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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 7, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number - 333-56013
_______________
ADVANCE STORES COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
_______________
Virginia 54-0118110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5673 Airport Road 24012
Roanoke, Virginia (Zip Code)
(Address of Principal Executive Offices)
(540) 362-4911
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report).
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
As of November 16, 2000, the registrant had outstanding 538 shares of Class
A Common Stock, par value $100 per share (the only class of common stock of the
registrant outstanding). The registrant's Class A Common Stock is not traded in
a public market.
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<PAGE>
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
Twelve and Forty Week Periods Ended October 7, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements of Advance
Stores Company, Incorporated and Subsidiaries:
Condensed Consolidated Balance Sheets as of October 7, 2000 and
January 1, 2000........................................................................ 1
Condensed Consolidated Statements of Operations for the Twelve and
Forty Week Periods Ended October 7, 2000 and October 9, 1999........................... 2
Condensed Consolidated Statements of Cash Flows for the
Forty Week Periods Ended October 7, 2000 and October 9, 1999........................... 3
Notes to the Condensed Consolidated Financial Statements............................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risks............................ 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 20
Item 6. Exhibits and Reports on Form 8-K....................................................... 20
SIGNATURE.................................................................................................. S-1
</TABLE>
i
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
October 7, 2000 and January 1, 2000
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
October 7, January 1,
Assets 2000 2000
------ ------------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 16,353 $ 22,577
Receivables, net 92,486 106,032
Inventories 803,107 749,447
Other current assets 20,524 9,239
----------- -----------
Total current assets 932,470 887,295
Property and equipment, net of accumulated depreciation of $180,470
and $146,647 404,994 402,476
Assets held for sale 26,166 29,694
Other assets, net 16,307 24,974
----------- -----------
$ 1,379,937 $ 1,344,439
=========== ===========
Liabilities and Stockholder's Equity
------------------------------------
Current liabilities:
Bank overdrafts $ 4,564 $ 12,182
Current portion of long-term debt 3,555 3,665
Accounts payable 415,858 341,188
Accrued expenses 134,819 147,776
Other current liabilities 37,278 26,172
----------- -----------
Total current liabilities 596,074 530,983
----------- -----------
Long-term debt 485,950 560,302
----------- -----------
Other long-term liabilities 66,053 50,626
----------- -----------
Commitments and contingencies
Stockholder's equity:
Common stock, Class A, voting, $100 par value; 5,000 shares
authorized; 538 and 536 issued and outstanding 54 54
Additional paid-in capital 275,654 273,598
Other 2,264 1,777
Accumulated deficit (46,112) (72,901)
----------- -----------
Total stockholder's equity 231,860 202,528
----------- -----------
$ 1,379,937 $ 1,344,439
=========== ===========
</TABLE>
The accompanying notes to the condensed consolidated financial statements are an
integral part of these balance sheets.
1
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations
For the Twelve and Forty Week Periods Ended
October 7, 2000 and October 9, 1999
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Twelve Week Periods Ended Forty Week Periods Ended
----------------------------- -----------------------------
October 7, October 9, October 7, October 9,
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 552,138 $ 522,846 $ 1,787,370 $ 1,735,619
Cost of sales, including purchasing and warehousing costs 328,235 323,209 1,087,959 1,113,095
----------- ----------- ------------ -----------
Gross profit 223,903 199,637 699,411 622,524
Selling, general and administrative expenses 193,792 184,777 617,867 610,570
----------- ----------- ------------ -----------
Operating income 30,111 14,860 81,544 11,954
----------- ----------- ------------ -----------
Other (expense) income:
Interest expense (12,851) (12,156) (44,165) (40,673)
Other 467 49 861 318
----------- ----------- ------------ -----------
Total other expense, net (12,384) (12,107) (43,304) (40,355)
----------- ----------- ------------ -----------
Income (loss) before provision (benefit)
for income taxes and extraordinary item 17,727 2,753 38,240 (28,401)
Provision (benefit) for income taxes 6,703 1,223 14,384 (10,106)
----------- ----------- ------------ -----------
Income (loss) before extraordinary item 11,024 1,530 23,856 (18,295)
Extraordinary gain on debt extinguishment,
