for the twenty-eight weeks ended July
18, 1998 by less than $100. In September 1998, the interest rate on the New
Credit Facility declined to 7.88%, which would reduce pro forma interest
expense as presented in the unaudited pro forma statement of operations for
the Recapitalization by less than $200 for both the year ended January 3, 1998
and the twenty-eight week period ended July 18, 1998.
(b) Historical interest expense represents interest on intercompany debt, all
of which was retired with proceeds from borrowings 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 period in which the borrowings were outstanding in
fiscal 1998. Average interest rates on these notes were 8.2% during the year
ended January 3, 1998 and 6.6% during the period in which the borrowings were
outstanding in fiscal 1998.
(2) Estimated income tax effects of the pro forma adjustments at a statutory
tax rate of 40%.
45
<PAGE>
(3) Pro forma adjustment eliminates the effect of various Western Auto private
label credit card programs retained by Sears in accordance with the Acquisition
Agreement:
<TABLE>
<CAPTION>
Year Ended Twenty-Eight Weeks
January 3, 1998 Ended July 18, 1998
--------------- -------------------
(dollars in thousands)
<S> <C> <C>
Credit card revenues, included in net sales........................... $(45,900) $(18,932)
Credit card operating expenses, included in selling, general
and administrative expenses. (See (4) below)....................... 55,536 21,368
Credit card financing fees, included in interest expense. (See
(5) below).......................................................... 2,272 1,082
-------- --------
Net pre-tax loss eliminated........................................... $ 11,908 $ 3,518
======== ========
</TABLE>
46
<PAGE>
(4) Pro forma adjustment reflects the following:
<TABLE>
<CAPTION>
Year Ended Twenty-Eight Weeks
January 3, 1998 Ended July 18, 1998
--------------- -------------------
(dollars in thousands)
<S> <C> <C>
Elimination of the credit card operating expenses (See (3) above)......... $(55,536) $(21,368)
Elimination of goodwill amortization...................................... (4,455) (2,228)
Reduction in other intangibles amortization(a)............................ (146) (73)
Reduction in depreciation as a result of preliminary purchase
price allocation(b)..................................................... (8,119) (4,372)
Adjustment to include the interchange fee of 2%(c)........................ 2,615 930
Elimination of gain amortization on the post retirement benefit
obligation.............................................................. 1,215 640
Elimination of rental income, net of depreciation expense, for the
tire store properties................................................... 639 329
-------- --------
Net decrease in selling, general and administrative expenses.............. $(63,787) $(26,142)
======== ========
</TABLE>
___________________________
(a) The historical balance sheet for Western Auto includes other intangibles of
$9,114 which were being depreciated over 40 years. The pro forma adjustment
above is made in conjunction with the write-down of the intangible assets
by $4,500.
(b) Reflects elimination of depreciation related to the purchase price
allocation based on an average useful life of 13 years.
(c) Historically, Western Auto has not been charged for the interchange fee of
2% on Sears' credit card sales. The Company will enter into a Merchant
Agreement with Sears, whereby Sears will service its credit card used at
the Parts America, Western Auto dealer stores and Western Auto Puerto Rico
stores for a specified period of time, and will charge the Company an
interchange fee of 2% of related credit card sales.
47
<PAGE>
(5) Pro forma adjustment reflects the following:
<TABLE>
<CAPTION>
YEAR ENDED TWENTY-EIGHT WEEKS
JANUARY 3, 1998 ENDED JULY 18, 1998
--------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Elimination of historical Western Auto inter-company interest expense............... $(13,107) $(10,136)
Elimination of credit card financing fees relating to credit card
program retained by Sears (See (3) above).......................................... (2,272) (1,082)
Interest expense on $40,000 under the New Credit Facility and
$75,000 under a new term loan facility that will become part of the
New Credit Facility at 7.88% (a)................................................... 9,062 4,884
Amortization of deferred debt issuance costs over five and one-half
years.............................................................................. 1,182 637
Reduction in commitment fees on unused borrowings at a rate of
0.5% per annum resulting from $40,000 additional borrowings
under the New Credit Facility...................................................... (200) (108)
-------- --------
Net decrease in interest expense................................................. $ (5,335) $ (5,805)
-------- --------
</TABLE>
_______________________
(a) The interest rates on the new credit facility are variable. A change in the
rates of 1/8 of 1% on these borrowings would change the pro forma interest
expense for the year ended January 3, 1998 by $200 and for the twenty-eight
weeks ended July 18, 1998 by $100.
48
<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 twenty-eight weeks ended July 12, 1997 and
July 18, 1998 are derived from financial statements that are unaudited and
include, in the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the data for such
periods, and are not necessarily indicative of the results expected for a full
fiscal year or for any future period. The data presented below should be read
in conjunction with the consolidated financial statements of 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) TWENTY-EIGHT WEEKS ENDED
------------------------------------------------------------------ --------------------------
JULY 12, JULY 18,
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
STATEMENT OF OPERATIONS DATA:
Net sales...................... $365,241 $482,347 $602,559 $705,983 $848,108 $435,880 $544,000
Cost of sales.................. 227,750 297,444 369,962 437,615 524,586 268,198 332,825
Selling, general and
administrative expenses(2).... 117,733 155,457 196,153 228,049 279,924 145,433 178,700
Expenses associated with the
Recapitalization.............. -- -- -- -- -- -- 14,005
Operating income (loss)........ 19,758 29,446 36,444 40,319 43,598 22,249 18,470
Interest expense............... 2,031 3,633 6,327 6,221 7,732 (4,382) (11,821)
Other income (expense)......... 27 10,472 (1,764) (151) (824) (450) 119
Income (loss) before taxes(3).. 17,754 36,285 28,353 33,947 35,042 17,417 6,768
Income tax expense (benefit)... 6,790 13,453 11,648 13,735 14,670 7,291 3,116
Net income (loss)(3)........... 10,964 22,832 16,705 20,212 20,372 10,126 3,652
OTHER DATA:
EBITDA(4)...................... $ 28,953 $ 42,694 $ 51,243 $ 57,818 $ 65,399 $ 33,512 $ 31,978
EBITDAR(5)..................... 44,792 64,893 82,427 96,423 113,697 58,026 63,252
Capital expenditures........... 25,316 25,781 42,939 44,264 48,864 20,464 26,028
Ratio of earnings to fixed
charges(6).................... 3.43x 4.29x 2.70x 2.78x 2.47x 2.39x 1.30x
Total store square footage
(000s) (at period end)(7)..... 2,408 3,150 3,939 4,710 5,857 5,239 6,485
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Percentage increase in
comparable store net
sales(8)........................ 17.3% 9.5% 1.7% 1.1% 5.1% 6.6% 6.4%
Net cash provided by (used
in) operating activities........ 6,697 (5,358) 26,854 22,991 41,484 27,922 23,165
Net cash used in investing
activities...................... (25,275) (14,201) (39,855) (44,121) (48,607) (20,346) (21,873)
Net cash provided by (used
in) financing activities........ 18,578 19,559 22,925 13,777 7,638 (7,798) 36,020
Stores open at end of period..... 352 437 536 649 814 720 909
BALANCE SHEET DATA:
Net working capital(9)........... $ 24,903 $ 79,721 $ 92,699 $101,957 $113,136 $149,686
Net working capital, as
adjusted(10).................... 54,432 84,061 91,864 111,142 112,924 104,927
Total assets..................... 185,594 228,242 287,716 384,620 450,201 593,221
Total debt (including
current maturities)............. 53,279 69,622 92,727 107,920 113,777 335,000
Stockholder's equity
(deficit)....................... 49,048 71,880 88,585 108,797 129,169 (40,070)
</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 1997, which consists of 53 weeks. The Company's first fiscal
quarter consists of 16 weeks and the other three fiscal quarters consist
of 12 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 $900.
(3) Fiscal 1994 includes a net after-tax gain of $6,700 on the sale of
equity securities of TBC Corporation, a distributor of automotive products
in which the Company held a minority equity ownership interest.
(4) EBITDA represents operating income plus depreciation and amortization
included in operating income. EBITDA is not intended to represent cash flow
from operations as defined by GAAP and should not be considered as a
substitute for net income as an indicator of operating performance or as an
alternative to cash flow (as measured by GAAP) as a measure of liquidity.
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 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.
(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.
(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
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<PAGE>
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.
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.
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<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, and the other three
quarters consist of 12 weeks.
GENERAL
The Company is the second largest retailer of automotive parts and
accessories in the United States (based on store count) with 909 stores in 17
states as of July 18, 1998. Based on store count, the Company believes it is
the largest automotive retailer in a majority of its markets.
The Company was formed in 1929 when the Company's founders purchased three
stores from Pep Boys and was acquired by Arthur Taubman in 1932. Nicholas F.
Taubman, Arthur Taubman's son and 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
909.
In 1996, the Company made the decision to aggressively expand its sales to
the DIFM market by implementing a commercial delivery program, which is now in
place at 494 stores. Due to its success in rapidly building its commercial
delivery program, the Company will continue to expand this program, including
adding approximately 45 stores to the program in the remainder of 1998. The
Company believes it has significant competitive advantages in servicing the DIFM
segment because it has the distribution capacity and sophisticated information
systems necessary to efficiently stock, advertise and deliver a broad inventory
selection of brand name and quality private label parts.
The Company has also invested heavily in store, logistical and management
information systems. The Company has reengineered its POS system, implemented
a new store level inventory management system, installed a satellite
communications network, upgraded host systems and built additional distribution
centers. With these technological enhancements and the opening of a fourth
distribution center to be completed by early 1999, the Company will be able to
serve over 1,600 stores.
On August 17, 1998, the Company and Holding entered into the Acquisition
Agreement to acquire Western Auto from Sears for $175.0 million and
approximately 40% of the Common Stock of Holding. The Acquisition Agreement
provides that (i) Western Auto will be merged into a subsidiary of the Company,
with such subsidiary to become the surviving corporation, (ii) the issued and
outstanding shares of Western Auto will be converted into the right to receive
in the aggregate (a) $175.0 million and (b) 11,474,606 shares of Holding's Class
A common stock, $.01 par value per share, constituting approximately 40% of the
outstanding Common Stock of Holding. FS&Co., Ripplewood, Nicholas F. Taubman and
the Taubman Trust have committed to invest an additional $70.0 million in equity
to fund a portion of the cash purchase price for Western Auto. The Company
anticipates that $115.0 million of the cash purchase price and certain
transaction costs will be funded through bank debt. The Acquisition is expected
to close by year end but there can be no assurance that the Acquisition will be
consummated.
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<PAGE>
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 affecting 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.
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>
TWENTY-EIGHT WEEKS
FISCAL YEAR ENDED ENDED
------------------------------------------------------------ ---------------------------
DECEMBER 30, DECEMBER 28, JANUARY 3, JULY 12, JULY 18,
1995 1996 1998 1997 1998
------------- ------------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 61.4 62.0 61.9 61.5 61.2
----- ----- ----- ----- -----
Gross profit 38.6 38.0 38.1 38.5 38.8
Selling, general and 32.6 32.3 33.0 33.4 32.8
administrative expenses
Expenses associated with -- -- -- -- 2.6
recapitalization ----- ----- ----- ----- -----
Operating profit (loss) 6.0 5.7 5.1 5.1 3.4
Interest expense 1.0 0.9 0.9 1.0 2.2
Other expense, net 0.3 0.0 0.1 0.1 (0.1)
Income tax expense (benefit) 1.9 1.9 1.7 1.7 0.6
----- ----- ----- ----- -----
Income (loss) 2.8% 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 related benefits of
corporate employees, administrative office expenses, data processing,
professional expenses and other related expenses.
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<PAGE>
Twenty-Eight Weeks Ended July 18, 1998 Compared to Twenty-Eight Weeks Ended July
12, 1997
Net sales for the twenty-eight weeks ended July 18, 1998 increased by
$108.1 million, or 24.8%, to $544.0 million as compared to $435.9 million, for
the comparable twenty-eight weeks ended July 12, 1997. This increase was due
to an increase in comparable store net sales of 6.4%, or $27.0 million, an
increase in net sales from stores opened in fiscal 1997 of $62.8 million, the
contribution of $19.1 million in net sales from stores opened in fiscal 1998,
and a decrease in miscellaneous net sales of $0.8 million. During the twenty-
eight weeks ended July 18, 1998, the Company opened 96 new stores, relocated
four stores, 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 twenty-eight weeks ended July 12, 1997.
The increase is due to increased debt associated with the Recapitalization and
related higher interest rates.
Income tax expense for the twenty-eight weeks ended July 18, 1998, was $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
54
<PAGE>
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.
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.
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.
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
55
<PAGE>
warehouse and delivery expenses (5.78% of net sales in fiscal 1996 compared to
5.25% of net sales in fiscal 1995) and volatility in the freon market. Warehouse
and delivery expenses increased due to opening a new distribution center and
increasing service levels to stores which prior to implementation of the DCMS
required significant amounts of incremental labor expense. See "Business--
Management Information Systems."
Selling, general and administrative expenses for fiscal 1996 increased by
$31.9 million as compared to fiscal 1995 and, as a percentage of net sales,
decreased from 32.6% to 32.3%. The decrease as a percentage of net sales was
primarily due to increased vendor support for advertising and marketing.
Additionally, in fiscal 1995, 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 $23.2 million in the twenty-eight weeks ended July 18,
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.
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.
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<PAGE>
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 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 "Summary--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 a
$40.0 million under the delayed draw facility under the New Credit Facility, a
$75.0 million new term loan facility under the New Credit Facility, the sale of
approximately $70.0 million of Holding Common Stock to existing stockholders of
Holding, and $10.0 million of existing cash. The new term loan facility will
mature on April 15, 2004 and will have amortization of $1.0 million per year
until 2004, with amortization of $72.5 million in 2004.
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, $40.0 million of which will be used in
connection with the Acquisition. The term loan facilities, other than the
Tranche B term loan, will mature on the sixth anniversary of initial borrowing,
and the Tranche B term loan will mature on the eighth anniversary of initial
borrowing. Annual principal payments on the term loan facilities prior to the
sixth anniversary of initial borrowing will be nominal; thereafter, required
principal payments will be approximately $149.0 million in 2004, $60.0 million
in 2005 and $30.0 million in 2006, assuming the term loan facilities have been
fully borrowed. The revolving loan facility will mature on the sixth
anniversary of initial borrowing. The loans under the New Credit Facility are
secured by a first priority security interest in substantially all tangible and
intangible assets of the Company. Amounts available to the Company under the
revolver and delayed draw term loans are subject to a borrowing base formula
which is based on certain percentages of the Company's inventories. The Company
intends to use borrowings under the revolver and delayed draw term loans for
store expansion and funding of working capital. Borrowings under the New Credit
Facility are required to be prepaid, subject to certain exceptions, with (a) 50%
of defined excess cash flow, (b) 100% of the net cash proceeds of all asset
sales or other dispositions of property by the Company and its subsidiaries
(including certain insurance and condemnation proceeds), subject to certain
exceptions (including exceptions for (i) reinvestment of certain asset sale
proceeds within 360 days of such sale and (ii) certain sale-leaseback
transactions), (c) 100% of the net proceeds of issuances of debt obligations of
the Company and its subsidiaries, and (d) 100% of the net proceeds of issuance
of equity of the Company and its subsidiaries. Because increases in net working
capital, capital expenditures and debt repayments are deducted in calculating
excess cash flow, the Company does not anticipate that the prepayment obligation
under the New Credit Facility in respect thereof will have a material effect on
its operating strategy. With respect to growth through acquisitions, the
operation of this covenant may result in the application of cash resources for
57
<PAGE>
prepayments which would require the Company to secure additional equity or debt
financing to fund an acquisition, but while no assurance can be given, the
Company does not anticipate that this would have a material effect on its
ability to finance acquisitions in the future.
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 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
58
<PAGE>
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 on its future results of operations or financial
condition.
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.
Western Auto has adopted a Year 2000 strategy and has retained an adequate
number of personnel to execute its strategy. The Company will enter into a
number of retention agreements to retain such key personnel. There can be no
assurance, however, that Western Auto will attain sufficient Year 2000
compliance in a timely manner.
The cost and time estimated for the Year 2000 project are based on the
Company's best estimates. There can be no guarantee that these estimates will
be achieved and that planned results will be achieved. Risks include, but are
not limited to, the retention of internal and external resources dedicated to
the project, the timely delivery of software corrections from external vendors,
and the successful completion of key business partners' Year 2000 projects.
59
<PAGE>
BUSINESS
GENERAL
The Company is the second largest specialty retailer of automotive parts
and accessories in the United States (based on store count) and, as of July 18,
1998, had 909 stores in 17 states operating under the "Advance Auto Parts" name.
The Company has achieved significant growth through a focused store expansion
strategy of opening stores in new contiguous and selected existing markets.
Since accelerating its store expansion plan in 1992, the Company has grown from
the eighth largest to the second largest U.S. specialty retailer of automotive
parts (based on store count), increasing its store count from 223 to 909. From
fiscal 1992 through fiscal 1997, the Company increased net sales, net income and
EBITDA, as adjusted for the Recapitalization, by a compound annual growth rate
of 29.3%, 22.2% and 28.4%, respectively. See footnote (4) to "Summary--Summary
Consolidated Historical and Pro Forma Financial Data" for information with
respect to EBITDA, as adjusted for the Recapitalization, and "Summary--Summary
Consolidated Historical and Pro Forma Financial Data" for certain cash flow
information. In addition, the Company has aggressively implemented its
commercial delivery program to penetrate the DIFM segment of the automotive
aftermarket. The Company, which it believes is the largest automotive retailer
in a majority of its markets based on store count, has expanded from its
original geographic base of North Carolina, South Carolina, Tennessee and
Virginia to also operate in Alabama, Arkansas, Delaware, Florida, Georgia,
Indiana, Kentucky, Maryland, Michigan, Mississippi, Ohio, Pennsylvania and West
Virginia. For fiscal 1997, net sales, net income and EBITDA, as adjusted for
the Recapitalization, were $848.1 million, $20.4 million and $68.2 million,
respectively.
The Company believes that it has successfully established customer loyalty
in its markets by providing high levels of customer service, by offering an
extensive selection of brand name and quality private label products at
competitive prices and by creating strong name recognition, all of which are
reinforced by targeted regional advertising. In addition, the Company believes
that its size provides numerous competitive advantages over smaller retail
chains and independent operators, which make up a majority of its competitors.
These advantages include: (i) greater product availability, (ii) purchasing
economies, (iii) economies of scale with respect to advertising, distribution
and warehousing, and (iv) a greater number of convenient locations with longer
store hours. The Company has expanded on these advantages by investing heavily
in employee training and information systems, which are designed to support the
Company's commitment to superior customer service.
The automotive aftermarket is a highly fragmented industry with the top 10
retail chains accounting for approximately 10% of the industry's approximately
$78.0 billion in annual sales. The Company believes that the industry is
consolidating as national and regional specialty retail chains gain market share
at the expense of smaller independent operators and less specialized mass
merchandisers. The Company primarily serves the approximately $34.0 billion
retail DIY segment of the automotive aftermarket, which the Company believes has
historically been characterized by stable, recession-resistant demand. In
addition, in 1996, the Company implemented a commercial delivery program to
capitalize on the approximately $44.0 billion commercial or DIFM segment of the
automotive aftermarket. The Company has aggressively implemented this program
in 494 stores and expects to add approximately 45 stores to the program in 1998.
The Company serves its commercial delivery customers from its existing store
base, which allows the Company to leverage its existing fixed costs and in-store
personnel with minimal capital outlay.
RECENT DEVELOPMENTS
On August 17, 1998, the Company and Holding entered into the Acquisition
Agreement to acquire Western Auto from Sears for $175.0 million and
approximately 40% of the Common Stock of Holding (the "Acquisition"). The
Acquisition Agreement provides that (i) Western Auto will be merged into a
subsidiary of the Company, with such subsidiary to become the surviving
corporation, (ii) the issued and outstanding shares of Western Auto will be
converted into the right to receive in the aggregate (a) $175.0 million and (b)
11,474,606 shares of Holding's Class A common stock, $.01 par value per share,
constituting approximately 40% of the outstanding Common Stock of Holding.
FS&Co., Ripplewood, Nicholas F. Taubman and the Taubman Trust have committed to
invest an additional $70.0 million in equity to fund a
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<PAGE>
portion of the cash purchase price for Western Auto. The Company anticipates
that $115.0 million of the cash purchase price and certain transaction costs
will be funded through bank debt.
Based in Kansas City, Missouri, Western Auto is a specialty retailer of
automotive parts and accessories and also maintains an extensive wholesale
dealer network. As of August 17, 1998, Western Auto operated 590 stores in the
U.S. under the "Parts America" name and 40 stores primarily in Puerto Rico under
the "Western Auto" name that provide service as well as parts sales and operated
four distribution centers.
The combined entity will operate domestic retail stores under the "Advance
Auto Parts" name in most markets. The wholesale dealer network and Puerto Rico
stores will continue to operate primarily under the "Western Auto" banner. The
Company and Western Auto together will operate over 1,500 retail stores in 37
states, Puerto Rico and the U.S. Virgin Islands and will supply through its
wholesale distribution center approximately 775 "dealer" stores in 48
states.
Sears is evaluating various options with respect to the private label
credit card portfolios associated with Western Auto. The Company has agreed to
share in any losses generated by the ongoing operations of the credit card
portfolios from the date of closing of the Acquisition or in any losses incurred
as a result of a sale of the portfolios, but in any case its share of such
losses will not exceed $10.0 million (the "Credit Card Liability"). The
Acquisition is expected to close by year end but there can be no assurance that
the Acquisition will be consummated. See "Unaudited Pro Forma Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and the historical
financial statements of Western Auto included elsewhere in this Prospectus.
AUTOMOTIVE AFTERMARKET INDUSTRY
The automotive aftermarket industry includes batteries, replacement parts,
accessories and chemicals for cars and trucks. According to industry estimates,
the size of the automotive aftermarket for replacement parts, maintenance items
and accessories is approximately $78.0 billion per year. The market is
generally segregated into two major segments based upon the end-user customer
base: the DIY segment and the DIFM segment. The DIY portion of this market is
estimated to be $34.0 billion per year and the DIFM segment to be $44.0 billion
per year. The Company believes that the automotive aftermarket for batteries and
replacement parts, maintenance items and accessories is growing due to several
factors, including: (i) increasing size and age of the country's automotive
fleet; (ii) increasing number of miles driven annually per vehicle; (iii) higher
cost of new cars as compared to historical costs; (iv) higher cost of
replacement parts as a result of technological changes in recent makes and
models of vehicles; (v) increasing labor costs associated with replacement
parts, installation and maintenance; (vi) increasing need for refurbishing and
tuning of vehicles primarily due to the popularity of leasing; and (vii)
proliferation of parts due to increased vehicle diversity.
The automotive aftermarket distribution channels are highly fragmented in
both the DIFM and DIY segments. However, the Company believes that the industry
is consolidating as national and regional specialty retail chains gain market
share at the expense of small independent operators and less specialized mass
merchandisers. Automotive specialty retailing chains, such as the Company, enjoy
competitive advantages in purchasing, distribution, advertising and marketing
compared to most small independent retailers, regional chains and mass
merchandisers. The increase in recent years in the variety of domestic and
imported vehicle makes and models has made it difficult for smaller independent
retailers and less specialized mass merchandise chains to maintain an inventory
selection broad enough to meet customer demands. The Company believes that
availability, convenience, quality and price continue to be the key attributes
attracting both DIY and DIFM customers. Automotive specialty retail chains,
such as the Company, are in a favorable competitive position because they have
the distribution capacity and sophisticated information systems necessary to
efficiently stock, advertise and deliver a broad selection of brand name and
quality private label products to all market segments.
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<PAGE>
OPERATING STRATEGY
The Company's operating strategy focuses on serving its customers and
capitalizing on its position as a leading automotive aftermarket retailer. The
Company's key operating objectives are to:
Provide Superior Customer Service. The Company believes that its customers
place significant value on technical knowledge and service. Due to increased
vehicle diversity and automotive parts proliferation, customers increasingly
rely on well-trained sales associates to offer knowledgeable assistance in
product selection and use. To serve this need, Company employees participate in
continuous training programs, including formal classroom workshops, seminars and
ASE certification to build technical, managerial and customer service skills.
In addition, the Company has customer service measurement systems and
recognition programs for division managers, store managers, sales associates and
other employees to measure and encourage overall customer satisfaction.
Offer Broad Selection of Quality Products. The Company offers a broad
selection of brand name and quality private label automotive parts and other
products designed to cover a wide range of vehicles. At the end of fiscal 1997,
substantially all of the Company's stores offered between 15,000 to 16,000 in-
store SKUs supplemented by approximately 36,000 SKUs available on a next-day
delivery basis to substantially all of its stores through the Company's PDQ(R)
system. The Company is currently implementing an SKU expansion strategy such
that, by the end of 1998, the Company will offer to its customers on a same day
basis a range of 20,000 to 21,000 SKUs in substantially all of its stores and
approximately 100,000 SKUs through its PDQ(R) system. The store SKU expansion
will be supported by (i) the roll-out of "hub" stores with approximately 4,000
additional SKUs, which will generally be available on an immediate or same day
basis to other area stores, and (ii) daily restocking of these additional SKUs.
In addition, the Company has expanded the PDQ(R) system with the opening of a
master PDQ(R) facility which provides approximately 70,000 SKUs and has the
capacity to offer up to 200,000 SKUs. The majority of the expanded SKUs will be
replacement parts which generally have higher gross margins than accessories and
other products. The Company believes that the SKU expansion program will be an
important competitive advantage, particularly with respect to the commercial
delivery program.
Capitalize on Strong Vendor Relationships and Merchandising Expertise. The
Company has consistently been able to negotiate lower product costs and improved
purchasing terms due to its ability to successfully grow its store base and
existing business. These favorable purchasing relationships enable the Company
to employ an everyday low price strategy with an emphasis on being a price
leader in replacement parts. The Company purchases from over 200 different
vendors with no single vendor accounting for 10% or more of purchases. The
Company's merchandising staff focuses on offering customers a broad selection of
products displayed in a manner designed to enhance sales. The Company
continually measures store productivity and is able to rapidly roll out sales
enhancing displays or other merchandising changes to all of its stores.
Employ Advanced Information Technology and Logistics Systems. Since
1992, the Company has invested significantly in its information technology and
logistics systems to facilitate its rapid growth by enhancing customer service,
increasing in-stock SKUs and providing for a broad product selection with same
day or next day delivery. As a result, use of these systems has helped to
increase the Company's average customer sale from $10.86 in fiscal 1992 to
$14.28 in fiscal 1997. In addition, these systems facilitate rapid expansion of
the Company's store base by improving operating efficiencies. The Company has
nearly completed converting its distribution centers from a labor intensive
system to a technologically advanced, fully integrated system with real time
software and modern material handling equipment. With these technological
enhancements and the opening of a fourth distribution center to be completed by
early 1999, the Company will be able to service over 1,600 stores.
GROWTH STRATEGY
As the Company pursues its expansion plan, management believes it will
continue to benefit from greater purchasing economies and an increased ability
to leverage advertising and logistics expenses. The Company will continue to
focus on the following key areas in implementing its growth strategy.
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<PAGE>
Continue New Store Growth. The Company's new store growth strategy is
focused on penetrating targeted new geographic areas with multiple store
openings, while continuing to open additional stores in selected existing
territories to increase its market share. The Company believes that the highly
fragmented nature of the retail automotive aftermarket industry allows it to
quickly establish itself in new markets and to increase its market penetration
in existing markets. The Company opened 170 stores in 1997, 96 stores in 1998
and plans to open approximately 70 stores in the remainder of fiscal 1998. To
further support its growth, the Company expects to begin television advertising
on a national basis in 1999. The Company believes that its proven ability to
effectively select new markets and store locations and quickly open new stores
will allow it to substantially increase its store base in approximately five
years.
Pursue Acquisitions. To augment its store growth strategy, the Company
intends to continue to pursue growth opportunities through selected acquisitions
when such acquisitions provide a quicker and more economic alternative to new
store openings. The fragmented nature of the automotive aftermarket industry
creates significant acquisition opportunities in existing and new markets. The
Company believes it can increase revenues and profitability of acquired stores
by leveraging its established infrastructure and improving stocking levels,
merchandising and customer service. Since 1994, acquisitions have accounted for
approximately 10% of the Company's new store openings. See "--Recent
Developments" for a description of the pending Acquisition.
Increase Commercial Sales. In 1996, the Company focused its marketing
efforts on expanding sales to the DIFM segment of the automotive aftermarket,
which the Company believes represents approximately 56% of the automotive
aftermarket. Since 1996, the Company has added its commercial delivery program
to 494 stores. Due to its success in rapidly building its commercial sales
program, which currently represents approximately 10% of sales, the Company will
continue to expand this program, including adding approximately 45 stores in the
remainder of 1998. The Company serves its commercial delivery customers through
its existing store base which allows the Company to effectively leverage its
store-level costs. Commercial delivery customers order parts via a telephone
call to a Company store, and orders are delivered usually in less than an hour
in a Company truck. The Company's experience and market research indicate that
its broad selection of quality parts at competitive prices, knowledgeable sales
assistance, quick, accurate delivery, and the availability of credit are
important competitive advantages in serving the commercial delivery
customer.
Grow Same Store Sales. The Company believes that it can grow its same
store sales by (i) expanding product availability at the store level and through
the Company's PDQ(R) distribution system; (ii) continuing to implement its
commercial delivery program (as described above); and (iii) increasing name
recognition. The Company believes that expanding its product offerings through
increased SKU availability will enhance sales by (a) decreasing the likelihood
of a lost sale due to not stocking an item and (b) attracting customers,
particularly commercial delivery customers, who require hard to find replacement
parts and brand names. In addition, the Company believes that its market
penetration strategy and regional advertising will continue to build broad name
recognition and increase sales.
STORE LOCATION AND DEVELOPMENT STRATEGY
The Company's new market expansion strategy is focused on new markets that
are contiguous to existing markets. These new markets can be efficiently served
by the Company's existing distribution and operational infrastructure and
supported by its existing managerial resources and brand recognition. The
Company conducts extensive analyses to evaluate and prioritize potential new
markets. Key criteria reviewed include the availability of quality locations
necessary to reach critical mass in a market, competitive factors, the
availability of labor and the ability to serve a market efficiently from
existing distribution centers.
As part of its store growth program, the Company has developed a
comprehensive strategy for selecting new store sites. The Company's in-house
real estate department conducts extensive market research in identifying and
evaluating, among other considerations, competition, population diversity and
income and selected automotive purchases per household. The time frame required
for developing a new store site typically ranges from six to twelve months from
the initial visit through store opening.
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In addition to opening new stores, the Company will continue to develop new
markets by making selective acquisitions which allow it to penetrate markets in
a timely and cost-effective manner without adding additional retail square
footage to such markets.
The following table illustrates the Company's store expansion program from
223 stores in 1992 to 814 stores in 1997, reflecting a 24.1% compounded annual
growth rate.
<TABLE>
<CAPTION>
FISCAL YEARS
-----------------------------------------------
1992 1993 1994 1995 1996 1997
-----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning stores 223 273 352 437 536 649
New stores openings 51 81 90 104 115 170
Closed stores (1) (2) (5) (5) (2) (5)
--- --- --- --- --- ---
Ending stores 273 352 437 536 649 814
Acquired stores (included in new store openings) 1 -- -- 16 2 22
Remodeled stores 19 61 52 6 35 27
Relocated stores 6 8 6 18 3 15
Percentage of new, relocated or remodeled stores within 97%
last five years
Number of states doing business in 7 8 9 9 10 14
Stores with commercial delivery program -- -- -- -- 213 421
</TABLE>
MARKETING AND ADVERTISING
The Company has an extensive marketing and advertising program designed to
promote its competitive prices, broad product offerings, and commitment to
customer service. The Company uses a combination of print, radio and television
advertising and in-store promotional displays to reinforce the Company's image
and name recognition. Television advertising is targeted on a regional basis to
sports programming and radio advertising is primarily aired during peak drive
times. The Company utilizes several sports celebrities in its regional
advertising campaigns, including Lynn Swann, Bobby Allison, Hank Aaron, Archie
Griffin, Gene Stallings, Pat Dye and Sterling Marlin. The Company is a sponsor
of major sporting events and teams such as NASCAR, the Southern Conference
Basketball Tournament and the Pittsburgh Steelers.
The Company has recently implemented a proprietary credit card program for
its commercial delivery program customers. The Company believes that this
program will increase brand awareness and customer loyalty and will be an
important marketing tool and competitive advantage in the commercial delivery
business.
In addition, the Company has recently developed a new marketing program to
support store openings. This plan is customized for each store opening and
includes a minimum of 12 weeks of grand opening promotions including television,
print, radio broadcasts, giveaways and celebrity appearances and promotions.
The Company believes that this plan has been successful in accelerating
awareness and customer traffic in its new stores. The plan will continue to be
utilized for all store openings.
STORE OPERATIONS
The retail store is the focal point of the Company's operations. Although
the Company is more than 68 years old, its stores and retail presentations have
been built, relocated or remodeled, on average, within the last five years. The
Company's stores generally are located in or adjacent to good visibility, high
traffic strip shopping
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centers. Stores generally range in size from 5,000 to 10,000 square feet,
averaging approximately 7,200 square feet, and currently offer between 15,000
and 16,000 SKUs. The Company's stores are divided into six districts which are
supervised by a District Vice President or Assistant Vice President. Reporting
to district management are Division Managers who have direct responsibilities
for their stores. A typical division consists of 14 to 18 stores. Depending on
store size and sales volume, each store is staffed by 8 to 30 employees under
the leadership of a store manager. Stores generally are open seven days a week
from 8am to 8pm.
The Company's stores are currently located as follows:
<TABLE>
<CAPTION>
Location At July 18, 1998
- ----------------- ----------------
<S> <C>
North Carolina 155
Virginia 121
Georgia 114
Tennessee 96
South Carolina 93
Kentucky 57
Ohio 69
West Virginia 54
Alabama 51
Pennsylvania 57
Michigan 16
Indiana 10
Mississippi 7
Maryland 3
Florida 2
Arkansas 3
Delaware 1
---
Total 909
===
</TABLE>
MANAGEMENT INFORMATION SYSTEMS
In fiscal 1993, the Company began building a technology infrastructure to
support its store growth strategy. This infrastructure is composed of software
and hardware designed to integrate store, distribution and vendor services into
a seamless customer service network. Stores, host computers and distribution
centers are linked via a satellite and a leased line communications center.
STORE BASED INFORMATION SYSTEMS
The Company's store based information systems, which are designed to
improve the efficiency of its operations and enhance customer service, are
comprised of Point-of-Sale ("POS"), Electronic Parts Catalogs ("EPC") and Store
Level Inventory Management ("SLIM") systems and a satellite communications
network. These systems are tightly integrated and together provide real time,
comprehensive information to store personnel, resulting in improved customer
service levels and in-stock availability.
Point-of-Sale: The Company's POS system was originally installed in 1981,
enhanced over the years and reengineered in 1995. This system has improved
store productivity and customer service by streamlining store procedures. The
POS system gathers sales and gross profit data by SKU on a daily basis. This
information is used to formulate the Company's pricing, marketing and
merchandising strategies as well as to rapidly replenish inventory. The POS
system and automated reordering have been instrumental in increasing store in-
stock position. The Company believes that the automation of the reorder process
has decreased the time and labor required for store
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inventory management. Additionally, the POS system maintains a customer purchase
and warranty history database which is used for targeted marketing programs.
Electronic Parts Catalog: The EPC system is a software based system that
identifies the application, location and availability of over 1.5 million parts
enabling sales associates to assist customers in parts selection and ordering
based on the year, model, engine type and application needed. The EPC system
displays an identified part and its inventory status, and if the part is not
available at the store, its availability through PDQ/(R)/. The EPC system also
displays related parts for sales associates to recommend to a customer, leading
to increased average customer sales. The integration of this system with the
POS system improves customer service by reducing time spent at the cash register
and fully automating the sales process between the parts counter and the POS
register. Additionally, this system will allow sales associates to order parts
electronically with immediate confirmation of price, availability and delivery.
Information about a customer's automobile can be entered into a permanent
customer database that can be accessed immediately whenever the customer visits
or phones the store.
Store Level Inventory Management System: The SLIM system, which provides
real-time inventory tracking at the store level, was implemented in September
1997. With SLIM, store personnel can check the quantity of on-hand inventory
for any SKU, automatically process returns and defective merchandise, designate
SKUs for cycle counts and track merchandise transfers. With this system, the
Company is able to achieve an average store level inventory in-stock position in
excess of 98%.
Satellite Communications Network: In 1995, the Company established a
satellite communications network linking all of its stores with its corporate
office. The satellite network enables the Company to efficiently obtain from
and deliver to its stores all file transfers, including price changes, sales
information and interactive transactions such as electronic parts ordering. The
system also broadcasts common files to all stores to update the EPC system.
Additionally, the satellite network significantly increases the speed of credit
card and check authorization transactions.
LOGISTICS AND PURCHASING INFORMATION SYSTEMS
The Company has installed its Distribution Center Management System
("DCMS") in the Roanoke, Virginia and Jeffersonville, Ohio distribution centers
and plans to install it in the Gadsden, Alabama and Thomson, Georgia
distribution centers. Upon full implementation, the Company will have converted
its distribution centers from a manual, labor intensive, paper-based system to a
technologically advanced, fully integrated real-time software management system.
Receiving and storage management functions are enhanced by system-directed
putaway and radio frequency technology and by advance vendor shipping notices.
This system allows merchandise to be selected through a paperless system which
utilizes "pick to light," radio frequency and carousel material handling
technology and then moves merchandise to the shipping dock via conveyor and an
automated sortation system. The DCMS, together with new material handling
equipment, significantly reduces warehouse and distribution costs while
improving efficiency. Quantifiable improvements have included an increase in
inventory fill rate from 93% to 97% with a significantly reduced inventory level
and reduction in average receipt putaway time from over 48 hours to less than 12
hours and an over 6% reduction in payroll per store serviced. Using this
technology the Company will be able to service 1,600 stores from its four
distribution centers.
The E3 Replenishment System, which was implemented in 1994, monitors the
Company's distribution center and PDQ/(R)/ warehouse inventory levels and orders
additional products when appropriate. In addition, the system tracks sales
trends by SKU, allowing the Company to adjust future orders to evolving demand.
This system, together with DCMS and material handling equipment, allowed the
Company to decrease its average distribution backup inventory per store by 22%
in fiscal 1997.
PURCHASING
Merchandise is selected and purchased for all stores by personnel at the
Company's corporate headquarters in Roanoke, Virginia. In fiscal 1997, the
Company purchased from over 200 vendors, with no single vendor accounting for
10% or more of purchases.
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The Company's purchasing team is led by a group of five senior
professionals, with an average of over 18 years of automotive purchasing
experience. This group currently sources products throughout the world and
focuses on reducing product acquisition costs at all levels without sacrificing
quality. This purchasing team has been able to leverage freight and handling
costs through the use of efficient purchasing patterns and strong vendor
relationships. To monitor current market trends, buyers spend two days per
month visiting and working in retail stores and distribution centers.
The Company's purchasing strategy involves negotiating multi-year
agreements with certain vendors based upon its expansion plans. By negotiating
with a larger purchasing power base and with the proven credibility of meeting
growth objectives year after year, the Company is able to achieve percentage
discounts and other favorable terms on purchases.
MERCHANDISING
The Company's merchandising effort is focused on building market share by
providing a broad selection of brand name and quality private label products at
everyday low prices. The Company offers these products at conveniently located
and attractively designed stores, supported by highly trained, efficient and
courteous customer service personnel.
The Company's objective is to carry a broad selection of brand name
products, including Fram-Bendix-Autolite, Fel-Pro Incorporated, Federal-Mogul
Corporation and AC Delco, that generate customer traffic and have strong appeal
to its commercial delivery customers. In addition, the Company stocks a wide
selection of high quality private label products that appeal to value conscious
customers. Sales of replacement parts account for approximately 65% of the
Company's sales and generate higher gross profit margins than maintenance items
or general accessories. The Company believes that its percentage of sales of
replacement parts will increase in the future due primarily to an increased SKU
count in the replacement parts category and increased sales to commercial
delivery customers.