net of $1,759 income tax 2,933 -- 2,933 --
----------- ----------- ------------ -----------
Net income (loss) $ 13,957 $ 1,530 $ 26,789 $ (18,295)
=========== =========== ============ ===========
</TABLE>
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
2
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Forty Week Periods Ended
October 7, 2000 and October 9, 1999
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Forty Week Periods Ended
----------------------------------
October 7, October 9,
2000 1999
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 26,789 $ (18,295)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation 50,614 43,677
Amortization of stock option compensation 533 989
Amortization of deferred debt issuance costs 2,373 2,525
Amortization of interest on capital lease obligation 42 61
Provision (benefit) for deferred income taxes 17,484 (1,394)
Extraordinary gain on extinguishment of debt, net of tax (2,933) --
Net losses on sales of property and equipment 368 7
Net decrease (increase) in:
Receivables, net 13,549 (32,399)
Inventories (53,660) (32,521)
Other assets (5,931) (3,632)
Net increase (decrease) in:
Accounts payable 74,670 (18,739)
Accrued expenses (21,380) (21,731)
Other liabilities (1,879) 28,972
-------------- -------------
Net cash provided by (used in) operating activities 100,639 (52,480)
-------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (46,883) (81,758)
Other 4,777 2,215
-------------- -------------
Net cash used in investing activities (42,106) (79,543)
-------------- -------------
Cash flows from financing activities:
(Decrease) increase in bank overdrafts (7,618) 1,573
Net borrowings under note payable 1,555 --
Early extinguishment of debt (24,990) --
Borrowings under credit facilities 191,200 358,500
Payments on credit facilities (233,200) (242,500)
Payment of debt issuance costs -- (930)
Proceeds from issuance of common stock 2,053 --
Other 6,243 5,261
-------------- -------------
Net cash (used in) provided by financing activities (64,757) 121,904
-------------- -------------
Net decrease in cash and cash equivalents (6,224) (10,119)
Cash and cash equivalents at beginning of period 22,577 34,220
-------------- -------------
Cash and cash equivalents at end of period $ 16,353 $ 24,101
============== =============
Supplemental cash flow information:
Interest paid $ 36,089 $ 29,775
Income tax refunds (payments), net 6,700 (5,880)
Non-cash transactions:
Conversion of capital lease obligation $ 3,509 $ --
Forfeiture of stock options 46 --
Obligations under capital lease -- 3,345
Debt issuance and acquisition costs accrued -- 186
</TABLE>
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
3
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended
October 7, 2000 and October 9, 1999
(dollars in thousands)
1. Basis of Presentation:
Advance Stores Company, Incorporated is a wholly owned subsidiary of
Advance Holding Corporation (the "Parent"). The accompanying 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 October 7, 2000, the
condensed consolidated statements of operations for the twelve and forty week
periods ended October 7, 2000 and October 9, 1999 and the condensed consolidated
statements of cash flows for the forty week periods ended October 7, 2000 and
October 9, 1999, 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 disclosures 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 1,
2000.
The results of operations for the twelve week and forty week periods are
not necessarily indicative of the operating results to be expected for the full
fiscal year.
Change in Accounting Estimate
In July 2000, the Company adopted a change in an accounting estimate to
reduce the depreciable lives of certain property and equipment on a prospective
basis. The effect on operations for the third quarter of fiscal 2000 was to
increase depreciation expense by $1,229. The Company expects to discontinue the
operation of the effected assets by the third quarter of fiscal 2001, at which
time they will be fully depreciated under the reduced useful lives.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires companies to recognize all
derivatives as either assets or liabilities in their statement of financial
position and measure those instruments at fair value. In September 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133," which delayed the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. In
June 2000, the FASB issued SFAS No. 138, "Accounting for Derivative Instruments
and Certain Hedging - an Amendment of SFAS No. 133," which amended the
accounting and reporting standards for certain risks related to normal purchases
and sales, interest and foreign currency transactions addressed by SFAS No. 133.
The Company has not yet determined the impact SFAS No. 133 will have on its
financial position or the results of its operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
4
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended
October 7, 2000 and October 9, 1999
(dollars in thousands)
Reclassifications
Certain 1999 amounts have been reclassified to conform with their 2000
presentation.
2. Receivables:
Receivables consist of the following:
<TABLE>
<CAPTION>
October 7, January 1,
2000 2000
------------ ------------
(unaudited)
<S> <C> <C>
Trade:
Wholesale $ 15,999 $ 22,221
Retail 16,769 10,525
Vendor 41,043 47,405
Installment 14,076 13,616
Related parties 5,046 12,559
Employees 364 349
Other 3,005 3,481
----------- -----------
Total receivables 96,302 110,156
Less - Allowance for doubtful accounts (3,816) (4,124)
----------- -----------
Receivables, net $ 92,486 $ 106,032
=========== ===========
</TABLE>
3. Inventories:
Inventories are stated at the lower of cost or market using the last-in,
first-out (LIFO) method. An actual valuation of inventory under the LIFO method
can be made only at the end of each fiscal year based on the inventory levels
and costs at that time. Accordingly, interim LIFO calculations must be based on
management's estimates of expected fiscal year-end inventory levels and costs.
The Company capitalizes certain purchasing and warehousing costs into inventory.
Purchasing and warehousing costs included in inventory at October 7, 2000 and
January 1, 2000 were $53,376 and $49,252, respectively. Inventories consist of
the following:
October 7, January 1,
2000 2000
------------- -----------
(unaudited)
Inventories at FIFO $ 792,251 $ 735,762
Adjustment to state inventories at LIFO 10,856 13,685
------------- -----------
Inventories at LIFO $ 803,107 $ 749,447
============= ===========
5
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended
October 7, 2000 and October 9, 1999
(dollars in thousands)
4. Restructuring Liabilities:
In November 1998, the Company consummated a plan of merger (the
"Western Merger") with Sears, Roebuck and Co. ("Sears") to acquire Western Auto
Supply Company ("Western"). The Company's restructuring activities relate to the
settlement of restructuring activities undertaken as a result of the Western
Merger and the ongoing analysis of the profitability of store locations.
Expenses associated with restructuring are included in selling, general and
administrative expenses in the accompanying condensed consolidated statements of
operations. During the first three quarters of fiscal 2000, the Company closed
five stores included in the fiscal 1999 restructuring activities and made the
decision to close or relocate 18 additional stores not meeting profitability
objectives, of which 16 have been closed as of October 7, 2000.
The Company assumed the restructuring accrual related to Western's
restructuring activities prior to the Western Merger. As of October 7, 2000,
this restructuring accrual relates primarily to ongoing lease obligations on
closed facilities and estimated severance payments. The Company actively pursues
subleasing these closed stores, including certain service bays in stores
obtained through the Western Merger that currently do not produce revenue.
A reconciliation of activity with respect to these restructuring
accruals is as follows:
Other Exit
Severance Costs
--------- ----------
Balance, January 1, 2000 $ 18 $ 9,963
New provisions -- 1,435
Change in estimates -- 250
Reserves utilized (14) (3,666)
--------- ----------
Balance, October 7, 2000 (unaudited) $ 4 $ 7,982
========= ==========
The above liabilities related to severance costs will be settled during
fiscal 2000. Other exit cost liabilities will be settled over the remaining
terms of the underlying lease agreements.
Additionally, as a result of the Western Merger, the Company
established restructuring reserves in connection with the decision to close
certain Parts America stores, to relocate certain Western administrative
functions, to exit certain facility leases and to terminate certain employees of
Western. As of October 7, 2000, all employees have been terminated and all
leased stores have been closed.
A reconciliation of activity with respect to these restructuring
accruals is as follows:
Other Exit
Severance Costs
--------- -----------
Balance, January 1, 2000 $ 3,510 $ 7,825
Change in estimates - (221)
Reserves utilized (3,146) (2,139)
--------- ----------
Balance, October 7, 2000 (unaudited) $ 364 $ 5,465
========= ==========
The above liabilities related to severance costs will primarily be
settled during fiscal 2000. Other exit cost liabilities will be settled over the
remaining terms of the underlying lease agreements.
5. Early Extinguishment of Debt:
During the third quarter of fiscal 2000, the Company repurchased
$30,550 face value of Senior
6
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended
October 7, 2000 and October 9, 1999
(dollars in thousands)
Subordinated Notes at a price ranging from 81.5 to 82.5 percent of their face
value. Accordingly, the Company recorded a gain related to the extinguishment of
this debt of $2,933, net of $1,759 provided for income taxes and $868 of
associated deferred debt issuance costs.