The Company determines its product mix based on a merchandising program
designed to identify the optimal inventory mix at each individual store based on
that store's historical sales. The Company believes that it can continue to
improve store sales, gross profit margin and inventory turnover by further
tailoring individual store inventory mix based on historical sales patterns.
WAREHOUSE AND DISTRIBUTION
The Company currently operates three main distribution facilities located
in Roanoke, Virginia, Gadsden, Alabama and Jeffersonville, Ohio. A fourth
distribution center is currently under construction in Thomson, Georgia and is
expected to open in early 1999. On average, each distribution center is able to
serve approximately 400 stores.
All distribution centers are equipped with technologically advanced
material handling equipment, including carousels, "pick-to-light" systems, radio
frequency technology and automated sortation systems. The Roanoke, Virginia and
Jeffersonville, Ohio distribution centers operate with an advanced paperless
software system. These systems and equipment significantly reduce warehouse and
distribution costs, while providing the Company with sufficient capacity to meet
the requirement of its growth plans for the foreseeable future. The
distribution centers consistently maintain approximately 97% order fill on all
items and approximately 99% order fill on key items.
In addition, the Company believes it has a competitive advantage by
offering over 36,000 SKUs on a next day basis to substantially all of its stores
via its four PDQ/(R)/ warehouses. Stores place orders to these facilities
through an on-line ordering system, and ordered parts are delivered to the store
the next day through the Company's dedicated PDQ/(R)/ trucking fleet. The
Company has recently opened a new PDQ/(R)/ warehouse that stocks approximately
70,000 SKUs (expandable up to 200,000 SKUs) of harder to find automotive parts
and accessories. This facility is known as the "master PDQ(R)" warehouse and
utilizes existing PDQ(R) distribution infrastructure to provide next day service
to substantially all the Company's stores.
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The following table sets forth certain information relating to the
Company's main distribution facilities:
<TABLE>
<CAPTION>
DISTRIBUTION FACILITY OPENING AREA SERVED SIZE
DATE (SQ. FT.)
- -------------------------------- --------------------------
MAIN DISTRIBUTION CENTERS
<S> <C> <C> <C>
Roanoke, Virginia 1988 Mid-Atlantic 440,000
Gadsden, Alabama 1994 South 240,000
Jeffersonville, Ohio 1996 Mid West 383,000
Thomson, Georgia (1) late 1998 Southeast 383,000
PDQ(R) WAREHOUSES
Roanoke, Virginia 1983 Mid-Atlantic 50,400
Smithfield, North Carolina 1991 Southeast 42,000
Thomson, Georgia (2) early 1999 South, 50,000
Southeast
Jeffersonville, Ohio (2) 1996 Midwest 50,000
Goodlettsville, Tennessee (3) early 1999 Central 41,900
MASTER PDQ(R) WAREHOUSE
Andersonville, Tennessee 1998 All 66,000
</TABLE>
________________
(1) The Company is currently constructing this facility and contemplates its
opening in late 1998.
(2) This facility is located within the main distribution center.
(3) The Company recently executed a lease for this facility and contemplates its
opening in early 1999.
EMPLOYEES
As of August 31, 1998, the Company employed approximately 8,100 full-time
employees and 5,400 part-time employees. Approximately 84% of the Company's
workforce is employed in store level operations, 12% in distribution and 4% in
the Company's corporate headquarters.
The Company expends substantial resources in the recruiting and training of
employees. In addition, management has established a number of empowerment
programs for employees, such as employee task forces and regular meetings, to
promote employee recognition and address customer service issues. Management
believes that these efforts have provided the Company with a well-trained, loyal
workforce which is committed to high levels of customer service. The Company is
not party to any collective bargaining agreements. The Company has never
experienced any labor disruption and believes that its labor relations are good.
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FACILITIES
The following table sets forth certain information concerning the Company's
principal facilities:
<TABLE>
<CAPTION>
PRIMARY USE LOCATION SQUARE NATURE OF
FOOTAGE OCCUPANCY
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate headquarters Roanoke, Virginia 49,000 Leased (1)
Distribution center Roanoke, Virginia 440,000 Leased (2)
Distribution center Gadsden, Alabama 240,000 Owned
Distribution center and regional PDQ(R) Warehouse Jeffersonville, Ohio 383,000 Owned
Distribution center and regional PDQ(R) Warehouse Thomson, Georgia 383,000 Leased (3)
Regional PDQ(R) Warehouse Salem, Virginia 50,400 Leased
Regional PDQ(R) Warehouse Smithfield, North Carolina 42,000 Leased
Regional PDQ(R) Warehouse Goodlettsville, Tennessee 41,900 Leased
Master PDQ(R) Warehouse Andersonville, Tennessee 66,000 Leased
</TABLE>
____________________
(1) This facility is owned by Ki, L.C., a Virginia limited liability company
owned by two trusts for the benefit of a child of Nicholas F. Taubman. See
"Certain Transactions."
(2) This facility is owned by Nicholas F. Taubman. See "Certain Transactions."
(3) The construction of this facility was financed by a $10.0 million IRB
issuance from the Development Authority of McDuffie County of the State of
Georgia, from which the Company leases the facility. The Company has an
option to purchase this facility for $10.00 at the end of five years or upon
prepayment of the outstanding bonds.
At July 18, 1998, all but one of the Company's 909 stores were leased. The
expiration dates (including renewal options) of the store leases are summarized
as follows:
<TABLE>
<CAPTION>
YEARS STORES (1)
----- ------
<S> <C>
1998-2000 37
2001-2005 86
2006-2010 153
2011-2020 626
2021-2030 6
</TABLE>
____________________
(1) Of these stores, 26 are owned by affiliates of the Company. See "Certain
Transactions."
COMPETITION
The Company competes in both the DIY and DIFM segments of the automotive
aftermarket. Although the number of competitors and the level of competition
vary by market area, both segments are highly fragmented and generally very
competitive. The Company competes primarily with national and regional retail
automotive parts chains (such as AutoZone, Inc., Trak Auto Corporation, The Pep
Boys--Manny, Moe & Jack, Parts America,
69
<PAGE>
Western Auto Supply Company and Discount Auto Parts, Inc.), wholesalers or
jobber stores (some of which are associated with national automotive parts
distributors or associations, such as NAPA), independent operators, automobile
dealers and mass merchandisers that carry automotive replacement parts,
maintenance items and accessories (such as Wal-Mart Stores, Inc.). The Company
believes that chains of automotive parts stores, such as the Company, with
multiple locations in regional markets, have competitive advantages in customer
service, marketing, inventory selection, purchasing and distribution as compared
to independent retailers and jobbers that are not part of a chain or associated
with other retailers or jobbers. The Company believes that, as a result of these
advantages, national and regional chains have been gaining market share in
recent years at the expense of independent retailers and jobbers. See "Summary--
Recent Developments" for a description of the Company's pending acquisition of
Western Auto.
The principal competitive factors that affect the Company's business are
store location, customer service and product selection, availability, quality
and price. While the Company believes that it competes effectively in its
various geographic areas, certain competitors have larger sales volumes, have
greater financial and management resources and have been operating longer in
certain geographic areas.
TRADENAMES, SERVICE MARKS AND TRADEMARKS
The Company owns and has registrations for the trade name "Advance Auto
Parts" and the trademark "PDQ(R)" with the United States Patent and Trademark
Office for use in connection with the automotive parts retailing business. In
addition, the Company owns and has registered a number of trademarks with
respect to its private label products. The Company believes that its various
tradenames, service marks and trademarks are important to its merchandising
strategy, but that its business is not otherwise dependent on any particular
service mark, tradename or trademark. There are no infringing uses known by the
Company that materially affect the use of such marks. However, in connection
with a decision in a recent lawsuit, the Company is restricted from opening
stores under the "Advance Auto Parts" name in Jefferson County, Kentucky. See
"--Legal Proceedings."
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local laws and
governmental regulations relating to the operation of its business, including
those governing recycling of batteries and used lubricants, and regarding
ownership and operation of real property. The Company handles hazardous
materials during its operations, and its customers may also use hazardous
materials on the Company's properties or bring hazardous materials or used oil
onto the Company's properties. The Company currently provides collection and
recycling programs for spent automotive batteries and used lubricants at certain
of its stores as a service to its customers pursuant to agreements with third
party vendors. Pursuant to these agreements, the spent batteries and used
lubricants are collected by Company employees, deposited into vendor-supplied
containers/pallets and stored by the Company until collected by the third-party
vendors for recycling or proper disposal. Persons who arrange for the disposal,
treatment, or other handling of hazardous or toxic substances may be liable for
the costs of removal or remediation at any affected disposal, treatment or other
site affected by such substances.
The Company owns and leases property. Under various environmental laws and
regulations, a current or previous owner or operator of real property may be
liable for the cost of removal or remediation of hazardous or toxic substances
on, under, or in such property. Such laws often impose joint and several
liability and may be imposed without regard to whether the owner or operator
knew of, or was responsible for, the release of such hazardous or toxic
substances. Certain other environmental laws and common law principles also
could be used to impose liability for releases of hazardous materials into the
environment or work place, and third parties may seek recovery from owners or
operators of real properties for personal injury or property damage associated
with exposure to released hazardous substances. Compliance with such laws and
regulations has not had a material impact on its operations to date, but there
can be no assurance that future compliance with such laws and regulations will
not have a material adverse effect on the Company or its operations. The
Company believes it is currently in material compliance with such laws and
regulations.
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<PAGE>
LEGAL PROCEEDINGS
On November 5, 1997, Joe C. Proffitt, Jr. on behalf of himself and all
others in the States of Alabama, California, Georgia, Kentucky, Michigan, 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, 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.
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<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 July 18, 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 37 Senior Vice President and Chief Financial Officer, Secretary and Treasurer
Paul W. Klasing 38 Senior Vice President, Merchandising
David R. Reid 36 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.
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<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. and Century
Maintenance Supply, Inc.
Mr. Roth, Director, became a member of the Board in connection with the
Recapitalization. Mr. Roth joined FS&Co. in March 1988 and became a principal
in March 1993. Mr. Roth is also a director of AFC Enterprises, Inc. and
EnviroSource, Inc.
Mr. Simmons, Director, became a member of the Board in connection with the
Recapitalization. Mr. Simmons joined FS&Co. in 1986 and became a principal in
January 1991. Mr. Simmons is also a director of EnviroSource, Inc. and Century
Maintenance Supply, Inc.
Mr. Spogli, Director, is a founding principal of FS&Co., which was founded
in 1983. Mr. Spogli became a member of the Board in connection with
Recapitalization. Mr. Spogli is the Chairman of the Board and Director of
EnviroSource, Inc. Mr. Spogli is also a director of AFC Enterprises, Inc.,
Hudson Respiratory Care Inc., River Holding Corp. and Century Maintenance
Supply, Inc.
Mr. Collins, Director, became a member of the Board in connection with the
Recapitalization. Mr. Collins is Senior Managing Director and Chief Executive
Officer of Ripplewood Holdings L.L.C., a private investment firm formed by him
in October 1995. From February 1990 to October 1995, Mr. Collins was a Senior
Managing Director of the New York office of Onex Corporation, an Ontario
corporation listed on the Toronto and Montreal Stock Exchanges. Mr. Collins is
also a director of Scotsman Industries, Inc. and Dayton Superior Corporation.
Directors of the Company are elected annually and hold office until the
next annual meeting of stockholders or until their successors are duly elected
and qualified.
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<PAGE>
Executive Officers are elected by, and serve at the discretion of, the
Board of Directors. The Company has entered into employment agreements with
certain of its executive officers. See "--Executive Employment Contracts."
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation for
fiscal 1997 of the Chief Executive Officer and the four other most highly
compensated executive officers who were serving as executive officers at the end
of the last completed fiscal year and an individual for whom disclosure would
have been provided but for the fact that the individual was not serving as an
executive officer at the end of the last completed fiscal year (collectively,
the "Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------------------------------
NAME AND PRINCIPAL POSITION FISCAL SALARY BONUS OTHER ANNUAL ALL OTHER
YEAR 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 of $458,000 and an annual cash bonus based on the
Company's achievement of performance targets established by the Board of
Directors. The bonus to be paid upon achievement of targets will be consistent
in amount with the bonuses paid to Mr. Smith by the Company historically. In the
event Mr. Smith is terminated without cause, or terminates his employment for
"good reason" as defined in the employment agreement, he will receive salary
through the later of the end of the term of employment or one year from the
effective date of termination, less any amounts earned in other employment. Mr.
Smith has agreed not to compete with the Company, to preserve its confidential
information, not to recruit or employ employees of the Company to or in other
businesses, and not to solicit customers or suppliers of the Company for
competitors.
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<PAGE>
Messrs. Leftwich, Tilley and Wirth of the Company have entered into
employment agreements with the Company, pursuant to which each Executive Officer
will receive a base salary of $162,000, $240,000 and $112,000, respectively.
Such agreements contain severance provisions that provide for base salary for
the remainder of the term of the agreement upon termination of employment or one
year, unless the termination is due to death, disability or retirement, by the
Company for "cause" (as defined in the agreements) or by the employee other than
for "good reason" (as defined in the agreements). The term of Messrs.
Leftwich's Tilley's and Wirth's agreements is two years. The term of employment
will extend from year-to-year unless terminated by either the Company or the
employee. Other provisions require the Company to pay bonuses earned by the
employee upon the Company's achievement of earnings targets established by the
Board of Directors, and an agreement by the employee not to compete with the
Company, to preserve its confidential information, not to recruit or employ
employees of the Company to or in other businesses, and not to solicit customers
or suppliers of the Company for competitors.
CONSULTING AGREEMENT
Mr. Taubman has entered into a consulting and non-competition agreement
with Holding and the Company. The agreement, which has a term of three years,
requires Holding or the Company to pay consulting fees in an amount of $300,000
per annum, plus an annual bonus of at least $300,000 based upon the achievement
of targeted performance goals established by the Board of Directors. Mr.
Taubman has agreed not to compete with the Company, to preserve its confidential
information, not to recruit or employ employees of the Company to or in other
businesses, and not to solicit customers or suppliers of the Company for
competitors. Pursuant to the consulting agreement, Holding and Mr. Taubman have
entered into an indemnity agreement whereby Holding will indemnify Mr. Taubman
for actions taken as an officer or director of or consultant to Holding or the
Company to the fullest extent permitted by law. The amount of time Mr. Taubman
must devote to his consultation duties declines throughout the term of the
agreement.
COMPENSATION OF DIRECTORS
Directors of the Company receive no compensation as directors. Directors
are reimbursed for their reasonable expenses in attending meetings and
performing duties as directors.
BENEFIT PLANS
401(k) Plan. The Company sponsors a 401(k) employee retirement savings
plan for eligible employees. Employees must be at least 21 years of age and have
completed one year of service working at least 1,000 hours to be eligible to
participate in the 401(k) plan. Employees may contribute up to 15% of their
annual compensation 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,
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<PAGE>
$250,000, $750,000, and $106,000 of their purchase price, respectively, was
financed through the delivery of promissory notes on the terms described above.
The agreements entered into in connection with the Stock Subscription Plans
provide for restrictions on transferability, and acquired shares are subject to
a right of first refusal and a repurchase right at stated prices in favor of
Holding and co-sale rights in favor of the executive if FS&Co. sells its shares
to a third party. The agreements also include an obligation to sell at the
request of FS&Co. These rights (but not the restrictions on transferability)
will terminate upon an initial public offering by Holding of its Common Stock,
as further defined in agreements entered into under the Stock Subscription
Plans.
STOCK OPTION PLANS
Holding has adopted stock option plans (the "Option Plans"), under which
Holding made initial grants of approximately 6.4% of Holding Common Stock. Each
Option Plan participant has entered into an option agreement (an "Option
Agreement") with Holding. The Option Plans and each outstanding option
thereunder are subject to termination in the event of a change in control of
Holding or other extraordinary 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.
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<PAGE>
(3) Represents the value of the shares of Common Stock issuable upon the
exercise of the Option, assuming the stated rates of price appreciation for
seven years, compounded annually, with the aggregate exercise price deducted
from the final appreciated value. The 5% and 10% rates are established by
the SEC as examples only and are not intended to forecast future
appreciation in the Common Stock price. Variable Price Service Options will
have no value at the appreciation rates shown. Performance Options are
assumed to be fully vested at the end of the period. Full vesting would
require achievement of certain performance targets (as defined in each Stock
Option Agreement) by the Company for the period beginning January 4, 1998
and ending at the end of the Company's fiscal year 2001.
(4) Represents 37,500 Fixed Price Service Options, 162,500 Variable Price
Service Options, and 162,500 Performance Options.
(5) Represents 15,000 Fixed Price Service Options, 65,000 Variable Price Service
Options and 65,000 Performance Options.
(6) Represents 7,500 Fixed Price Service Options, 32,500 Variable Price Service
Options, and 32,500 Performance Options.
(7) Represents 3,000 Fixed Price Service Options, 11,000 Variable Price Service
Options, and 11,000 Performance Options.
OPTION EXERCISES AND YEAR-END VALUE
None of the Options issued by Holding vest until December 31, 1998, and no
Options have been issued since the Recapitalization. As a privately held
company, Holding cannot readily ascertain the fair market value of a share of
Common Stock as of the date hereof; therefore the value of in-the-money Options
(if any) cannot be determined.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company determines the compensation of
the Executive Officers. During fiscal 1997, Messrs. Taubman and Smith
participated in Board of Director deliberations regarding the compensation of
the Company's Executive Officers.
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<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 the leases with affiliates (including
provisions relating to assignment, damage by casualty and default cure periods)
were amended so that they would be no less favorable to the Company than non-
affiliated leases. All affiliate leases are on a triple net basis. Lease
expense for leases with affiliates has been $2,735,000, $3,076,000 and
$3,171,000 for fiscal 1995, 1996 and 1997, respectively.
STOCKHOLDERS' AGREEMENT
Mr. Taubman and the Taubman Trust (the "Continuing Stockholders"), FS&Co.,
Ripplewood and Holding have entered into a Stockholders' Agreement (the
"Stockholders' Agreement"). Under the Stockholders' Agreement, FS&Co.,
Ripplewood and the Continuing Stockholders have the right to purchase their pro
rata share of certain new issuances of capital stock by Holding. In addition,
the Stockholders' Agreement provides for restrictions on the transferability of
the shares of Holding Common Stock of the Continuing Stockholders and Ripplewood
for a period of two years following consummation of the Recapitalization and,
thereafter, for the following three-year period any transfers (other than sales
pursuant to a registered public offering or pursuant to Rule 144 under the
Securities Act) are subject to a right of first offer in favor of FS&Co. or its
designee, provided that Ripplewood's obligation to make a first offer extends
indefinitely. In addition, the Stockholders' Agreement provides that upon
transfers by FS&Co. of its shares of Holding Common Stock (excluding limited
transfers in the first year following the Recapitalization or transfers to
affiliates of FS&Co.), the Continuing Stockholders and Ripplewood will have the
right to participate in such sales on a pro rata basis. If FS&Co. sells all of
its holdings of Holding Common Stock, Ripplewood and the Continuing Stockholders
will be obligated to sell all of their shares of Holding Common Stock at the
request of FS&Co.
The Stockholders' Agreement further provides that FS&Co. will vote at each
annual meeting of Holding to elect Mr. Taubman or his nominee to the Board of
Directors of Holding, and the Continuing Stockholders will likewise vote to
elect nominees of FS&Co. Ripplewood has granted FS&Co. an irrevocable proxy to
vote Ripplewood's stock in Holding on all matters, expiring upon an initial
public offering of common stock by Holding, but FS&Co. will nominate one
director designated by Ripplewood. This Exchange Offer is not considered
Holding's initial public offering under the Stockholders' Agreement. The
Ripplewood director will agree to vote with the FS&Co. directors on all matters
prior to an initial public offering of common stock by Holding. Pursuant to the
Stockholders' Agreement, Mr. Taubman has certain approval rights with respect to
major corporate transactions. Upon the closing of the Acquisition, the
Stockholders' Agreement will be amended to add a wholly owned Sears subsidiary
as a party and to grant the Sears entity rights to (i) designate three members
of the Board of Directors, (ii) participate on a pro rata basis in any sales of
Holding Common Stock by FS&Co., and (iii) receive a first offer on sales of
Holding Common Stock by FS&Co., Mr. Taubman, the Taubman Trust and Ripplewood.
FS&Co. will receive parallel rights of first offer on sales of Holding Common
Stock by the Sears entity, and FS&Co., Mr. Taubman, the Taubman Trust and
Ripplewood will have co-sale rights on sales by the Sears entity. In addition,
all of the current stockholders will agree to sell their shares to a third party
upon the request of the Board of Directors, which, in addition to the Sears
directors, will include three directors nominated by FS&Co., one director
nominated by Ripplewood, Mr. Taubman and Mr. Smith. Other terms of the
Stockholders' Agreement will remain as currently in force in all material
respects.
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OPTIONS GRANTED TO THE CONTINUING STOCKHOLDERS
In connection with the Merger, Holding has entered into an Option Agreement
with Mr. Taubman and the Taubman Trust whereby each of them has been granted
immediately exercisable options to purchase 250,000 shares of Holding Common
Stock. The options have an initial exercise price of $10.00, with the exercise
price increasing by $2.00 on each anniversary of the Recapitalization. Both the
exercise price and the number of shares which may be purchased pursuant to the
options are subject to certain adjustments. The options will expire if not
exercised by the seventh anniversary of the Recapitalization. Shares received
upon exercise of all or any part of the option by the Continuing Stockholders
will be subject to the Stockholders Agreement.
SALE OF AIRPLANE
In connection with the Recapitalization, Mr. Taubman has purchased an
airplane from the Company for $4.1 million, a price equal to the approximate net
book value of the airplane, which amount also equalled the approximate fair
market value of the airplane (based on estimates of value provided by the
airplane's manufacturer). The airplane was purchased in 1995 for $5.2 million.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Stockholders Agreement, Holding has agreed, beginning 180
days after consummation of an initial public offering 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. Upon the
closing of the Acquisition, Sears will be granted registration rights with
respect to the Holding Common Stock it owns.
MANAGEMENT EQUITY PLANS
See "Management--Stock Subscription Plans" and "--Stock Option Plans."
INDEMNIFICATION AGREEMENTS
In connection with the Recapitalization, the Company has entered into
indemnification agreements with each of the directors of the Company.
CERTAIN PAYMENTS
In connection with the Recapitalization, a portion of the common stock and
all of the preferred stock of Holding were converted into the right to receive
in the aggregate approximately $351.0 million in cash and certain options to
purchase shares of Holding Common Stock. In addition, FS&Co. and an affiliate
of Ripplewood, stockholders of Holding, have received collectively a $5.0
million fee for arranging the financing, performing advisory and consulting
services, and negotiating the Recapitalization, and they will receive a $3.5
million fee for performing similar services with respect to the Acquisition. In
connection with the Recapitalization, certain employees of the Company,
including the Executive Officers, have received an aggregate of approximately
$11.5 million in bonuses with Messrs. Smith, Tilley, Leftwich and Wirth
receiving $7,000,000, $1,000,000, $750,000 and $150,000, respectively.
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DESCRIPTION OF THE NEW CREDIT FACILITY
In connection with the Recapitalization, the Company has entered into the
New Credit Facility with The Chase Manhattan Bank, as administrative agent, DLJ
Capital Funding, Inc., as syndication agent, First Union National Bank, as
documentation agent, and Chase Securities Inc., as advisor and arranger
(collectively, the "Agents"). The New Credit Facility currently provides the
Company up to $375.0 million in senior secured credit facilities, consisting of
(i) a $50.0 million senior secured delayed draw term loan facility (the "Delayed
Draw Facility I"), (ii) a $75.0 million senior secured delayed draw term loan
facility (the "Delayed Draw Facility II" and, together with the Delayed Draw
Facility I, the "Delayed Draw Facilities"), (iii) a $125.0 million Tranche B
senior secured term loan facility (the "Tranche B Facility"), and (iv) a $125.0
million senior secured revolving credit facility (the "Revolving Facility").
The Revolving Facility has a letter of credit sublimit of $25.0 million.
Amounts available under the Delayed Draw Facilities and the Revolving Facility
are subject to a borrowing base formula equal to a specified percentage of the
Company's eligible inventory. To provide funding for the Acquisition, the
Company has received a commitment from the Agents to, among other things,
consent to the Acquisition, add an additional Senior Secured Deferred Term Loan
Facility of at least $75.0 million under the New Credit Facility (the "Deferred
Term Loan Facility"), and amend certain provisions of the New Credit Facility in
light of the Acquisition.
Use of Proceeds; Maturity. The proceeds of the Tranche B Facility,
together with a portion of the net proceeds of the issuance of the Series A
Notes, were used (a) to pay the Company Distribution, (b) to repay all
principal, interest, fees and other amounts outstanding under the existing
credit agreements, (c) to repay certain other existing indebtedness, (d) to fund
loans in an aggregate principal amount not in excess of $3.0 million to existing
management of Holding or the Company and (e) to pay the fees and expenses of
Recapitalization. The Company will borrow an aggregate of $115.0 million
consisting primarily of the entire amount of the Deferred Term Loan Facility
with the balance, if any, to be drawn from the Delayed Draw Facility I to
provide the funds needed for the Acquisition. Borrowings under the Delayed Draw
Facility I and the Delayed Draw Facility II will be made during the first 18
months and first three years, respectively, after the closing of the
Recapitalization. Proceeds of the Delayed Draw Facility II, the balance of the
Delayed Draw Facility I, and the Revolving Facility (including the letters of
credit) are available for general corporate purposes. The Delayed Draw
Facilities will mature on the sixth anniversary of the closing and provide for
nominal annual amortization prior to maturity. The Tranche B Facility will
mature on the eighth anniversary of the closing. These term facilities provide
for nominal annual amortization in the first five years and amortization of
$198.0 million in the sixth anniversary year, $60.0 million in the seventh
anniversary year and $60.0 million in the eighth anniversary year. The
Revolving Facility will mature on the sixth anniversary of the closing.
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.
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Voluntary prepayments and voluntary reductions of the unutilized portion of
the Revolving Facility commitments are permitted in whole or in part, at the
option of the Company, in minimum principal amounts to be agreed upon, without
premium or penalty, subject to reimbursement of redeployment costs incurred by
the syndicate of lenders under the New Credit Facility (the "Lenders") in the
case of prepayment of eurodollar borrowings other than on the last day of the
relevant interest period. Voluntary prepayments under the Delayed Draw
Facilities, Tranche B Facility, and the Deferred Term Loan Facility are (a)
allocated among those facilities on a pro rata basis and (b) within each such
facility, applied to the installments under the amortization schedule within the
following 12 months under such facility, and all remaining amounts are applied
in the inverse order of maturity to the remaining amortization payments under
such facility. The Lenders under the Tranche B Facility may decline any
voluntary prepayments in which case the amount declined will be applied to
increase proportionately the prepayments under the remaining Facilities.
Interest. Until the delivery to the Lenders of the Company's consolidated
financial statements for the first four fiscal quarters after the closing of the
Recapitalization, the interest rates under the Delayed Draw Facilities and the
Revolving Facility are based, at the option of the Company, on either a
eurodollar rate plus 2.25% per annum or a base rate plus 1.25% per annum. From
and after the delivery of such consolidated financial statements, the interest
rates under the Delayed Draw Facilities and the Revolving Facility will be
determined by reference to a pricing grid that will provide for reductions in
the applicable interest rate margins based on the Company's trailing Total Debt
to EBITDA ratio. The initial margins will be 2.25% and 1.25% for eurodollar and
base rate borrowings, respectively, and can step down to 1.75% and 0.75%,
respectively, if the Company's Total Debt to EBITDA ratio is less than or equal
to 4.00 to 1.00. The interest rate under the Tranche B Facility and the
Deferred Term Loan Facility is based, at the option of the Company, on a
eurodollar rate plus 2.5% or a base rate plus 1.5%. A commitment fee of 0.50%
per annum will be charged on the unused portion of the New Credit Facility.
Collateral and Guarantees. The New Credit Facility is guaranteed by
Holding and all of its existing and future domestic subsidiaries, except one
subsidiary of the Company which owns the Company's inventory delivery vehicles.
The New Credit Facility is secured by a first priority lien on substantially
all, subject to certain exceptions, of the properties and assets of Holding, the
Company and each existing or future domestic subsidiary, and the guarantors now
owned or acquired later. Upon consummation of the Acquisition, Advance
Acquisition Corporation (the successor by merger to Western Auto) and its
subsidiaries will guaranty the New Credit Facility and grant liens on their
assets to secure the New Credit Facility.
Covenants. The New Credit Facility contains covenants restricting the
ability of the Company and its subsidiaries to, among others, (i) redeem or
repurchase capital stock, (ii) prepay, redeem or purchase debt, (iii) incur
liens or engage in sale-leaseback transactions, (iv) make loans and investments,
(v) incur additional debt (including hedging arrangements), (vi) make capital
expenditures, (vii) engage in mergers, acquisitions and asset sales, (viii)
engage in transactions with affiliates, (ix) change the nature of the business
conducted by the Company and its subsidiaries, (x) change the passive holding
company status of Holding, and (xi) amend existing debt agreements. The Company
is required to comply with financial covenants with respect to (a) a maximum
leverage ratio, (b) a minimum interest coverage ratio, and (c) a minimum
retained cash earnings test. The Company is generally prohibited from paying
dividends (including to Holding) except that as long as no Event of Default
under the New Credit Facility then exists, the Company will be permitted to pay
dividends to Holding in an amount sufficient to cover the cash interest due on
the Series B Debentures commencing October 15, 2003.
Events of Default. Events of default under the New Credit Facility include
but are not limited to (i) the Company's failure to pay principal when due or
interest after a grace period, (ii) the Company's material breach of any
covenant, representation or warranty contained in the loan documents, (iii) any
event or condition that results in any Material Indebtedness (generally defined
as obligations of Holding, the Company or the Company's subsidiaries in an
aggregate principal amount exceeding $5.0 million) becoming due prior to its
scheduled maturity or that enables or permits (with or without the giving of
notice, the lapse of time or both) the holder or holders of any Material
Indebtedness or any trustee or agent on its or their behalf to cause any
Material Indebtedness to become due, or to require the prepayment, repurchase,
redemption or defeasance
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thereof, prior to its scheduled maturity; provided that such event of default
described in this clause (iii) shall not apply to secured Indebtedness (as
defined) that becomes due as a result of the voluntary sale or transfer of the
property or assets securing such Indebtedness, (iv) certain events of
bankruptcy, insolvency or dissolution of the Company or its subsidiaries, (v)
certain judgments against Holding, the Company, the Company's subsidiaries, or
their assets, (vi) the actual or asserted invalidity of security documents or
guarantees of Holding, the Company or the Company's subsidiaries, and (vii) a
Change in Control (as defined) of Holding.
The preceding discussion of certain of the provisions of the New
Credit Facility is not intended to be exhaustive and is qualified in its
entirety by reference to the provisions of the New Credit Facility, copies of
which are available as set forth under "Additional Information."
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DESCRIPTION OF SERIES B 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 Indenture 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 July 18, 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 $240.0 million, which, if borrowed, would be
senior to the Series B Notes. In addition, indebtedness incurred in connection
with the Acquisition will also constitute Senior Debt.
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. In
addition, indebtedness incurred in connection with the Acquisition will also
constitute Senior Debt.
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 July 18, 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 $240 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. In connection with the
Acquisition, the Company intends to borrow an aggregate of $115.0 million,
consisting primarily of an additional term loan facility under the New Credit
Facility with the balance, if any, to be drawn from an existing facility under
the New Credit Facility. 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
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thereof so tendered and (3) deliver or cause to be delivered to the Trustee the
Series B Notes so accepted together 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"
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that 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 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
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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
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(ii) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person or assumed in connection with the acquisition of any asset used
or useful in a Permitted Business acquired by such specified Person; provided
that such Indebtedness was not incurred in connection with, or in contemplation
of, such other Person merging with or into or becoming a Subsidiary of such
specified Person, or such acquisition, as the case may be.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease (other than an operating lease),
conveyance or other disposition of any assets or rights (including, without
limitation, by way of a sale and leaseback) other than in the ordinary course of
business (provided that the sale, lease (other than an operating lease),
conveyance or other disposition of all or substantially all of the assets of 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
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surplus in excess of $250.0 million, (iv) repurchase obligations with a term of
not more than seven days for underlying securities of the types described in
clauses (i) and (iii), above entered into with any financial institution meeting
the qualifications specified in clause (iii) above, (v) commercial paper having
one of the two of the highest ratings obtainable from either Moody's or S&P and
in each case maturing within one year after the date of acquisition and (vi)
investments in funds investing at least 90% of its assets in investments of the
types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of any of the following: (i) 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,
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on a consolidated basis and determined in accordance with GAAP. Notwithstanding
the foregoing, the provision for taxes based on the income or profits of, and
the depreciation and amortization and other non-cash charges of, a Restricted
Subsidiary of a Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in the same proportion) that the
Net Income of such Restricted Subsidiary was included in calculating the
Consolidated Net Income of such Person.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP, provided
that (i) the Net Income (but not loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Restricted Subsidiary thereof, (ii) the Net
Income of any Restricted Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that Restricted
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders, (iii)
the Net Income of any Person acquired in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded, (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. The following
summary of some of the terms of the Debentures does not purport to be complete
and is qualified in its entirety by reference to the Holding Indenture,
including the definitions therein of certain terms used below. 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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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes 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 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 Holders 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.
EXCHANGE OFFER
The exchange of the Series A Notes for the Series B Notes pursuant to the
Exchange Offer will not constitute a taxable exchange. As a result, (i) a U.S.
Holder will not recognize taxable gain or loss as a result of exchanging the
Series A Notes for the Series B Notes pursuant to the Exchange Offer, (ii) the
holding
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period of the Series B Notes will include the holding period of the Series A
Notes exchanged therefor and (iii) the adjusted tax basis of the Series B Notes
will 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 with 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 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.
115
<PAGE>
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 United States 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 and interest 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 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 not a
Non-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
116
<PAGE>
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. Holders 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.
117
<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
118
<PAGE>
of Chase Securities Inc. is a limited partner of certain investment funds
organized by FS&Co. See "Description of the New Credit Facility."
EXPERTS
The consolidated financial statements of Holding as of January 3, 1998 and
for the three years then ended, included in this Prospectus, have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The financial statements of Western Auto as of January 3, 1998 and December
28, 1996 and for each of the three years in the period ended January 3, 1998
included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the legality of the Series B 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.
119
<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 - July 18, 1998, and January 3, 1998..................... F-22
Condensed Consolidated Statements of Income for the Twelve and Twenty-Eight Week Periods Ended
July 18, 1998, and July 12, 1997............................................................. F-23
Condensed Consolidated Statements of Cash Flows for the Twenty-Eight Week Periods Ended
July 18, 1998, and July 12, 1997............................................................. F-24
Notes to Unaudited Condensed Consolidated Financial Statements for the Twelve and
Twenty-Eight Week Periods Ended July 18, 1998 and July 12, 1997.............................. F-25
WESTERN AUTO SUPPLY COMPANY (A WHOLLY OWNED SUBSIDIARY OF SEARS, ROEBUCK AND CO.) AND
SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS:
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report................................................................... F-36
Consolidated Balance Sheets - January 3, 1998 and December 28, 1996............................ F-37
Consolidated Statements of Operations for the Years (53/52 weeks) Ended January 3, 1998,
December 28, 1996, and December 30, 1995..................................................... F-38
Consolidated Statements of Stockholders' Equity For the Years (53/52 weeks) Ended January 3,
1998, December 28, 1996, and December 30, 1995............................................... F-39
Consolidated Statements of Cash Flows For the Years (53/52 weeks) Ended January 3, 1998,
December 28, 1996, and December 30, 1995..................................................... F-40
Notes to Consolidated Financial Statements for the Years (53/52 weeks) Ended January 3, 1998,
December 28, 1996, and December 30, 1995..................................................... F-41
UNAUDITED FINANCIAL STATEMENTS:
Consolidated Balance Sheets - July 4, 1998 and January 3, 1998................................. F-54
Consolidated Statements of Operations for the 3 and 6 Month Periods Ended July 4, 1998 and
June 28, 1997................................................................................ F-55
Consolidated Statements of Cash Flows for the 6 Month Periods Ended July 4, 1998 and
June 28, 1997................................................................................ F-56
Notes to Consolidated Financial Statements (unaudited) for the 3 and 6 Month Periods Ended
July 4, 1998 and June 28, 1997............................................................... F-57
</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 matters discussed
in Note 11, as to which the date
is March 18, 1998, and in Note 13,
as to which the date is August 17, 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 - RECAPITALIZATION OF PARENT:
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
13. SUBSEQUENT EVENT - ACQUISITION:
On August 17, 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 $115,000 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.
F-21
<PAGE>
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.
F-22
<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.
F-23
<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.
F-24
<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.
F-25
<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.
F-26
<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.
F-27
<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.
F-28
<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.
F-29
<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.
F-30
<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.
F-31
<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.
F-32
<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.
F-33
<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.
F-34
<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 17, 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 $115,000 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.
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Western Auto Supply Company
Kansas City, Missouri
We have audited the accompanying consolidated balance sheets of Western Auto
Supply Company (a wholly owned subsidiary of Sears, Roebuck and Co.) and
subsidiaries (the "Company") as of January 3, 1998 and December 28, 1996 and the
related consolidated statements of operations, stockholder's equity and cash
flows for each of the three years (53/52 weeks) in the period ended January 3,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of January 3, 1998
and December 28, 1996 and the results of its operations and its cash flows for
each of the three years (53/52 weeks) in the period ended January 3, 1998 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, effective December 29, 1996
the Company changed its method of accounting for securitized accounts receivable
as required by Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities."