6. Contingencies:
In March 2000, the Company was notified that it was named in a lawsuit
filed on behalf of independent retailers and jobbers against the Company and
others for various claims under the Robinson-Patman Act. The litigation is in
preliminary stages. The Company believes these claims are without merit and
intends to defend them vigorously; however, the ultimate outcome of this matter
cannot be ascertained at this time.
The Company is also involved in various other claims, lawsuits and
environmental issues arising in the normal course of business. The damages
claimed against the Company in some of these proceedings are substantial.
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 future results of operations.
7. Related Parties:
The following table presents the related party transactions with Sears
included in the condensed consolidated statements of operations for the forty
week periods ended October 7, 2000 and October 9, 1999 and the condensed
consolidated balance sheets as of October 7, 2000 and January 1, 2000:
Forty Week Periods Ended
-----------------------------------
October 7, 2000 October 9, 1999
--------------- ---------------
(unaudited) (unaudited)
Net sales to Sears $ 5,905 $ 3,790
Shared services revenue - 2,001
Shared services expense - 1,072
Credit card fee expense 325 1,800
October 7, 2000 January 1, 2000
--------------- ---------------
(unaudited)
Receivables from Sears $ 4,759 $ 6,625
Payables to Sears 1,332 4,304
The Company also enters into intercompany transactions with the Parent
in the normal course of its business. These transactions are primarily related
to intercompany loans and current and deferred income tax assets and
liabilities. As of October 7, 2000 and January 1, 2000, the Company had a net
receivable from its Parent of $226 and $5,912 respectively.
8. Segment and Related Information:
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires entities to report financial and descriptive information
related to segments within the organization.
7
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended
October 7, 2000 and October 9, 1999
(dollars in thousands)
The Company has the following operating segments: Retail and Wholesale.
Retail consists of the retail operations of the Company, operating under the
trade name "Advance Auto Parts" in the United States and "Western Auto" in
Puerto Rico and the Virgin Islands. Wholesale consists of the wholesale
operations, including distribution services to independent dealers, franchisees
and one Company-owned store in California all operating under the "Western Auto"
trade name. The California store location generates approximately 12% of the
total Wholesale segment revenues.
Prior to January 1, 2000, management received and used financial
information at the Advance Stores and consolidated Western levels. The Advance
Stores segment consisted of the same operations described above and the Western
segment consisted of the "Western Auto" retail locations and wholesale
operations described above.
The accounting policies of the consolidated company have been
consistently applied to the reportable segments listed below.
<TABLE>
<CAPTION>
Twelve Week Periods Ended
---------------------------------------------
October 7, 2000 (unaudited) Retail Wholesale Totals
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 523,243 $ 28,895 $ 552,138
Income before provision
for income taxes and extraordinary item 15,773 1,954 17,727
Segment assets (b) 1,309,455 70,482 1,379,937
October 9, 1999 (unaudited)
----------------------------------------------------------------------------------------------------------
Net sales $ 485,776 $ 37,070 $ 522,846
Income (loss) before provision (benefit)
for income taxes 2,912 (159) 2,753
Segment assets (a) (b) 1,298,800 74,627 1,373,427
<CAPTION>
Forty Week Periods Ended
---------------------------------------------
October 7, 2000 (unaudited) Retail Wholesale Totals
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,673,561 $ 113,809 $1,787,370
Income before provision for income
taxes and extraordinary items 38,211 29 38,240
Segment assets (b) 1,309,455 70,482 1,379,937
October 9, 1999 (unaudited)
----------------------------------------------------------------------------------------------------------
Net sales $1,565,936 $ 169,683 $1,735,619
Loss before benefit for income taxes (21,332) (7,069) (28,401)
Segment assets (a) (b) 1,298,800 74,627 1,373,427
</TABLE>
(a) During fiscal 1999, certain assets, liabilities and the
corresponding activity related to the Parts America store
operations and a distribution center were transferred to the Retail
segment through a dividend.
(b) Excludes investment in and equity in net earnings or losses of
subsidiaries.