Kansas City, Missouri
July 17, 1998
(August 17, 1998 as to Note 13)
F-36
<PAGE>
WESTERN AUTO SUPPLY COMPANY
(A Wholly Owned Subsidiary of Sears, Roebuck and Co.)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 3, 1998 and December 28, 1996
($000, except share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 3, December 28,
ASSETS 1998 1996
<S> <C> <C>
CURRENT ASSETS:
Cash $ 23,785 $ 27,645
Receivables, net 81,047 44,628
Inventories 353,267 333,807
Deferred income taxes 54,762 53,399
Prepaid expenses and other current assets 9,274 11,888
Income taxes receivable - Parent 36,142
---------- ---------
Total current assets 558,277 471,367
PROPERTY AND EQUIPMENT 344,066 285,124
GOODWILL 116,783 121,238
OTHER ASSETS 9,259 9,539
---------- ---------
TOTAL $1,028,385 $887,268
========== =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 152,839 $227,116
Accrued expenses and other current liabilities 130,132 113,593
Due to Parent, net 196,081 65,996
Income taxes payable - Parent 17,883
Secured borrowings 36,500
---------- ---------
Total current liabilities 515,552 424,588
ACCRUED RETIREE HEALTH CARE BENEFITS 39,454 44,435
DEFERRED INCOME TAXES 5,567 2,403
LONG-TERM DEBT - Parent 140,802 140,802
COMMITMENTS AND CONTINGENCIES (See Note 9)
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value - authorized, 100,000
shares; issued and outstanding, 1,000 shares Nil Nil
Additional paid-in capital 376,821 264,422
Retained earnings (deficiency) (49,811) 10,618
---------- ---------
Total stockholder's equity 327,010 275,040
---------- ---------
TOTAL $1,028,385 $887,268
========== =========
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
WESTERN AUTO SUPPLY COMPANY
(A Wholly Owned Subsidiary of Sears, Roebuck and Co.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS (53/52 WEEKS) ENDED JANUARY 3, 1998, DECEMBER 28, 1996,
AND DECEMBER 30, 1995
($000)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 3, December 28, December 30,
1998 1996 1995
<S> <C> <C> <C>
NET SALES AND OTHER REVENUES:
Net merchandise sales and other revenues $1,260,886 $1,349,124 $1,728,537
Net service sales 58,925 102,597 229,185
---------- ---------- ----------
Total net sales and other revenues 1,319,811 1,451,721 1,957,722
COSTS OF SALES (exclusive of depreciation and amortization
shown separately below):
Merchandise and other costs of sales 846,375 916,824 1,196,024
Service costs of sales 36,887 60,840 134,548
---------- ---------- ----------
Total costs of sales 883,262 977,664 1,330,572
---------- ---------- ----------
GROSS PROFIT 436,549 474,057 627,150
EXPENSES:
Selling, general and administrative 317,713 288,901 359,907
Buying and occupancy 82,902 95,932 100,137
Depreciation and amortization 38,885 33,275 37,439
Provision for uncollectible accounts 35,537 37,068 24,940
Restructuring 38,441 12,974 15,246
---------- ---------- ----------
Total expenses 513,478 486,150 537,669
---------- ---------- ----------
OPERATING INCOME (LOSS) (76,929) 5,907 89,481
OTHER INCOME (EXPENSE):
Interest (15,379) (15,064) (17,748)
Gain (loss) on the sale of property and equipment (6) (828) 110
---------- ---------- ----------
Total other expense, net (15,385) (15,892) (17,638)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (92,314) (9,985) 71,843
INCOME TAXES:
Current expense (benefit) (33,686) (2,676) 46,850
Deferred expense (benefit) 1,801 952 (15,313)
---------- ---------- ----------
Total income taxes (31,885) (1,724) 31,537
---------- ---------- ----------
NET INCOME (LOSS) $ (60,429) $ (8,261) $ 40,306
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE>
WESTERN AUTO SUPPLY COMPANY
(A Wholly Owned Subsidiary of Sears, Roebuck and Co.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS (53/52 WEEKS) ENDED JANUARY 3, 1998, DECEMBER 28, 1996,
AND DECEMBER 30, 1995
($000)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Retained Total
Paid-in Earnings Stockholder's
Common Stock Capital (Deficiency) Equity
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 Nil $ 184,765 $ 81,901 $266,666
Contributed capital 3,281 3,281
Net income 40,306 40,306
--------- --------- -------- --------
BALANCE, DECEMBER 30, 1995 Nil 188,046 122,207 310,253
Transfer of subsidiaries to Parent (18,652) (103,328) (121,980)
Contributed capital 93,040 93,040
Income tax benefit upon exercise
of stock options 1,988 1,988
Net loss (8,261) (8,261)
--------- --------- -------- --------
BALANCE, DECEMBER 28, 1996 Nil 264,422 10,618 275,040
Contributed capital 110,732 110,732
Income tax benefit upon exercise
of stock options 1,667 1,667
Net loss (60,429) (60,429)
--------- --------- -------- --------
BALANCE, JANUARY 3, 1998 Nil $ 376,821 $(49,811) $327,010
========= ========= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE>
WESTERN AUTO SUPPLY COMPANY
(A Wholly Owned Subsidiary of Sears, Roebuck and Co.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS (53/52 WEEKS) ENDED JANUARY 3, 1998, DECEMBER 28, 1996,
AND DECEMBER 30, 1995
($000)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28, DECEMBER 30,
1998 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(60,429) $(8,261) $ 40,306
Adjustments to reconcile net income (loss) to net cash:
Depreciation and amortization 38,885 33,275 37,439
Provision for uncollectible accounts 35,537 37,068 24,940
Deferred income taxes 1,801 952 (15,313)
Loss (gain) on sale of property and equipment 6 828 (110)
Changes in assets:
Receivables (71,956) (17,523) (28,865)
Inventories (19,460) (46,727) (39,860)
Prepaid expenses and other current assets 2,614 4,879 (15,177)
Changes in liabilities:
Accounts payable (100,469) (33,982) 23,177
Accrued expenses and other current liabilities 16,539 (24,568) 17,393
Income taxes - Parent (54,025) (15,086) 6,367
Accrued retiree health care benefits (4,981) 1,655 1,688
Income tax benefit upon exercise of stock options 1,667 1,988
Other, net (11) 407
--------- -------- --------
Net cash provided by (used in) operating activities (214,282) (65,095) 51,985
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (106,699) (69,425) (74,216)
Sales of property and equipment 13,612 3,149 954
Purchase of companies, net of cash acquired (53,398)
--------- -------- --------
Net cash used in investing activities (93,087) (66,276) (126,660)
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdrafts 26,192 39,535 25,713
Borrowings on long-term debt 3,400
Payments on long-term debt (39,789)
Borrowings from Parent 130,085 56,392 47,258
Secured borrowings 36,500
Capital contributed from Parent 110,732 93,040 3,281
--------- -------- --------
Net cash provided by financing activities 303,509 149,178 79,652
--------- -------- --------
NET INCREASE (DECREASE) IN CASH (3,860) 17,807 4,977
CASH, BEGINNING OF PERIOD 27,645 9,838 4,861
--------- -------- --------
CASH, END OF PERIOD $ 23,785 $ 27,645 $ 9,838
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments made for interest to:
Parent $ 13,107 $ 15,064 $ 15,454
========= ======== ========
Other $ 2,272 $ 2,143 $ 1,244
========= ======== ========
Cash payments of income taxes - Parent $ 20,339 $ 13,557 $ 40,483
========= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE>
WESTERN AUTO SUPPLY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF SEARS, ROEBUCK AND CO.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS (53/52 WEEKS) ENDED JANUARY 3, 1998, DECEMBER 28, 1996,
AND DECEMBER 30, 1995
($000)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION - Western Auto Supply
Company (the "Company" or "Western Auto") is a wholly owned subsidiary of
Sears, Roebuck and Co. ("Sears" or "Parent"). The Company is engaged
principally in the sale of automotive aftermarket products. Its principal
markets are located throughout the eastern and midwest portions of the United
States. The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Western Auto of Puerto Rico, Inc.,
Western Auto of St. Thomas, Inc., WASCO Insurance Company and Tire & Auto
Holdings. All material intercompany profits, transactions and balances have
been eliminated.
FISCAL YEAR - The Company's fiscal year ends on the Saturday closest to
December 31, resulting in fiscal years ending January 3, 1998 (53 weeks)
("fiscal year 1997"), December 28, 1996 ("fiscal year 1996") and December 30,
1995 ("fiscal year 1995").
RECEIVABLES - Receivables consist primarily of wholesale and retail trade
accounts receivable from sales of merchandise, which normally are not
assessed finance charges if paid within the trade terms.
Effective for fiscal year 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Those
standards are based on consistent application of a financial-components
approach that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities when
extinguished. This Statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. A transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange.
SFAS No. 125 requires that the Company recognize the receivables on its
Puerto Rico credit card securitizations, which do not qualify as sales under
the Statement. Additionally, the Company has recorded borrowings on the
transfer of interest in credit card receivables to a major bank. Previously,
the transfer of credit card receivables were derecognized on the consolidated
balance sheet. Adoption of SFAS No. 125 was not material to the results of
operations in fiscal year 1997.
F-41
<PAGE>
Western Auto records monthly credit card service fee income under a servicing
agreement (Note 3) as received. Amounts required by the agreement to be
reimbursed to the bank for delinquent accounts are recorded as charge-offs
against the allowance for doubtful accounts. Included in the allowance for
doubtful accounts is an estimate of the amount deemed necessary to absorb
losses on delinquent credit card balances that have been, or may have to be,
reimbursed under the agreement. The reserve is established by charges against
operations based upon management's continuing evaluation of the pertinent
factors underlying the quality of the related outstanding balances.
INVENTORIES - Inventories are stated at the lower of cost (first-in, first-
out method) or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful asset lives ranging from 3 to 20 years. Leasehold improvements are
amortized over the shorter of the estimated useful life or the lease term of
the related asset. Maintenance and repairs are expensed as incurred.
Expenditures which significantly increase the value or extend useful asset
lives are capitalized.
GOODWILL - Goodwill represents the cost in excess of fair value of net assets
acquired and is being amortized over 20 to 40 years using the straight-line
method. Accumulated amortization was $45,007 and $40,552 at January 3, 1998
and December 28, 1996, respectively. When events and circumstances so
indicate, goodwill is assessed for recoverability based on the expectations
of future profitability of the Company, along with management's plans with
respect to operations. If the Company determines, based on such factors, that
the carrying amount is impaired, the goodwill will be written down to its
recoverable value, which is calculated as the amount of estimated future cash
flows for the remaining amortization period, with a corresponding charge to
earnings. No impairment losses have been recognized in any of the periods
presented.
IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets and certain identifiable
intangibles to be held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value
of the asset may not be recoverable. Long-lived assets and identified
intangibles to be disposed of are reported at the lower of carrying amount or
fair value less cost to sell.
WARRANTIES - An accrual for warranties is established by charges against
operations for anticipated costs relating to merchandise and services sold
under warranty which are not covered by manufacturers' warranties.
INCOME TAXES - Under the provisions of a tax sharing agreement, the Company
and its subsidiaries file a consolidated Federal income tax return with
Sears. Substantially all of the income taxes receivable or payable are
settled through the Due to Parent intercompany account.
Deferred income taxes result from temporary differences between the financial
statement and tax basis of the Company's assets and liabilities in accordance
with the liability method. Under the tax sharing agreement, Western Auto
recognizes the benefits and costs associated with income taxes.
REVENUE RECOGNITION - The Company recognizes merchandise revenue at the point
of sale to a retail customer and at the point of shipment to a wholesale
customer, while service revenue is recognized upon performance of such
service to a retail customer.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-42
<PAGE>
FAIR VALUES OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist principally of cash equivalents, accounts receivable, accounts
payable, intercompany balances and long-term debt. The Company has determined
that the carrying value of its long-term debt is a reasonable estimate of its
fair value based upon the terms of the debt at year end. The Company's
remaining financial instruments typically have terms such that the Company
has determined that their carrying values are a reasonable estimate of their
fair values.
EFFECTS OF NEW ACCOUNTING STANDARDS - In 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive
Income," which requires that an enterprise report the change in its net
assets during the period from nonowner sources. Adoption of this Statement is
effective for fiscal year 1998 and will not impact the Company's consolidated
financial position, results of operations or cash flows, and will be limited
to the form and content of its disclosures.
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits," which requires changes to disclosures
relating to pension and other postretirement benefit plans. This Statement
supercedes the disclosure requirements in SFAS No. 87, "Employers' Accounting
for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"
and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions." Adoption of this Statement is effective for fiscal year 1998
and will not impact the Company's consolidated financial position, results of
operations or cash flows, and will be limited to the form and content of its
disclosures.
RECLASSIFICATIONS - Certain reclassifications have been made in the 1996 and
1995 financial statements to conform with current year presentation.
2. REORGANIZATION AND RESTRUCTURING CHARGES
In fiscal year 1995 the Company recorded a pretax restructuring charge of
$15,246 for employee termination benefits and certain other exit costs. These
costs relate principally to the Company's decision to eliminate all employee
positions associated with credit operations, which were outsourced, and
related home office positions associated with the credit operations.
Concurrently with this reorganization, Sears announced the realignment of its
automotive group, which includes the Company, into two divisions -- tire and
auto parts. The impact of such realignment was the closing of the home office
locations for NTW, Inc. ("NTW") and Tire America, Inc. ("Tire America"), both
subsidiaries of the Company at the time. NTW and Tire America are principally
in the business of tire sales, service and installation. The fiscal year 1995
restructuring charges include the employee termination benefits and,
principally severance benefits, exit costs, principally lease termination
costs, related to the closing of these facilities. The number of employees
planned to be terminated, as a result of the above actions was approximately
320. Actual employees terminated upon completion of the exit activities
approximated 370. Substantially all activities associated with these costs
were completed by the end of fiscal year 1996.
F-43
<PAGE>
The ownership and operating activities of NTW and Tire America were transferred
to Sears effective the first day of fiscal year 1996. The amounts in the
following table were removed from the Company's consolidated balance sheet as of
that date.
<TABLE>
<CAPTION>
<S> <C>
Receivables $ 4,553
Inventories 56,980
Deferred income tax assets 9,474
Prepaid expenses and other current assets 1,229
Property and equipment 134,283
Goodwill 80,568
Other assets 1,187
Accounts payable (3,622)
Accrued expenses and other current liabilities (31,901)
Income taxes payable (1,147)
Current maturities of long-term debt (3,400)
Long-term debt, Sears (79,198)
Deferred income tax liabilities (2,413)
Due to Sears (44,531)
Stockholder's equity (121,980)
</TABLE>
For the year ended December 30, 1995, net sales related to NTW and Tire America
were $641,462.
Restructuring charges of $12,974 were recorded in fiscal year 1996 related to
the Company's decision to exit the service aspect of its remaining businesses
and focus operations solely on the sale of parts and accessories. This resulted
in the writedown of the related service assets, including store service bays and
related equipment that were no longer involved in the production of revenue.
Additionally in fiscal year 1996, the Company exited retail operations in two
major metropolitan markets and accrued for such related exit costs, principally
lease termination costs. Substantially all activities associated with these
costs, except for ongoing lease obligations, were completed by the end of fiscal
year 1997.
In fiscal year 1997, the Company accrued $38,441 in restructuring charges
relating to severance benefits, facility exit costs and asset write-downs.
These costs were associated with the exit from two additional major markets
where the Company operated retail stores. Additionally, the Company restructured
its distribution center operations which included the elimination of the
transportation function impacting the Company's truck fleet and the related
workforce. Home office positions supporting certain distribution center
operations exited were also eliminated. The number of employees both planned and
actually terminated, as a result of the above actions was approximately 4,000.
With the exception of lease termination costs, all activities associated with
these exit costs are anticipated to be completed by the end of fiscal year 1998.
The charges associated with the restructurings identified above were recorded in
the period in which the costs were incurred or when management of the Company
announced its intentions to employees.
F-44
<PAGE>
The following table sets forth the restructuring reserve activity from December
30, 1995 to January 3, 1998:
<TABLE>
<CAPTION>
Other
Severance Exit Costs
---------------- -----------------
<S> <C> <C>
Reserves recorded in fiscal year 1995 $ 6,731 $ 8,515
------- -------
Reserves as of December 30, 1995 6,731 8,515
------- -------
Additional reserves recorded during fiscal year 1996 12,974
Reserves used during fiscal year 1996 (2,532) (2,173)
Reserves transferred to Sears during fiscal year 1996 (2,381) (5,460)
------- -------
Reserves as of December 28, 1996 1,818 13,856
------- -------
Additional reserves recorded during fiscal year 1997 16,835 21,606
Reserves used during fiscal year 1997 (8,582) (22,040)
------- -------
Reserves as of January 3, 1998 $10,071 $13,422
======= =======
</TABLE>
3. ACQUISITIONS
The Company acquired Nationwise, Inc. ("Nationwise") on October 26, 1995.
Nationwise operated 89 stores throughout Ohio, Kentucky, Indiana, Tennessee and
West Virginia. On November 28, 1995, the Company acquired Wheels, Inc.
("Wheels"). Wheels operated 85 stores in New York and Pennsylvania.
The aggregate purchase price of these acquisitions was $53,398 in cash. The
acquisitions have been accounted for by the purchase method of accounting, and
accordingly, the purchase price has been allocated to the assets acquired and
the liabilities assumed based on the estimated fair values at the date of
acquisition. The excess of the purchase price over the estimated fair values of
the net assets acquired has been recorded as goodwill, which will be amortized
over 20 years. The estimated fair values of the net assets acquired are
summarized as follows:
<TABLE>
<S> <C>
Inventory $36,738
Other assets 9,385
Deferred tax asset 13,277
Goodwill 29,545
Accrued expenses (35,547)
-------
$53,398
=======
</TABLE>
The operating results of Nationwise and Wheels have been included in the
Company's consolidated results of operations from the dates of their
acquisition.
F-45
<PAGE>
4. RECEIVABLES
<TABLE>
<CAPTION>
January 3, December 28,
1998 1996
----------------- ----------------
<S> <C> <C>
Wholesale $ 29,240 $34,050
Retail 72,402 32,970
-------- -------
101,642 67,020
Less allowance for doubtful accounts 20,595 22,392
-------- -------
$ 81,047 $44,628
======== =======
</TABLE>
The Company has an agreement with a major bank (the "Domestic
Agreement") whereby the bank extends credit on consumer credit cards to
Company customers meeting the bank's credit criteria. Under the Domestic
Agreement, the Company services receivables ($224,987 and $272,198
outstanding at January 3, 1998 and December 28, 1996, respectively) and
receives a fee based upon outstanding receivables and prevailing
interest rates. Additionally, the Company is required to reimburse the
bank for certain delinquent accounts after which time the Company
pursues collection from the cardholder.
Under a second credit agreement with the same bank (the "Puerto Rico
Agreement"), the bank purchases an individual ownership interest in the
receivables originating on the Company's credit card in Puerto Rico.
Under the Puerto Rico Agreement, the Company services the receivables
and receives a fee based upon outstanding receivables and prevailing
interest rates. The Puerto Rico Agreement requires the Company to pay
the 30-day commercial paper rate, plus 0.37% on the portion of the
portfolio that has been secured by the bank. The weighted average
interest rate on the portfolio in fiscal year 1997 was 5.53%. Provisions
in the Puerto Rico Agreement restrict the amount of the portfolio that
the bank may secure at the lower of $44,000 or 90% of the outstanding
credit card portfolio, adjusted for charge-off experience. At January 3,
1998, the credit card receivable balances that were secured by the bank
totaled $36,500. During the fiscal year 1997, total portfolio credit
extended and collected was $43,255 and $40,951, respectively, of which
the portion secured by the bank was restricted as described herein. As
with the Domestic Agreement, the Company is required to reimburse the
bank for certain delinquent accounts. The Puerto Rico Agreement will
expire July 31, 1998 and is not expected to be renewed.
Total service charges earned by the Company on credit sales were
$51,814, $57,290 and $54,088 for fiscal years 1997, 1996 and 1995,
respectively. Such amounts are included in net sales and other revenues.
The provision for uncollectible accounts included recoveries of $6,273,
$4,203 and $3,062 for fiscal years 1997, 1996 and 1995, respectively.
The Domestic and Puerto Rico agreements contain certain restrictive
covenants regarding the maintenance of minimum net worth and require
that a letter of credit be provided for the benefit of the bank. Such
letter of credit must be from an issuer having a minimum credit rating
of A-2 from Standard and Poor's Corporation or Prime-2 from Moody's
Investors Service, Inc.
F-46
<PAGE>
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
----------------- -----------------
<S> <C> <C>
Land $ 73,204 $ 67,321
Buildings 164,325 148,367
Equipment 191,072 171,321
Leasehold improvements 67,172 54,776
--------- ---------
495,773 441,785
Less accumulated depreciation and amortization 151,707 156,661
--------- ---------
$ 344,066 $ 285,124
========= =========
</TABLE>
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
----------------- -----------------
<S> <C> <C>
Accrued salaries and employee benefits $ 35,685 $ 32,206
Restructuring reserves 23,493 15,674
Warranty reserves 15,239 11,894
Deferred income 2,870 5,313
Real estate and sales tax 9,244 9,725
Other 43,601 38,781
--------- ---------
$ 130,132 $ 113,593
========= =========
</TABLE>
7. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ -------------------
<S> <C> <C> <C>
Salary and related benefits expense $ 194,467 $ 197,809 $ 215,619
Advertising expense 39,936 27,989 45,811
Other 83,310 63,103 98,477
--------- --------- ---------
$ 317,713 $ 288,901 $ 359,907
========= ========= =========
</TABLE>
F-47
<PAGE>
8. INCOME TAXES
The following represents the approximate tax effect of each type of temporary
difference that gives rise to the Company's deferred income tax assets and
liabilities:
<TABLE>
<CAPTION>
January 3, 1998 December 28, 1996
------------------------------ ----------------------------------
Current Long-Term Current Long-Term
<S> <C> <C> <C> <C>
Deferred income tax assets:
Nondeductible reserves and accruals $48,291 $45,273
Accrued retiree health care benefits $15,782 $17,774
Additional inventory costs
capitalized for tax purposes 1,257 1,500
Other 5,214 6,626
------- ------- ------- -------
54,762 15,782 53,399 17,774
------- ------- ------- -------
Deferred income tax liabilities:
Asset basis difference due
to purchase accounting (15,425) (16,612)
Accelerated depreciation for
tax purposes (5,924) (3,565)
------- ------- ------- -------
(21,349) (20,177)
------- ------- ------- -------
$54,762 $(5,567) $53,399 $(2,403)
======= ======= ======= =======
</TABLE>
No valuation allowance was considered necessary for fiscal years 1997 or 1996.
Income (loss) before income taxes was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ----------------- --------------
<S> <C> <C> <C>
Domestic $ (93,065) $ (14,631) $70,433
Foreign 751 4,646 1,410
--------- --------- -------
Total $ (92,314) $ (9,985) $71,843
========= ========= =======
</TABLE>
F-48
<PAGE>
Federal, state and foreign tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- --------
<S> <C> <C> <C>
Federal income tax:
Current $ (32,878) $(3,936) $ 36,724
Deferred 2,347 537 (11,529)
State income tax:
Current (1,437) (517) 9,537
Deferred 77 184 (3,117)
Foreign income tax:
Current 629 1,777 589
Deferred (623) 231 (667)
--------- ------- --------
Income tax provision (benefit) $ (31,885) $(1,724) $ 31,537
========= ======= ========
</TABLE>
Deferred income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- --------
<S> <C> <C> <C>
Nondeductible reserves and accruals $ (3,018) $ (227) $ (9,600)
Accrued retiree health care benefits 1,992 (662) (675)
Additional inventory costs capitalized for
tax purposes 243 384 (595)
Asset basis differences due to purchase
accounting (1,187) (1,187) (3,187)
Accelerated depreciation for tax purposes 2,359 1,405 (854)
Other 1,412 1,239 (402)
-------- ------- --------
Total deferred tax expense (benefit) $ 1,801 $ 952 $(15,313)
======== ======= ========
</TABLE>
Following is a reconciliation between income tax expense (benefit) recorded of
$(31,885), $(1,724) and $31,537 for fiscal years 1997, 1996 and 1995,
respectively, and the amount computed by multiplying earnings before income
taxes by the statutory Federal income tax rate of 35%:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- --------------- --------------
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Income taxes computed at the statutory rate $(32,310) (35.0) $(3,495) (35.0) $ 25,145 35.0
State taxes net of federal benefit (1,046) (1.1) (119) (1.2) 3,320 4.6
Non-deductible goodwill amortization 1,012 1.1 1,050 10.5 1,795 2.5
Foreign taxes net of Federal benefit 231 0.3 472 4.7 911 1.3
50% meals and entertainment 315 0.3 315 3.2 365 0.5
Other (87) (0.1) 53 0.5 1
-------- ---- ------- ---- -------- ----
$(31,885) (34.5) $(1,724) (17.3) $ 31,537 43.9
======== ==== ======= ==== ======== ====
</TABLE>
F-49
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
The Company conducts its retail operations principally from facilities under
operating leases which expire at various dates through 2015. These
agreements normally provide for minimum annual rentals, rentals based on
sales volume in excess of specified minimums, and executory costs.
Management expects that, in the normal course of business, leases which
expire will be renewed or replaced by other leases or that comparable
facilities will be obtained. Total rent expense was $43,407, $52,820 and
$47,504 including $2,337, $3,197 and $3,815 based on sales volume, for
fiscal years 1997, 1996, and 1995, respectively.
At January 3, 1998 the minimum rental commitments under operating leases
that have initial or remaining noncancelable lease terms in excess of one
year are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 34,171
1999 31,839
2000 28,648
2001 23,808
2002 19,781
Thereafter 79,992
---------
Total $ 218,239
=========
</TABLE>
10. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan which qualifies as a thrift plan under
Section 401(k) of the Internal Revenue Code. The plan covers all full-time
employees who have completed one year of service and have attained the age
of twenty-one years as of the first day of each calender year quarter.
Participant accounts are payable to employees upon retirement or
termination. Contributions by the Company to the profit sharing plan charged
to operations were $2,225, $2,996 and $4,631 for fiscal years 1997, 1996,
and 1995, respectively.
Certain employees of the Company participate in Sears stock option plans.
Options to purchase Sears stock have been granted to employees in fiscal
years 1997 and 1994 at prices equal to the fair market value of the stock on
the date of grant. Options are generally exercisable in not more than four
equal, annual installments beginning one year after the date of grant, and
generally expire in 10 to 12 years. At January 3, 1998 and December 28,
1996, approximately 570 common share options were outstanding to Western
Auto employees to purchase Sears common stock with weighted average exercise
prices of $23.87 and $36.59, respectively. The Company measures compensation
cost under APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
accordingly, no compensation cost has been recognized for the fixed stock
option plans. Had compensation cost for the Company's participation in its
parent stock option plans been determined consistent with the fair value
method outlined in SFAS No. 123, "Accounting for Stock-Based Compensation,"
the impact on the Company's consolidated net income (loss) would not have
been material.
The Company has a deferred compensation plan for certain key employees of
the Company and its subsidiaries. Costs of the plan charged against earnings
were $1,034, $1,471 and $1,576 for fiscal years 1997, 1996 and 1995,
respectively.
The Company also has various other profit sharing and incentive plans. Costs
of such plans charged against earnings were $7,129, $4,203 and $17,512 for
fiscal years 1997, 1996 and 1995, respectively.
F-50
<PAGE>
Employees retiring from the Company on or after attaining age 55 who have
rendered at least 10 years of service and have participated in the employee
group health insurance plan are entitled to extend their participation in the
plan and purchase postretirement health care coverage for themselves and their
dependents. The Company continues to fund these costs on a pay-as-you-go basis,
and, for fiscal years 1997, 1996 and 1995, the Company made payments totaling
$1,122, $1,248 and $1,265, respectively.
The following table sets forth the amounts recognized in the Company's
consolidated financial statements for the years ended January 3, 1998, December
28, 1996, and December 30, 1995 as it relates to accumulated postretirement
benefits.
<TABLE>
<CAPTION>
January 3, December 28, December 30,
1998 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ (15,152) $ (14,017) $ (13,082)
Fully eligible active plan participants (4,417) (5,696) (6,820)
Other active plan participants (5,738) (6,849) (11,170)
----------- ----------- -----------
(25,307) (26,562) (31,072)
Unrecognized net gain from past experience
different from that assumed and from changes
in assumption (6,752) (8,108) (8,230)
Prior service benefit from negative plan amendment
not yet recognized in net periodic postretirement
benefit cost (7,395) (9,765) (3,478)
----------- ----------- -----------
Accrued retiree health care benefits $ (39,454) $ (44,435) $ (42,780)
=========== =========== ===========
Net periodic postretirement benefit cost for fiscal years
1997, 1996 and 1995 included the following components:
Service cost $ 928 $ 1,405 $ 1,184
Interest cost 1,927 2,203 2,273
Net amortization and deferral (1,215) (704) (789)
----------- ----------- -----------
Net post-retirement benefit expense 1,640 2,904 2,668
One-time gain due to reduction in workforce (5,500)
----------- ----------- -----------
Total expense (income) $ (3,860) $ 2,904 $ 2,668
=========== =========== ===========
</TABLE>
As a result of the restructuring discussed in Note 2, a significant reduction in
the Company's workforce has occurred. Accordingly, the Company recognized a
curtailment gain of $5,500 in fiscal year 1997.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 10.5%, 11.0% and 11.5% in fiscal years
1997, 1996 and 1995, respectively, gradually declining to 6.0% in the year
2007.
The year end measurement date settlement rate changed from 7.5% (time weighted)
in fiscal year 1995 to 7.75% (time weighted) in fiscal year 1996 to 7.25% (time
weighted) in fiscal year 1997, and to turnover rates were changed to reflect
Company experience.
F-51
<PAGE>
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefit obligation as of January 3, 1998
would be increased by 3.4%. The effect of this change on the sum of the
service cost and interest cost would be an increase of 12.6%.
11. RELATED PARTY TRANSACTIONS
At January 3, 1998 and December 28, 1996, long-term debt due to Sears
consists of a $100,802 note payable due December 31, 1999 at a fixed
rate of 6.26% and a $40,000 note payable due January 15, 2004 at a fixed
rate of 6.40%. Additionally, the Company advances to and borrows funds
as needed from Sears with no set repayment terms. Intercompany interest
expense totaled approximately $13,107, $15,064 and $15,454 for fiscal
years 1997, 1996 and 1995, respectively. Such interest is settled
through the intercompany account with Sears.
During fiscal years 1997 and 1996, Sears charged the Company for certain
shared services totaling $11,072 and $845, respectively. There were no
shared services during fiscal year 1995. The following table sets
forth these amounts by department:
<TABLE>
<CAPTION>
1997 1996
------- -----
<S> <C> <C>
Credit and corporate finance services $ 7,982 $ 607
Real estate and construction 2,853
Other 237 238
------- -----
$11,072 $ 845
======= =====
</TABLE>
Also, the Company purchases and services commercial receivables from its
former subsidiaries, NTW and Tire America, and the purchases are settled
through the Due to/from intercompany account. Any expense associated
with such servicing is charged to the respective subsidiary through the
intercompany account. As of January 3, 1998 and December 28, 1996, the
NTW and Tire America accounts included in the Company's receivables were
$7,696 and $6,634, respectively.
12. LITIGATION, CLAIMS AND ASSESSMENTS
The Company is engaged in various legal actions arising in the ordinary
course of its business. Reserves which the Company believes are
appropriate have been established, however, the Company believes that
the ultimate outcome of such litigation will not have a material adverse
effect on the Company's consolidated financial statements.
F-52
<PAGE>
The Company has been notified by the United States Environmental Protection
Agency ("EPA") that it is a potentially responsible party under superfund
legislation with respect to three different sites. For two of the sites the
EPA has issued a Record of Decision relating to its investigation and
feasibility study of the sites. Utilizing information compiled by the EPA as
part of those decisions, the Company has accrued its best estimate of its
obligation with respect to these sites. Those estimates are based primarily
on documents compiled by the EPA which estimate the total costs to remediate
the sites as well as each company's allocable share of the joint and several
remediation liability for the sites. The Company has considered the
likelihood of the contribution of other significant parties which includes
the effects of those potentially responsible parties which may not be
financially viable. The estimated amounts do not consider any benefit that
may be derived from other parties which may enter into the allocation in an
effort to settle their obligation for remediation of the sites. The estimated
liabilities accrued have not been discounted as the time frame over which the
accrued amounts may be paid out has not been determined.
In the case of the third site, the Company has agreed to enter into a
settlement with the EPA on a de minimis basis and has estimated its
obligation based on that settlement which is anticipated to be consummated by
the end of fiscal year 1998.
In addition to the EPA matters discussed above, the Company is subject to
other legal and governmental proceedings pending against the Company, many
involving routine litigation incidental to the business. Other matters
contain allegations which are nonroutine and involve compensatory and
punitive damages as well as other types of relief.
In the opinion of management after consulting with legal counsel, the
ultimate liability in excess of reserves currently recorded is not expected
to have a material effect on annual results of operations, financial
position, liquidity or capital resources of the Company.
13. SUBSEQUENT EVENT
On August 17, 1998, Sears entered into an Agreement and Plan of Merger
between the Company and Advance Stores Company, Inc. for $175 million in cash
and the retention by Sears of approximately 40% equity ownership interest in
the resulting combined company. The merger is subject to antitrust clearance.
The transaction is expected to be finalized in the fourth quarter of fiscal
year 1998.
******
F-53
<PAGE>
WESTERN AUTO SUPPLY
(A Wholly Owned Subsidiary of Sears, Roebuck and Co.)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 4, 1998 AND JANUARY 3, 1998
($000, except share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS July 4, 1998 January 3, 1998
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 27,313 $ 23,785
Receivables 82,073 81,047
Inventories 347,919 353,267
Deferred income taxes 45,391 54,762
Prepaid expenses and other current assets 17,133 9,274
Income taxes receivable - Parent 56,858 36,142
---------- ----------
Total current assets 576,687 558,277
PROPERTY AND EQUIPMENT 350,234 344,066
GOODWILL 114,555 116,783
OTHER ASSETS 9,114 9,259
---------- ----------
TOTAL $1,050,590 $1,028,385
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 159,133 $ 152,839
Accrued expenses and other current liabilities 96,610 130,132
Due to Parent, net 247,880 196,081
Secured borrowings 35,500 36,500
---------- ----------
Total current liabilities 539,123 515,552
ACCRUED RETIREE HEALTH CARE BENEFITS 39,720 39,454
DEFERRED INCOME TAXES 12,897 5,567
LONG-TERM DEBT - Parent 140,802 140,802
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value - authorized, 100,000
shares; issued and outstanding, 1,000 shares Nil Nil
Additional paid-in capital 377,753 376,821
Retained earnings (deficiency) (59,705) (49,811)
---------- ----------
Total stockholder's equity 318,048 327,010
---------- ----------
TOTAL $1,050,590 $1,028,385
---------- ----------
</TABLE>
See notes to unaudited consolidated financial statements.
F-54
<PAGE>
WESTERN AUTO SUPPLY COMPANY
(A Wholly Owned Subsidiary of Sears, Roebuck and Co.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
PERIODS ENDED JULY 4, 1998 AND JUNE 28, 1997
($000)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
------------------------------ ------------------------------
July 4, 1998 June 28, 1997 July 4, 1998 June 28, 1997
<S> <C> <C> <C> <C>
NET SALES AND OTHER REVENUES:
Net merchandise sales and other revenues $298,971 $335,994 $574,802 $669,365
Net service sales 5,735 18,183 11,392 39,913
-------- -------- -------- --------
Total net sales and other revenues 304,706 354,177 586,194 709,278
COSTS OF SALES (exclusive of depreciation and
amortization shown separately below):
Merchandise and other costs of sales 191,798 226,323 374,588 453,011
Service costs of sales 3,198 10,655 6,288 23,419
-------- -------- -------- --------
Total costs of sales 194,996 236,978 380,876 476,430
-------- -------- -------- --------
GROSS PROFIT 109,710 117,199 205,318 232,848
EXPENSES:
Selling, general and administrative 69,257 82,045 133,321 160,195
Buying and occupancy 20,037 21,570 39,906 44,025
Depreciation and amortization 12,264 9,516 22,143 18,749
Provision for uncollectible accounts 6,238 11,179 13,647 17,760
Restructuring 7,800
-------- -------- -------- --------
Total expenses 107,796 124,310 209,017 248,529
-------- -------- -------- --------
OPERATING INCOME (LOSS) 1,914 (7,111) (3,699) (15,681)
OTHER INCOME (EXPENSE):
Interest (5,286) (2,960) (11,218) (6,844)
Gain on the sale of property and equipment 21 739 1 530
-------- -------- -------- --------
Total other expense, net (5,265) (2,221) (11,217) (6,314)
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES (3,351) (9,332) (14,916) (21,995)
INCOME TAXES:
Current benefit (4,694) (6,211) (21,723) (8,473)
Deferred expense 3,900 2,818 16,701 292
-------- -------- -------- --------
Total income taxes (794) (3,393) (5,022) (8,181)
-------- -------- -------- --------
NET LOSS $ (2,557) $ (5,939) $ (9,894) $(13,814)
-------- -------- -------- --------
</TABLE>
See notes to unaudited consolidated financial statements.
F-55
<PAGE>
WESTERN AUTO SUPPLY COMPANY
(A Wholly Owned Subsidiary of Sears, Roebuck and Co.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PERIODS ENDED JULY 4, 1998 AND JUNE 28, 1997
($000)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 Months Ended
-----------------------------
July 4, 1998 June 28, 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,894) $ (13,814)
Adjustments to reconcile net loss to net cash:
Depreciation and amortization 22,143 18,749
Provision for uncollectible accounts 13,647 17,760
Deferred income taxes 16,701 292
Gain on sale of property and equipment (1) (530)
Changes in assets:
Receivables (14,673) (66,993)
Inventories 5,348 (18,648)
Prepaid expenses and other current assets (7,859) 1,551
Income taxes - Parent (20,716) (28,251)
Changes in liabilities:
Accounts payable 5,580 (66,758)
Accrued expenses and other current liabilities (33,522) 8,685
Accrued retiree health care benefits 266 1,000
Income tax benefit upon exercise of stock options 932 1,000
------------ -------------
Net cash used in operating activities (22,048) (145,957)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (29,645) (30,069)
Sales of property and equipment 3,708 2,823
------------ -------------
Net cash used in investing activities (25,937) (27,246)
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdrafts 714 21,828
Borrowings from Parent 51,799 111,937
Secured borrowings (1,000) 37,000
------------ -------------
Net cash provided by financing activities 51,513 170,765
------------ -------------
NET INCREASE (DECREASE) IN CASH 3,528 (2,438)
CASH, BEGINNING OF PERIOD 23,785 27,645
------------ -------------
CASH, END OF PERIOD $ 27,313 $ 25,207
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments made for interest to:
Parent $ 10,136 $ 5,708
------------ -------------
Other $ 1,082 $ 1,136
------------ -------------
Cash payments (receipts) made for income taxes - Parent $ (19,627) $ 19,778
============ =============
</TABLE>
See notes to unaudited consolidated financial statements.
F-56
<PAGE>
WESTERN AUTO SUPPLY COMPANY
(A Wholly Owned Subsidiary of Sears, Roebuck and Co.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PERIODS ENDED JULY 4, 1998 AND JUNE 28, 1997
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES AND BASIS OF PRESENTATION
The consolidated balance sheet as of July 4, 1998 and the related
consolidated statements of operations for the 13 and 26 weeks ended July 4,
1998 and June 28, 1997 and the consolidated statements of cash flows for the
26 weeks ended July 4, 1998 and June 28, 1997 of Western Auto Supply Company
(the "Company") are unaudited. The interim financial statements have been
prepared in accordance with Generally Accepted Accounting Principles ("GAAP")
and rules and regulations of the Securities and Exchange Commission and
reflect all adjustments (consisting of normal recurring accruals) which are,
in the opinion of management, necessary for the fair presentation of the
results for the interim periods presented. The consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the period ended January 3, 1998.
The results of operations for the interim periods should not be considered
indicative of results of operations to be expected for the full year.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
2. LITIGATION, CLAIMS AND ASSESSMENTS
The Company is engaged in various legal actions arising in the ordinary
course of its business. Reserves which the Company believes are appropriate
have been established, however, the Company believes that the ultimate
outcome of such litigation will not have a material adverse effect on the
Company's consolidated financial statements.
The Company has been notified by the United States Environmental Protection
Agency ("EPA") that it is a potentially responsible party under superfund
legislation with respect to three different sites. For two of the sites the
EPA has issued a Record of Decision relating to its investigation and
feasibility study of the sites. Utilizing information compiled by the EPA as
part of those decisions, the Company has accrued its best estimate of its
obligation with respect to these sites. Those estimates are based primarily
on documents compiled by the EPA which estimate the total costs to remediate
the sites as well as each companies' allocable share of the joint and several
remediation liability for the sites. The Company has considered the
likelihood of the contribution of other significant parties which includes
the effects of those potentially responsible parties which may not be
financially viable. The estimated amounts do not consider any benefit that
may be derived from other parties which may enter into the allocation in an
effort to settle their obligation for remediation of the sites. The estimated
liabilities accrued have not been discounted as the time frame over which the
accrued amounts may be paid out has not been determined.
F-57
<PAGE>
In the case of the third site, the Company has agreed to enter into a
settlement with the EPA on a de minimis basis and has estimated its
obligation based on that settlement which is anticipated to be consummated by
the end of fiscal year 1998.
In addition to the EPA matters discussed above, the Company is subject to
other legal and governmental proceedings pending against the Company, many
involving routine litigation incidental to the business. Other matters
contain allegations which are nonroutine and involve compensatory and
punitive damages as well as other types of relief.
In the opinion of management after consulting with legal counsel, the
ultimate liability in excess of reserves currently recorded is not expected
to have a material effect on annual results of operations, financial
position, liquidity or capital resources of the Company.
3. SUBSEQUENT EVENT
On August 17, 1998, Sears, Roebuck and Co. ("Sears"), the Company's Parent,
entered into an Agreement and Plan of Merger between the Company and Advance
Stores Company, Inc. for $175 million in cash and the retention by Sears of
approximately 40% equity ownership interest in the resulting combined
company. The merger is subject to antitrust clearance. The transaction is
expected to be finalized in the fourth quarter of fiscal year 1998.
F-58
<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.................................... 20
Use of Proceeds................................. 26
Capitalization.................................. 27
The Exchange Offer.............................. 28
Unaudited Pro Forma Consolidated Financial
Data........................................... 35
Selected Consolidated Financial Data............ 49
Management's Discussion and Analysis
of Financial Condition and
Results of Operations.......................... 52
Business........................................ 60
Management...................................... 72
Certain Transactions............................ 78
Description of the New Credit Facility.......... 80
Description of Series B Notes................... 83
Description of Holding Indebtedness.............113
Material Federal Income Tax Considerations......114
Plan of Distribution............................118
Experts.........................................119
Legal Matters...................................119
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
II-1
<PAGE>
(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.
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.
2.2 Agreement and Plan of Merger dated as of August 16, 1998 among Sears, Roebuck and Co.,
Western Auto Holding Co., Holding, the Company, Western Auto Supply Company,
Advance Acquisition Corporation and the stockholders of Holding listed on the signature
pages thereto.
3.1* Articles of Incorporation of 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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
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.
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,
Gearheart, Gerald, Gray, Gregory, Hale, Helms, Jeter, Knighten, Kyle, Livesay, McDaniel,
Miley, Quinn, Rakes, Richardson, Smith, Turner and Williams and the Company (one-year
agreement).
10.23* 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.
23.3 Consent of Deloitte & Touche LLP.
24.1* Power of Attorney (contained in the signature pages hereof)
25.1* Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939
of United States Trust Company of New York.
27.1* Financial Data Schedule.
99.1* Form of Letter of Transmittal with respect to the Exchange Offer.
99.2* Form of Notice of Guaranteed Delivery with respect to the Exchange Offer.
</TABLE>
_________________________________
II-4
<PAGE>
* 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 thereof) which, individually or
in the aggregate, represent a fundamental change in the information
set forth in the Registration Statement; (iii) to include any material
information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement.
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
2. To provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
3. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
4. To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
5. The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused Amendment No. 2 to this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Roanoke, Commonwealth of Virginia, on October 6, 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. 2 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>
/s/* President and Chief Executive October 6, 1998
- ----------------------------- Officer
Garnett E. Smith and Director (Principal Executive
Officer)
/s/ J. O'Neil Leftwich Senior Vice President and Chief October 6, 1998
- ----------------------------- Financial Officer, Secretary and
J. O'Neil Leftwich Treasurer (Principal Financial and
Accounting Officer)
/s/* Chairman of the Board and Director October 6, 1998
- -----------------------------
Nicholas F. Taubman
/s/* Director October 6, 1998
- -----------------------------
Mark J. Doran
/s/* Director October 6, 1998
- -----------------------------
John M. Roth
/s/* Director October 6, 1998
- -----------------------------
J. Frederick Simmons
/s/* Director October 6, 1998
- -----------------------------
Ronald P. Spogli
/s/* Director October 6, 1998
- -----------------------------
Timothy C. Collins
*By: /s/ J. O'Neil Leftwich
-----------------------------
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. 2 to this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Wilmington, State of Delaware, on October 1, 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. 2 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>
/s/ David C. Eppes President and Director October 1, 1998
- ------------------------ (Principal Executive Officer)
David C. Eppes
/s/* Secretary and Treasurer (Principal October 1, 1998
- ------------------------ Financial and Accounting Officer)
Andrew T. Panaccione
/s/* Director October 1, 1998
- ------------------------
J. O'Neil Leftwich
*By: /s/ David C. Eppes
- ------------------------
David C. Eppes
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
================================================================================
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
SEARS, ROEBUCK AND CO.,
WESTERN AUTO HOLDING CO.,
ADVANCE HOLDING CORPORATION,
ADVANCE STORES COMPANY, INCORPORATED,
WESTERN AUTO SUPPLY COMPANY,
ADVANCE ACQUISITION CORPORATION,
AND
THOSE STOCKHOLDERS OF ADVANCE HOLDING CORPORATION LISTED ON THE SIGNATURE PAGE
HERETO.
DATED AS OF AUGUST 16, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
(Not Part of this Agreement)
<TABLE>
<CAPTION>
PAGE NO.
--------
ARTICLE I
DEFINITIONS AND TERMS
---------------------
<C> <S> <C>
1.01 Specific Definitions.............................................. 2
1.02 Other Definitional Provisions..................................... 10
ARTICLE II
THE MERGER
----------
2.01 The Merger........................................................ 11
2.02 Effective Time.................................................... 11
2.03 Certificate of Incorporation and By-Laws.......................... 11
2.04 Directors and Officers............................................ 11
2.05 Further Assurances................................................ 11
2.06 Conversion or Cancellation of Company Shares...................... 12
2.07 Sale of Advance Common Stock to the Investors..................... 12
2.08 The Closing....................................................... 12
2.09 Deliveries........................................................ 13
2.10 Closing Retained Working Capital Statement........................ 13
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER AND PARENT
---------------------------------------------------
3.01 Ownership of Company Shares....................................... 14
3.02 Authorization..................................................... 14
3.03 Binding Effect.................................................... 14
3.04 No Violations..................................................... 14
3.05 Brokers and Finders............................................... 15
3.06 Investment Intent................................................. 15
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
4.01 Authorization..................................................... 15
4.02 Binding Effect.................................................... 15
4.03 Organization...................................................... 16
4.04 Capitalization.................................................... 16
4.05 Subsidiaries...................................................... 16
4.06 No Violations..................................................... 16
4.07 Consents and Approvals............................................ 17
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
4.08 Financial Statements.............................................. 17
4.09 Absence of Change................................................. 18
4.10 Title to Assets; Real Property and Related Matters............... 18
4.11 Litigation........................................................ 18
4.12 Compliance With Applicable Law.................................... 19
4.13 Permits........................................................... 19
4.14 Environmental Matters............................................. 19
4.15 Contracts......................................................... 21
4.16 Intellectual Property............................................. 23
4.17 Taxes............................................................. 24
4.18 Employee Matters.................................................. 25
4.19 Certain Business Relationships with the Company
and Its Subsidiaries............................................. 26
4.20 Warranties........................................................ 26
4.21 Inventories....................................................... 27
4.22 Sufficiency of Assets............................................. 27
4.23 Insurance......................................................... 27
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ADVANCE AND PURCHASER
-------------------------------------------------------
5.01 Authorization..................................................... 27
5.02 Binding Effect.................................................... 28
5.03 No Violations..................................................... 28
5.04 Brokers and Finders............................................... 28
5.05 Investment Intent................................................. 28
5.06 Organization...................................................... 28
5.07 Capitalization.................................................... 29
5.08 Subsidiaries...................................................... 29
5.09 Consents and Approvals............................................ 29
5.10 Financial Statements.............................................. 30
5.11 Absence of Change................................................. 30
5.12 Title to Assets; Real Property and Related Matters............... 30
5.13 Litigation........................................................ 31
5.14 Compliance With Applicable Law.................................... 31
5.15 Permits........................................................... 31
5.16 Environmental Matters............................................. 32
5.17 Contracts......................................................... 33
5.18 Intellectual Property............................................. 35
5.19 Taxes............................................................. 36
5.20 Employee Matters.................................................. 37
5.21 Warranties........................................................ 38
5.22 Inventories....................................................... 38
5.23 Financing......................................................... 38
</TABLE>
ii
<PAGE>
<TABLE>
<C> <S> <C>
5.24 Sufficiency of Assets............................................. 38
5.25 Insurance......................................................... 39
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF INVESTORS
-------------------------------------------
6.01 Authorization..................................................... 39
6.02 Binding Effect.................................................... 39
6.03 No Violations..................................................... 39
6.04 Investment Intent................................................. 40
ARTICLE VII
COVENANTS OF SELLER, PURCHASER AND INVESTORS
--------------------------------------------
7.01 Conduct of the Business Pending the Closing....................... 40
7.02 Access to Information............................................. 44
7.03 Best Efforts; Good Faith.......................................... 45
7.04 Public Announcements.............................................. 46
7.05 Employee Benefits................................................. 46
7.06 Certain Debt Obligations and Intercompany Accounts................ 47
7.07 Employee Retention and Severance Agreements....................... 47
7.08 Transition Services............................................... 47
7.09 No Solicitation................................................... 48
7.10 Consents.......................................................... 48
7.11 Environmental Investigations...................................... 48
7.12 Road Hazard Service Agreements.................................... 49
7.13 Credit Card Receivables Program................................... 49
7.14 Compliance with the WARN Act...................................... 50
7.15 Updated Schedules................................................. 50
7.16 Company Employees' Profit Sharing/Thrift Plan..................... 50
7.17 WASCO Insurance................................................... 51
7.18 Intellectual Property............................................. 51
7.19 Insurance......................................................... 51
7.20 Wet Stores........................................................ 51
ARTICLE VIII
CONDITIONS TO CLOSING
---------------------
8.01 General Conditions................................................ 51
8.02 Conditions to Obligations of Seller............................... 52
8.03 Conditions to Obligations of Purchaser............................ 52
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
ARTICLE IX
TERMINATION
-----------
<C> <S> <C>
9.01 Termination....................................................... 53
9.02 Effect of Termination............................................. 54
ARTICLE X
INDEMNIFICATION
---------------
10.01 Indemnification by Parent and Seller.............................. 54
10.02 Indemnification by Advance........................................ 56
10.03 Indemnification Process........................................... 57
10.04 Limitations on Indemnity Payments................................. 58
10.05 Survival.......................................................... 59
10.06 Environmental Matters............................................. 59
10.07 Credit Card Receivable Losses..................................... 61
10.08 Characterization of Indemnification Payments...................... 62
ARTICLE XI
TAX MATTERS
-----------
11.01 Transactional Taxes............................................... 62
11.02 Tax Returns....................................................... 63
11.03 Apportionment of Income Taxes..................................... 63
11.04 Tax Records....................................................... 64
11.05 Sale of Assets.................................................... 64
11.06 Allocation of Purchase Price...................................... 64
11.07 Tax Elections..................................................... 65
11.08 Tax Sharing Agreements............................................ 65
11.09 Parent and Seller Tax Indemnity................................... 65
11.10 Time of Payment................................................... 65
11.11 Indemnification Process........................................... 66
11.12 Section 338(h)(10) Election....................................... 66
11.13 Timing Adjustments................................................ 66
ARTICLE XII
GENERAL PROVISIONS
------------------
12.01 Expenses.......................................................... 67
12.02 Mutual Release.................................................... 67
12.03 Further Assurances................................................ 67
12.04 Amendment......................................................... 67
12.05 Waiver............................................................ 68
12.06 Notices........................................................... 68
</TABLE>
iv
<PAGE>
<TABLE>
<C> <S> <C>
12.07 Headings and Schedules............................................ 70
12.08 Applicable Law.................................................... 70
12.09 No Third Party Rights............................................. 70
12.10 Counterparts...................................................... 70
12.11 Severability...................................................... 70
12.12 Entire Agreement.................................................. 70
12.13 Consent to Jurisdiction; Jury Trial; Venue........................ 71
12.14 Fair Construction................................................. 71
</TABLE>
v
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
This AGREEMENT AND PLAN OF MERGER, dated as of August 16, 1998, is by
and among SEARS, ROEBUCK AND CO., a New York corporation ("Parent"), WESTERN
------
AUTO HOLDING CO., a Delaware corporation and wholly owned subsidiary of Parent
("Seller"), WESTERN AUTO SUPPLY COMPANY, a Delaware corporation and wholly owned
------
subsidiary of Seller (the "Company"), ADVANCE HOLDING CORPORATION, a Virginia
-------
corporation ("Advance"), ADVANCE STORES COMPANY, INCORPORATED, a Virginia
-------
corporation and a wholly owned subsidiary of Advance ("ASCI"), ADVANCE
----
ACQUISITION CORPORATION, a Delaware corporation and wholly owned subsidiary of
ASCI ("Purchaser"), and those stockholders of Advance (the "Investors") listed
--------- ---------
on the signature page hereto, who are parties only for purposes of Sections
2.07, 2.09(a), 2.09(f) and 12.04 and Article VI.
R E C I T A L S
---------------
WHEREAS, Seller is the owner of all of the issued and outstanding
shares of capital stock (the "Company Shares") of the Company.
--------------
WHEREAS, the respective Boards of Directors of Purchaser and the
Company have determined that it is in the best interest of their stockholders
that the Company be merged with and into Purchaser and Purchaser be the
surviving corporation (the "Merger").
------
WHEREAS, the Seller and ASCI, as the sole stockholders of the Company
and Purchaser, respectively, have approved the Merger upon the terms and subject
to the conditions of this Agreement whereby the issued and outstanding Company
Shares will be converted into the right to receive, in the aggregate, (i)
$175,000,000, (ii) 11,474,606 shares ("Merger Shares") of Advance's Class A
-------------
common stock, $.01 par value per share ("Advance Common Stock") and (iii) that
--------------------
portion of the loss sharing arrangement relating to the Company's Credit Card
Receivables Programs (if any) payable at the Effective Time (as defined in
Section 2.02).
WHEREAS, the Merger Shares will immediately after the Closing (as
defined in Section 1.01) represent approximately 40.6% of the sum of the issued
and outstanding shares of Advance Common Stock as of the date of this Agreement
plus the shares of Advance Common Stock to be issued to the Investors described
in the following recital.
WHEREAS, immediately prior to the Effective Time (as defined in
Section 2.02), Advance desires to sell to the Investors and the Investors desire
to purchase from Advance 4,161,712 shares of Advance Common Stock for
$70,000,000.
WHEREAS, Seller, Advance and the Investors have agreed to amend and
restate the Stockholders Agreement of Advance dated as of April 15, 1998 (the
"Stockholders Agreement") regarding certain rights of the parties post Closing,
- -----------------------
including certain rights with respect to the registration of the Merger Shares
acquired by Seller hereby substantially in the form of Exhibit A.
<PAGE>
WHEREAS, as a condition and inducement to Advance and Purchaser
entering into this Agreement and incurring the obligations set forth in this
Agreement, ASCI and Parent have agreed to enter into Purchase and Supply
Agreements (the "Purchase and Supply Agreements") upon terms consistent with the
------------------------------
term sheets set forth as Exhibit B, pursuant to which, among other things,
Parent has agreed to sell to ASCI and its Subsidiaries, including Purchaser,
certain Craftsman products and DieHard batteries.
WHEREAS, as a condition and inducement to Advance and Purchaser
entering into this Agreement and incurring the obligations set forth in this
Agreement, ASCI and Parent have agreed to enter into a first-call supplier
agreement (the "First-Call Agreement") upon terms consistent with the term sheet
--------------------
set forth as Exhibit C, pursuant to which, among other things, ASCI and its
Subsidiaries, including Purchaser, shall be the first-call supplier of
automotive aftermarket products to certain Affiliates of Parent.
WHEREAS, as a condition and inducement to Advance and Purchaser
entering into this Agreement and incurring the obligations set forth in this
Agreement, Parent and Seller have agreed to enter into merchant agreements (the
"Merchant Agreements") with ASCI and its Subsidiaries upon terms consistent with
-------------------
the term sheets set forth as Exhibit D with respect to Parent's credit card
services.
WHEREAS, as a condition and inducement to the parties entering into
this Agreement, Parent and Seller have agreed to enter into a transition
services agreement (the "Transition Services Agreement") with ASCI and
-----------------------------
Purchaser, upon terms consistent with the term sheet set forth as Exhibit E with
respect to certain transition services.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
DEFINITIONS AND TERMS
---------------------
1.01 Specific Definitions. As used in this Agreement, the following
--------------------
terms have the following meanings:
"AAA" has the meaning specified in Section 10.06(c).
---
"Advance" has the meaning specified in the preamble.
-------
"Advance Common Stock" has the meaning specified in the recitals.
--------------------
"Advance Disclosure Memorandum" means the disclosure memorandum
-----------------------------
delivered by Advance to Seller or Parent at or prior to the date of this
Agreement.
2
<PAGE>
"Advance Indemnified Parties" means Advance, ASCI, Purchaser,
---------------------------
Advance's Affiliates, and their respective directors, officers, stockholders,
attorneys, accountants, representatives, agents and employees, and their
respective heirs, successors and assigns.
"Advance Material Adverse Change" means a change that has had an
-------------------------------
Advance Material Adverse Effect.
"Advance Material Adverse Effect" means a material adverse effect on
-------------------------------
the financial condition or business of Advance and its Subsidiaries, taken as a
whole, but shall exclude any effect, condition, change or development involving,
arising out of or relating to (i) a change arising out of any proposed or
adopted legislation, or any other proposal or enactment by any governmental,
regulatory or administrative authority, (ii) general conditions applicable to
the economy of the United States, other than a general unavailability of bank
credit for a transaction of this type and (iii) conditions or effects resulting
from the announcement of the existence and terms of this Agreement provided that
this exclusion shall not operate to exclude any liabilities or obligations which
arise from or are based upon facts and circumstances that exist irrespective of
the announcement of the existence and terms of this Agreement.
"Advance's Financial Statements" has the meaning specified in Section
------------------------------
5.10(a).
"Advance's Intellectual Property" has the meaning specified in Section
-------------------------------
5.18(a).
"Advance's Leases" has the meaning specified in Section 5.12(b).
----------------
"Advance's Most Recent Financial Statements" has the meaning specified
------------------------------------------
in Section 5.10(a).
"Advance's Most Recent Fiscal Quarter" has the meaning specified in
------------------------------------
Section 5.10(a).
"Advance's Plans" has the meaning specified in Section 5.20(a).
---------------
"Advance's Real Property" has the meaning specified in Section
-----------------------
5.12(a).
"Affiliate" means, with respect to any Person, any Person directly or
---------
indirectly controlling, controlled by or under common control with such Person.
"Agreement" means this Agreement and Plan of Merger (including all
---------
schedules, exhibits and annexes hereto), as the same may be amended or
supplemented from time to time in accordance with the terms of this Agreement.
"Allocation Schedule" has the meaning specified in Section 11.06.
-------------------
"Arbitrator" has the meaning specified in Section 2.10.
----------
3
<PAGE>
"ASCI" has the meaning specified in the preamble.
----
"Business Day" means any day other than a Saturday, a Sunday or a day
------------
on which banks in New York City are authorized or obligated by law or executive
order to close.
"Certificate of Merger" has the meaning specified in Section 2.02.
---------------------
"Certificates" has the meaning specified in Section 2.06.
------------
"Claim Notice" has the meaning specified in Section 10.03(a).
------------
"Closing" means the closing of the transactions provided for in this
-------
Agreement.
"Closing Date" means the date on which the Closing occurs.
------------
"Closing Retained Working Capital Statement" has the meaning specified
------------------------------------------
in Section 2.10.
"Code" means the United States Internal Revenue Code of 1986, as
----
amended.
"Commitment Letters" has the meaning specified in Section 5.23.
------------------
"Company" has the meaning specified in the preamble.
-------
"Company Consent Lease" has the meaning specified in Section 4.07.
---------------------
"Company Employees" has the meaning specified in Section 7.05(b).
-----------------
"Company Material Adverse Change" means a change that has had a
-------------------------------
Company Material Adverse Effect.
"Company Material Adverse Effect" means a material adverse effect on
-------------------------------
the financial condition or business of the Company and its Subsidiaries, taken
as a whole, but shall exclude any effect, condition, change or development
involving, arising out of or relating to (i) a change arising out of any
proposed or adopted legislation, or any other proposal or enactment by any
governmental, regulatory or administrative authority, (ii) general conditions
applicable to the economy of the United States, other than a general
unavailability of bank credit for a transaction of this type and (iii)
conditions or effects resulting from the announcement of the existence and terms
of this Agreement provided that this exclusion shall not operate to exclude any
liabilities or obligations which arise from or are based upon facts and
circumstances that exist irrespective of the announcement of the existence and
terms of this Agreement.
"Company Shares" has the meaning specified in the recitals.
--------------
4
<PAGE>
"Company's 401(k) Plan" has the meaning specified in Section 7.16.
---------------------
"Company's Financial Statements" has the meaning specified in Section
------------------------------
4.08(a).
"Company's Intellectual Property" has the meaning specified in Section
-------------------------------
4.16(a).
"Company's Leases" has the meaning specified in Section 4.10(b).
----------------
"Company's Most Recent Financial Statements" has the meaning specified
------------------------------------------
in Section 4.08(a).
"Company's Most Recent Fiscal Quarter" has the meaning specified in
------------------------------------
Section 4.08(a).
"Company's Plans" has the meaning specified in Section 4.18(a).
---------------
"Company's Real Property" has the meaning specified in Section
-----------------------
4.10(a).
"Confidentiality Agreements" means, collectively, (i) the
--------------------------
Confidentiality Agreement, dated May 1, 1998, between Parent and Freeman Spogli
& Co. Incorporated and (ii) the Confidentiality Agreement, dated May 29, 1998,
between Parent and Advance.
"Consent" means any consent, waiver, approval, authorization,
-------
exemption, registration or declaration.
"Constituent Corporations" has the meaning specified in Section 2.01.
------------------------
"Contracts" means all agreements, contracts, leases, mortgages,
---------
purchase and sale orders, notes, bonds or indentures, arrangements, commitments
and licenses to which the Company or any of its Subsidiaries, on the one hand,
or Advance or any of its Subsidiaries, on the other hand, is a party.
"Credit Card Loss Sharing" has the meaning specified in Section 10.07.
------------------------
"Credit Card Losses" has the meaning specified in Section 10.07.
------------------
"Credit Card Receivables" has the meaning specified in Section 10.07.
-----------------------
"Credit Card Receivables Programs" has the meaning specified in
--------------------------------
Section 7.13.
"Damages" has the meaning specified in Section 10.01.
-------
"DGCL" means the Delaware General Corporation Law, as amended.
----
5
<PAGE>
"Direct Claim" has the meaning specified in Section 10.03(a).
------------
"Dispute" has the meaning specified in Section 10.06(c).
-------
"Dispute Resolution" has the meaning specified in Section 10.06(c).
------------------
"Effective Time" has the meaning specified in Section 2.02.
--------------
"Environmental Laws" means all Laws which regulate or relate to (i)
------------------
the protection or clean-up of the environment, (ii) the use, treatment, storage,
transportation, generation, manufacture, processing, distribution, handling or
Release of Hazardous Substances or (iii) the preservation or protection of
waterways, groundwater, drinking water, air, wildlife, plants or other natural
resources, Environmental Laws include the Federal Water Pollution Control Act,
Resource Conservation & Recovery Act, Clean Water Act, Safe Drinking Water Act,
Atomic Energy Act, Toxic Substances Control Act, Clean Air Act, Comprehensive
Environmental Response, Compensation and Liability Act, Hazardous Material
Transportation Act and all analogous or related foreign, federal, state or local
law.
"ERISA" means the United States Employee Retirement Income Security
-----
Act of 1974, as amended.
"FDR Agreement" has the meaning specified in Section 10.07.
-------------
"Financing" has the meaning specified in Section 5.23.
---------
"First-Call Agreement" has the meaning specified in the recitals.
--------------------
"GAAP" means United States generally accepted accounting principles as
----
in effect from time to time.
"HSR Act" means the United States Hart-Scott-Rodino Antitrust
-------
Improvements Act of 1976, as amended.
"Income Tax" means (a) federal, state, local or foreign income Taxes
----------
(including minimum or add-on Taxes), capital gains Taxes or other Taxes
(including franchise Taxes) measured by reference to income or capital gains,
together with any interest, penalties, charges or fees imposed with respect
thereto, and (b) any obligations under any agreement or arrangements with
respect to Income Taxes described in clause (a) above.
"Income Tax Returns" means any report, return, declaration or other
------------------
filing required to be supplied to any taxing authority or jurisdiction with
respect to Income Taxes including any amendment thereto.
"Indemnified Party" has the meaning specified in Section 10.03.
-----------------
6
<PAGE>
"Indemnifying Party" has the meaning specified in Section 10.03.
------------------
"Interim Period" has the meaning specified in Section 11.09.
--------------
"Investors" has the meaning specified in the preamble.
---------
"IRS" means the United States Internal Revenue Service.
---
"Judgments" means any judgments, injunctions, orders, decrees, writs,
---------
rulings or awards of any court or other judicial authority or any governmental,
administrative or regulatory authority of competent jurisdiction.
"Knowledge" or "knowledge" means, with respect to Seller, actual
--------- ---------
knowledge, assuming completion of a reasonable investigation with respect to a
matter, of Paul Baffico, Anthony Boone, Philip Cargill, David Copas, Craig
Foskit, Edward Kaminski, James Lowry, Susan Field, James Walpole, Donald
Shaffer, Jeffrey Warzell or Daniel Wilson and, with respect to Advance, actual
knowledge, assuming completion of a reasonable investigation with respect to a
matter, of Garnett E. Smith, Carroll R. Tilley, J. O'Neil Leftwich, David R.
Reid, Nicholas F. Taubman, Jimmie L. Wade or S. Lynn Stevens.
"Laws" means any Federal, state, local or foreign law, statute,
----
ordinance, rule, regulation, order or decree.
"Liens" means all liens, mortgages, easements, charges, security
-----
interests, options or other encumbrances.
"Merchant Agreements" has the meaning specified in the recitals.
-------------------
"Merger" has the meaning specified in the recitals.
------
"Merger Consideration" has the meaning specified in Section 2.06.
--------------------
"Merger Shares" has the meaning specified in the recitals.
-------------
"NationsBank Credit Card Program" means the existing credit card
-------------------------------
program between NationsBank of Delaware, N.A. and the Company.
"NationsBank Receivables" has the meaning specified in Section 7.13.
-----------------------
"Parent" has the meaning specified in the preamble.
------
"Permits" means all permits, authorizations, approvals, registrations,
-------
licenses, certificates or variances granted by or obtained from any federal,
state, local or foreign governmental, administrative or regulatory authority.
7
<PAGE>
"Permitted Liens" means (i) Liens created by Advance or the Company,
---------------
as the case may be, created or incurred in the ordinary course of business,
which are disclosed in the relevant Disclosure Memorandum, (ii) Liens for or in
respect of Taxes, impositions, assessments, fees, water and sewer rents and
other governmental charges levied or assessed or imposed against the Company's
property or Advance's property which are not yet delinquent or are being
contested in good faith by appropriate proceedings, (iii) the rights of lessors
and lessees under the Company's Leases or Advance's Leases executed in the
ordinary course of business, (iv) the rights of licensors and licensees under
licenses executed in the ordinary course of business, (v) Liens, and rights to
Liens, of mechanics, warehousemen, carriers, repairmen and others arising by
operation of law and incurred in the ordinary course of business, securing
obligations not yet delinquent or being contested in good faith by appropriate
proceedings, (vi) any conditions relating to the Company's Real Property or
Advance's Real Property disclosed on any title commitments, if any, delivered or
made available to a party, which do not materially affect the use of such real
property as it is used on the date of this Agreement, (vii) customary and other
Liens which, in the aggregate, do not have a Company Material Adverse Effect or
an Advance Material Adverse Effect, as applicable, (viii) any Liens disclosed in
the Company's Financial Statements or Advance's Financial Statements, and (ix)
Liens set forth on Schedules 4.10(a) of the Seller Disclosure Memorandum and
-----------------
5.12(a) of the Advance Disclosure Memorandum.
- -------
"Person" means an individual, a corporation, a limited liability
------
company, a partnership, an association, a trust or other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Policies" has the meaning specified in Section 7.19.
--------
"Pre-Closing Periods" has the meaning specified in Section 11.09.
-------------------
"Proceeding" means any action, suit, demand, claim or legal,
----------
administrative (including a Tax audit), arbitration or other alternative dispute
resolution proceeding, hearing or investigation.
"Puerto Rico Receivables" has the meaning specified in Section 7.13.
-----------------------
"Puerto Rico Receivables Program" has the meaning set forth in Section
-------------------------------
7.13.
"Purchase and Supply Agreements" has the meaning specified in the
------------------------------
recitals.
"Purchaser" has the meaning specified in the preamble .
---------
"Reimbursement Agreement" means the Second Amended and Restated
-----------------------
Reimbursement Agreement dated as of December 6, 1996 among the Company, NCNB
National Bank of North Carolina and NCNB National Bank, as amended.
"Required Consents" has the meaning specified in Section 4.07.
-----------------
8
<PAGE>
"Retained Working Capital" means the difference between current
------------------------
operating assets and current operating liabilities of the Company and its
Subsidiaries calculated in accordance with Schedule 2.06 of the Seller
-------------
Disclosure Memorandum.
"Sears Plan" has the meaning specified in Section 7.05(b).
----------
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Seller" has the meaning specified in the preamble.
------
"Seller Disclosure Memorandum" means the disclosure memorandum
----------------------------
delivered by Seller to Purchaser at or prior to the date of this Agreement.
"Seller Indemnified Parties" means Parent, Parent's Affiliates,
--------------------------
Seller, Seller's Affiliates (other than the Company and its Subsidiaries), and
their respective directors, officers, stockholders, attorneys, accountants,
representatives, agents and employees, and their respective heirs, successors
and assigns.
"Servicing Agreement" means the Second Amended and Restated Servicing
-------------------
Agreement dated as of December 6, 1990 by and between NCNB National Bank and the
Company, as amended.
"Stockholders Agreement" has the meaning specified in the recitals.
----------------------
"Store Assessment Work" means any environmental investigations,
---------------------
assessments or studies with respect to a Wet Store as a result of any
Environmental Condition (as defined in Section 4.14) which existed or
activities which occurred at or are related to such store's operations prior to
the Closing Date and which is (i) required to be performed under any
Environmental Law or by a governmental agency, (ii) required to be performed in
connection with any financing, sale or other disposition of such Wet Store
which, after such disposition, is intended to be used in a comparable manner to
the use as of the Closing Date or any other retail use, (iii) required to be
performed by the terms of any lease in effect as of the Closing Date or (iv)
reasonably necessary in connection with a claim asserted by a third party.
"Subsidiary" or "Subsidiaries" of any Person means any corporation,
---------- ------------
partnership, limited liability company, association, trust, joint venture or
other entity or organization of which such Person, either alone or through or
together with any other Subsidiary, owns, directly or indirectly, more than 50%
of the stock or other equity interests, the holder of which is generally
entitled to vote for the election of the board of directors or members or other
governing body of such corporation, partnership, limited liability company,
association, trust, joint venture or other entity or organization.
"Surviving Corporation" has the meaning specified in Section 2.01.
---------------------
9
<PAGE>
"Tax Returns" means any report, return, declaration or other filing
-----------
required to be supplied to any taxing authority or jurisdiction with respect to
Taxes including any amendments thereto.
"Taxes" means all taxes, assessments, charges, duties, fees, levies,
-----
imposts or other governmental charges, including, all federal, state, local,
foreign and other income, environmental, add-on, minimum, franchise, profits,
capital gains, capital stock, capital structure, transfer, sales, gross receipt,
use, service, occupation, property, excise, severance, windfall profits,
premium, stamp, license, payroll, social security, unemployment, disability,
value-added, withholding and other taxes, assessments, charges, duties, fees,
levies, imposts or other governmental charges of any kind whatsoever (whether
payable directly or by withholding and whether or not requiring the filing of a
Tax Return), and all estimated taxes, deficiency assessments, additions to tax,
penalties and interest, and shall include any liability for such amounts as a
result either of being a member of a combined, consolidated, unitary or
affiliated group or of a contractual obligation to indemnify any Person,
regardless of whether disputed.
"Taxing Authority" means the United States Internal Revenue Service or
----------------
any comparable state, local or foreign governmental agency responsible for the
administration of Tax.
"Third Party Claim" has the meaning specified in Section 10.03(a).
-----------------
"Tire Stores" means stores of Parent and its Subsidiaries which
-----------
operate or previously operated under the names "National Tire Warehouse", "NTW",
"Tire America" and "National Tire & Battery."
"Transition Services Agreement" has the meaning specified in the
-----------------------------
recitals.
"United States" means the United States of America, its territories
-------------
(including Puerto Rico and the Virgin Islands) and possessions, any state of the
United States, and the District of Columbia.
"Wet Stores" means any store owned or leased by the Company or any of
----------
its Subsidiaries at any time from and after April 19, 1988 which does or did
remove or change automotive fluids (including oil, brake fluid or transmission
fluid change services).
1.02 Other Definitional Provisions. (a) Any reference to an Article,
-----------------------------
Section or Annex is a reference to an Article or Section of, or an Annex to,
this Agreement.
(b) Terms defined in the singular shall have a comparable meaning when
used in the plural, and vice versa.
(c) The words "include", "includes" and "including" mean include,
------- -------- ---------
includes and including without limitation.
10
<PAGE>
(d) The terms "dollars" and "$" mean United States dollars.
------- -
ARTICLE II
THE MERGER
----------
2.01 The Merger. On the terms and subject to the conditions of this
----------
Agreement and in accordance with the DGCL, at the Effective Time (as defined in
Section 2.02), Seller shall cause the Company to merge with and into Purchaser
and the separate corporate existence of the Company shall thereupon cease.
Purchaser shall be the surviving corporation in the Merger (the Company and
Purchaser are sometimes hereinafter referred to as the "Constituent
-----------
Corporations" and Purchaser is sometimes hereinafter referred to as the
"Surviving Corporation") and shall, following the Merger, be governed by the
- ----------------------
laws of the State of Delaware, and the separate corporate existence of
Purchaser, with all its rights, privileges, immunities, powers and franchises,
of a public as well as of a private nature, shall continue unaffected by the
Merger. From and after the Effective Time, the Merger shall have the effects
specified in the DGCL.
2.02 Effective Time. At the Closing contemplated in Section 2.08,
--------------
Purchaser and Advance will cause a Certificate of Merger (the "Certificate of
--------------
Merger"), to be filed with the Secretary of State of the State of Delaware. The
- ------
Merger shall become effective as of the date and at the time the Delaware
Certificate of Merger is duly filed with the Secretary of State of the State of
Delaware (or such later time as may be specified therein), and such time is
hereinafter referred to as the "Effective Time."
--------------
2.03 Certificate of Incorporation and By-Laws. The Certificate of
----------------------------------------
Incorporation and By-Laws of Purchaser shall be the Certification of
Incorporation and By-Laws of the Surviving Corporation until duly amended in
accordance with the terms thereof and the DGCL.
2.04 Directors and Officers. At the Effective Time, the directors of
----------------------
Purchaser shall be the directors of the Surviving Corporation, each of such
directors to hold office, subject to the applicable provisions of the
Certificate of Incorporation and By-Laws of the Surviving Corporation, until
their respective successors shall be duly elected or appointed and qualified.
The officers of Purchaser immediately prior to the Effective Time shall be the
initial officers of the Surviving Corporation, in each case until their
respective successors are duly elected or appointed and qualified.
2.05 Further Assurances. If at any time after the Effective Time the
------------------
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments or assurances or any other acts or things are necessary,
desirable or proper (a) to vest, perfect or confirm, of record or otherwise, in
the Surviving Corporation, its right, title or interest in, to or under any of
the rights, privileges, powers, franchises, properties or assets of either of
the Constituent Corporations or (b) otherwise to carry out the purposes of this
Agreement, the proper officers and directors of the Surviving Corporation are
hereby authorized on behalf of the respective Constituent Corporations to
execute and deliver, in the name and on behalf of the respective Constituent
Corporations, all such
11
<PAGE>
deeds, bills of sale, assignments and assurances and do, in the name and on
behalf of the Constituent Corporations, all such other acts and things
necessary, desirable or proper to vest, perfect or confirm its right, title or
interest in, to or under any of the rights, privileges, powers, franchises,
properties or assets of the Constituent Corporations and otherwise to carry out
the purposes of this Agreement.
2.06 Conversion or Cancellation of Company Shares. At the Effective
--------------------------------------------
Time, by virtue of the Merger and without any action on the part of the holders
thereof, the Company Shares issued and outstanding immediately prior to the
Effective Time, in the aggregate, shall be converted into and represent the
right to receive, without interest, (i) $175,000,000, (ii) the Merger Shares and
(iii) that portion of the Credit Card Loss Sharing (if any) payable in cash as
part of the Merger Consideration pursuant to Section 10.07 ((i), (ii) and (iii)
collectively, the "Merger Consideration") upon surrender of the certificate or
--------------------
certificates that, immediately prior to the Effective Time, represented all the
issued and outstanding Company Shares (the "Certificates"); it being understood
------------ -------------------
that, immediately following the Closing, Seller will hold approximately 40.6% of
the sum of the issued and outstanding Advance Common Stock as of the date of
this Agreement plus the shares of Advance Common Stock to be issued to the
Investors set forth in Section 2.07; it being further understood that,
---------------------------
immediately prior to the Effective Time and subject to Section 7.01(a), the
Company shall have at least $6,000,000 of cash and that amount of other Retained
Working Capital set forth in Schedule 2.06 of the Seller Disclosure Memorandum.
-------------
As of the Effective Time, all such Company Shares shall no longer be
outstanding, shall be automatically canceled and shall cease to exist, and each
holder of a Certificate which formerly represented any such Company Shares shall
thereafter cease to have any rights with respect to such Company Shares, except
the right to receive the Merger Consideration without interest for such Company
Shares upon the surrender of such Certificate or Certificates at the Closing.
2.07 Sale of Advance Common Stock to the Investors. At the Closing,
---------------------------------------------
Advance shall issue to each Investor one or more certificates representing that
number of shares of Advance Common Stock set forth opposite such Investor's name
on Schedule 2.07 of the Advance Disclosure Memorandum. In consideration of the
-------------
issuance of such shares of Advance Common Stock, at the Closing, each Investor
will deliver or cause to be delivered to Advance same-day funds by wire transfer
in the amount set forth opposite such Investor's name on Schedule 2.07 of the
-------------
Advance Disclosure Memorandum. The total consideration set forth on Schedule
--------
2.07 of the Advance Disclosure Memorandum shall be $70,000,000. Investors shall
- ----
promptly prepare and file any required filings under the HSR Act. The
Investors' obligations regarding its investment in Advance hereunder shall be
subject to satisfaction or waiver by Advance of the conditions set forth in
Sections 8.01 and 8.03.
2.08 The Closing. Unless otherwise mutually agreed, the Closing shall
-----------
take place at 9:00 a.m., Chicago time, at the offices of Mayer, Brown & Platt,
190 South LaSalle Street, Chicago, Illinois, five Business Days after the
conditions to Closing set forth in Article VIII can be satisfied or waived or at
such other place, time or date as Seller and Purchaser may agree. The parties
to this Agreement shall use reasonable best efforts to satisfy the conditions to
Closing set forth in Article VIII on or before September 30, 1998.
12
<PAGE>
2.09 Deliveries. At the Closing, (a) the Investors shall deliver or
----------
cause to be delivered to Advance the consideration specified in Section 2.07,
(b) Advance shall contribute $70,000,000 to ASCI and ASCI shall purchase the
Merger Shares from Advance and contribute the Merger Shares to Purchaser, (c)
ASCI shall contribute $175,000,000 to Purchaser, (d) Seller shall deliver or
cause to be delivered to Purchaser one or more certificates representing all of
the Company Shares, endorsed in blank or accompanied by duly executed assignment
documents, (e) Advance and ASCI shall cause Purchaser to pay to Seller
$175,000,000 plus that portion of the Credit Card Loss Sharing (if any) payable
as part of the Merger Consideration pursuant to Section 10.07 in same-day funds
by wire transfer to an account designated by Seller not less than two Business
Days prior to the Closing and Purchaser shall deliver to Seller one or more
certificates representing the Merger Shares and (f) Advance shall deliver or
cause to be delivered to the Investors one or more certificates representing the
shares of Advance Common Stock specified in Section 2.07.