8
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended
October 7, 2000 and October 9, 1999
(dollars in thousands)
9. Consolidated Subsidiaries:
The Company has wholly owned subsidiaries, LARALEV, INC., Advance
Trucking Corporation and Western (the "Guarantor Subsidiaries") that are
guarantors of the Company's subordinated notes, term loan facility and revolving
credit facility. The guarantees are joint and several in addition to full and
unconditional. LARALEV, INC. holds certain trademarks, trade names and other
intangible assets for which it receives royalty income from the Company. Advance
Trucking Corporation is a wholly owned subsidiary that holds substantially all
of the Company's inventory delivery vehicles. Advance Trucking Corporation
became a guarantor subsidiary in the second quarter of fiscal 1999. The
Guarantor Subsidiaries comprise all direct and indirect subsidiaries. The
Company has not presented separate financial statements for the subsidiaries
because management has determined that such information is not material to
investors.
Unaudited summarized combined financial information for Guarantor
Subsidiaries is as follows:
<TABLE>
<CAPTION>
Twelve Week Periods Ended Forty Week Periods Ended
------------------------------- --------------------------------
October 7, October 9, October 7, October 9,
2000 (b) 1999 (a)(b) 2000 (b) 1999 (a)(b)
-------------- --------------- -------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 75,639 $ 82,802 $ 262,157 $ 323,502
Gross profit 23,757 23,435 70,386 77,796
Royalty income from the Company 9,597 8,851 30,691 30,668
Operating income 12,093 7,201 28,267 25,925
Net income (loss) 8,576 (9,109) 1,387 (13,427)
<CAPTION>
October 7, January 1,
2000 (b) 2000 (a)(b)
-------------- ---------------
(unaudited)
<S> <C> <C>
Current assets $ 126,113 $ 122,304
Non-current assets 70,941 86,053
Current liabilities 145,236 146,416
Non-current liabilities 500,407 576,368
</TABLE>
(a) During fiscal 1999, certain assets, liabilities and the
corresponding activity related to the Parts America store
operations and a distribution center were transferred to Advance
Stores through a dividend.
(b) Reflects the push down of guaranteed debt, deferred debt issuance
costs and related interest and amortization.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Advance Stores Company, Incorporated and its subsidiaries (the "Company")
is a wholly owned subsidiary of Advance Holding Corporation ("Holding"). The
Company was formed in 1929. In the 1980's, the Company sharpened its marketing
focus to target sales of automotive parts and accessories to "do-it-yourself"
("DIY") customers and accelerated its growth strategy. From the 1980's through
the present, the Company has grown significantly through new store openings,
strategic acquisitions and a merger with Western Auto Supply Company (the
"Western Merger"). Additionally, in 1996, the Company began to aggressively
expand its sales to "do-it-for-me" ("DIFM") customers by implementing a
commercial delivery program that supplies parts and accessories to third party
automotive service and repair providers.
As of October 7, 2000, the Company had 1,701 stores in 37 states, Puerto
Rico and the Virgin Islands operating under the "Advance Auto Parts" and
"Western Auto" trade names (the "Retail" segment). Advance Auto Parts is the
second largest retailer of automotive parts and accessories in the United States
and, based on store count, the Company believes it is the largest retailer in a
majority of its markets. The Western Auto stores (the "Service Stores") included
in the Retail segment offer home and garden merchandise in addition to
automotive parts, accessories and service. The Company also operates a wholesale
distribution network which includes distribution services of automotive parts
and accessories and home and garden merchandise to approximately 600
independently owned dealer stores and three franchisees in 48 states and one
Company-owned retail store in California all operating under the "Western Auto"
trade name (the "Wholesale" segment).
During the first quarter of fiscal 2000, the Company announced and
finalized a plan to partner with CSK Auto, Inc. ("CSK") and Sequoia Capital to
form PartsAmerica.com, Inc. ("PartsAmerica.com"). PartsAmerica.com is an e-
commerce destination in the automotive aftermarket that operates independently
from its partners and will utilize the Company's and CSK's existing logistics
systems to support its web-based operations. The Company contributed the use of
the "Parts America" domain name to PartsAmerica.com under a royalty free license
agreement and the use of certain other assets. The Company is also party to a
service agreement with PartsAmerica.com that defines the wholesale sale of
merchandise to PartsAmerica.com and certain other services to be provided by the
Company. The Company began selling product to PartsAmerica.com during the third
quarter of fiscal 2000.