2.10 Closing Retained Working Capital Statement. As soon as
------------------------------------------
practicable after the Closing Date, Advance shall deliver to Parent a statement
of the Chief Financial Officer of Advance prepared in consultation with the
current Chief Financial Officer of the Company, setting forth the amount of the
Retained Working Capital as of the Closing Date (the "Closing Retained Working
------------------------
Capital Statement"), after taking into account the transactions described in
- -----------------
Section 7.01(a)(i)(A), (B), (C), (D), (E) and (F) and applying the same
accounting principles and practices used in determining Retained Working Capital
as of June 30, 1998 as described on Schedule 2.06 of the Seller Disclosure
-------------
Memorandum. Parent shall have thirty (30) days after receipt of the Closing
Retained Working Capital Statement to review the Closing Retained Working
Capital Statement and propose any adjustments thereto. Advance shall allow
Parent to review all financial information, working papers, schedules and
calculations related to the Closing Retained Working Capital Statement. If the
amount of Retained Working Capital reflected in the Closing Retained Working
Capital Statement is less than the amount of Retained Working Capital set forth
on Schedule 2.06 of the Seller Disclosure Memorandum, unless disputed as
-------------
provided in the next sentence, Parent shall within such thirty (30) day review
period pay to ASCI by wire transfer in immediately available funds the amount,
if any, by which the amount of Retained Working Capital on Schedule 2.06 of the
-------------
Seller Disclosure Memorandum exceeds the amount of Retained Working Capital on
the Closing Retained Working Capital Statement. If Parent disagrees with the
Closing Retained Working Capital Statement, Parent shall not pay any such amount
within such thirty (30) day period and shall notify Advance in writing of such
disagreement within thirty (30) days of receipt of the Closing Retained Working
Capital Statement and Parent and Advance shall meet promptly in an effort to
resolve such disagreement. If Parent and Advance are unable to resolve such
disagreement within fifteen (15) days thereafter, Parent and Advance shall
promptly submit the disagreement to PricewaterhouseCoopers LLP (the
"Arbitrator"), whose decision with respect to the calculation of Retained
----------
Working Capital in the Closing Retained Working Capital Statement and any
payments due with respect thereto will be final and binding. Parent and Advance
will cooperate to complete the arbitration within fifteen (15) days of
submission of the matter to the Arbitrator, and the Arbitrator will be
instructed to render a decision within ten (10) days after completion of the
arbitration. Parent and Advance will each pay one-half of the fees and expenses
of the Arbitrator. Any payment due and owing from Parent to Advance under this
Section 2.10 shall
13
<PAGE>
bear interest at the rate of eight and one-half percent (8 1/2%) per annum from
the Closing Date to the Date of Payment.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER AND PARENT
---------------------------------------------------
Seller and Parent represent and warrant to Advance, ASCI and Purchaser
as follows:
3.01 Ownership of Company Shares. Seller is the owner, beneficially
---------------------------
and of record, of the Company Shares, free and clear of any Lien, except as set
forth on Schedule 3.01 of the Seller Disclosure Memorandum. Seller is not a
-------------
party to any option, warrant, purchase right or other contract or commitment
that could require Seller to sell, transfer or otherwise dispose of any Company
Shares (other than this Agreement).
3.02 Authorization. Each of Seller and Parent has the requisite
-------------
power and authority to execute and deliver this Agreement and to perform its
obligations under this Agreement. The execution and delivery of this Agreement
by Seller, the performance by Seller of its obligations under this Agreement and
the consummation by Seller of the transactions contemplated by this Agreement
have been duly authorized by its Board of Directors and approved by all
necessary stockholder action on the part of Seller and Parent. No other
corporate proceeding on the part of Seller and Parent is necessary for the
execution and delivery of this Agreement by Seller and Parent, the performance
by Seller and Parent of their respective obligations under this Agreement and
the consummation by Seller and Parent of the transactions contemplated by this
Agreement.
3.03 Binding Effect. This Agreement has been duly executed and
--------------
delivered by Seller and Parent and is a legal, valid and binding obligation of
Seller and Parent, enforceable against Seller and Parent in accordance with its
terms, subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and to general principles of equity.
3.04 No Violations. The execution, delivery and performance by
-------------
Seller or Parent of this Agreement, and the consummation of the transactions
contemplated by this Agreement, do not and will not (i) conflict with or violate
any provision of the certificate of incorporation, bylaws or other
organizational documents of Seller or Parent, (ii) subject to obtaining the
Required Consents, conflict with, or result in the breach of, or constitute a
default under, or result in the termination, cancellation or acceleration
(whether after the giving of notice or the lapse of time or both) of any right
or obligation of Seller or Parent under, any note, bond, mortgage, indenture,
Permit, license, lease, agreement, contract, arrangement or commitment to which
Seller or Parent is a party or by which Seller or Parent or any of its assets or
properties are bound or affected, or (iii) subject to obtaining the Required
Consents, violate or result in a breach of, or constitute a default under, any
Law or Judgment applicable to Seller or Parent or by which Seller or Parent or
any of their respective assets are bound or affected, except, in the cases of
clauses (ii) and (iii), for any conflict, breach, default, termination,
cancellation, acceleration or violation which, in the
14
<PAGE>
aggregate, would not reasonably be expected to materially impair the ability of
Seller or Parent to effect the Closing.
3.05 Brokers and Finders. Except for Lazard Freres & Co. LLC, whose
-------------------
fees will be paid by Parent or an Affiliate of Parent (other than the Company or
any of its Subsidiaries), there is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of
Parent or any Affiliate of Parent (including the Company) who might be entitled
to any fee or commission from Parent or any Affiliate of Parent (including the
Company) in connection with the transactions contemplated by this Agreement.
3.06 Investment Intent. Seller and Parent hereby acknowledge that
-----------------
the Merger Shares are not registered under the Securities Act or registered or
qualified for sale under any state securities law and that the Merger Shares
cannot be resold without registration thereunder or exemption therefrom.
Subject to the terms of the Stockholders Agreement, Seller is acquiring such
Merger Shares for its own account as principal, for investment and not with a
view toward the sale or distribution thereof. Seller has sufficient knowledge
and experience in financial and business matters to enable it to evaluate the
risks of investment in such Merger Shares and has the ability to bear the
economic risks of such investment.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
Except as disclosed in the Seller Disclosure Memorandum delivered at
or prior to the date of this Agreement (it being understood that each section of
the Seller Disclosure Memorandum shall list all items applicable to such
section, although the inadvertent omission of an item from a section shall not
be a breach of this Agreement if such item is disclosed in another section of
the Seller Disclosure Memorandum), Seller, Parent and the Company represent and
warrant to Advance, ASCI and Purchaser as follows:
4.01 Authorization. The Company has the requisite power and
-------------
authority to execute and deliver this Agreement and to perform its obligations
under this Agreement. The execution and delivery of this Agreement by the
Company, the performance by the Company of its obligations under this Agreement
and the consummation by the Company of the transactions contemplated by this
Agreement have been duly authorized by the Board of Directors of the Company and
approved by all necessary stockholder action. No other corporate proceeding on
the part of the Company is necessary for the execution and delivery of this
Agreement by the Company, the performance by the Company of its obligations
under this Agreement and the consummation by the Company of the transactions
contemplated by this Agreement.
4.02 Binding Effect. This Agreement has been duly executed and
--------------
delivered by the Company and is a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, subject
to applicable bankruptcy, insolvency and similar laws affecting creditors'
rights generally and to general principles of equity.
15
<PAGE>
4.03 Organization. Each of the Company and its Subsidiaries is duly
------------
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and has all requisite power and authority to
carry on its business as it is now being conducted and to own, lease and operate
its properties where now conducted, owned, leased or operated. Each of the
Company and its Subsidiaries is duly licensed or qualified to do business and is
in good standing as a foreign corporation in each jurisdiction where such
license or qualification is required to carry on its business as now conducted,
except where the failure to be so qualified or licensed or in good standing, as
the case may be, would not, in the aggregate, have a Company Material Adverse
Effect.
4.04 Capitalization. The entire authorized capital stock of the
--------------
Company consists of 100,000 Company Shares, of which 1,000 Company Shares are
issued and outstanding. All of the issued and outstanding Company Shares have
been duly authorized, are validly issued, fully paid and nonassessable, and are
held beneficially and of record by Seller. There are no outstanding or
authorized options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights or other contracts or commitments that could require the
Company to issue, sell or otherwise cause to become outstanding any of its
capital stock. There are no outstanding or authorized stock appreciation,
phantom stock, profit participation or similar rights with respect to the
Company. Since the Company's Most Recent Financial Statements, the Company has
not declared, set aside or paid any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its capital
stock.
4.05 Subsidiaries. Schedule 4.05 of the Seller Disclosure Memorandum
------------ -------------
sets forth for each Subsidiary of the Company (i) its name and jurisdiction of
organization, (ii) the amount of capital stock or other equity interests
authorized and (iii) the amount of capital stock or other equity interests
issued and outstanding, the names of the holders thereof, and the number of
shares or the percentage interests held by the Company or its Subsidiaries. All
of the issued and outstanding shares of capital stock or other equity interests
of each Subsidiary of the Company have been duly authorized and are validly
issued. The Company, directly or indirectly, holds of record and owns
beneficially all of the outstanding shares of each Subsidiary of the Company.
4.06 No Violations. Except as set forth on Schedule 4.06 of the
------------- -------------
Seller Disclosure Memorandum, the execution, delivery and performance by the
Company of this Agreement, and the consummation of the transactions contemplated
by this Agreement, do not and will not (i) conflict with or violate any
provision of the certificates of incorporation, by-laws or other organizational
documents of the Company and its Subsidiaries, (ii) assuming the Required
Consents are obtained, conflict with, or result in the breach of, or constitute
a default under, or result in the termination, cancellation or acceleration
(whether after the giving of notice or the lapse of time or both) of any right
or obligation of the Company under, any Contract, or (iii) assuming the Required
Consents are obtained, violate or result in a breach of or constitute a default
under, any Law or Judgment, except, in the cases of clauses (ii) and (iii), for
any conflict, breach, default, termination, cancellation or acceleration which,
in the aggregate, would not reasonably be expected to result in a Company
Material Adverse Effect or materially impair the ability of Parent, Seller or
the Company to effect the Closing.
16
<PAGE>
4.07 Consents and Approvals. Except as specifically set forth on
----------------------
Schedule 4.07 of the Seller Disclosure Memorandum or as required by the HSR Act
- -------------
and any other similar federal, state, local or foreign laws or regulations and
except for the filing of the Certificate of Merger with the Secretary of State
of Delaware (together with the Consents, notices and filings referred to in
Section 5.09 and Schedules 4.07 of the Seller Disclosure Memorandum and 5.09 of
-------------- ----
the Advance Disclosure Memorandum, the "Required Consents"), no Consent is
-----------------
required to be obtained by the Company (or by any Affiliate) from, and no notice
or filing is required to be given by the Company (or by any Affiliate) to or
made by the Company (or by any Affiliate) with, any federal, state, local,
foreign or other governmental authority or other Person in connection with the
execution, delivery and performance by Seller of this Agreement, other than in
all cases where the failure to obtain such Consent or to give or make such
notice or filing would not, in the aggregate, reasonably be expected to result
in a Company Material Adverse Effect. Schedule 4.07 of the Seller Disclosure
-------------
Memorandum sets forth each Company's Lease which expressly requires the Consent
of a Person in connection with the consummation of the transactions contemplated
by this Agreement (a "Company Consent Lease").
---------------------
4.08 Financial Statements. (a) Set forth on Schedule 4.08(a) of the
-------------------- ----------------
Seller Disclosure Memorandum are the following financial statements
(collectively the "Company's Financial Statements"): (i) the audited
------------------------------
consolidated balance sheets and statements of income, changes in stockholders'
equity, and cash flow as of and for the fiscal years ended December 30, 1995,
December 28, 1996 and January 3, 1998 for the Company and its Subsidiaries and
the notes related thereto; and (ii) the unaudited consolidated balance sheets
and statements of income, stockholders' equity, and cash flow (the "Company's
---------
Most Recent Financial Statements") as of and for the quarter and the six months
- --------------------------------
ended July 4, 1998 (the "Company's Most Recent Fiscal Quarter") for the Company
------------------------------------
and its Subsidiaries. The Company's Financial Statements (including the notes
thereto) have been prepared in accordance with GAAP applied on a consistent
basis throughout the periods covered thereby and present fairly the financial
position of the Company and its Subsidiaries as of such dates and the results of
operations of the Company and its Subsidiaries for such periods; provided,
--------
however, that the Company's Most Recent Financial Statements are subject to
- -------
normal year-end adjustments that in the aggregate will not be material and lack
footnotes and other presentation items.
(b) Except to the extent reflected or reserved against in the
Company's Financial Statements, and except as set forth in the Seller
Disclosure Memorandum, the Company has no liabilities except for (i) liabilities
which have arisen after the Company's Most Recent Financial Statements in the
ordinary course of business consistent with past practice, (ii) liabilities with
respect to Contracts and (iii) liabilities which, in the aggregate, would not
reasonably be expected to have a Company Material Adverse Effect.
(c) Assuming the Required Consents are obtained and except as set
forth on Schedule 4.08(c) of the Seller Disclosure Memorandum, the Company and
----------------
its Subsidiaries have no liability, whether absolute, contingent, accrued or
otherwise, and no liability will arise out of the transactions contemplated by
this Agreement, due to the issuance or acceptance of Sears Credit Cards by the
Company or its Subsidiaries (other than as provided for in the applicable
Merchant
17
<PAGE>
Agreements), or any Contract for servicing, financing, insurance or collection
of accounts receivable related to issuance or acceptance of Sears Credit Cards
(other than liabilities to Parent, its Affiliates or third party providers
retained by them that are reflected on the Company's Most Recent Financial
Statements or such similar liabilities incurred since the Company's Most Recent
Financial Statements). The Company and its Subsidiaries have complied in all
material respects with all laws related to issuance or acceptance of credit
cards by the Company and its Subsidiaries.
4.09 Absence of Change. Except as disclosed on Schedule 4.09 of the
----------------- -------------
Seller Disclosure Memorandum and except to the extent arising out of or relating
to the transactions contemplated by this Agreement, since the end of the
Company's Most Recent Fiscal Quarter, (i) the Company and its Subsidiaries have
been operated in the ordinary course in a manner consistent with past practice
and in accordance with Section 7.01(a) and (ii) there has not been any change in
the business, properties, assets or financial condition of the Company and its
Subsidiaries other than, in each of cases (i) and (ii), changes which, in the
aggregate, would not constitute a Company Material Adverse Change.
4.10 Title to Assets; Real Property and Related Matters. (a)
---------------------------------------------------
Schedule 4.10(a) of the Seller Disclosure Memorandum lists all real property
- ----------------
owned by the Company and its Subsidiaries as of August 10, 1998 (the "Company's
---------
Real Property"). Except as set forth on Schedule 4.10(a) of the Seller
- ------------- ----------------
Disclosure Memorandum, the Company and its Subsidiaries have good and, with
respect to the Company's Real Property, insurable, indefeasible, fee-simple
title to their respective properties and assets reflected on the Company's Most
Recent Financial Statements or acquired by them since the Company's Most Recent
Fiscal Quarter (other than properties and assets disposed of in the ordinary
course of business since the Company's Most Recent Fiscal Quarter), and all such
properties and assets are free and clear of Liens, except for Permitted Liens.
(b) Schedule 4.10(b) of the Seller Disclosure Memorandum lists each
----------------
lease or agreement to which the Company or any of its Subsidiaries is a party
under which it is a lessee of any material property, real or personal as of
August 10, 1998 (the "Company's Leases"). Except as set forth on Schedule
---------------- --------
4.10(b) of the Seller Disclosure Memorandum, as of the date of this Agreement,
- -------
each lease is in full force and effect and is a valid agreement, duly authorized
and entered into, without any material default of the Company or any of its
Subsidiaries thereunder and, to the knowledge of Seller, without any material
default thereunder of any other party thereto. The Company or its Subsidiaries
have good and indefeasible leasehold title to the real properties covered by the
Company's Leases, free and clear of Liens, except for Permitted Liens, other
than failures of title which in the aggregate would not have a Company Material
Adverse Effect. Neither the Company nor any of its Subsidiaries have received
or given a written notice of default under the Company's Leases other than
notices with respect to defaults which have either been cured or waived or with
respect to defaults which, in the aggregate, would not reasonably be expected to
have a Company Material Adverse Effect.
4.11 Litigation. (a) Except as set forth on Schedule 4.11(a) of the
---------- ----------------
Seller Disclosure Memorandum, there are no Proceedings pending or, to the
knowledge of Seller, threatened, involving the Company or any of its
Subsidiaries other than those which, in the aggregate, would
18
<PAGE>
not reasonably be expected to result in a Company Material Adverse Effect or
materially impair Seller's ability to effect the Closing.
(b) None of the Company nor any of its Subsidiaries is subject to any
Judgment other than those which, in the aggregate, would not reasonably be
expected to result in a Company Material Adverse Effect or materially impair
Seller's ability to effect the Closing.
(c) Except as set forth on Schedule 4.11(c) of the Seller Disclosure
----------------
Memorandum, there are no Proceedings pending or, to the knowledge of Seller,
threatened, that allege or indicate that the Company or any of its Subsidiaries
may be in violation of, or has any liability under, any Environmental Law other
than those which in the aggregate would not reasonably be expected to result in
a Company Material Adverse Effect or materially impair Seller's ability to
effect the Closing.
4.12 Compliance With Applicable Law. Except as set forth on Schedule
------------------------------ --------
4.12 of the Seller Disclosure Memorandum, each of the Company and its
- ----
Subsidiaries is presently complying in all material respects with all applicable
Laws and Judgments, except for such failures to comply which, in the aggregate,
would not reasonably be expected to result in a Company Material Adverse Effect.
4.13 Permits. Schedule 4.13 of the Seller Disclosure Memorandum sets
------- -------------
forth each Permit affecting, or relating to, the business and operations of the
Company and its Subsidiaries, other than Permits the absence of which would not
have a Company Material Adverse Effect. Except as set forth on Schedule 4.13 of
-------------
the Seller Disclosure Memorandum, as of the date of this Agreement such Permits
are valid and in full force and effect and none of the Permits will, assuming
the related Required Consents have been obtained, be terminated or impaired or
become terminable, or subject to penalty, forfeiture or damages, as a result of
the transactions contemplated by this Agreement, except, in each case, such
Permits the termination or impairment of which would not have a Company Material
Adverse Effect. The Company and each of its Subsidiaries have all Permits
required to conduct their respective businesses as currently conducted, and the
Company and each of the Subsidiaries have been operating their respective
businesses pursuant to and in compliance with the terms of all such Permits,
except for such failures to comply which have not resulted in and will not
result in, in the aggregate, a Company Material Adverse Effect.
4.14 Environmental Matters. (a) For purposes of this Section 4.14,
---------------------
the following terms shall have the following meanings:
(i) "Release" means any release, threatened release, spilling,
-------
leaking, pumping, pouring, emitting, emptying, discharging, injecting,
escaping, leaching, dumping or disposing into the environment of any
Hazardous Substance on or prior to the Closing Date in excess of
federal or state mandatory clean up levels. Notwithstanding the
foregoing, in the event (i) of any environmental Proceeding by a third
party or any claim of damage or injury to a third party or (ii) where
the federal or state mandatory clean up levels have not been specified
and the Company or any
19
<PAGE>
of its Subsidiaries is liable for any Damages, the term "Release"
shall mean any Release without regard to federal or state mandatory
clean up levels.
(ii) "Hazardous Substance" means any pollutants, contaminants,
-------------------
chemicals, waste and any toxic, infectious, carcinogenic, reactive,
corrosive, ignitable or flammable chemical or chemical compound or
hazardous substance, material or waste, whether solid, liquid or gas,
including any quantity of asbestos in any form, urea formaldehyde,
PCB's, radon gas, crude oil or any fraction thereof, all forms of
natural gas, petroleum products or by-products or derivatives,
radioactive substance, waste waters, sludges, slag and any other
substance, material or waste in a quantity that is subject to
regulation, control or remediation under any Environmental Law.
(iii) "Environmental Conditions" means the Release of any
------------------------
Hazardous Substance (whether or not such Release constituted at the
time thereof a violation of any Environmental Law) as a result of
which the Company or any of its Subsidiaries has or may become liable
to any Person or by reason of which their respective businesses or any
of their respective assets may suffer or be subjected to any Lien or
liability.
(iv) "Site" means any real property now or previously owned or
----
operated by the Company or any of its Subsidiaries other than Wet
Stores and all Tire Stores or assets owned, leased or operated by the
Company or its Subsidiaries at any time prior to Closing.
(b) Except as disclosed on Schedules 4.11(c) and 4.14(b) of the Seller
----------------- -------
Disclosure Memorandum:
(i) To the knowledge of Seller, all Sites are in material
compliance with all Environmental Laws and to the knowledge of Seller,
neither the Company nor any of its Subsidiaries has any material
liability under any Environmental Law with respect to any Site;
(ii) To the knowledge of Seller, the Company and its
Subsidiaries have obtained and are in material compliance with the
conditions of all Permits required under applicable Environmental Laws
for the continued conduct of their respective businesses in the manner
now conducted;
(iii) There is no pending or, to the knowledge of Seller,
threatened in writing Proceeding indicating or alleging that the
Company or any of its Subsidiaries may be (A) in material violation of
any Environmental Law, (B) subject to material liabilities or
obligations for any clean-up, remediation or corrective action under
any Environmental Law or otherwise, (C) subject to material claims
arising under any Environmental Law for personal injury, property
damage or damage to natural
20
<PAGE>
resources or (D) subject to material fines or penalties arising under
any Environmental Law;
(iv) No Release has occurred at any Site, and there are no
present or past Environmental Conditions in any way relating to the
Company, any of its Subsidiaries, their respective businesses, or any
Site, except for Releases or Environmental Conditions which in the
aggregate would not reasonably be expected to have a Company Material
Adverse Effect;
(v) The Company has made available to Purchaser copies of all
environmental audits or other studies or reports in the Company's or
any of its Subsidiaries possession or reasonably available to any of
them relating to any Environmental Condition or relating to the
business of the Company or any of its Subsidiaries;
(vi) Neither the Company nor any of its Subsidiaries has
received written notice that it is a potentially responsible party
with respect to any foreign, federal, state, or local environmental
clean-up site or with respect to investigations or corrective actions
under any Environmental Law;
(vii) Neither the Company nor any of its Subsidiaries has
received written notice of any alleged, actual or potential
responsibility, inquiry, investigation or Proceeding regarding (x) any
Release by the Company or any of its Subsidiaries at any Site or other
location or (y) any violation of or non-compliance by the Company or
any of its Subsidiaries with the conditions of any Permit for any Site
required under any Environmental Law or the provisions of any
Environmental Law;
(viii) From and after January 1, 1996, the Company and its
Subsidiaries have caused batteries in connection with Puerto Rico
operations to be disposed of in a manner which is in compliance with,
and would otherwise not result in any material liability under,
Environmental Laws; and
(ix) None of the matters disclosed on Schedule 4.14(b) of the
----------------
Seller Disclosure Memorandum would reasonably be expected, in the
aggregate, to have a Company Material Adverse Effect.
4.15 Contracts. (a) Except as listed in Schedule 4.15(a) of the
--------- ----------------
Seller Disclosure Memorandum, as of August 10, 1998, none of the Company or any
of its Subsidiaries is a party to or subject to:
(i) any lease providing for annual rentals or an aggregate
rental of $50,000 or more;
21
<PAGE>
(ii) any Contract for the purchase of materials, supplies,
goods, services, equipment or other assets which either provides for
payment by the Company or its Subsidiaries of $250,000 or more
annually or extends for a term of greater than one year, or any
material agreement in the form of a requirements, exclusive dealing or
take-or-pay arrangement;
(iii) any sales, agency, distribution or other similar agreement
providing for the sale by the Company or any of its Subsidiaries of
materials, supplies, goods, services, equipment or other assets that,
for the period subsequent to January 1, 1997, provided any revenue in
excess of $250,000 (during the course of one year) to the Company or
any of its Subsidiaries or any other such agreements to be performed
subsequent to the date of this Agreement;
(iv) any dealer agreements and sales center agreements as of
July 22, 1998;
(v) any partnership, joint venture or other similar contract
arrangement or agreement;
(vi) any option agreement, license agreement, franchise
agreement or other agreement in respect of similar rights granted to
or by or held by the Company or any of its Subsidiaries;
(vii) any material agreement, contract or commitment that
substantially limits the freedom of the Company or any of its
Subsidiaries to compete in any line of business or with any Person or
in any area or to own, operate, sell, transfer, pledge or otherwise
dispose of or encumber any of their material assets or which would so
limit the freedom of the Surviving Corporation after the Closing Date;
(viii) any written agreement or contract with or for the benefit
of any Affiliate of the Company;
(ix) any labor union contract;
(x) any agreement, contract or commitment with any employee,
executive, director or officer of the Company or any of its
Subsidiaries, including agreements related to separation from
employment;
(xi) except for intercompany obligations which will be
eliminated prior to the Closing Date, any agreement or commitment
pursuant to which the Company or any of its Subsidiaries (A) will make
loans or advances, (B) has or will have incurred debts or (C) will
become a guarantor or surety or pledged its credit on or otherwise
become responsible with respect to any undertaking of another (except
in
22
<PAGE>
the case of each of (A), (B) and (C), for the negotiation or
collection of negotiable instruments in the ordinary course of
business);
(xii) any material advertising or event sponsorship agreement;
(xiii) any tax sharing agreement;
(xiv) any indentures, credit agreements, loan agreements, notes,
mortgages, security agreements or other agreements for financing; or
(xv) any other agreement, contract or commitment not made in
the ordinary course of business which is material to the Company and
its Subsidiaries taken as a whole.
(b) Except as set forth on Schedule 4.15(b) of the Seller Disclosure
----------------
Memorandum, each of the material Contracts of the Company and its Subsidiaries
and each of the Contracts listed on Schedule 4.15(a) of the Seller Disclosure
----------------
Memorandum is a valid and binding agreement of the Company or its Subsidiaries
in accordance with its terms and is in full force and effect and, to the
knowledge of Seller, such Contracts are valid and binding on each other party
thereto. The Company is not in default of any Contract other than such defaults
that in the aggregate would not constitute a Company Material Adverse Effect.
To the knowledge of Seller, no other party to such Contracts is in default in
any material respect under the terms of any such Contract, nor, to the knowledge
of Seller, has any event or circumstance occurred that, with notice or lapse of
time or both, would constitute an event of default thereunder. True and
complete copies of each material Contract have been delivered or made available
to Advance.
4.16 Intellectual Property. (a) Schedule 4.16(a) of the Seller
--------------------- ----------------
Disclosure Memorandum lists all patents, registered trademarks, registered
service marks, trade names and registered copyrights and all applications for
any of the foregoing owned by the Company and its Subsidiaries as of the date of
this Agreement or exclusively licensed for use in the conduct of the businesses
of the Company and its Subsidiaries as of the date of this Agreement
(collectively, the "Company's Intellectual Property"). There are no
-------------------------------
unregistered or common law trademarks, service marks or copyrights owned by the
Company and its Subsidiaries that are used in the ordinary course of their
business for which registrations have not been applied for which in the
aggregate are material to their business. Except as set forth on Schedule
--------
4.16(a) of the Seller Disclosure Memorandum and subject to obtaining the
- -------
Required Consents associated with licenses of any of the foregoing by the
Company and its Subsidiaries which are in effect as of the date of this
Agreement, (i) to the knowledge of Seller, the Company and its Subsidiaries, as
of the date of this Agreement, possess the lawful right to conduct their
respective businesses using the Company's Intellectual Property where these
businesses are now conducted, and (ii) none of the Company or any of its
Subsidiaries has received notice of any material claim by any Person or any
Proceeding pending or threatened which relates to the infringement of or the use
of any of the Company's Intellectual Property or another Person's Intellectual
Property by the Company or any of its Subsidiaries, or the
23
<PAGE>
validity or enforceability of the Company's Intellectual Property or the rights
of the Company or any of its Subsidiaries therein.
(b) Except as set forth on Schedule 4.16(b)(i) of the Seller
-------------------
Disclosure Memorandum, Seller has no knowledge of any infringement or improper
use by any third party of the Company's Intellectual Property. Except as set
forth on Schedule 4.16(b)(ii) of the Seller Disclosure Memorandum, none of the
--------------------
Company or any of its Subsidiaries has taken or omitted to take any action which
action or omission to act would have the effect of waiving any material rights
to the material Intellectual Property.
4.17 Taxes. Except as disclosed in Schedule 4.17 of the Seller
----- -------------
Disclosure Memorandum:
(i) The Company and each of its Subsidiaries have filed or
will file (or has had filed on its behalf) on a timely basis all Tax
Returns as required by applicable law to be filed before the Closing
Date. Each such Tax Return is, or will be when filed, true, correct
and complete in all material respects. All Taxes shown as due and
owing on all such Tax Returns have been paid, or will be paid upon
filing of such Tax Return. If any Tax Return of the Company or any of
its Subsidiaries was not filed on or before the applicable due date
for such Tax Return, the Company or its Subsidiary, as the case may
be, filed a timely request for an extension of time within which to
file such Tax Return.
(ii) The Company and each of its Subsidiaries have or will have
no additional material liability for Taxes with respect to any Tax
Return which was or will be required by law to be filed before the
Closing Date, other than as reflected as liabilities on the Company's
Most Recent Financial Statements. The amounts provided as a liability
on the Company's Most Recent Financial Statements for Taxes are
adequate to cover unpaid liabilities for Taxes, whether or not
disputed, that have accrued with respect to or are applicable to the
period ended on and including the Closing Date or to any years and
periods prior thereto.
(iii) No federal, state, local or foreign audits or other
administrative proceeding or court proceeding exist with regard to any
Taxes or Tax Returns of the Company or any of its Subsidiaries.
Neither the Company nor any of its Subsidiaries has received any
written notice that an audit or other administrative proceeding is
pending or threatened with respect to any Taxes due from or with
respect to the Company or any of its Subsidiaries or any Tax Return
filed by or with respect to the Company or any of its Subsidiaries.
Neither the Company nor any of its Subsidiaries has granted or been
requested to grant any waiver of any statutes of limitations
applicable to any claim for Taxes for any taxable period ending on or
before the Closing Date.
24
<PAGE>
(iv) All Tax deficiencies which have been claimed, proposed or
asserted in writing against the Company or any of its Subsidiaries
have been fully paid or finally settled.
(v) All Taxes that the Company and each of its Subsidiaries
are required by law to withhold or collect, including without
limitation, sales and use taxes, and amounts required to be withheld
for Taxes of employees and other withholding taxes, have been duly
withheld or collected and, to the extent required, have been paid over
to the proper Taxing Authorities or are held in separate bank accounts
for such purpose.
(vi) Neither the Company nor any of its Subsidiaries has made
or become obligated to make, and will not as a result of any event
connected with any transaction contemplated herein become obligated to
make, any payments that could be nondeductible by reason of Section
280G (without regard to subsection (b)(4) thereof) or 162(m) of the
Code.
(vii) Neither the Company nor any of its Subsidiaries is
required to include in income any adjustment pursuant to Section
481(a) of the Code, for any period after the Closing Date, by reason
of any voluntary or involuntary change in accounting method (nor has
any taxing authority proposed in writing any such adjustment or change
of accounting method).
(viii) Neither the Company nor any of its Subsidiaries has any
liability for Taxes of any person, other than itself or any of the
Subsidiaries under Treasury Regulation Section 1.1502-6 (or any
similar provision of federal, state, local or foreign law).
(ix) None of the assets of either the Company or any of its
Subsidiaries are subject to a consent pursuant to Section 341(f) of
the Code (or any predecessor provision).
(x) There are no Liens for Taxes other than Permitted Liens
upon the Company's assets.
4.18 Employee Matters. (a) Schedule 4.18(a) of the Seller Disclosure
---------------- ----------------
Memorandum lists each material employee benefit plan, arrangement, policy or
program that any of the Company and its Subsidiaries maintains or to which any
of the Company and its Subsidiaries contributes other than severance and
retention plans relating to the transactions contemplated by this Agreement and
set forth on Schedule 7.07 of the Seller Disclosure Memorandum (collectively,
-------------
the "Company's Plans"), including each material employee benefit plan within the
---------------
meaning of Section 3(3) of ERISA. None of the Company nor any of its
Subsidiaries has any obligation to contribute to, or has any liability or
contingent liability with respect to, any "multiemployer plan" (within the
meaning of Section 3(37) of ERISA). The value, determined on a termination
basis using the
25
<PAGE>
actuarial assumptions stated in the plan, of all accrued and ancillary benefits
(whether or not vested) under each Company's Plan that is a defined benefit plan
(within the meaning of Section 414(j) of the Code) did not exceed, as of the
most recent valuation date, and will not exceed as of the Closing Date, the then
current fair market value of the assets of the plan. No amount is due or owing
to the Pension Benefit Guaranty Corporation (other than a liability for premiums
under Section 4007 of ERISA). There are no investigations, proceedings or
lawsuits, either currently in progress or expected to be instituted in the
future, relating to any Company's Plan, by any administrative agency, whether
local, state or federal. There are no pending or threatened lawsuits or other
claims (other than routine claims for benefits under the plan and qualified
domestic relations orders) against or involving any Company's Plan, or any
Fiduciary of such plan (within the meaning of Section 3(21)(A) of ERISA) brought
on behalf of any participant, beneficiary or Fiduciary thereunder, nor is there
any reasonable basis for any such claim. None of the persons performing services
for the Company or any of its Subsidiaries have been improperly classified as
independent contractors, leased employees or as being exempt from the payment of
wages for overtime other than such improper classifications which in the
aggregate would not reasonably be expected to have a Company Material Adverse
Effect. To the extent applicable, the Company has furnished or made available to
Purchaser copies of each Company's Plan and any summary plan description
relating thereto, a copy of the most recent determination letter issued by the
IRS with respect to each Company's Plan, and the most recent Form 5500.
(b) Except as set forth on Schedule 4.18(b) of the Seller Disclosure
----------------
Memorandum, to the knowledge of Seller, each Plan complies and has been
administered in form and in operation in all material respects with all
applicable requirements of Law.
(c) Except as set forth on Schedule 4.18(c) of the Seller Disclosure
----------------
Memorandum, since January 1, 1995, there has not been nor is there pending, or
to the knowledge of Seller threatened, any strikes, slow downs, work stoppages
or other similar labor actions by any group of employees employed by the Company
or any of its Subsidiaries.
(d) Except as set forth on Schedule 4.18(d) of the Seller Disclosure
----------------
Memorandum, there are no labor unions or other organizations representing,
purporting to represent or attempting to represent any employees of the Company
or its Subsidiaries, and there has been no such attempt since January 1, 1995.
4.19 Certain Business Relationships with the Company and Its
-------------------------------------------------------
Subsidiaries. Except as set forth on Schedule 4.19 of the Seller Disclosure
- ------------ -------------
Memorandum and the Transition Services Agreement, and except as otherwise
contemplated by this Agreement none of Seller or its Affiliates has been
involved in any material business arrangement or relationship, Contract or Lease
with any of the Company and its Subsidiaries within the past 12 months and none
of Seller or its Affiliates owns any material asset, tangible or intangible,
which is used in the business of any of the Company and its Subsidiaries.
4.20 Warranties. Except as set forth on Schedule 4.20 of the Seller
---------- -------------
Disclosure Memorandum, no warranty or similar claims are currently pending
against the Company or any of
26
<PAGE>
its Subsidiaries other than those claims which in the aggregate would not
reasonably be expected to result in a Company Material Adverse Effect.
4.21 Inventories. The inventories of the Company and its
-----------
Subsidiaries that are reflected on the Most Recent Financial Statements are
usable or saleable in all material respects in the ordinary course of business,
in accordance with the past custom and practice of the Company and its
Subsidiaries.
4.22 Sufficiency of Assets. Except for such properties (i) used to
---------------------
provide such services described in Schedule 4.19 of the Seller Disclosure
-------------
Memorandum, (ii) used to provide the services of Parent under the Transition
Services Agreement and (iii) which is distributed, conveyed or transferred in
accordance with this Agreement, the real property owned or leased by the Company
or its Subsidiaries, and the personal, intellectual or other property that is
owned, leased or licensed by the Company and its Subsidiaries, constitute all
the properties and assets necessary for, or material to, the business of the
Company and its Subsidiaries as currently conducted, except for such properties
and assets which are immaterial to the Company and its Subsidiaries, taken as a
whole.
4.23 Insurance. Schedule 4.23 of the Seller Disclosure Memorandum
--------- -------------
sets forth a true and complete list, as of the date of this Agreement, of all
insurance policies to which the Company or any of its Subsidiaries is a party
covering the Company or its Subsidiaries and their owned or leased properties or
employees. To Seller's knowledge, such insurance polices are in full force and
effect and would not be terminated as a result of the transactions contemplated
by this Agreement. None of the Company or any of its Subsidiaries has received
any written notice of cancellation or nonrenewal of any such insurance policy.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ADVANCE AND PURCHASER
-------------------------------------------------------
Except as disclosed in the Advance Disclosure Memorandum delivered at
or prior to the date of this Agreement (it being understood that each section of
the Advance Disclosure Memorandum shall list all items applicable to such
section, although the inadvertent omission of an item from a section shall not
be a breach of this Agreement if such item is disclosed in another section of
the Advance Disclosure Memorandum), Advance and Purchaser represent and warrant
to Parent and Seller as follows:
5.01 Authorization. Advance has the requisite power and authority to
-------------
execute and deliver this Agreement and to perform its obligations under this
Agreement. The execution and delivery of this Agreement by Advance and
Purchaser, the performance by Advance and Purchaser of their respective
obligations under this Agreement and the consummation by Advance and Purchaser
of the transactions contemplated by this Agreement have been duly authorized by
their respective Boards of Directors and approved by all necessary stockholder
action. No other corporate proceeding on the part of Advance and Purchaser is
necessary for the execution and delivery of this Agreement by Advance and
Purchaser, the performance by Advance and Purchaser of their
27
<PAGE>
respective obligations under this Agreement and the consummation by Advance and
Purchaser of the transactions contemplated by this Agreement.
5.02 Binding Effect. This Agreement has been duly executed and
--------------
delivered by Advance and Purchaser and is a legal, valid and binding obligation
of Advance and Purchaser, enforceable against Advance and Purchaser in
accordance with its terms, subject to applicable bankruptcy, insolvency and
similar laws affecting creditors' rights generally and to general principles of
equity.
5.03 No Violations. Except as set forth on Schedule 5.03 of the
------------- -------------
Advance Disclosure Memorandum, the execution, delivery and performance by
Advance or Purchaser of this Agreement, and the consummation of the transactions
contemplated by this Agreement, do not and will not (i) conflict with or violate
any provision of the certificate of incorporation, bylaws or other
organizational documents of Advance or Purchaser, (ii) assuming the Required
Consents are obtained, conflict with, or result in the breach of, or constitute
a default under, or result in the termination, cancellation or acceleration
(whether after the giving of notice or the lapse of time or both) of any right
or obligation of Advance or Purchaser under, any Contract, or (iii) assuming the
Required Consents are obtained, violate or result in a breach of, or constitute
a default under, any Law or Judgment, except, in the cases of clauses (ii) and
(iii), for any conflict, breach, default, termination, cancellation or
acceleration, which, in the aggregate, would not reasonably be expected to
materially impair the ability of Advance or Purchaser to effect the Closing or
result in an Advance Material Adverse Effect.
5.04 Brokers and Finders. Except for the fees of Freeman Spogli &
-------------------
Co. Incorporated, which will be paid by Advance or Purchaser, there is no
investment banker, broker, finder or other intermediary which has been retained
by or is authorized to act on behalf of Advance or Purchaser or any Affiliate of
Advance or Purchaser who might be entitled to any fee or commission from Advance
or Purchaser or any Affiliate of Advance or Purchaser in connection with the
transactions contemplated by this Agreement.
5.05 Investment Intent. Advance and Purchaser hereby acknowledge
-----------------
that the Company Shares are not registered under the Securities Act or
registered or qualified for sale under any state securities law and that the
Company Shares cannot be resold without registration thereunder or exemption
therefrom. Advance has sufficient knowledge and experience in financial and
business matters to enable it to evaluate the risks of investment in the Company
and has the ability to bear the economic risks of such investment.
5.06 Organization. Each of Advance, Purchaser and their Subsidiaries
------------
is duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and has all requisite power and authority to
carry on its business as it is now being conducted and to own, lease and operate
its properties where now conducted, owned, leased or operated. Each of Advance,
Purchaser and their Subsidiaries is duly licensed or qualified to do business
and is in good standing as a foreign corporation in each jurisdiction where such
license or qualification is required to carry on its business as now conducted,
except where the failure to be so qualified or licensed or
28
<PAGE>
in good standing, as the case may be, would not, in the aggregate, have an
Advance Material Adverse Effect.
5.07 Capitalization. The entire authorized capital stock of Advance
--------------
consists of Advance Class A Common Stock, Class B Common Stock and Preferred
Stock, of which 12,603,800 shares of Class A Common Stock are issued and
outstanding, not taking into account the issuance of Advance Common Stock set
forth in Sections 2.07 and 2.09, and no shares of Class B Common Stock or
Preferred Stock are outstanding. Set forth on Schedule 5.07 of the Advance
-------------
Disclosure Memorandum is the name of, and number of shares of Advance Common
Stock held of record by, each shareholder of Advance as of the date of this
Agreement. All of the issued and outstanding shares of Advance Common Stock
have been duly authorized, are validly issued, fully paid and nonassessable.
Except as set forth on Schedule 5.07 of the Advance Disclosure Memorandum, there
-------------
are no outstanding or authorized options, warrants, purchase rights,
subscription rights, conversion rights, exchange rights or other contracts or
commitments that could require Advance to issue, sell or otherwise cause to
become outstanding any shares of Advance Common Stock (other than this
Agreement). There are no outstanding or authorized stock appreciation, phantom
stock, profit participation or similar rights with respect to Advance. Since
Advance's Most Recent Financial Statements, neither Advance nor any of its
Subsidiaries other than directly or indirectly wholly owned Subsidiaries of
Advance have declared, set aside or paid any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
its capital stock. Immediately after the Closing, the Merger Shares shall
represent approximately 40.6% of the sum of the issued and outstanding Advance
Common Stock as of the date of this Agreement plus the shares of Advance Common
Stock sold to the Investors hereunder and shall be duly authorized, fully paid
and non-assessable.
5.08 Subsidiaries. Schedule 5.08 of the Advance Disclosure
------------ -------------
Memorandum sets forth for each Subsidiary of Advance (i) its name and
jurisdiction of organization, (ii) the amount of capital stock or other equity
interests authorized and (iii) the amount of capital stock or other equity
interests issued and outstanding, the names of the holders thereof, and the
number of shares or the percentage interests held by Advance or its
Subsidiaries. All of the issued and outstanding shares of capital stock or other
equity interests of each Subsidiary of Advance have been duly authorized and are
validly issued. Advance, directly or indirectly, holds of record and owns
beneficially all of the outstanding shares of each Subsidiary of Advance.
5.09 Consents and Approvals. Except as specifically set forth on
----------------------
Schedule 5.09 of the Advance Disclosure Memorandum or as required by the HSR Act
- -------------
and any other similar federal, state, local or foreign laws or regulations and
except for the filing of the Certificate of Merger with the Secretary of State
of the State of Delaware or as required by the Required Consents, no Consent is
required to be obtained by the Company (or by any Affiliate) from, and no notice
or filing is required to be given by Advance (or by any Affiliate) to or made by
Advance (or by any Affiliate) with, any federal, state, local, foreign or other
governmental authority or other Person in connection with the execution,
delivery and performance by Advance and Purchaser of this Agreement, other than
in all cases where the failure to obtain such Consent or to give or make such
29
<PAGE>
notice or filing would not, in the aggregate, reasonably be expected to result
in an Advance Material Adverse Effect.
5.10 Financial Statements. (a) Set forth on Schedule 5.10(a) of the
-------------------- ----------------
Advance Disclosure Memorandum are the following financial statements
(collectively "Advance's Financial Statements"): (i) the audited consolidated
------------------------------
balance sheets and statements of income, changes in stockholders' equity, and
cash flow as of and for the fiscal years ended December 30, 1995, December 28,
1996 and January 3, 1998 for Advance and its Subsidiaries and the notes related
thereto; and (ii) the unaudited condensed consolidated balance sheets and
statements of income, stockholders' equity, and cash flow ("Advance's Most
--------------
Recent Financial Statements") as of and for the sixteen weeks and twenty-eight
- ---------------------------
weeks ended July 18, 1998 ("Advance's Most Recent Fiscal Quarter") for Advance
------------------------------------
and its Subsidiaries. Advance's Financial Statements (including the notes
thereto) have been prepared in accordance with GAAP applied on a consistent
basis throughout the periods covered thereby and present fairly the financial
position of Advance and its Subsidiaries as of such dates and the results of
operations of Advance and its Subsidiaries for such periods; provided, however,
-------- -------
that Advance's Most Recent Financial Statements are subject to normal year-end
adjustments that in the aggregate will not be material and lack footnotes and
other presentation items.
(b) Except to the extent reflected or reserved against in Advance's
Financial Statements and except as set forth in the Advance Disclosure
Memorandum, Advance and its Subsidiaries have no liabilities except for (i)
liabilities which have arisen after Advance's Most Recent Financial Statements
in the ordinary course of business consistent with past practice, (ii)
liabilities with respect to Contracts and (iii) liabilities which, in the
aggregate, would not reasonably be expected to have an Advance Material Adverse
Effect.
5.11 Absence of Change. Except as disclosed on Schedule 5.11 of the
----------------- -------------
Advance Disclosure Memorandum and except to the extent arising out of or
relating to the transactions contemplated by this Agreement, since the end of
Advance's Most Recent Fiscal Quarter, (i) Advance and its Subsidiaries have been
operated in the ordinary course in a manner consistent with past practice and in
accordance with Section 7.01(b) and (ii) there has not been any change in the
business, properties, assets or financial condition of Advance and its
Subsidiaries other than, in each of cases (i) and (ii), changes which, in the
aggregate, would not constitute an Advance Material Adverse Change. Except with
respect to the matters described in Schedule 5.11 of the Advance Disclosure
-------------
Memorandum, Advance and its Subsidiaries have not entered into any material
agreement with an Affiliate of Advance since the end of Advance's Most Recent
Fiscal Quarter.
5.12 Title to Assets; Real Property and Related Matters. (a)
---------------------------------------------------
Schedule 5.12(a) of the Advance Disclosure Memorandum lists all real property
- ----------------
owned by Advance and its Subsidiaries as of August 10, 1998 ("Advance's Real
--------------
Property"). Except as set forth on Schedule 5.12(a) of the Advance Disclosure
- -------- ----------------
Memorandum, Advance and its Subsidiaries have good and, with respect to
Advance's Real Property, insurable, indefeasible, fee-simple title to their
respective properties and assets reflected on Advance's Most Recent Financial
Statements or acquired by them since Advance's Most Recent Fiscal Quarter (other
than properties and assets disposed of in the ordinary
30
<PAGE>
course of business since Advance's Most Recent Fiscal Quarter), and all such
properties and assets are free and clear of Liens, except for Permitted Liens.
(b) Schedule 5.12(b) of the Advance Disclosure Memorandum lists each
----------------
lease or agreement to which Advance or any of its Subsidiaries is a party under
which it is a lessee of any material property, real or personal as of August 10,
1998 ("Advance's Leases"). Except as set forth on Schedule 5.12(b) of the
---------------- ----------------
Advance Disclosure Memorandum, as of the date of this Agreement, each lease is
in full force and effect and is a valid agreement, duly authorized and entered
into, without any material default of Advance or any of its Subsidiaries
thereunder and, to the knowledge of Advance, without any material default
thereunder of any other party thereto. To the knowledge of Advance, as of the
date of this Agreement, neither Advance nor any of its Subsidiaries have
received or given a written notice of default under Advance's Leases other than
notices with respect to defaults which have either been cured or waived or with
respect to defaults which, in the aggregate, would not reasonably be expected to
have an Advance Material Adverse Effect.
5.13 Litigation. (a) Except as set forth on Schedule 5.13(a) of the
---------- ----------------
Advance Disclosure Memorandum, there are no Proceedings pending or, to the
knowledge of Advance, threatened, involving Advance or any of its Subsidiaries
other than those which, in the aggregate, would not reasonably be expected to
result in an Advance Material Adverse Effect or materially impair Advance's
ability to effect the Closing.
(b) None of Advance nor any of its Subsidiaries is subject to any
Judgment other than those which, in the aggregate, would not reasonably be
expected to result in an Advance Material Adverse Effect or materially impair
Advance's ability to effect the Closing.
5.14 Compliance With Applicable Law. Except as set forth on Schedule
------------------------------ --------
5.14 of the Advance Disclosure Memorandum, each of Advance and its Subsidiaries
- ----
is presently complying in all material respects with all applicable Laws and
Judgments, except for such failures to comply which, in the aggregate, would not
reasonably be expected to result in an Advance Material Adverse Effect.
5.15 Permits. Schedule 5.15 of the Advance Disclosure Memorandum
------- -------------
sets forth each Permit affecting, or relating to, the business and operations of
Advance and its Subsidiaries, other than Permits the absence of which would not
have an Advance Material Adverse Effect. Except as set forth on Schedule 5.15
-------------
of the Advance Disclosure Memorandum as of the date of this Agreement, such
Permits are valid and in full force and effect and none of the Permits will,
assuming the related Required Consents have been obtained, be terminated or
impaired or become terminable, or subject to penalty, forfeiture or damages, as
a result of the transactions contemplated by this Agreement, except, in each
case, such Permits the termination or impairment of which would not have an
Advance Material Adverse Effect. Advance and each of its Subsidiaries have all
Permits required to conduct their respective businesses as currently conducted,
and Advance and each of the Subsidiaries have been operating their respective
businesses pursuant to and in compliance with the terms of all such Permits,
except for such failures to comply which have not resulted in and will not
result in, the aggregate, an Advance Material Adverse Effect.
31
<PAGE>
5.16 Environmental Matters. (a) For purposes of this Section 5.16,
---------------------
the following terms shall have the following meanings:
(i) "Release" means any release, threatened release, spilling,
-------
leaking, pumping, pouring, emitting, emptying, discharging, injecting,
escaping, leaching, dumping or disposing into the environment of any
Hazardous Substance on or prior to the Closing Date in excess of
federal or state mandatory clean up levels. Notwithstanding the
foregoing, in the event (i) of any environmental Proceeding by a third
party or any claim of damage or injury to a third party or (ii) where
the federal or state mandatory clean up levels have not been specified
and Advance or any of its Subsidiaries is liable for any Damages, the
term "Release" shall mean any Release without regard to federal or
state mandatory clean up levels.
(ii) "Hazardous Substance" means any pollutants, contaminants,
-------------------
chemicals, waste and any toxic, infectious, carcinogenic, reactive,
corrosive, ignitable or flammable chemical or chemical compound or
hazardous substance, material or waste, whether sold, liquid or gas,
including any quantity or asbestos in any form, urea formaldehyde,
PCB's, radon gas, crude oil or any fraction thereof, all forms of
natural gas, petroleum products or by-products or derivatives,
radioactive substance, waste waters, sludges, slag and any other
substance, material or waste in a quantity that is subject to
regulation, control or remediation under any Environmental Law.
(iii) "Environmental Conditions" means the Release of any
------------------------
Hazardous Substance (whether or not such Release constituted at the
time thereof a violation of any Environmental Law) as a result of
which Advance or any of its Subsidiaries has or may become liable to
any Person or by reason of which their respective businesses or any of
their respective assets may suffer or be subjected to any Lien or
liability.
(iv) "Site" means any real property now or previously owned or
----
operated by Advance or any of its Subsidiaries.
(b) Except as disclosed on Schedule 5.16(b) of the Advance Disclosure
----------------
Memorandum:
(i) To the knowledge of Advance, all Sites are in material
compliance with all Environmental Laws and, to the knowledge of
Advance, Purchaser has no material liability under any Environmental
Law with respect to any Site;
(ii) To the knowledge of Advance, Advance and its Subsidiaries
have obtained and are in material compliance with the conditions of
all Permits required under applicable Environmental Laws for the
continued conduct of their respective businesses in the manner now
conducted;
32
<PAGE>
(iii) There is no pending or, to the knowledge of Advance,
threatened in writing Proceeding indicating or alleging that Advance
or any of its Subsidiaries may be (a) in material violation of any
Environmental Law, (b) subject to material liabilities or obligations
for any cleanup, remediation or corrective action under any
Environmental Law or otherwise, (c) subject to material claims arising
under any Environmental Law for personal injury, property damage or
damage to natural resources or (d) subject to material fines or
penalties arising under any Environmental Law;
(iv) No Release has occurred at any Site, and there are no
present or past Environmental Conditions in any way relating to
Advance, any of its Subsidiaries, their respective businesses, or any
Site, except for any Release or Environmental Conditions which in the
aggregate would not reasonably be expected to have an Advance Material
Adverse Effect;
(v) Advance has made available to Seller copies of all
environmental audits or other studies or reports in Advance's or any
of its Subsidiaries possession or reasonably available to any of them
relating to any Environmental Condition or relating to the businesses
of Advance or any of its Subsidiaries;
(vi) Neither Advance nor any of its Subsidiaries has received
written notice that it is a potentially responsible party with respect
to any foreign, federal, state or local environmental clean-up site or
with respect to investigations or corrective actions under any
Environmental Law relating to a Site;
(vii) Neither Advance nor any of its Subsidiaries has received
written notice of any alleged, actual or potential responsibility,
inquiry, investigation or Proceeding regarding (a) any Release by
Advance or any of its Subsidiaries at any Site or other location or
(b) any violation of or non-compliance by Advance or any of its
Subsidiaries with the conditions of any Permit required under any
Environmental Law or the provisions of any Environmental Law; and
(viii) None of the matters disclosed on Schedule 5.16(b) of the
----------------
Advance Disclosure Memorandum would reasonably be expected, in the
aggregate, to have an Advance Material Adverse Effect.
5.17 Contracts. (a) Except as listed in Schedule 5.17(a) of the
--------- ----------------
Advance Disclosure Memorandum, as of August 10, 1998, none of Advance or any of
its Subsidiaries is a party to or subject to:
(i) any lease providing for annual rentals or an aggregate rental
of $50,000 or more;
33
<PAGE>
(ii) any Contract for the purchase of materials, supplies,
goods, services, equipment or other assets which either provides for
payment by Advance or its Subsidiaries of $250,000 or more annually or
extends for a term of greater than one year, or any material agreement
in the form of a requirements, exclusive dealing or take-or-pay
arrangement (except that with respect to merchandise vendor Contracts,
Schedule 5.17(a) of the Advance Disclosure Memorandum shall only set
----------------
forth the top 25 merchandise vendors by purchased volume);
(iii) any sales, agency, distribution or other similar agreement
providing for the sale by Advance or any of its Subsidiaries of
materials, supplies, goods, services, equipment or other assets that,
for the period subsequent to January 1, 1997, provided any revenue in
excess of $250,000 (during the course of one year) to Advance or any
of its Subsidiaries or any other such agreements to be performed
subsequent to the date of this Agreement;
(iv) any partnership, joint venture or other similar contract
arrangement or agreement;
(v) any option agreement, license agreement, franchise
agreement or other agreement in respect of similar rights granted to
or by or held by Advance or any of its Subsidiaries;
(vi) any material agreement, contract or commitment that
substantially limits the freedom of Advance or any of its Subsidiaries
to compete in any line of business or with any Person or in any area
or to own, operate, sell, transfer, pledge or otherwise dispose of or
encumber any of their material assets;
(vii) any written agreement or contract with or for the benefit
of any Affiliate of Advance;
(viii) any labor union contract;
(ix) any agreement, contract or commitment with any employee,
executive, director or officer of Advance or any of its Subsidiaries,
including agreements related to separation from employment;
(x) any agreement or commitment pursuant to which Advance or
any of its Subsidiaries (A) will make loans or advances, (B) has or
will have incurred debts or (C) will become a guarantor or surety or
pledged its credit on or otherwise become responsible with respect to
any undertaking of another (except in the case of each of (A), (B) and
(C), for the negotiation or collection of negotiable instruments in
the ordinary course of business);
(xi) any material advertising or event sponsorship agreement;
34
<PAGE>
(xii) any tax sharing agreement;
(xiiii) any indentures, credit agreements, loan agreements,
notes, mortgages, security agreements or other agreements for
financing; or
(xiv) any other agreement, contract or commitment not made in
the ordinary course of business which is material to Advance and its
Subsidiaries taken as a whole.
(b) Except as set forth on Schedule 5.17(b) of the Advance Disclosure
----------------
Memorandum, each of the material Contracts of Advance and its Subsidiaries and
each of the Contracts listed on Schedule 5.17(a) of the Advance Disclosure
----------------
Memorandum is a valid and binding agreement of Advance or its Subsidiaries in
accordance with its terms and is in full force and effect and, to the knowledge
of Advance, such Contracts are valid and binding on each other party thereto.
Advance and its Subsidiaries are not in default of any Contract other than such
defaults that in the aggregate would not constitute an Advance Material Adverse
Effect. To the knowledge of Advance, no other party to such Contracts is in
default in any material respect under the terms of any such Contract, nor, to
the knowledge of Advance, has any event or circumstance occurred that, with
notice or lapse of time or both, would constitute an event of default
thereunder. True and complete copies of each material Contract have been
delivered or made available to the Seller.
5.18 Intellectual Property. (a) Schedule 5.18(a) of the Advance
--------------------- ----------------
Disclosure Memorandum lists all patents, registered trademarks, registered
service marks, trade names and registered copyrights and all applications for
any of the foregoing owned by Advance and its Subsidiaries as of the date of
this Agreement or exclusively licensed for use in the conduct of the businesses
of Advance and its Subsidiaries as of the date of this Agreement (collectively,
"Advance's Intellectual Property"). Except as set forth on Schedule 5.18(a) of
------------------------------- ----------------
the Advance Disclosure Memorandum, there are no unregistered or common law
trademarks, service marks or copyrights owned by Advance and its Subsidiaries
that are used in the ordinary course of their business for which registrations
have not been applied for which in the aggregate are material to their business.
Except as set forth on Schedule 5.18(a) of the Advance Disclosure Memorandum and
----------------
subject to obtaining the Required Consents associated with licenses of any of
the foregoing by Advance and its Subsidiaries which are in effect as of the date
of this Agreement, (i) to the knowledge of Advance, as of the date of this
Agreement, Advance and its Subsidiaries possess the lawful right to conduct
their respective businesses using Advance's Intellectual Property where these
businesses are now conducted, and (ii) none of Advance or any of its
Subsidiaries has received notice of any material claim by any Person or any
Proceeding pending or threatened which relates to the use of any of Advance's
Intellectual Property or another Person's Intellectual Property by Advance or
any of its Subsidiaries, or the validity or enforceability of Advance's
Intellectual Property or the rights of Advance or any of its Subsidiaries
therein.
(b) Except as set forth on Schedule 5.18(b)(i) of the Advance
-------------------
Disclosure Memorandum, Advance has no knowledge of any infringement or improper
use by any third party of Advance's Intellectual Property. Except as set forth
on Schedule 5.18(b)(ii) of the Advance
--------------------
35
<PAGE>
Disclosure Memorandum, none of Advance or any of its Subsidiaries has taken or
omitted to take any action which action or omission to act would have the effect
of waiving any material rights to material Advance's Intellectual Property.
5.19 Taxes. Except as disclosed in Schedule 5.19 of the Advance
----- -------------
Disclosure Memorandum:
(i) Advance and each of its Subsidiaries have filed or will
file (or has had filed on its behalf) on a timely basis all Tax
Returns as required by applicable law to be filed before the Closing
Date. Each such Tax Return is, or will be when filed, true, correct
and complete in all material respects. All Taxes shown as due and
owing on all such Tax Returns have been paid, or will be paid upon
filing of such Tax Return. If any Tax Return of Advance or any of its
Subsidiaries was not filed on or before the applicable due date for
such Tax Return, Advance or its Subsidiary, as the case may be, filed
a timely request for an extension of time within which to file such
Tax Return.
(ii) Advance and each of its Subsidiaries have or will have no
additional material liability for Taxes with respect to any Tax Return
which was or will be required by law to be filed before the Closing
Date, other than as reflected as liabilities on Advance's Most Recent
Financial Statements. The amounts provided as a liability on
Advance's Most Recent Financial Statements for Taxes are adequate to
cover unpaid liabilities for Taxes, whether or not disputed, that have
accrued with respect to or are applicable to the period ended on and
including the Closing Date or to any years and periods prior thereto.
(iii) No federal, state, local or foreign audits or other
administrative proceeding or court proceeding exist with regard to any
Taxes or Tax Returns of Advance or any of its Subsidiaries. Neither
Advance nor any of its Subsidiaries has received any written notice
that an audit or other administrative proceeding is pending or
threatened with respect to any Taxes due from or with respect to
Advance or any of its Subsidiaries or any Tax Return filed by or with
respect to Advance or any of its Subsidiaries. Neither Advance nor
any of its Subsidiaries has granted or been requested to grant any
waiver of any statutes of limitations applicable to any claim for
Taxes for any taxable period ending on or before the Closing Date.
(iv) All Tax deficiencies which have been claimed, proposed or
asserted in writing against Advance or any of its Subsidiaries have
been fully paid or finally settled.
(v) All Taxes that Advance and each of its Subsidiaries are
required by law to withhold or collect, including without limitation,
sales and use taxes, and amounts required to be withheld for Taxes of
employees and other withholding taxes, have been duly withheld or
collected and, to the extent required, have been paid over
36
<PAGE>
to the proper Taxing Authorities or are held in separate bank accounts
for such purpose.
(vi) Neither Advance nor any of its Subsidiaries has made or
become obligated to make, and will not as a result of any event
connected with any transaction contemplated herein become obligated to
make, any payments that could be nondeductible by reason of Section
280G (without regard to subsection (b)(4) thereof) or 162(m) of the
Code.
(vii) Neither Advance nor any of its Subsidiaries is required to
include in income any adjustment pursuant to Section 481(a) of the
Code, for any period after the Closing Date, by reason of any
voluntary or involuntary change in accounting method (nor has any
taxing authority proposed in writing any such adjustment or change of
accounting method).
(viii) Neither Advance nor any of its Subsidiaries has any
liability for Taxes of any person, other than itself or any of the
Subsidiaries under Treasury Regulation Section 1.1502-6 (or any
similar provision of federal, state, local or foreign law).
(ix) None of the assets of either Advance or any of its
Subsidiaries are subject to a consent pursuant to Section 341(f) of
the Code (or any predecessor provision).
(x) There are no Liens for Taxes other than Permitted Liens upon
the assets of Purchaser or Advance.
5.20 Employee Matters. (a) Schedule 5.20(a) of the Advance
---------------- ----------------
Disclosure Memorandum lists each material employee benefit plan, arrangement,
policy or program that any of Advance and its Subsidiaries maintains or to which
any of Advance and its Subsidiaries contributes (collectively, "Advance's
---------
Plans"), including each material employee benefit plan within the meaning of
- ------
Section 3(3) of ERISA. None of Advance nor any of its Subsidiaries has any
obligation to contribute to, or has any liability or contingent liability with
respect to, any "multiemployer plan" (within the meaning of Section 3(37) of
ERISA). The value, determined on a termination basis using the actuarial
assumptions stated in the plan, of all accrued and ancillary benefits (whether
or not vested) under each Advance's Plan that is a defined benefit plan (within
the meaning of Section 414(j) of the Code) did not exceed, as of the most recent
valuation date, and will not exceed as of the Closing Date, the then current
fair market value of the assets of the plan. No amount is due or owing to the
Pension Benefit Guaranty Corporation (other than a liability for premiums under
Section 4007 of ERISA). There are no investigations, proceedings or lawsuits,
either currently in progress or expected to be instituted in the future,
relating to any Advance's Plan, by any administrative agency, whether local,
state or federal. There are no pending or threatened lawsuits or other claims
(other than routine claims for benefits under the plan and qualified domestic
relations orders) against or involving any Advance's Plan, or any Fiduciary of
such plan (within the meaning of Section 3(21)(A) of ERISA) brought on behalf of
any participant, beneficiary or
37
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Fiduciary thereunder, nor is there any reasonable basis for any such claim. None
of the persons performing services for Advance or any Subsidiary have been
improperly classified as independent contractors, leased employees or as being
exempt from the payment of wages for overtime other than such improper
classifications which in the aggregate would not reasonably be expected to have
an Advance Material Adverse Effect. To the extent applicable, Advance has
furnished or made available to the Seller copies of each Advance's Plan and any
summary plan description relating thereto, a copy of the most recent
determination letter issued by the IRS with respect to each Advance's Plan, and
the most recent Form 5500.
(b) Except as set forth on Schedule 5.20(b) of the Advance Disclosure
----------------
Memorandum, to the knowledge of Advance, each Advance's Plan complies and has
been administered in form and in operation in all material respects with all
applicable requirements of Law.
(c) Except as set forth on Schedule 5.20(c) of the Advance Disclosure
----------------
Memorandum, since January 1, 1995, there have not occurred nor is there pending,
or to the knowledge of Advance threatened, any strikes, slow downs, work
stoppages or other similar labor actions by any group of employees employed by
Advance or any of its Subsidiaries.
(d) Except as set forth on Schedule 5.20(d) of the Advance Disclosure
----------------
Memorandum, there are no labor unions or other organizations representing,
purporting to represent or attempting to represent any employees of Advance and
its Subsidiaries, and there has been no such attempt since January 1, 1995.
5.21 Warranties. Except as set forth on Schedule 5.21 of the Advance
---------- -------------
Disclosure Memorandum, no warranty or similar claims are currently pending
against Advance or any of its Subsidiaries other than those claims which in the
aggregate would not reasonably be expected to result in an Advance Material
Adverse Effect.
5.22 Inventories. The inventories of Advance and its Subsidiaries
-----------
that are reflected on the Most Recent Financial Statements are usable or
saleable in all material respects in the ordinary course of business in
accordance with the past custom and practice of Advance and its Subsidiaries.
5.23 Financing. Advance has obtained signed commitment letters (the
---------
"Commitment Letters") for bank financing in amounts sufficient to consummate the
- -------------------
transactions contemplated by this Agreement (the "Financing") and has delivered
---------
to Seller true and complete copies of such commitment letters. As of the date
of this Agreement, Advance has no reason to believe that any of the conditions
to the Financing will not be satisfied or that the Financing will not be
available on a timely basis subject to the terms of the Commitment Letters
(including the expiration dates therein) to consummate the transactions
contemplated by this Agreement.
5.24 Sufficiency of Assets. The real property owned or leased by
---------------------
Advance or its Subsidiaries, and the personal, intellectual or other property
that is owned, leased or licensed by
38
<PAGE>
Advance or its Subsidiaries, and the personal, intellectual or other property
that is owned, leased or licensed by Advance and its Subsidiaries, constitute
all the properties and assets necessary for, or material to, the business of
Advance and its Subsidiaries as currently conducted, except for such properties
and assets which are immaterial to Advance and its Subsidiaries, taken as a
whole.
5.25 Insurance. Advance and its Subsidiaries maintain, in coverages
---------
and amounts believed by the Company to be customary in the industry, property
and casualty insurance with respect to their business, operations, properties
and assets. To Advance's knowledge, its insurance policies are in full force
and effect. None of Advance or any of its Subsidiaries has received any written
notice of cancellation or nonrenewal of any insurance policy.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF INVESTORS
-------------------------------------------
Each Investor severally and not jointly represents and warrants to
Seller as follows:
6.01 Authorization. Each Investor has the requisite power and
-------------
authority to execute and deliver this Agreement and to perform its obligations
under this Agreement. The execution, delivery and performance of this Agreement
by each Investor that is not a natural person have been duly and validly
authorized by all necessary action of such Investor and no additional
authorization on the part of such Investor is necessary in connection with the
execution, delivery and performance by such Investor of this Agreement.
6.02 Binding Effect. This Agreement has been duly executed and
--------------
delivered by each Investor and is a legal, valid and binding obligation of such
Investor, enforceable against such Investor in accordance with its terms,
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and to general principles of equity.
6.03 No Violations. The execution, delivery and performance by each
-------------
Investor of this Agreement, and the consummation of the transactions
contemplated by this Agreement, do not and will not (i) conflict with or violate
any provision of the certificate of incorporation, bylaws or other
organizational documents of such Investor (other than Investors who are natural
persons), (ii) conflict with, or result in the breach of, or constitute a
default under, or result in the termination, cancellation or acceleration
(whether after the giving of notice or the lapse of time or both) of any right
or obligation of such Investor under, any note, bond, mortgage, indenture,
Permit, license, lease, agreement, contract, arrangement or commitment to which
such Investor is a party or by which such Investor or any of its assets or
properties are bound or affected, or (iii) violate or result in a breach of, or
constitute a default under, any Law or Judgment applicable to such Investor or
by which such Investor or any of its assets are bound or affected, except, in
the cases of clauses (ii) and (iii), for any conflict, breach, default,
termination, cancellation, acceleration or violation which, in the aggregate,
would not reasonably be expected to materially impair such Investor's ability to
effect the Closing.
39
<PAGE>
As of the date of this Agreement, the Investor owns of record and
beneficially the shares of Advance Common Stock shown opposite its name on
Schedule 5.07 of the Advance Disclosure Memorandum, and the options, warrants,
- -------------
purchase rights, subscription rights, conversion rights or exchange rights shown
opposite its name on Schedule 5.07 of the Advance Disclosure Memorandum.
-------------
6.04 Investment Intent. Each Investor hereby acknowledges that the
-----------------
shares of Advance Common Stock issued to such Investor pursuant to Section 2.07
are not registered under the Securities Act or registered or qualified for sale
under any state securities law and that such Advance Common Stock cannot be
resold without registration thereunder or exemption therefrom. Each Investor is
acquiring such Advance Common Stock for its own account as principal, for
investment and not with a view toward the sale or distribution thereof. Each
Investor has sufficient knowledge and experience in financial and business
matters to enable it to evaluate the risks of investment in such Advance Common
Stock and has the ability to bear the economic risks of such investment.
ARTICLE VII
COVENANTS OF SELLER, PURCHASER AND INVESTORS
--------------------------------------------
7.01 Conduct of the Business Pending the Closing. (a) During the
-------------------------------------------
period from the date of this Agreement to the Closing, except as otherwise
contemplated by this Agreement or as Purchaser shall otherwise consent in
writing, Seller shall cause the Company and its Subsidiaries to conduct the
business and operations of the Company and its Subsidiaries in the ordinary and
usual course in a manner consistent with past practice, and use all commercially
reasonable efforts to preserve intact the Company's present business
organization, to make available to Purchaser the services of the officers and
employees of the Company and its Subsidiaries, to preserve the good will and
relationships with customers, suppliers and others having business dealings with
the Company and its Subsidiaries, to maintain the books and records of the
Company and its Subsidiaries in the regular manner, to perform in all material
respects all of its obligations under the Contracts, and to cause the Company
and its Subsidiaries to comply in all material respects with all applicable Laws
(except to the extent any non-compliance is reflected in the Seller Disclosure
Memorandum or is being contested in good faith by appropriate proceedings), all
to the end that the business and operations of the Company and its Subsidiaries
as a going concern shall be unimpaired and transferred to Purchaser at the
Closing. Up to and including the Closing Date, Seller shall not cause the
Company or any of its Subsidiaries to accelerate the collection of receivables,
shall cause the Company in the ordinary course of business consistent with past
practice to (i) pay merchandise and other payables and Taxes on a timely basis,
(ii) continue advertising and promotional expenditures, (iii) purchase and
replenish inventory in accordance with the Company's inventory policy and
practices and shall cause the Company not to otherwise affect the working
capital of the Company and its Subsidiaries other than in the ordinary course of
business consistent with past practice. During the period from the date of this
Agreement to the Closing, except as otherwise provided for in this Agreement or
as Purchaser shall otherwise consent, Seller covenants and agrees that, with
respect to the Company and its Subsidiaries, it will maintain capital
expenditures necessary to
40
<PAGE>
support its business plans and current operations and, other than as described
on Schedule 7.01 (a) of the Seller Disclosure Memorandum, it shall:
-----------------
(i) not permit the Company or its Subsidiaries to dispose of any
capital assets of the Company or its Subsidiaries if the greater of
the book value or the fair market value in the aggregate of such
assets exceeds $2,500,000, or incur, create or assume any Lien on any
individual capital asset of the Company or its Subsidiaries if the
greater of the book value or the fair market value of such capital
asset exceeds $2,500,000, other than Permitted Liens; provided,
--------
however, that notwithstanding the foregoing, up to and including the
-------
Closing Date, Seller may cause the Company to dispose of closed stores
in a manner consistent with past practice and to pay dividends or make
other distributions to Seller of (A) subject to this Section 7.01(a),
cash generated or held by the Company or excess cash, and shall cause
the Company to distribute to Seller prior to the Closing (B) the Tire
Store properties or leases described in Schedule 7.01(a)(i) of the
-------------------
Seller Disclosure Memorandum (or the proceeds from the sale thereof),
(C) any assets and properties including accounts receivable and
computer systems relating to the Sears Tire Group Commercial Credit
Receivables Program, (D) any Credit Card Receivables, together with
the related reserves on the Company's financial statements, (E)
transfer to Parent those portions of the reserves for any Company
"Road Hazard" warranty being assumed by Parent and the Sears deferred
compensation liability related to the Sears Tire Group and (F)
consummate the transactions described in Section 7.13;
(ii) not permit the Company or its Subsidiaries to authorize for
issuance, issue, sell, deliver or agree or commit to issue, sell or
deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise)
any stock of any class or any other securities or equity equivalents
(including stock appreciation rights);
(iii) not permit the Company or its Subsidiaries to split, combine
or reclassify any shares of its capital stock, declare, set aside or
pay any dividend or other distribution (whether in cash, stock, or
property or any combination thereof) in respect of its capital stock
(other than dividends or distributions by a directly or indirectly
wholly owned Subsidiary of the Company and any distribution to Seller
of (A) subject to this Section 7.01(a), cash generated or held by the
Company or excess cash, and shall cause the Company to distribute to
Seller prior to the Closing (B) the Tire Store properties or leases
described in Schedule 7.01(a)(i) of the Seller Disclosure Memorandum
-------------------
(or the proceeds from the sale thereof), (C) any assets and properties
including accounts receivable and computer systems relating to the
Sears Tire Group Commercial Credit Receivables Program, (D) any Credit
Card Receivables, together with the related reserves reflected on the
Company's financial statements, (E) transfer to Parent those portions
of the reserves for any Company "Road Hazard" warranty being assumed
by Parent and the Sears deferred compensation liability related to the
Sears Tire Group and (F) consummate the
41
<PAGE>
transactions described in Section 7.13), or redeem, repurchase or
otherwise acquire any of its securities or any securities of its
Subsidiaries;
(iv) not permit the Company or its Subsidiaries to enter into any
Contract or other commitment (including any acquisition agreement or
any hedging arrangement or other derivative transaction) in excess of
$5,000,000 or that has a term of, or requires the performance of any
obligations by the Company or its Subsidiaries over a period in excess
of, one year or incur any indebtedness for money borrowed, except as
contemplated by this Agreement or the transactions contemplated by the
Transition Services Agreement;
(v) except as required by Law or the terms of any existing
Contract, not permit the Company or its Subsidiaries to enter into any
employment agreement or enter into any contract or other binding
commitment to increase materially, the salary, wage, rate of
compensation, commission, bonus or other direct or indirect
remuneration payable to, or other compensation of, any employee of the
Company or its Subsidiaries or make such increases outside of the
ordinary course of business consistent with past practice and, except
as provided in Section 7.07 enter into any retention incentive
severance or similar agreement, make retention, severance incentive or
similar payments relating to the consummation of the transactions
contemplated by this Agreement, nor amend, adopt or terminate any Plan
covering employees of the Company or its Subsidiaries that would
materially increase the liability of the Company hereunder or enter
into any negotiation in respect of or enter into any collective
bargaining agreement covering employees of the Company or any of its
Subsidiaries;
(vi) not permit the Company or its Subsidiaries to settle any
Proceeding that is material to the Company and its Subsidiaries taken
as a whole that does not contain a complete release of the Company or
that otherwise binds the Company to any obligations after the Closing
Date without the consent of Purchaser which consent will not be
unreasonably withheld;
(vii) not change any of the accounting policies and practices of
the Company and its Subsidiaries;
(viii) not permit the Company and its Subsidiaries to fail to
perform their "Year 2000" compliance programs; and
(ix) not agree or commit to do any of the foregoing.
(b) During the period from the date of this Agreement to the Closing,
except as otherwise contemplated by this Agreement or as Seller shall otherwise
consent in writing, Advance shall, and shall cause its Subsidiaries to, conduct
the business and operations of Advance and its Subsidiaries in the ordinary and
usual course in a manner consistent with past practice, and use all
42
<PAGE>
commercially reasonable efforts to preserve intact Advance's present business
organization, make available to Seller the services of the officers and
employees of Advance and its Subsidiaries, preserve the good will and
relationships with customers, suppliers and others having business dealings with
Advance and its Subsidiaries, maintain the books and records of Advance and its
Subsidiaries in the regular manner, perform in all material respects all of its
obligations under its Contracts, use reasonable best efforts to obtain loans
sufficient to deliver funds to Seller pursuant to Section 2.09 and for the
payment of certain fees and expenses incurred in connection with this Agreement,
and to, and to cause its Subsidiaries to, comply in all material respects with
all applicable Laws (except to the extent any non-compliance is reflected in the
Advance Disclosure Memorandum or is being contested in good faith by appropriate
proceedings), all to the end that the business and operations of Advance and its
Subsidiaries as a going concern shall be unimpaired at the Closing. In addition,
Advance and Purchaser agree to use reasonable best efforts to extend the
Commitment Letters prior to their expiration so that the Financing is available
at the Closing, including the payment of additional reasonable commitment fees,
if necessary. In the event the Commitment Letters are not extended
notwithstanding such reasonable best efforts or the Financing is otherwise
unavailable on terms substantially similar to the Commitment Letters, Advance
and Purchaser agree to use reasonable best efforts to utilize unused borrowing
capacity to the extent permissible under Advance's credit facilities and excess
cash then currently available to the extent permissible under Advance's credit
facilities and to obtain other debt and/or preferred stock financing sufficient
to deliver the funds to Seller pursuant to Section 2.09 and to pay certain fees
and expenses incurred in connection with this Agreement. Notwithstanding any
provision of this Agreement to the contrary, Advance may issue equity to the
providers of such debt and/or preferred stock financing provided that the
overall terms of the financing transaction reflect market standards for a
transaction of this type and are fair to and in the best interests of Advance
and its stockholders as reasonably determined in good faith by the Board of
Directors. During the period from the date of this Agreement to the Closing,
except as otherwise provided for in this Agreement or as Seller shall otherwise
consent, Advance covenants and agrees that, with respect to Advance and its
Subsidiaries, other than as described on Schedule 7.01(b) of the Advance
----------------
Disclosure Memorandum, it shall:
(i) subject to Section 7.01(b)(iii) and except for the issuance
of Advance Common Stock set forth in Section 2.07 or the issuance of
equity of Advance with respect to acquisitions for an equity value of
not more than $20,000,000 (in any twelve month period) (provided,
that, for any issuance of equity the Board of Directors shall
determine in good faith that such equity is issued at not less than
the fair market value thereof), not permit Advance or its Subsidiaries
to authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or
otherwise) any stock of any class or any other securities or equity
equivalents (including stock appreciation rights), except pursuant to
any Advance's Plan as in effect as of the date hereof or amend any of
the terms of any such securities or agreements outstanding as of the
date hereof;
43
<PAGE>
(ii) not permit Advance or its Subsidiaries to split, combine or
reclassify any shares of its capital stock, declare, set aside or pay
any dividend or other distribution (whether in cash, stock, or
property or any combination thereof) in respect of its capital stock
(other than dividends or distributions by a directly or indirectly
wholly owned Subsidiary of Advance), or redeem, repurchase or
otherwise acquire any of its securities or any securities of its
Subsidiaries, except pursuant to the terms of any Advance's Plan as in
effect on the date of this Agreement and as set forth on Schedule 5.07
-------------
of the Advance Disclosure Memorandum;
(iii) not permit Advance or its Subsidiaries to enter into any
acquisition agreements which in the aggregate exceed $40,000,000 (in
any twelve month period); provided that any purchase price in excess
of $20,000,000 must be funded by or paid for by issuance of the equity
described in Section 7.01(b)(i);
(iv) not enter into any material amendment to the Commitment
Letters that might reasonably be expected to impair the ability of
Advance to consummate the transactions contemplated by this Agreement;
(v) not permit Advance or its Subsidiaries to sell all or
substantially all of their assets;
(vi) not agree or commit to do any of the foregoing;
(vii) not change any of the accounting policies and practices of
Advance and its Subsidiaries.