The following discussion of the consolidated historical results of
operations and financial condition of the Company should be read in conjunction
with the unaudited condensed consolidated financial statements of the Company
and the notes thereto included elsewhere in this Form 10-Q. The Company's first
quarter consists of 16 weeks and its other three quarters consist of 12 weeks.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this quarterly report contain
certain "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. These statements include without limitation the
words "believes," "anticipates," "estimates," "intends," "expects," and words of
similar import. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of Holding and the Company or the retail industry to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements.
These potential risks and uncertainties include, among others, the
following: general economic and business conditions; the Company's substantial
leverage and debt service obligations; restrictive loan covenants on the
Company's ability to pursue its business strategies; changes in business
strategy or development plans; competition; weather conditions; extent of the
market demand for auto parts; availability of inventory supply; unexpected
fluctuation in merchandise costs; adequacy and perception of customer service,
product quality and defect experience; availability of and ability to take
advantage of vendor pricing programs and incentives; rate of new store openings;
cannibalization of store sites; mix and types of merchandise sold; governmental
regulation of products; new store development; performance of information
systems; effectiveness of deliveries from distribution centers; ability to hire,
train and retain qualified employees and environmental risks. Forward-looking
statements regarding revenues, expenses, cash flows and
10
<PAGE>
liquidity are particularly subject to a variety of assumptions, some or all of
which may not be realized. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the results of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
11
<PAGE>
Results of Operations
The following tables set forth the statement of operations data for the
Company expressed in dollars and as a percentage of net sales for the periods
indicated.
<TABLE>
<CAPTION>
Twelve Week Periods Ended Forty Week Periods Ended
(dollars in thousands) (dollars in thousands)
(unaudited) (unaudited)
------------------------------- --------------------------------
October 7, October 9, October 7, October 9,
2000 1999 2000 1999
------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 552,138 $ 522,846 $ 1,787,370 $ 1,735,619
Cost of sales, including purchasing and warehousing costs 328,235 323,209 1,087,959 1,113,095
------------- --------------- -------------- -------------
Gross profit 223,903 199,637 699,411 622,524
Selling, general and administrative expenses 193,859 174,536 617,334 574,167
------------- --------------- -------------- -------------
Operating income, as adjusted 30,044 25,101 82,077 48,357
Expenses associated with merger integration -- 10,261 -- 35,414
Expenses associated with non-cash compensation (67) (20) 533 989
------------- --------------- -------------- -------------
Operating income 30,111 14,860 81,544 11,954
------------- --------------- -------------- -------------
Interest expense (12,851) (12,156) (44,165) (40,673)
Other, net 467 49 861 318
------------- --------------- -------------- -------------
Income (loss) before provision (benefit) for income
taxes and extraordinary item 17,727 2,753 38,240 (28,401)
Provision (benefit) for income taxes 6,703 1,223 14,384 (10,106)
------------- --------------- -------------- -------------
Net income (loss) before extraordinary item 11,024 1,530 23,856 (18,295)
Extraordinary gain, net of $1,759 income taxes 2,933 -- 2,933 --
------------- --------------- -------------- -------------
Net income (loss) $ 13,957 $ 1,530 $ 26,789 $ (18,295)
============= =============== ============== =============
<CAPTION>
Twelve Week Periods Ended Forty Week Periods Ended
(unaudited) (unaudited)
------------------------------- --------------------------------
October 7, October 9, October 7, October 9,
2000 1999 2000 1999
------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales, including purchasing and warehousing costs 59.4 61.8 60.9 64.1
-------------- ------------- ------------ -----------
Gross profit 40.6 38.2 39.1 35.9
Selling, general and administrative expenses 35.1 33.4 34.5 33.1
-------------- ------------- ------------ -----------
Operating income, as adjusted 5.5 4.8 4.6 2.8
Expenses associated with merger integration - 2.0 - 2.0
Expenses associated with non-cash compensation (0.0) (0.0) 0.0 0.1
-------------- ------------- ------------ -----------
Operating income 5.5 2.8 4.6 0.7
-------------- ------------- ------------ -----------
Interest expense (2.3) (2.3) (2.5) (2.3)
Other, net 0.1 0.0 0.0 0.0
-------------- ------------- ------------ -----------
Income (loss) before provision (benefit) for income
taxes and extraordinary item 3.3 0.5 2.1 (1.6)
Provision (benefit) for income taxes 1.2 0.2 0.8 (0.6)
-------------- ------------- ------------ -----------
Net income (loss) before extraordinary item 2.1 0.3 1.3 (1.0)
Extraordinary gain, net of $1,759 income taxes 0.5 - 0.2 -
-------------- ------------- ------------ -----------
Net income (loss) 2.6 % 0.3 % 1.5 % (1.0) %
============== ============= ============ ===========
</TABLE>
12
<PAGE>
Net sales consist primarily of comparable store net sales, new store
net sales, Service Store net sales and net sales to the wholesale dealer
network. Comparable store net sales is calculated based on the change in net
sales starting once a store has been opened for thirteen complete accounting
periods (each period represents four weeks). Relocations are included in
comparable store net sales from the original date of opening. Additionally, each
converted Parts America store is included in the comparable store net sales
calculation after thirteen complete accounting periods following its conversion
to an Advance Auto Parts store. The Company has historically not included the
Service Stores in the comparable store net sales calculation but intends to
during fiscal 2001.
The Company's cost of sales includes merchandise costs and warehouse
and distribution expenses as well as service labor costs for the Service Stores
and the one Company-owned retail store in California. 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. The Company seeks to avoid fluctuation
in merchandise costs by entering into long-term purchasing agreements with
vendors in exchange for pricing certainty, but there can be no assurance such
measures will in fact mitigate the effect of fluctuations in merchandise costs
on gross profits.
Selling, general and administrative expenses are comprised of store
payroll, store occupancy, net advertising expenses, depreciation and
amortization, other store expenses and general and administrative expenses,
including salaries and related benefits of corporate employees, administrative
office expenses, data processing, professional expenses and other related
expenses.
Twelve Weeks Ended October 7, 2000 Compared to Twelve Weeks Ended October 9,
1999
Net sales for the twelve weeks ended October 7, 2000 were $552.1
million, an increase of $29.3 million or 5.6% over net sales for the twelve
weeks ended October 9, 1999. Net sales for the Retail segment increased $37.5
million or 7.7%. The net sales increase for the Retail segment was due to an
increase in the comparable store sales of 4.0%, contributions from new stores
opened within the last year and increased net sales from converted Parts America
stores not included in the comparable store sales calculation. The comparable
store sales increase of 4.0% was primarily a result of growth in both the DIY
and DIFM market segments, as well as the continued maturation of new stores and
the converted Parts America stores included in the comparable store sales
calculation. Comparable store sales increased 8.6% for the twelve weeks ended
October 9, 1999 as compared to the comparable period of fiscal 1998. Net sales
for the Wholesale segment decreased 22.1% or $8.2 million, due to a decline in
the number of independently owned dealer stores and increased local competition
for the dealers.
During the twelve weeks ended October 7, 2000, the Company opened 32
new stores, relocated three stores, and closed five stores, bringing the total
retail stores to 1,701. The Company has 1,216 stores participating in its
commercial delivery program, a result of no net program changes during the third
quarter of fiscal 2000.
Gross profit for the twelve weeks ended October 7, 2000 was $223.9
million or 40.6% of net sales, as compared to $199.6 million or 38.2% of net
sales in the twelve weeks ended October 9, 1999. The increase in the gross
profit percentage is reflective of the realization of certain purchasing
synergies, fewer product liquidations, lower inventory shrinkage and freight
costs and the continued decline in the net sales of the lower margin Wholesale
segment. The higher shrinkage and freight costs in fiscal year 1999 were
primarily related to merchandise conversions and product liquidations resulting
from the Western Merger. The gross profit for the Retail segment was $217.9
million or 41.7% of net sales for the twelve week period ended October 7, 2000,
as compared to $191.8 million or 39.5% of net sales for the twelve week period
ended October 9, 1999.