7.02 Access to Information. (a) Prior to the Closing, Seller will
---------------------
cause each of the Company and its Subsidiaries to permit representatives of
Advance, Purchaser and the Investors to have full access at all reasonable times
and with reasonable notice, and in a manner so as not to interfere with the
normal business operations of the Company and its Subsidiaries, to all premises,
properties, personnel, books, records (including Tax records), contracts and
documents of or pertaining to each of the Company and its Subsidiaries and to
conduct such inspections and investigations as Purchaser may reasonably require
(other than physically intrusive environmental investigations which shall be
subject to Section 7.11); provided, however, that, prior to the expiration or
-------- -------
termination of any waiting period under the HSR Act or other similar law
applicable to the transaction, each party shall only be permitted such
reasonable access which, in its discretion, after consultation with counsel, is
appropriate during such review process. In addition, to the extent reasonably
necessary in connection with Seller's ownership of the Company prior to Closing,
after the consummation of the transactions contemplated by this Agreement,
Seller will have full access at all reasonable times and with reasonable notice,
and in a manner so as not to interfere with the normal business operations of
the Company and its Subsidiaries, to all premises, properties, personnel, books,
records (including Tax records), work papers, contracts and documents of or
pertaining to each of the Company and its Subsidiaries. No information or
knowledge obtained in any investigation pursuant to this Section 7.02(a) shall
affect or be deemed to modify any
44
<PAGE>
representation or warranty contained in the Agreement or the conditions to the
obligations of the parties to consummate the transactions contemplated by this
Agreement. The confidentiality of all such documents and information furnished
in connection with the transactions contemplated by this Agreement shall be
governed by the terms of the Confidentiality Agreements.
(b) Prior to the Closing, Advance will, and will cause each of its
Subsidiaries to, permit representatives of the Seller to have full access at all
reasonable times, and in a manner so as not to interfere with the normal
business operations of Advance and its Subsidiaries, to all premises,
properties, personnel, books, records (including Tax records), contracts and
documents of or pertaining to each of Advance and its Subsidiaries; provided,
--------
however, that, prior to the expiration or termination of any waiting period
- -------
under the HSR Act or other similar law applicable to the transaction, each party
shall only be permitted such reasonable access which, in its discretion, after
consultation with counsel, is appropriate during such review process. In
addition, to the extent reasonably necessary in connection with any matter
arising with respect to operations of the Company, after the consummation of the
transactions contemplated by this Agreement, Surviving Corporation will have
reasonable access at all reasonable times and in a manner so as not to interfere
with the normal business operations of Parent and its Subsidiaries, to all
books, records (including Tax records) and work papers of or pertaining to each
of the Surviving Corporation and its Subsidiaries, and contracts and documents
of or pertaining to each of the Surviving Corporation and its Subsidiaries in
the possession of Parent and its Subsidiaries. No information or knowledge
obtained in any investigation pursuant to this Section 7.02(b) shall affect or
be deemed to modify any representation or warranty contained in the Agreement or
the conditions to the obligations of the parties to consummate the transactions
contemplated by this Agreement. The confidentiality of all such documents and
information furnished in connection with the transactions contemplated by this
Agreement shall be governed by the terms of the Confidentiality Agreements.
7.0 Best Efforts; Good Faith. Upon the terms and subject to the
------------------------
conditions of this Agreement, Parent and Seller, on the one hand, and Purchaser
and Advance, on the other hand, will cooperate and use their reasonable best
efforts to fulfill the conditions precedent to the other parties' obligations
under this Agreement, including securing as promptly as practicable all Required
Consents. Without limiting the generality of the foregoing, Parent and Seller,
on the one hand, and Purchaser and Advance, on the other hand, shall cooperate
with one another: (i) in the prompt preparation and filing of any required
filings under the HSR Act and each of the other Laws listed in Section 4.07 and
Section 5.09; (ii) in determining whether action by or in respect of, or filing
with, any governmental body, agency, official or authority (either domestic or
foreign) is required, proper or advisable or any actions, consents, waivers or
approvals are required to be obtained from parties to any Contracts, in
connection with the transactions contemplated by this Agreement; and (iii) in
seeking timely to obtain any such actions, consents or waivers or to make any
such filings. Seller shall cause the Company to use reasonable best efforts to
assist Advance and Purchaser in obtaining the Financing, including affording
Financing sources access as provided by Section 7.02, making its personnel
available for conferences with such sources and providing all documentation or
legal opinions as such sources may reasonably request. In addition, Parent and
Seller, on the one hand, and Purchaser and Advance, on the other hand, shall
take such action as may be required by any governmental authority of competent
jurisdiction within the United States in order to resolve
45
<PAGE>
any objections such authority may have to the transactions contemplated by this
Agreement under applicable antitrust laws; provided, however, that nothing set
-------- -------
forth in this Section 7.03 shall be construed so as to preclude, prevent or
otherwise limit Purchaser and Advance from instituting, prosecuting or defending
a suit or claim with respect to any objection, requirement, suit or other action
concerning the transactions contemplated by this Agreement whether imposed or
brought by any governmental or other authority of competent jurisdiction within
the United States or by any private party concerning the transactions
contemplated by this Agreement. In case at any time after the Closing any
further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers and directors of each party to this Agreement
shall take all such necessary action according to Section 12.03.
7.04 Public Announcements. Purchaser and Seller will consult with
--------------------
each other before issuing any press release or otherwise making any public
statements with respect to this Agreement or the transactions contemplated by
this Agreement and neither Purchaser nor Seller shall issue any such press
release or make any such public statement without the prior approval of the
other party to this Agreement, such approval not to be unreasonably withheld or
delayed, except as may be required by applicable Law or any securities exchange
on which the securities of the parties or their Affiliates are listed.
7.05 Employee Benefits. (a) Subject to paragraph (b) next below,
-----------------
Purchaser hereby agrees to honor without modification or contest, and agrees to
cause the Company and its Subsidiaries to honor without modification or contest,
and to make required payments in accordance with all Company's Plans listed on
Schedule 4.18 of the Seller Disclosure Memorandum; provided, however, that,
- ------------- -------- -------
nothing in this Agreement shall be construed as preventing Purchaser from
amending or terminating any Company's Plan to the extent permitted under any
applicable Law. Purchaser hereby acknowledges that, notwithstanding the terms
of any Company's Plan or award or agreement entered into thereunder, the
transactions contemplated by this Agreement may constitute a "Change in Control"
for purposes of such Company's Plans, awards and agreements and agrees to abide
by the provisions of any Company's Plan which relate to a Change in Control or
similar event or circumstance, including the accelerated vesting and/or payment
of equity-based awards under any such Company's Plans.
(b) On the Closing Date individuals employed by the Company and its
Subsidiaries as of the Closing Date ("Company Employees") will cease active
-----------------
participation in the Sears 401(k) Profit Sharing Plan (the "Sears Plan"). The
----------
accounts of Company Employees shall remain in the Sears Plan until each such
individual incurs a separation from service (within the meaning of section
401(k)(2) of the Code) unless distributed earlier in accordance with section
401(k)(10) of the Code. Purchaser agrees that, immediately following the
Closing Date, it shall, or shall cause the Company and its Subsidiaries to,
either (i) continue to maintain the Company's Plans (other than the Sears Plan)
for the benefit of the employees and former employees of the Company and its
Subsidiaries or (ii) provide that such employees and former employees of the
Company and its Subsidiaries may participate in Advance's Plans.
46
<PAGE>
(c) Purchaser and Advance agree that for purposes of all Company's
Plans and Advance's Plans under which an employee's benefit depends, in whole or
in part, on length of service, credit will be given to Company Employees for
service previously credited with the Company or its Subsidiaries prior to the
Closing Date; provided, that such crediting of service does not result in
duplication of benefits, and provided that such crediting of service shall not
be given for benefit accrual purposes under any defined benefit plan. Company
Employees shall also be given credit under any Advance's Plan for any deductible
or co-payment amounts paid under any Company's Plan in respect of the plan year
in which the Closing Date occurs, to the extent that, following the Closing
Date, they participate in any Advance's Plan for which deductibles or co-
payments are required. Advance shall also use reasonable best efforts to cause
each Advance's Plan to waive (i) any preexisting condition restriction which was
waived under the terms of any analogous Company's Plan immediately prior to the
Closing Date or (ii) any waiting period limitation which would otherwise be
applicable to a Company Employee on or after the Closing Date to the extent such
Company Employee had satisfied any similar waiting period limitation under an
analogous Company Plan prior to the Closing Date.
7.06 Certain Debt Obligations and Intercompany Accounts. On or prior
--------------------------------------------------
to the Closing, and subject to the consummation of the transactions contemplated
by this Agreement, Seller will cause all debt obligations of the Company to be
satisfied in full. All intercompany payables and receivables (including Tax
payables and receivables) between the Company and its Affiliates will be
eliminated prior to Closing.
7.07 Employee Retention and Severance Agreements. (a) Parent shall be
-------------------------------------------
responsible for and shall pay all the retention payments due and owing to the
employees of the Company listed on Schedule 7.07 of the Seller Disclosure
-------------
Memorandum and additional employees to be designated by Advance pursuant to
terms determined by Advance after consultation with Parent in an aggregate
amount not to exceed $7,500,000. Within 10 Business Days of the date of this
Agreement, Purchaser shall provide Parent with a list of all employees to
receive retention and severance payments and consult with Parent regarding the
terms of such payments and Seller will reasonably cooperate in the giving of
notices required in connection therewith. After the Closing, the Surviving
Corporation shall be responsible for and shall pay for all severance obligations
for the employees of the Company and its Subsidiaries except as provided in
Section 7.13. Parent shall be responsible for and shall pay for all retention
and severance payments due and owing to Donald Shaffer, and all costs,
liabilities and expenses related to Donald Shaffer's employment with the
Company.
(b) From and after the Closing Date, Purchaser shall provide Seller
written notice in a timely manner of the Company's intention to terminate any
employee of the Company who is party to a retention and severance agreement with
Seller. Seller shall promptly provide Advance with a true and complete list of
all employees of the Company and its Subsidiaries as of the most recent
practicable date setting forth each such employee's years of service and salary.
7.08 Transition Services. Parent shall provide to the Company
-------------------
transition management and administrative services on the terms set forth in the
Transition Services Agreement.
47
<PAGE>
The Surviving Corporation shall provide to Parent transition management and
administrative services on the terms set forth in the Transition Services
Agreement.
7.09 No Solicitation. From the date of this Agreement through the
---------------
Closing or the earlier termination of this Agreement, Parent, Seller and the
Company and their representatives shall not, directly or indirectly, enter into,
solicit, initiate or continue any discussions or negotiations with, or encourage
or respond to any inquiries or proposals by, or participate in any negotiations
with, or provide any information to, any Person, other than Advance and its
representatives, concerning the sale of all or a portion of the assets or the
business of the Company, or of any Company Shares, or any merger, consolidation,
liquidation, dissolution or similar transaction involving the Company, its
assets or the business of the Company.
7.10 Consents. Seller will cause the Company to use commercially
--------
reasonable efforts to provide Purchaser with copies of all correspondence from
landlords alleging that the transactions contemplated by this Agreement violate
any Company Lease and all written notices of defaults under, or threatened
termination of, any Company Leases. Seller will cause the Company to use
commercially reasonable efforts to obtain all Required Consents (including
Consents required under any Company Consent Lease as agreed by Seller and
Purchaser); provided, however, that in no event shall Seller or the Company be
-------- -------
required to pay any money or provide any guarantee to provide such Consent;
provided, further, that the failure to obtain any Required Consent shall not in
- -------- -------
any way prevent or delay the parties from closing the transactions contemplated
by this Agreement. In connection therewith, and in connection with its
negotiations for such Consents, the Company may not offer or consent to any
modification or amendment of any Company Lease or other Contract without
Purchaser's prior written consent which consent may be withheld in Purchaser's
sole discretion. At Advance's election, Advance may participate in and jointly
control the process of obtaining Required Consents. The Company agrees to
transmit the Consent to the appropriate parties for approval promptly after the
execution of this Agreement. Purchaser shall have the right to approve the form
of Consent and the transmittal letter used to transmit such Consents to each
such party. The Company shall keep Purchaser advised of its progress in
obtaining such Consents and shall obtain Purchaser's written consent which
consent may be withheld in Purchaser's sole discretion prior to offering or
consenting to any substantive change or modification of the form of any
substantive such Consent approved by Purchaser.
7.11 Environmental Investigations. The Seller, Company and Purchaser
----------------------------
covenant and agree that none of them shall undertake any environmental
investigation of the other prior to the Closing; provided, however, if Advance
-------- -------
is required to mortgage the Company's headquarters or any distribution center,
then Advance's lender shall have the right to conduct a reasonable environmental
investigation of such property. From and after the Closing, so long as
Purchaser or any of its Subsidiaries owns any Wet Store, Purchaser shall not
permit any intrusive environmental testing, including soil and ground water
testing to be conducted with respect to such Wet Store (other than Wet Stores
listed on Attachment C to Schedule 4.14(b) of the Seller Disclosure Memorandum
----------------
and any Wet Store where any remedial work is ongoing) as a result of any
Environmental Condition which existed or activities which occurred at or related
to such stores' operations prior to the Closing
48
<PAGE>
Date unless such investigation, assessment or study relates to Store Assessment
Work. Nothing in this Section 7.11 shall be construed as limiting any
investigation permitted by Section 7.02.
7.12 Road Hazard Service Agreements. Other than with respect to
------------------------------
stores in Puerto Rico and the Company dealer stores, Purchaser shall, and shall
cause its Subsidiaries to, direct to the nearest Sears Auto Center or Tire Store
any inquiries or claims by Company customers who have purchased a Company Road
Hazard service agreement or, if no Sears Auto Center or Tire Store is located
within a twenty mile radius of the Surviving Corporation store at which such
inquiry or claim is made, Purchaser shall provide such customer with Parent's
toll-free customer service number. Parent shall perform, or shall cause its
Affiliates to perform, and indemnify and hold harmless the Surviving Corporation
or Purchaser against all warranty work in accordance with the terms of the Road
Hazard service agreement at no cost to the Surviving Corporation or Purchaser.
7.13 Credit Card Receivables Program. (a) On or prior to the
-------------------------------
Closing, Parent shall (i) (A) assume all liabilities and obligations of the
Company and its Subsidiaries under the Servicing Agreement, the Reimbursement
Agreement and any other agreement relating to the NationsBank Credit Card
Program to the extent necessary so that the Company will have no assets or
liabilities with respect to the NationsBank Credit Card Program for reporting
purposes under GAAP and for Federal income Tax purposes and/or (B) purchase all
credit card accounts receivable then outstanding and arising out of sales of
goods or performance of services and related rights of NationsBank under the
NationsBank Credit Card Program (the "NationsBank Receivables"), provided,
-----------------------
however, in no event (other than as expressly provided in Section 10.07) shall
the Surviving Corporation bear any risk of loss with respect to the NationsBank
Credit Card Program or be required to service such NationsBank Receivables, (ii)
cause the Company to distribute to Parent all right, title and interest with
respect to credit card accounts receivable then outstanding and arising out of
sales of goods or performance of services in Puerto Rico under the Credit Card
Program of the Company in Puerto Rico ("Puerto Rico Receivables Program") and
-------------------------------
(iii) cause the Company to transfer to Parent any loss reserves relating to the
NationsBank Credit Card Program and the Puerto Rico Receivables Program
(collectively referred to as the "Credit Card Receivables Programs"). At the
--------------------------------
Closing, the Parent and Surviving Corporation shall enter into a Merchant
Agreement upon terms consistent with the term sheet set forth as Exhibit D with
respect to the servicing of the Puerto Rico Receivables Program. From and after
the date of this Agreement, Parent shall use reasonable best efforts to sell the
Credit Card Receivables Programs to an unaffiliated Person. Parent agrees to
keep Purchaser reasonably informed with respect to such sale and to use its
reasonable best efforts to maximize the sales price for such Credit Card
Receivables Programs subject to commercially reasonable terms and conditions.
In connection with such sale, upon the reasonable request of the buyer, the
Surviving Corporation will enter into customary program agreements with the
buyer of the Credit Card Receivables Programs for the ongoing issuance and
acceptance and servicing of proprietary card products upon commercially
reasonable terms and conditions.
(b) Until Parent sells the Credit Card Receivables Programs, (i)
except as otherwise provided in a program agreement, the Company and its
Affiliates shall not control any aspects of the Credit Card Receivables Programs
including underwriting, approval of new accounts
49
<PAGE>
and new purchases, customer credit limits and collections and (ii) Advance and
its Subsidiaries will not maintain a competing proprietary credit card program
in stores bearing the Parts America nameplate (prior to conversion to Advance
Auto Parts nameplates or point of sale system) or Western Auto nameplates. Until
the NationsBank Receivables Program is sold and the NationsBank Receivables
Program is converted from the First Data Resources system, the Surviving
Corporation shall make available its Chief Financial Officer and treasurer and
existing staff of three full time clerical associates to perform supervisory and
settlement functions related to such NationsBank Receivables Program for which
Seller agrees to fully compensate the Surviving Corporation on a dollar-for-
dollar basis (including administrative costs). The Surviving Corporation shall
appoint and shall maintain for 12 months at least one full-time equivalent
employee or consultant to support marketing programs and provide assistance in
addressing operational issues that relate to the Credit Card Receivables
Programs. The Surviving Corporation shall use the point of sale systems
currently in place or such point of sale systems as may be reasonably necessary
to support the Credit Card Receivables Programs with respect to Company owned
stores.
(c) Parent and Advance shall use reasonable best efforts from and
after the date of this Agreement to determine in good faith the additional
agreements, undertakings and arrangements that are necessary to effectuate the
intent of the parties in this Section 7.13 and shall negotiate in good faith to
agree upon mutually agreeable terms and conditions of such agreements,
undertakings and arrangements.
7.14 Compliance with the WARN Act. Advance and Purchaser shall timely
----------------------------
give all notices required to be given under, or will otherwise comply with, the
Worker Adjustment and Retraining Notification Act of 1988, as amended, or other
similar statutes or regulations of any jurisdiction relating to any plant
closing or mass layoff or as otherwise required by any such statute. If any
plant closing or mass layoff is to occur within sixty (60) days after the
Closing Date, Advance and Purchase shall give the Seller and the Company
sufficient notice of the time of such plant closing or mass layoff to give
appropriate notice under the WARN Act.
7.15 Updated Schedules. Seller shall provide Purchaser, Investors and
-----------------
Advance new Schedules 4.10(a), 4.10(b) and 4.15 of the Seller Disclosure
----------------- ------- ----
Memorandum to reflect changes therein from the date of such schedules to the
most recent practicable date prior to Closing. Purchaser and Advance shall
provide Seller new Schedules 5.12(a), 5.12(b) and 5.17 of the Advance Disclosure
----------------- ------- ----
Memorandum to reflect changes thereon from the date of such schedules to the
most recent practicable date prior to Closing. All such updated schedules shall
be subject to the applicable representations and warranties.
7.16 Company Employees' Profit Sharing/Thrift Plan. Seller shall
---------------------------------------------
cause the Company to use reasonable best efforts to identify and correct
operational defects relating to the Company Employees' Profit Sharing/Thrift
Plan (the "Company's 401(k) Plan") prior to the Closing Date.
---------------------
50
<PAGE>
7.17 WASCO Insurance. Seller shall cause the Company to use
---------------
reasonable best efforts to register as an insurance agent WASCO Insurance
Agency, Inc. as required by state and local insurance laws prior to the Closing
Date.
7.18 Intellectual Property. Seller will cause the Company to use
---------------------
commercially reasonable efforts to provide to ASCI all written notices from the
United States Patent and Trademark Office of cancellations of or oppositions to
the Company's Intellectual Property and all written notice of threatened claims
of infringement between the date of this Agreement and Closing. Advance will
cause ASCI to use commercially reasonable efforts to provide to Seller all
written notices from the United States Patent and Trademark Office of
cancellations of or oppositions to Advance's Intellectual Property and all
written notices of threatened claims of infringement between the date of this
Agreement and Closing.
7.19 Insurance. In consideration of the transfer of certain reserves
---------
from the Company to Parent, effective as of September 30, 1997, and,
subsequently, from Parent to Sears Risk Management Corp., and the transactions
contemplated by this Agreement, Parent will, or will cause its Subsidiaries to,
assume and hold the Surviving Corporation and its Affiliates harmless from any
and all claims, costs and liabilities related to deductibles, premiums, premiums
on retrospectively rated policies, or premium adjustments arising out of or
related to the insurance policies (the "Policies") related to the liabilities
--------
more fully described on Schedule 7.19 of the Seller Disclosure Memorandum.
-------------
Further, from and after the Closing Date, Parent will cause all insurers
providing coverage to the Company from the period October 1, 1997 to and
including the Closing Date to credit for the benefit of the Company all
deductibles, premiums, premiums on retrospectively rated policies, or premium
adjustments paid by or on behalf of Parent or its Affiliates for the benefit of
the Company and its Subsidiaries. Parent and its Affiliates will cooperate with
the Surviving Corporation and its Affiliates to assist in obtaining payment for
claims under all such Policies and all insurance obtained or provided by Parent
and its Affiliates for the benefit of the Company and its Subsidiaries.
7.20 Wet Stores. Seller shall use reasonable efforts based upon a
----------
review of existing internal files to provide a list of Wet Stores owned or
operated by the Company or its Subsidiaries since April 19, 1988.
ARTICLE VII
CONDITIONS TO CLOSING
---------------------
8.01 General Conditions. The obligations of each party to this
------------------
Agreement to consummate the transactions contemplated by this Agreement shall be
subject to the satisfaction at or prior to the Closing of the following
conditions:
(a) No order, statute, rule, regulation, executive order,
injunction, stay, decree or restraining order shall have been enacted,
entered, promulgated or enforced by any court of competent
jurisdiction or governmental or regulatory authority or
51
<PAGE>
instrumentality that prohibits the consummation of the transactions
contemplated by this Agreement; and
(b) All filings under the HSR Act and other similar laws
applicable to the transactions contemplated by this Agreement shall
have been made and any required waiting period under such laws
applicable to the transactions contemplated by this Agreement shall
have expired or been earlier terminated.
8.02 Conditions to Obligations of Seller. The obligations of Seller
-----------------------------------
to consummate the transactions contemplated by this Agreement shall be subject
to the satisfaction or waiver at or prior to the Closing of each of the
following conditions:
(a) Advance, Purchaser and Investors shall have performed and
complied in all material respects with all agreements and covenants
required to be performed and complied with by Advance, Purchaser and
the Investors under this Agreement at or prior to the Closing;
(b) The representations and warranties of Advance, Purchaser and
the Investors contained in this Agreement shall be true and correct at
and as of the date of this Agreement and at and as of the Closing Date
as though restated on and as of such date, except that any
representation or warranty that by its terms is made as of a date
specified therein need only be true and correct as of such date and
except where the failure of one or more representations or warranties
to be true and correct, in the aggregate, would not reasonably be
expected to result in an Advance Material Adverse Effect; provided,
--------
however, that the representations and warranties of Advance and
-------
Purchaser contained in Sections 5.01, 5.02, 5.03(i) and 5.07 and the
last sentence of Section 5.08 and the representations and warranties
of the Investors contained in Sections 6.01 and 6.02 must be true and
correct in all respects as of the date made and as of the Closing
Date;
(c) The Stockholders Agreement shall have been amended as
contemplated by this Agreement; and
(d) Seller shall have received from Advance, Purchaser and each
Investor a certificate signed by an appropriate officer or
representative of Advance, Purchaser or such Investor as to Advance's,
Purchaser's or such Investor's compliance with the conditions set
forth in paragraphs (a) and (b) of this Section 8.02.
8.03 Conditions to Obligations of Purchaser. The obligation of
--------------------------------------
Advance, ASCI and Purchaser to consummate the transactions contemplated by this
Agreement shall be subject to the satisfaction or waiver at or prior to the
Closing of each of the following conditions:
(a) Parent, Seller and the Company shall have performed and
complied in all material respects with all agreements and covenants
required to be performed
52
<PAGE>
and complied with by Parent, Seller and the Company under this
Agreement at or prior to the Closing;
(b) The representations and warranties of Parent, Seller and the
Company contained in this Agreement shall be true and correct at and
as of the date of this Agreement and at and as of the Closing Date as
though restated on and as of such date, except that any representation
or warranty that by its terms is made as of a date specified therein
be true and correct as of such date and except where the failure of
one or more representations or warranties to be true and correct, in
the aggregate, would not reasonably be expected to result in a Company
Material Adverse Effect; provided, however, that the representations
-----------------
and warranties of the Company contained in Sections 3.01, 3.02, 4.01,
4.02, the first sentence of 4.03 and 4.04 and the last sentence of
Section 4.05 must be true and correct in all respects as of the date
made and as of the Closing Date;
(c) The following agreements shall have been executed: (i) the
First-Call Agreement, (ii) the Purchase and Supply Agreements, (iii)
the Merchant Agreements and (iv) the Transition Services Agreement;
(d) The Stockholders Agreement shall have been executed by
Parent, Seller and/or one of its Affiliates; and
(e) Purchaser shall have received from Parent, Seller and the
Company a certificate signed by an appropriate officer as to Parent's,
Seller's and the Company's compliance, as the case may be, with the
conditions set forth in paragraphs (a) and (b) of this Section 8.03.
ARTICLE IX
TERMINATION
-----------
9.01 Termination. This Agreement may be terminated and the
-----------
transactions contemplated by this Agreement may be abandoned at any time prior
to the Closing:
(a) by the mutual written agreement of both Purchaser and Seller;
(b) by either Purchaser or Seller by giving written notice of
such termination to the other party, if the Closing shall not have
occurred by October 31, 1998, unless termination of the waiting period
under the HSR Act and all necessary approvals under applicable
antitrust laws shall not have been obtained prior thereto, in which
case no party may give notice under this Section 9.01(b) unless the
Closing shall not have occurred by the earlier of (i) ten Business
Days after termination of the waiting period under the HSR Act and
receipt of all necessary approvals under applicable antitrust laws or
(ii) April 30, 1999; provided that Purchaser and Advance
--------
53
<PAGE>
may not terminate this Agreement as of April 30, 1999 unless the
waiting period under the HSR Act has expired or been terminated and
all other obligations under applicable antitrust laws necessary to
consummate the transactions contemplated by this Agreement have been
satisfied; or
(c) by either Purchaser or Seller if there shall be any Law or
regulation that makes the consummation of the transactions
contemplated by this Agreement illegal or otherwise prohibited or if
consummation of the transactions contemplated by this Agreement would
violate any nonappealable final Judgment of any court or governmental
body having competent jurisdiction.
9.02 Effect of Termination. If this Agreement is terminated as
---------------------
permitted under Section 9.01, such termination shall be without liability to any
party to this Agreement or to any Affiliate, or their respective stockholders,
directors, officers, employees, agents, advisors or representatives, and
following such termination no party shall have any liability under this
Agreement or relating to the transactions contemplated by this Agreement to any
other party; provided that no such termination shall relieve any party that has
--------
breached any provision of this Agreement from liability for such breach, and any
such breaching party shall remain fully liable for (i) any and all Damages
incurred or suffered by another party to this Agreement as a result of such
breach and (ii) any other relief a court deems appropriate. The provisions of
this paragraph and the Confidentiality Agreements shall survive any termination
of this Agreement pursuant to this Article.
ARTICLE X
INDEMNIFICATION
---------------
10.01 Indemnification by Parent and Seller. From and after the Closing
------------------------------------
and subject to the provisions of this Article X (including the limitations set
forth in Section 10.04), Parent and Seller jointly and severally agree to
indemnify, hold harmless and defend each Advance Indemnified Party from and
against any and all claims and/or liabilities, damages, penalties, Judgments,
assessments, losses, costs and expenses (including reasonable attorneys' fees
but excluding lost profits or other consequential damages of an Indemnified
Party) (collectively, "Damages") arising out of or relating to:
-------
(a) any inaccuracy or breach of any representation or warranty of
Parent, Seller or the Company contained in this Agreement (except for
the representations contained in Section 4.17);
(b) any breach of any covenant or agreement of Parent, Seller or
the Company contained in this Agreement (except for the covenants
contained in Article XI);
(c) any deferred compensation liability incurred by the Company
post Closing which relates to an employee of the Sears Tire Group;
54
<PAGE>
(d) the threatened or pending litigation described as items
number 2, 3 and 6 on Schedule 4.11(a) of the Seller Disclosure
----------------
Memorandum;
(e) the threatened or pending litigation or claims described on
Schedule 4.11(c) of the Seller Disclosure Memorandum and/or any of the
----------------
Environmental Conditions existing prior to the Closing Date and
relating to the properties listed on Attachment D to Schedule 4.14(b)
----------------
of the Seller Disclosure Memorandum. For purposes hereof, the
continuing migration of Hazardous Substances off such a property which
existed prior to the Closing Date shall be deemed to be an
Environmental Condition which existed prior to the Closing Date.
(f) the Tire Stores properties or leases described on Schedule
--------
7.01(a)(i) of the Seller Disclosure Memorandum, all Tire Stores
----------
properties or assets owned, leased or operated by the Company or its
subsidiaries at any time prior to Closing and any commercial credit
programs of Tire Stores;
(g) any liability or obligation resulting from Wasco Insurance
Agency, Inc.'s failure prior to Closing to be duly licensed or
qualified to sell insurance in any jurisdiction in which it does
business;
(h) any noncompliance with applicable law by the Company with
respect to the Company's deferred compensation plan;
(i) any noncompliance with applicable Environmental Law by the
Company or any of its Subsidiaries or any liability to the Company or
any of its Subsidiaries regarding disposal of batteries with respect
to the Puerto Rico operations prior to January 1, 1996; or
(j) any noncompliance with applicable law with respect to the
Company's 401(k) Plan;
provided that Parent and Seller shall have an obligation to indemnify each
- --------
Advance Indemnified Party for Damages pursuant to this Section 10.01 only to the
extent that such Damages are in excess of (i) any amounts recovered by any
Advance Indemnified Party pursuant to any contract to which any Advance
Indemnified Party is a party or has assumed pursuant to this Agreement with
respect to the indemnified matter or (ii) amounts recovered by counterclaim or
otherwise from any third party based on any claims any Advance Indemnified Party
has against any such third party that reduces the Damages that would otherwise
be sustained (in each case net of the costs of recovery thereof); and, provided,
--------
further, that all Damages shall be reduced by the amount of any realized net
- -------
income Tax benefit to the Advance Indemnified Party resulting from the damage,
loss, liability or expense that is the subject of the indemnity; provided that
to the extent that any Tax benefit is realized in a Tax year other than the year
in which the indemnity is paid, the Advance Indemnified Party shall make a
payment to the indemnifying person in the amount of such realized Tax benefit in
the year in which it is realized within 10 days of the receipt of a benefit in
the form of a Tax
55
<PAGE>
refund or a reduction of a Tax payment due including an estimated Tax payment.
For purposes of this Section 10.01, a realized Tax benefit is a reduction in
Taxes payable or a refund of Taxes previously paid, and the amount of a realized
Tax benefit will be determined based on a 40 percent tax rate.
From and after the Closing, the right to indemnification provided for
in this Section 10.01, Sections 10.06 and 10.07, and Article XI shall be the
exclusive remedy of all Advance Indemnified Parties with respect to the
transactions contemplated under this Agreement, except in the case of fraud or
where equitable relief is determined by a court of competent jurisdiction to be
appropriate.
10.02 Indemnification by Advance. From and after the Closing and
--------------------------
subject to the provisions of this Article X (including the limitations set forth
in Section 10.04), Advance, ASCI and Purchaser jointly and severally agree to
indemnify, hold harmless and defend each Seller Indemnified Party from and
against any and all claims and/or Damages arising out of or relating to:
(a) any inaccuracy or breach of any representation or warranty of
Advance, Purchaser or the Investors contained in this Agreement;
(b) any breach of any covenant or agreement of Advance, Purchaser
or the Investors contained in this Agreement;
(c) any liability or obligation of the Surviving Corporation
except for liabilities or obligations that constitute a breach of this
Agreement by Parent, Seller or the Company; or
(d) the litigation described as items number B1 and B2 on
Schedule 5.13(a) of the Advance Disclosure Memorandum;
----------------
provided that Advance and Purchaser shall have an obligation to indemnify each
- --------
Seller Indemnified Party for Damages pursuant to this Section 10.02 only to the
extent that such Damages are in excess of (i) any amounts recovered by that
Seller Indemnified Party pursuant to any contract to which that Seller
Indemnified Party is a party with respect to the indemnified matter or (ii)
amounts recovered by counterclaim or otherwise from any third party based on any
claims that Seller Indemnified Party has against any such third party that
reduce the Damages that would otherwise be sustained (in each case net of the
costs of recovery thereof); and, provided, further, that all Damages shall be
-------- -------
reduced by the amount of any realized net income Tax benefit to the Seller
Indemnified Party resulting from the damage, loss, liability, or expense that is
the subject of the indemnity; provided that to the extent that any Tax benefit
is realized in a Tax year other than the year in which the indemnity is paid,
the Seller Indemnified Party shall make a payment to the indemnifying person in
the amount of such realized Tax benefit in the year in which it is realized
within 10 days of the receipt of a benefit in the form of a Tax refund or a
reduction of a Tax payment due including an estimated Tax payment. For purposes
of this Section 10.02, a realized Tax benefit is a reduction in Taxes payable or
a refund
56
<PAGE>
of Taxes previously paid, and the amount of a realized Tax benefit will be
determined based on a 40 percent tax rate.
From and after the Closing, the right to indemnification provided for
in this Section 10.02 and Sections 10.06 and 10.07 shall be the exclusive remedy
of all Seller Indemnified Parties with respect to the transactions contemplated
under this Agreement, except in the case of fraud or where equitable relief is
determined by a court of competent jurisdiction to be appropriate.
10.03 Indemnification Process. The party or parties making a claim for
-----------------------
indemnification under this Article X shall be, for the purposes of this
Agreement, referred to as the "Indemnified Party" and the party or parties
-----------------
against whom such claims are asserted under this Article X shall be, for the
purposes of this Agreement, referred to as the "Indemnifying Party". All claims
------------------
by any Indemnified Party under this Article X shall be asserted and resolved as
follows:
(a) In the event that (i) any claim, demand or Proceeding is
asserted or instituted by any Person other than the parties to this
Agreement or their Affiliates which could give rise to Damages for
which an Indemnifying Party could be liable to an Indemnified Party
under this Agreement (such claim, demand or Proceeding, a "Third Party
-----------
Claim") or (ii) any Indemnified Party under this Agreement shall have
-----
a claim to be indemnified by any Indemnifying Party under this
Agreement which does not involve a Third Party Claim (such claim, a
"Direct Claim"), the Indemnified Party shall with reasonable
-------------
promptness send to the Indemnifying Party a written notice specifying
the nature of such claim, demand or Proceeding and the amount or
estimated amount thereof (which amount or estimated amount shall not
be conclusive of the final amount, if any, of such claim, demand or
Proceeding) (a "Claim Notice"), provided that a delay in notifying the
------------
Indemnifying Party shall not relieve the Indemnifying Party of its
obligations under this Agreement except to the extent that (and only
to the extent that) such failure shall have caused the Damages for
which Indemnifying Party is obligated to be greater than such Damages
would have been had the Indemnified Party given the Indemnifying Party
proper notice.
(b) In the event of a Third Party Claim, the Indemnifying Party
shall be entitled to appoint counsel of the Indemnifying Party's
choice at the expense of the Indemnifying Party to represent the
Indemnified Party and any others the Indemnifying Party may reasonably
designate in connection with such claim, demand or Proceeding (in
which case the Indemnifying Party shall not thereafter be responsible
for the fees and expenses of any separate counsel retained by any
Indemnified Party except as set forth below); provided that such
--------
counsel is reasonably acceptable to the Indemnified Party.
Notwithstanding an Indemnifying Party's election to appoint counsel to
represent an Indemnified Party in connection with a Third Party Claim,
an Indemnified Party shall have the right to employ separate counsel,
and the Indemnifying Party shall bear the reasonable fees, costs and
expenses of such separate counsel if (i) the use of counsel selected
by the Indemnifying Party to represent the Indemnified Party would
present such counsel
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with a conflict of interest or (ii) the Indemnifying Party shall not
have employed counsel to represent the Indemnified Party within a
reasonable time after notice of the institution of such Third Party
Claim. If requested by the Indemnifying Party, the Indemnified Party
agrees to cooperate with the Indemnifying Party and its counsel in
contesting any claim, demand or Proceeding which the Indemnifying
Party defends, or, if appropriate and related to the claim, demand or
Proceeding in question, in making any counterclaim against the person
asserting the Third Party Claim, or any cross-complaint against any
person. No Third Party Claim may be settled or compromised (i) by the
Indemnified Party without the prior written consent of the
Indemnifying Party, which consent shall not be unreasonably withheld
or delayed or (ii) by the Indemnifying Party without the prior written
consent of the Indemnified Party, which consent shall not be
unreasonably withheld or delayed. In the event any Indemnified Party
settles or compromises or consents to the entry of any Judgment with
respect to any Third Party Claim without the prior written consent of
the Indemnifying Party, each Indemnified Party shall be deemed to have
waived all rights against the Indemnifying Party for indemnification
under this Article X.
(c) In the event of a Direct Claim, the Indemnifying Party shall
notify the Indemnified Party within 30 Business Days of receipt of a
Claim Notice whether or not the Indemnifying Party disputes such
claim.
(d) From and after the delivery of a Claim Notice under this
Agreement, at the reasonable request of the Indemnifying Party, each
Indemnified Party shall grant the Indemnifying Party and its
representatives all reasonable access to the books, records and
properties of such Indemnified Party to the extent reasonably related
to the matters to which the Claim Notice relates. All such access
shall be granted during normal business hours and shall be granted
under conditions which will not unreasonably interfere with the
business and operations of such Indemnified Party. The Indemnifying
Party will not, and shall require that its representatives do not, use
(except in connection with such Claim Notice) or disclose to any third
person other than the Indemnifying Party's representatives (except as
may be required by applicable Law) any information obtained pursuant
to this Section 10.03(d) which is designated as confidential by an
Indemnified Party.
10. Limitations on Indemnity Payments. (a) No claim for
---------------------------------
indemnification under Sections 10.01 (other than Sections 10.01(b) through
10.01(i)) or 10.02 (other than Section 10.02(b)) may be made by the Advance
Indemnified Parties or Seller Indemnified Parties, respectively, and no payment
in respect thereof shall be required from Parent or Seller, or from Advance or
Purchaser, as the case may be, unless the aggregate amount of Damages against
which the Advance Indemnified Parties or Seller Indemnified Parties,
respectively, are entitled to be indemnified exceeds $5 million (and then only
for the amount of such excess). The maximum aggregate amount of Damages against
which the Advance Indemnified Parties or Seller Indemnified Parties,
respectively, shall be entitled to be indemnified under Section 10.01 (other
than Sections 10.01(b)
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through 10.01(i)) or 10.02 (other than Section 10.02(b)) respect to all claims
thereunder shall be $40 million. In no event shall this Section 10.04 limit any
party's remedy for specific performance, injunctive relief or any other
equitable remedies otherwise available to such party or limit any party's
claims, obligations or liabilities with respect to any matters set forth in
Article II.
(b) The limitations set forth in Section 10.04(a) shall not apply to
indemnification of a Seller Indemnified Party or Advance Indemnified Party, as
the case may be, for breaches of the representations and warranties set forth in
Sections 3.01, 3.02, 4.01, 4.02, the first sentence of 4.03, 4.04, the last
sentence of 4.05, 4.06(i), 4.08(c), 5.01, 5.02, 5.03(i), 5.07, 6.01, 6.02 and
6.04.
10.05 Survival. The representations and warranties of the parties to
--------
this Agreement contained in this Agreement shall survive the Closing for the
applicable period set forth in this Section 10.05, and any and all claims and
causes of action for indemnification under this Article X arising out of the
inaccuracy or breach of any representation or warranty of Parent, Seller, the
Company, Advance, Purchaser or the Investors must be made prior to the
termination of the applicable survival period. All of the representations and
warranties of the parties to this Agreement contained in this Agreement and any
and all claims and causes of action for indemnification under this Article X
with respect thereto shall terminate one year after the Closing Date; provided
--------
that (a) the representations and warranties of Parent and Seller contained in
Sections 3.01, 3.02 and 3.03, the representations and warranties of the Company
contained in Sections 4.01, 4.02, 4.03 and 4.04, the representations and
warranties of Advance and Purchaser contained in Sections 5.01, 5.02, 5.06 and
5.07 and the representations and warranties of the Investors contained in
Sections 6.01, 6.02, 6.03 and 6.04 shall survive for six years after the Closing
Date, (b) the representations and warranties of Parent and Seller contained in
Section 4.14 and the representations and warranties of Advance and Purchaser
contained in Section 5.16 shall survive for three years after the Closing Date,
and (c) the representations and warranties of Parent and Seller contained in
Sections 4.17 and 4.18 and the representations and warranties of Advance and
Purchaser contained in Sections 5.19 and 5.20 shall survive until 90 days
following the expiration of the period of limitations applicable to the relevant
Tax or other Law; it being understood that in the event notice of any claim for
-- ----- ----------
indemnification under Section 10.01(a), Section 10.02(a) or Article XI shall
have been given within the applicable survival period, the representations and
warranties that are the subject of such indemnification claim shall survive
until such time as such claim is finally resolved.
10.06 Environmental Matters. (a) From and after the Closing, the
---------------------
Parent and Seller, jointly and severally on the one hand, and ASCI and
Purchaser, on the other hand, agree to indemnify, defend and hold each Advance
Indemnified Party, or Seller Indemnified Party, as the case may be, harmless
with respect to any Damages arising from or relating to any Environmental
Condition (as defined in Section 4.14) in connection with any property listed on
Attachment C on Schedule 4.14(b) of the Seller Disclosure Memorandum (to the
----------------
extent that the Company or any of its Subsidiaries is liable for any Damages in
connection therewith) and/or any Wet Store prior to the Closing Date as set
forth below. For purposes hereof, the continuing migration of Hazardous
Substances off a Wet Store or any property listed on Attachment C of Schedule
--------
4.14(b) of the Seller Disclosure Memorandum which existed prior to the Closing
- -------
Date shall be deemed to be an Environmental Condition which existed prior to the
Closing Date.
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(i) The first $2,500,000 of such Damages shall be borne solely by
ASCI and Purchaser;
(ii) Damages greater than $2,500,000 and less than or equal to
$5,000,000 will be borne equally by Parent and Seller, on the one
hand, and ASCI and Purchaser on the other hand; and
(iii) Damages in excess of $5,000,000 shall be borne solely by
Parent and Seller.
A party shall have an obligation to indemnify for Damages pursuant to this
Section 10.06 only to the extent that such Damages are in excess of (i) any
amounts recovered by the Indemnified Party pursuant to any contract which the
Indemnified Party is a party or has assumed pursuant to this Agreement with
respect to the indemnified matter or (ii) amounts recovered by counterclaim or
otherwise from any third party based on any claims the Indemnified Party has
against any such third party that reduces the Damages that would otherwise be
sustained (in each case net of the costs of recovery thereof); and, provided,
--------
further, that all Damages shall be reduced by the amount of any realized net
- -------
income Tax benefit to the Indemnified Party resulting from the damage, loss,
liability or expense that is the subject of the indemnity; provided that to the
extent that any Tax benefit is realized in a Tax year other than the year in
which the indemnity is paid, the Indemnified Party shall make a payment to the
Indemnifying Party in the amount of such realized Tax benefit in the year in
which it is realized within 10 days of the receipt of a benefit in the form of a
Tax refund or a reduction of a Tax payment due including an estimated Tax
payment. For purposes of this Section 10.06, a realized Tax benefit is a
reduction in Taxes payable or a refund of Taxes previously paid, and the amount
of a realized Tax benefit will be determined based on a 40 percent tax rate.
(b) Purchaser shall be responsible for and shall control all
remediation work or Proceedings relating to the first $2,500,000 of Damages
provided that such remediation work shall be performed (i) in compliance with
all applicable Environmental Laws, (ii) by licensed environmental professionals
reasonably acceptable to Parent and (iii) pursuant to a plan and scope of work
reasonably acceptable to Parent. ASCI and the Purchaser, on the one hand, and
Parent and Seller, on the other hand, shall be jointly responsible for and shall
jointly control all remediation work or Proceedings relating to any Damages
greater than $2,500,000 and less than or equal to $5,000,000 provided that such
remediation work shall be performed (i) in compliance with all applicable
Environmental Laws, (ii) by licensed environmental professionals reasonably
acceptable to the parties, (iii) pursuant to a plan and scope of work reasonably
acceptable to the parties, (iv) in a manner which minimizes disruption of the
business conducted at the affected property and (v) in a manner reasonably
satisfactory to the parties. Parent and Seller shall be responsible for and
shall control all remediation work or Proceedings relating to any Damages of
more than $5,000,000 provided that such remediation work shall be performed (i)
in compliance with all applicable Environmental Laws, (ii) by licensed
environmental professionals reasonably acceptable to Advance, (iii) pursuant to
a plan and scope of work reasonably acceptable to Advance, (iv) in a manner
which minimizes disruption of the business conducted at the affected property
and (v) in a manner reasonably satisfactory to Advance. Except with respect to
any claims for indemnification
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made prior to such date, the parties' obligations under this Section 10.07 shall
terminate upon the earlier of (i) the fifth anniversary of the Closing Date or
(ii) the third anniversary of the effective date of any registration statement
for the initial public offering of any equity securities of Advance or its
Subsidiaries.
If any indemnified matter is covered by both the indemnifications set
forth in Section 10.01 and Section 10.06, then such indemnified matter shall be
deemed covered by Section 10.01, without regard to any of the matters set forth
in Section 10.06.
(c) In the event of any dispute between Seller and Purchaser over
Store Assessment Work pursuant to Section 7.11, remediation work to be conducted
in accordance with Section 10.06(b) or any related Damages (a "Dispute"), the
-------
following dispute resolution procedures ("Dispute Resolution") shall apply and
------------------
shall be the exclusive means of resolving such Dispute. The party invoking
Dispute Resolution shall notify the other in writing of its intention to do so,
shall give reasonable notice of the issues over which Dispute Resolution is
sought and the relief which is sought in the Dispute Resolution, and shall
simultaneously commence an arbitration proceeding with the American Arbitration
Association ("AAA"). The party invoking Dispute Resolution shall, within ten
---
(10) days of doing so, name an arbitrator, who shall be technically competent to
evaluate the issues as to which Dispute Resolution is sought. The other party
shall have fourteen (14) days from the date on which the arbitrator is named to
appear and to accept arbitration by a single arbitrator, or to name a second
arbitrator of its choice. Failure to appear shall constitute agreement with the
position taken by the party invoking Dispute Resolution. Failure to name a
second arbitrator within fourteen (14) days shall constitute acceptance of the
single arbitrator for the Dispute Resolution. In the event that the other party
names its own arbitrator, it shall name a person who is technically competent to
evaluate the issues as to which Dispute Resolution is sought. The two
arbitrators thus named shall choose a third arbitrator within fourteen (14) days
of the selection of the second arbitrator. The arbitration shall take place in
Chicago, Illinois, Roanoke, Virginia or some other mutually acceptable place
under the auspices of the American Arbitration Association, shall be completed
within ninety (90) days of the date on which Dispute Resolution is commenced,
and shall, except as set forth to the contrary in this section, be held pursuant
to the rules of the American Arbitration Association. The decision of the
arbitrator or arbitrators of all matters presented to them shall be final and
not subject to any appeal or other review.
10.07 Credit Card Receivable Losses. If the difference between the
-----------------------------
sales price of the NationsBank Receivables and the Puerto Rico Receivables on a
combined basis (collectively, the "Credit Card Receivables") sold by Parent in
-----------------------
accordance with Section 7.13 and the sum of (i) the aggregate of the outstanding
principal balance of all such Credit Card Receivables as of the date of sale
based upon a closing price as certified by Parent to the purchaser of the Credit
Card Receivables Programs (taking into account any post Closing purchase price
adjustments), plus (ii) any operating losses incurred by Parent after the
Closing Date and prior to such sale with respect to the Credit Card Receivables,
plus (iii) any and all losses, costs and expenses incurred by Parent resulting
from the sale of the Credit Card Receivables (including any fees and expenses
payable as a result of such sale with respect to the Service Agreement dated
May 1, 1996 between First Data Resources Inc. and Parent (the "FDR Agreement")
-------------
and any investment banking fees, finders fee or
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other commissions payable in connection with such sale) and plus (iv) any costs
(including severance and related Damages) relating to the termination of any
employees of the Company who service the Puerto Rico Receivables (collectively,
the "Credit Card Losses") is less than zero, then, subject to the consummation
------------------
of the transactions contemplated by the Agreement, ASCI and Purchaser hereby
agree to jointly and severally indemnify Parent for one half of such Credit Card
Losses as provided in this Section 10.07 (the "Credit Card Loss Sharing"). If
------------------------
Parent has sold the Credit Card Receivables prior to the Closing Date, the
Merger Consideration shall be increased by the amount of the Credit Card Loss
Sharing and, except as otherwise provided in the next sentence, no further
payment pursuant to this Section 10.07 shall be made. In computing any Credit
Card Loss Sharing, such losses, costs and expenses shall be reduced by the
amount of any realized net income Tax benefit to the Parent resulting from such
losses, costs and expenses that is the subject of the indemnity; provided that
to the extent that any Tax benefit is realized in a Tax year other than the year
in which the indemnity is paid, Parent shall make a payment to the Purchaser in
the amount of such realized Tax benefit in the year in which it is realized
within 10 days of the receipt of a benefit in the form of a Tax refund or a
reduction of a Tax payment due including an estimated Tax payment. For purposes
of this Section 10.07, a realized Tax benefit is a reduction in Taxes payable or
a refund of Taxes previously paid, and the amount of a realized Tax benefit will
be determined based on a 40 percent tax rate. In no event shall the aggregate
amount payable by ASCI and Purchaser pursuant to this Section 10.07 exceed
$10,000,000. Except as otherwise provided in this Section 10.07, Parent shall
indemnify, defend and hold harmless the Advance Indemnified Parties from and
against the Credit Card Losses and any Damages relating to the Credit Card
Receivables including any Damages under the related agreements and the FDR
Agreement except for liabilities under customary program agreements for ongoing
issuance, acceptance and servicing entered into by the Surviving Corporation
pursuant to Section 7.13 and any credit card receivable arising after the date
of sale of the Credit Card Receivables Programs and except for customer returns,
chargebacks and refunds in accordance with the Surviving Corporation's then
existing credit card programs.
10.08 Characterization of Indemnification Payments. Purchaser and
--------------------------------------------
Seller agree to treat any payment made under this Article X as an adjustment to
the Merger Consideration. If, contrary to the intent of Purchaser and Seller as
expressed in the preceding sentence, any payment made pursuant to this Article X
is treated as taxable income of an Indemnified Party, then the Indemnifying
Party shall indemnify and hold harmless the Indemnified Party from any liability
for Taxes attributable to the receipt of such payment.
ARTICLE XI
TAX MATTERS
-----------
11.01 Transactional Taxes. Seller and Purchaser shall bear equally of
-------------------
all sales, use, stamp, transfer, service, recording, real estate and like taxes
or fees, if any, imposed by any Taxing Authority in connection with the Merger
or the transfer and assignment of the Company Shares. Surviving Company shall be
responsible for the filing of all such applicable Tax Returns relating to sales,
use, stamp, transfer, service, recording, real estate and like taxes and fees,
and Surviving
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Company shall pay all such Taxes shown as due thereon, subject to reimbursement
by the Seller of one-half of such Tax payment. Seller and Purchaser agree to use
all reasonable efforts to obtain a sale for resale or other Tax exemption where
available. Purchaser shall provide a resale certificate at Closing or such other
documents as may be requested by Seller to reduce any such Taxes.
11.02 Tax Returns. Seller shall prepare and file, or cause to be
-----------
prepared and filed, all of the Company's Tax Returns for all periods ending on
or before the Closing Date for which such Tax Returns are due on or before the
Closing Date, and the Seller shall pay, or cause to be paid, all Taxes shown as
due thereon. Seller shall prepare and file, or cause to be prepared and filed,
all of the Company's Income Tax Returns for all taxable periods ending on or
before the Closing Date, and the Seller shall pay, or cause to be paid, all
Income Taxes shown as due thereon. Seller shall prepare, or cause to be
prepared, such Income Tax Returns using accounting methods and other practices
that are consistent with those used by the Company in its prior Income Tax
Returns and items to be taken into account in the Company's Income Tax Returns
for the short taxable period ending on the Closing Date shall be determined
under the "closing-the-books" method as described in Treasury Regulations
section 1.1502-76(b)(2)(i). The Surviving Company shall prepare and file all of
the Company's Income Tax Returns for all taxable periods ending after the
Closing Date, and Surviving Company shall pay all Income Taxes shown as due
thereon; provided, that with respect to any Interim Period the Surviving
Company, to the extent applicable, shall be entitled to indemnification as set
forth in Section 11.09(ii). The Surviving Company shall prepare and file all of
the Company's Tax Returns (other than for Income Taxes) which are due after the
Closing Date and which were not yet filed as of the Closing Date, and the
Surviving Company shall pay all Taxes (other than Income Taxes) shown as due
thereon; provided, that the Surviving Company, to the extent applicable, shall
be entitled to indemnification as set forth in Section 11.09(v). In accordance
with the principles of section 5 of Revenue Procedure 96-60, 1996-2 C.B. 399,
provided that Seller provides Purchaser will all necessary payroll information
for the calendar year that includes the Closing Date and that Seller provides
Purchaser with such other information and offers such assurances and cooperation
reasonably requested by Purchaser relating to wages, withholding and payroll
taxes, Surviving Company shall furnish a Form W-2 to each employee employed by
Surviving Company who had been employed by Company, disclosing all wages and
other compensation paid for such calendar year and the Taxes withheld therefrom.
If the Surviving Corporation receives a Tax refund (whether paid to the
Surviving Company or credited against its Tax liability) with respect to taxable
periods ending on or before the Closing Date, Purchaser shall remit the amount
of such Tax refund to Seller, subject to an offset for any amounts due an
Indemnified Party hereunder.
11.03 Apportionment of Income Taxes. In order to apportion
-----------------------------
appropriately any Income Taxes relating to any taxable year or period that
includes an Interim Period, the parties hereto shall, to the extent permitted
under applicable law, elect with the relevant Taxing Authority to treat for all
purposes, the Closing Date as the last day of the taxable year or period of the
Company and its Subsidiaries, and such Interim Period shall be treated as a
short taxable year and a Pre-Closing Period for purposes of this Article XI. In
any case where applicable law does not permit the Company and its Subsidiaries
to treat the Closing Date as the last day of the taxable year or period of the
Company and its Subsidiaries with respect to Income Taxes that are payable with
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respect to an Interim Period, the portion of any such Income Tax that is
allocable to the portion of the Interim Period ending on the Closing Date shall
be deemed equal to the amount which would be payable if the taxable year or
period ended immediately following the Closing Date (except that, solely for
purposes of determining the marginal tax rate applicable to income during such
period in a jurisdiction in which such tax rate depends upon the level of
income, annualized income may be taken into account, if appropriate, for an
equitable sharing of such Income Taxes).
11.04 Tax Records. Purchaser shall, at its own expense, preserve and
-----------
keep the records in its possession relating to the preparation of any Tax Return
of the Company and such records as Seller may reasonably require for the defense
of any audit, examination, administrative appeal or litigation of any such Tax
Return for a period of six years from the Closing Date and shall make such
records available to Seller as may be reasonably required by Seller. In the
event Purchaser wishes to destroy such records after that time, Purchaser shall
first give ninety (90) days prior written notice to Seller and Seller shall have
the right at its option and expense, upon prior written notice given to
Purchaser within that ninety (90) day period, to take possession of the records
within one hundred and eighty (180) days after the date of such notice. In
addition, Purchaser shall use commercially reasonable best efforts to provide
Seller with a tax information package containing all information necessary for
Seller to prepare the Company's Tax Returns for the taxable period ending on the
Closing Date by April 30, 1999 but in no event later than May 28, 1999.
Purchaser shall execute, if necessary, a powers of attorney in favor of the
Seller which would enable Seller to exercise its rights under this Article XI.
Seller shall make available to Purchaser such records as Purchaser may require
for the preparation of any Tax Returns or other similar reports or forms
required to be filed by Purchaser and such records as Purchaser may require for
the defense of any audit, examination, administrative appeal or litigation of
any such Tax Return or other similar report or form. Seller shall execute, if
necessary, a powers of attorney in favor of Purchaser which would enable
Purchaser to exercise its rights under this Article XI.
11.05 Sale of Assets. Each of the parties to this Agreement shall
--------------
submit all necessary forms to report the Merger as a taxable sale of the assets
of the Company followed by the liquidation of the Company, and shall not take a
position for Tax purposes inconsistent therewith.
11.06 Allocation of Purchase Price. The Merger Consideration shall be
----------------------------
allocated in conformity with Section 1060 of the Code among the assets of the
Company as set forth in a schedule (the "Allocation Schedule"). Purchaser shall
-------------------
prepare a draft of the Allocation Schedule and deliver it, together with
supporting schedules and information, to Seller within 90 days after the Closing
Date. The Allocation Schedule shall be subject to the approval of Seller only
with respect to the total amount of Merger Consideration allocable to the assets
of the Company and the amount of Merger Consideration allocated to the stock of
Western Auto of Puerto Rico, Inc., and if Seller does not approve of such
allocations, Seller shall deliver a written statement of its differences with
Purchaser's proposed Allocation Schedule. If Seller and Purchaser cannot
resolve such differences within 60 days following delivery of such Allocation
Schedule, Seller and Purchaser shall agree upon an accounting firm to arbitrate
such differences and determine the proper Allocation Schedule. If Seller and
Purchaser cannot agree upon an accounting firm to act as arbitrator, each shall
nominate an accounting firm, which shall in turn, agree upon an accounting firm
to act as the arbitrator. All
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expenses of arbitration relating to the Allocation Schedule shall be paid one-
half by the Seller and one-half by Purchaser. Each of Purchaser and Seller shall
sign and timely submit all necessary forms (including IRS Form 8594) to report
this transaction for federal, state and foregoing Tax purposes in accordance
with the Allocation Schedule, as agreed upon by Purchaser and Seller, and shall
not take a position for Tax purposes inconsistent therewith.
11.07 Tax Elections. Except as set forth in Section 11.13 below, from
-------------
and after the date hereof, the Company and its Subsidiaries shall not, without
the prior written consent of Purchaser (which may not unreasonably withhold such
consent), make or revoke, or cause or permit to be made or revoked, any Tax
election, or adopt or change any method of accounting, that would adversely
affect the Company and its Subsidiaries.
11.08 Tax Sharing Agreements. As of the Closing Date, any and all Tax
----------------------
sharing, indemnity or allocation agreements shall terminate as between the
Company and its Subsidiaries on the one hand, and the Parent, Seller and/or any
affiliate of the Seller, on the other hand.
11.09 Parent and Seller Tax Indemnity. Except as set forth in Section
-------------------------------
11.01 and subject to the implementing provisions of this Article XI, from and
after the Closing Date, Parent and Seller jointly and severally agree to
indemnify, hold harmless and defend each Advance Indemnified Party from and
against any and all Taxes, claims and/or Damages arising out of or relating to:
(i) Income Taxes imposed on the Company and its Subsidiaries with respect to
taxable years or periods ending on or before the Closing Date that have not been
paid on or prior to the Closing Date; (ii) with respect to taxable years or
periods beginning on or before the Closing Date and ending after the Closing
Date, Income Taxes imposed on the Company and its Subsidiaries which are
allocable, pursuant to Section 11.03 above, to the portion of such taxable year
or period ending with the Closing Date as the last day of such taxable period or
year (an "Interim Period") that have not been paid on or prior to the Closing
--------------
Date (Interim Period and any taxable years or periods that end on or prior to
the Closing Date being referred to collectively hereinafter as "Pre-Closing
-----------
Periods"); (iii) Income Taxes imposed on any member of any affiliated group with
- -------
which the Company and its Subsidiaries or any Subsidiary file or have filed an
Income Tax Return on a consolidated, combined or unitary basis for a taxable
year or period ending on or before the Closing Date that have not been paid on
or prior to the Closing Date; (iv) any breach of the representations and
warranties contained in Section 4.17 of this Agreement or of the covenants
contained in this Article XI; (v) Taxes (other than Income Taxes) imposed on the
Company and its Subsidiaries which are due and payable or required to be
deposited with a Taxing Authority on or prior to the Closing Date (including,
but not limited to, all Taxes (other than Income Taxes) imposed on the Company
and its Subsidiaries with respect to taxable years or periods ending on or
before the Closing Date) and that have not been paid or deposited on or prior to
the Closing Date; and (vi) Tax payments made by the Company or its Subsidiaries
to Parent or Seller under any Tax sharing, indemnity or allocation agreement
(whether or not written) for a taxable year or period ending on or before the
Closing Date that have not been paid on or prior to the Closing Date.
11.10 Time of Payment. Payment of any amounts due under this Article
---------------
XI in respect of Taxes shall be made by the Seller or the Surviving Company, as
the case may be, within
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10 Business Days of the receipt of reasonable evidence establishing that such a
payment is required. Neither the Seller nor the Surviving Company shall make a
request for payment under this Article XI unless the aggregate amount of such
requests equals or exceeds $25,000. If a payment of any amount due under this
Article XI is not made within 10 Business Days of the receipt of reasonable
evidence establishing that such payment is required, interest shall accrued at
the federal "underpayment" rate set forth at 6621(a)(2) of the Code beginning on
the 11th Business Day after the receipt of reasonable evidence establishing that
such a payment is required.
11.11 Indemnification Process. In the event of a Third Party Claim for
-----------------------
Taxes, Purchaser shall permit Seller, at Seller's expense, to control any
proceeding relating to any taxable period of the Company ending on or before the
Closing Date. If the Seller or Parent do not assume the defense of any such
proceeding, Purchaser may, without any effect to its right of indemnification by
the Seller or Parent under this Article XI, defend the same in such manner as it
may deem appropriate, including, but not limited to, settling such audit or
proceeding. Purchaser shall control any Proceeding relating to any taxable
period of the Company ending after the Closing Date. Purchaser shall not settle,
compromise or concede any adjustment or claim for Taxes relating to any taxable
period of the Company ending on or before the Closing Date without Seller's
written consent which shall be unreasonably withheld, and Seller or Parent shall
not settle or otherwise compromise any issue or matter without the Purchaser's
prior written consent if such issue or matter will have a material affect on the
Tax liability of the Advance Indemnified Parties.
11.12 Section 338(h)(10) Election. Parent and Advance agree to jointly
---------------------------
make the elections provided for by 338(h)(10) of the Code and Treasury
Regulations Section 1.338(h)(10)-1 (and any comparable election under state or
local tax law) with respect to Parts America, Inc. At the Closing, Parent shall
deliver Internal Revenue Service Form 8023 to Advance, with Sections 3a through
8h and 11a through 11g completed and signed by Parent. Also, Parent and Advance
shall cooperate with each other to take all actions necessary and appropriate
(including filing such additional forms, returns, elections, schedules and other
documents) as may be required to effect and preserve a timely election in
accordance with the provisions of Treasury Regulation Section 1.338(h)(10)-1 (or
any comparable provisions of state or local tax law) or any successor
provisions. Parent and Advance shall report the purchase of the Company's
Subsidiaries pursuant to this Agreement consistent with the elections (and any
comparable elections under state or local tax laws) and shall take no position
inconsistent therewith in any Tax Return or any proceeding before any Tax
Authority.
11.13 Timing Adjustments. If Parent and its Subsidiaries are not able
------------------
to treat the payment of the retention payments as set forth in Section 7.07 as a
reduction to the Merger Consideration or to claim the payment of the retention
payments as set forth in Section 7.07 as a tax deduction, Purchaser shall remit
to Seller the amount of any Tax benefits of the Surviving Company from any Tax
deduction available to the Surviving Company relating to the retention payments
as set forth in Section 7.07 which Tax benefit was funded by Parent or any of
its Subsidiaries. The amount of any Tax benefit shall be determined by assuming
a 40 percent Tax rate. The Surviving Corporation shall not claim any Tax
deduction with respect to the exercise of any stock options granted by Parent.
66
<PAGE>
ARTICLE XII
GENERAL PROVISIONS
------------------
12.01 Expenses. Each party hereto shall bear its own expenses with
--------
respect to the transactions contemplated by this Agreement.
12.02 Mutual Release. (a) Except as provided in Sections 7.02, 7.05,
--------------
7.07, 7.08, 7.11, 7.12, 7.13, 7.14 and 7.19 and Articles X and XI of this
Agreement, subject to the occurrence of the Closing and as of the Closing Date,
Seller, on behalf of itself and its Affiliates (other than the Company and its
Subsidiaries), hereby releases and forever discharges the Company and its
Subsidiaries from all actions, causes of action, suits, debts, claims and
demands of Seller and its Affiliates (other than the Company and its
Subsidiaries) related to the Company and its Subsidiaries (except for rights or
obligations arising under this Agreement) that arise out of acts, events,
conditions or omissions, whether known or unknown, occurring or existing from
the beginning of the world to and including the Closing Date. Nothing in this
Section shall be deemed to release Parent or its Subsidiaries or Affiliates from
any claims, costs or liabilities arising out of or related to insurance obtained
or provided by Parent, its Subsidiaries or Affiliates for the benefit of the
Company and its Subsidiaries for periods prior to and including the Closing
Date, including sponsorship liability coverage, directors and officers liability
coverage, and employment practices liability insurance.
(b) Except as provided in Articles X and XI of this Agreement, subject
to the occurrence of the Closing Date, the Company, on behalf of itself and its
Affiliates (other than Seller and its Affiliates after the Closing Date), hereby
releases and forever discharges Seller and its Affiliates from all actions,
causes of action, suits, debts, claims and demands of the Company related to
Seller and its Affiliates (except for rights or obligations arising under this
Agreement) that arise out of acts, events, conditions or omissions, whether
known or unknown, occurring or existing from the beginning of the world to and
including the Closing Date.
12.03 Further Assurances. From time to time after the Closing and
------------------
without further consideration, each of the parties, upon the request of another
party and at such other party's expense, shall execute and deliver such
documents and instruments of conveyance and transfer as such other party may
reasonably request in order to consummate more effectively the terms of this
Agreement (including the vesting in Purchaser of title to the Company Shares
transferred under this Agreement). The Company shall use reasonable best
efforts to deliver to Advance within 15 days (and in no event more than 30 days)
after the date of this Agreement financial statements in form and substance
which comply with Regulation S-X promulgated under the Securities Act and
relating to the registration statement of Advance filed on June 4, 1998 with the
Securities and Exchange Commission and shall use reasonable efforts to assist
Advance in obtaining necessary consents and cooperation from the Company's
independent public accountants.
12.04 Amendment. This Agreement may not be amended except by an
---------
amendment signed by Advance and Parent, provided that Sections 2.07, 2.09(a),
2.09(f), 12.04 and Article VI
67
<PAGE>
and any amendment which adversely effects the rights and obligations of the
Investors shall require the written consent of the Investors. Notwithstanding
the foregoing, Purchaser may assign its rights to purchase the Company Shares
and its obligations under this Agreement to one or more wholly owned
Subsidiaries of Advance and FS Equity Partners IV L.P. may assign its rights to
purchase Advance Common Stock hereunder; provided that in either case no
--------
such assignment shall relieve Purchaser or Advance on the one hand or FS Equity
Partners IV L.P. on the other hand of their respective obligations under this
Agreement. ASCI may assign a security interest in this Agreement to any lender
providing financing in connection with the Merger Consideration.
12.05 Waiver. Either Purchaser or Seller may (a) extend the time for
------
the performance of any of the obligations or other acts of the other, (b) waive
any inaccuracies in the representations and warranties of the other contained in
this Agreement or in any document delivered by the other pursuant to this
Agreement or (c) waive compliance with any of the agreements, or satisfaction of
any of the conditions, contained in this Agreement by the other. Any agreement
on the part of a party to this Agreement to any such extension or waiver shall
be valid only if set forth in an instrument in writing signed by the other
party.
12.06 Notices. Any notices or other communications required or
-------
permitted under, or otherwise in connection with, this Agreement shall be in
writing and shall be deemed to have been duly given when delivered in person or
upon confirmation of receipt when transmitted by facsimile transmission or on
receipt after dispatch by registered or certified mail, postage prepaid,
addressed, as follows:
If to Parent, Seller or the Company:
Sears, Roebuck and Co.
3333 Beverly Road
Hoffman Estates, Illinois 60179
Attention: Assistant General Counsel Corporate
and Securities
Facsimile: (847) 286-0959
With a copy to:
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603-3441
Attention: Scott J. Davis, Esq.
Facsimile: (312) 701-7711
68
<PAGE>
If to Advance, Purchaser or the Investors to:
Advance Holding Corporation
5673 Airport Road
Roanoke, Virginia 24012
Attention: Garnett E. Smith
Facsimile: (540) 561-1699
With copies to:
Riordan & McKinzie
300 South Grand Avenue
29th Floor
Los Angeles, California 90071
Attention: Richard J. Welch, Esq.
Facsimile: (213) 229-8550
and
Flippin, Densmore, Morse, Rutherford & Jessee
300 First Campbell Square
Drawer 1200
Roanoke, Virginia 24006
Attention: Douglas W. Densmore, Esq.
Facsimile: (540) 510-3050
If to the Investors:
c/o Freeman Spogli & Co. Incorporated
599 Lexington Avenue
New York, New York 10022
Attention: John M. Roth
Facsimile: (212) 758-7499
With a copy to:
Riordan & McKinzie
300 South Grand Avenue
29th Floor
Los Angeles, California 90071
Attention: Richard J. Welch, Esq.
Facsimile: (213) 229-8550
69
<PAGE>
or such other address as the person to whom notice is to be given has furnished
in writing to the other parties. A notice of change in address shall not be
deemed to have been given until received by the addressee.
12.07 Headings and Schedules. The descriptive headings of the Articles
----------------------
and Sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement. The disclosure or inclusion of any matter
or item on any Schedule to the Disclosure Memorandum shall not be deemed an
acknowledgment or admission that any such matter or item is required to be
disclosed or is material for purposes of the representations and warranties set
forth in this Agreement.
12.08 Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the laws of the State of Delaware regardless of
principles of conflicts of laws.
12.09 No Third Party Rights. Except as specifically provided in
---------------------
Articles X and XI or Section 12.02, this Agreement is intended to be solely for
the benefit of the parties to this Agreement and is not intended to confer any
benefits upon, or create any rights in favor of, any person other than the
parties to this Agreement.
12.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute a single instrument.
12.11 Severability. If any provision of this Agreement shall be held
------------
invalid, illegal or unenforceable, the validity, legality or enforceability of
the other provisions of this Agreement shall not be affected thereby, and there
shall be deemed substituted for the provision at issue a valid, legal and
enforceable provision as similar as possible to the provision at issue.
12.12 Entire Agreement. This Agreement (including the documents and
----------------
instruments referred to in this Agreement) sets forth the entire understanding
and agreement among the parties as to the matters covered in this Agreement and
supersedes and replaces any prior understanding, agreement or statement of
intent, in each case, written or oral, of any and every nature with respect to
such understanding, agreement or statement other than the Confidentiality
Agreement and any other agreements executed in connection with this Agreement.
Purchaser and Seller each acknowledge that it has conducted its own independent
review and analysis of the business and operations of the Company and its
Subsidiaries or Advance and its Subsidiaries, as the case may be, and that it
has been provided access to the properties, records and personnel of the Company
and its Subsidiaries or Advance and its Subsidiaries, as the case may be, for
this purpose. In entering into this Agreement, each of Purchaser and Seller has
relied solely upon its own investigation and analysis and the representations
and warranties set forth in this Agreement and acknowledges that none of
Advance, Seller or any of their respective Affiliates or any of their respective
owners, directors, officers, employees, agents, representatives or advisors
makes any representation or warranty, either express or implied, as to the
accuracy or completeness of (and agrees that none of such persons shall have any
liability or responsibility to it in respect of) any of the information,
70
<PAGE>
including without limitation any projections, estimates or budgets, provided or
made available to Purchaser or Seller or their respective agents or
representatives, except as, and only to the extent expressly provided for in,
this Agreement.
12.13 Consent to Jurisdiction; Jury Trial; Venue. All disputes,
------------------------------------------
litigation, proceedings or other legal actions by any party to this Agreement in
connection with or relating to this Agreement or any matters described or
contemplated in this Agreement shall be instituted in the courts of the State of
Delaware or of the United States sitting in the State of Delaware. Each party
to this Agreement irrevocably submits to the exclusive jurisdiction of the
courts of the State of Delaware and of the United States sitting in the State of
Delaware in connection with any such dispute, litigation, action or proceeding
arising out of or relating to this Agreement. Advance and Purchaser irrevocably
appoint CT Corporation System as their agent for the sole purpose of receiving
service of process or other legal summons in connection with any such dispute,
litigation, action or proceeding brought in any such court. Each party to this
Agreement will maintain at all times a duly appointed agent in the State of
Delaware for the service of any process or summons in connection with any such
dispute, litigation, action or proceeding brought in any such court and, if its
fails to maintain such an agent during any period, any such process or summons
may be served on it by mailing a copy of such process or summons to it at its
address set forth, and in the manner provided, in Section 12.06, with such
service deemed effective on the fifteenth day after the date of such mailing.
Each party to this Agreement irrevocably waives the right to a trial
by jury in connection with any matter arising out of this Agreement and, to the
fullest extent permitted by applicable law, any defense or objection it may now
or hereafter have to the laying of venue of any proceeding under this Agreement
brought in the courts of the State of Delaware or of the United States sitting
in the State of Delaware and any claim that any proceeding under this Agreement
brought in any such court has been brought in an inconvenient forum.
12.14 Fair Construction. This Agreement shall be deemed to be the
-----------------
joint work product of all the parties to this Agreement without regard to the
identity of the draftsperson, and any rule of construction that a document shall
be interpreted or construed against the drafting party shall not be applicable.
* * * * * * * * * * *
71
<PAGE>
Each of the parties to this Agreement has caused this Agreement to be executed
on its behalf by its duly authorized officer, all as of the day and year first
above written.
SEARS, ROEBUCK AND CO.
By: /s/ Sue Field
---------------------------------
Name:
Title:
WESTERN AUTO HOLDING CO.
By: /s/ Sue Field
---------------------------------
Name:
Title:
WESTERN AUTO SUPPLY COMPANY
By: /s/ Sue Field
--------------------------------
Name:
Title:
ADVANCE ACQUISITION CORPORATION
By:
--------------------------------
Name:
Title:
ADVANCE HOLDING CORPORATION
By:
-------------------------------
Name:
Title:
ADVANCE STORES COMPANY, INCORPORATED
By:
--------------------------------
Name:
Title:
72
<PAGE>
SEARS, ROEBUCK AND CO.
By:
---------------------------------
Name:
Title:
WESTERN AUTO HOLDING CO.
By:
---------------------------------
Name:
Title:
WESTERN AUTO SUPPLY COMPANY
By:
--------------------------------
Name:
Title:
ADVANCE ACQUISITION CORPORATION
By: /s/ Garnett E. Smith
--------------------------------
Name: Garnett E. Smith
Title: President
ADVANCE HOLDING CORPORATION
By: /s/ J O'Neil Leftwich
-------------------------------
Name: J O'Neil Leftwich
Title: Senior Vice President &
Chief Financial Officer
ADVANCE STORES COMPANY, INCORPORATED
By: /s/ Garnett E. Smith
--------------------------------
Name: Garnett E. Smith
Title: President C.E.O.
73
<PAGE>
For purposes of Sections 2.07, 2.09(a), 2.09(f), 12.04 and
Article VI hereof only:
INVESTORS
FS EQUITY PARTNERS IV, L.P.
--------------------------------------
By: FS Capital Partners, LLC
Its: General Partner
By: /s/ Mark Doran
--------------------------------
Name: Mark Doran
Title: Principal
74
<PAGE>
EXHIBIT 12.1
ADVANCE STORES COMPANY, INCORPORATED
SCHEDULE OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Historical
------------------------------------------------------------------------
Twenty-eight
Weeks
Ended
Fiscal Year Ended July 18,
------------------------------------------------------------
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 $6,768
------------------------------------------------------------------------
Fixed charges:
Interest expense 2,031 3,633 6,327 6,221 7,732 11,821
Interest portion of rentals 5,280 7,400 10,395 12,868 16,099 10,425
------------------------------------------------------------------------
Total fixed charges 7,311 11,033 16,722 19,089 23,831 22,246
------------------------------------------------------------------------
Earnings before income taxes and fixed charges $25,065 $47,318 $45,075 $53,036 $58,873 29,014
=======================================================================
Ratio of earnings to fixed charges (2) 3.43 4.29 2.70 2.78 2.47 1.30
=======================================================================
<CAPTION>
Proforma (1)
-----------------------------
Twenty-eight
Weeks
Ended
Fiscal Yr July 18,
1997 1998
-----------------------------
<S> <C> <C>
Income (loss) before income taxes $ 8,417 $ (1,034)
----------------------------
Fixed charges:
Interest expense $34,357 19,623
Interest portion of rentals 16,099 10,425
-----------------------------
Total fixed charges 50,456 30,048
-----------------------------
Earnings before income taxes and fixed charges $58,873 $ 29,014
=============================
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 $1,034
for the pro forma twenty-eight weeks ended July 18, 1998.
<PAGE>
EXHIBIT 23.2
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Greensboro, North Carolina,
October 5, 1998.
<PAGE>
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this pre-effective Amendment No. 2 to Registration
Statements No. 333-56013 and 333-56013-01 of Advance Stores Company,
Incorporation of our report dated July 17, 1998 (August 17, 1998 as to Note 13)
on the financial statements of Western Auto Supply Company and Subsidiaries
appearing in the Prospectus, which is a part of such Registration Statements,
and to the reference to us under the heading "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Kansas City, Missouri
October 5, 1998