Selling, general and administrative expenses, before integration
expenses and non-cash compensation, increased to $193.9 million or 35.1% of net
sales for the twelve week period ended October 7, 2000, from $174.5 million or
33.4% of net sales for the twelve week period ended October 9, 1999. The
increase in selling, general and administrative expenses is primarily
attributable to the continued sales decline in the Wholesale segment, which
carries lower selling, general and administrative expenses as a percentage of
sales as compared to the Retail segment. Additionally, the Company has incurred
higher than expected medical claims as well as higher payroll, depreciation and
supplies expense, partially offset by a decrease in net advertising costs, as a
percentage of sales, as compared to the twelve week period ended October 9,
1999. The Company's commitment to its goal of making human resources a core
competency, which it believes is critical to the Company's long-term success,
has resulted in additional staffing in the stores and increased medical plan
costs. The Company expects this commitment to increase the productivity of store
personnel, which will positively impact store profitability and customer
service. The increase in depreciation expense is primarily related to the change
in an accounting estimate
13
<PAGE>
to reduce the depreciable lives of certain property and equipment on a
prospective basis. Additionally, the decrease in net advertising costs is a
result of advertising dedicated to the converted Parts America store grand
openings during third quarter of fiscal 1999.
Operating income, as adjusted for expenses associated with integration
expenses and non-cash compensation, in the twelve weeks ended October 7, 2000
was $30.0 million or 5.5% of net sales, as compared to $25.1 million or 4.8% of
net sales in the twelve weeks ended October 9, 1999. The Retail segment
contributed $26.9 million to operating income, while the Wholesale segment
contributed $3.1 million to operating income.
EBITDA (operating income plus depreciation and amortization), as
adjusted for integration expenses and non-cash compensation, was $46.3 million
in the twelve week period ended October 7, 2000 or 8.4% of net sales, as
compared to $39.4 million or 7.5% of net sales in the twelve week period ended
October 9, 1999. 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's method for
calculating EBITDA may differ from similarly titled measures reported by other
companies. Management believes certain one-time expenses, expenses associated
with merger integration and non-cash compensation should be eliminated from the
EBITDA calculation to evaluate the operating performance of the Company.
Interest expense in the twelve weeks ended October 7, 2000 was $12.9
million or 2.3% of net sales, as compared to $12.2.million or 2.3% of net sales
in the twelve weeks ended October 9, 1999. Interest expense increased as a
result of higher interest rates, offset by a reduction in average borrowings
during the twelve week period ended October 7, 2000. During the third quarter of
fiscal 2000, the Company repurchased $30.6 million of Senior Subordinated Notes.
As a result of the early extinguishment of debt, the Company expects to benefit
from lower interest expense in the future.
Income tax expense for the twelve weeks ended October 7, 2000 was $6.7
million compared to $1.2 million in the twelve weeks ended October 9, 1999. This
increase was primarily due to the increase in income before taxes for the twelve
weeks ended October 7, 2000 as compared to the twelve weeks ended October 9,
1999.
The Company recorded net income of $14.0 million for the twelve week
periods ended October 7, 2000, as compared to net income of $1.5 million for the
twelve week periods ended October 9, 1999. In addition to the items previously
discussed, the Company also recorded an extraordinary gain related to the early
extinguishment of debt of $2.9 million, net of $1.8 million provided for income
taxes and $0.9 million of associated deferred debt issuance costs. As a
percentage of sales, the net income for the twelve week period ended October 7,
2000 was 2.6% as compared to net income of 0.3% for the twelve week period ended
October 9, 1999.
Forty Weeks Ended October 7, 2000 Compared to Forty Weeks Ended October 9, 1999
Net sales for the forty weeks ended October 7, 2000 were $1,787.4
million, an increase of $51.8 million or 3.0% over net sales for the forty weeks
ended October 9, 1999. Net sales for the Retail segment increased $107.6 million
or 6.9%. The net sales increase for the Retail segment was due to an increase in
the comparable store sales of 3.8%, contributions from new stores opened within
the last year and increased net sales from converted Parts America stores not
included in the comparable store sales calculation. The comparable store sales
increase of 3.8% was primarily a result of growth in both the DIY and DIFM
market segments, as well as the continued maturation of new stores and the
converted Parts America stores included in the comparable store sales
calculation. Comparable store sales increased 11.4% for the forty weeks ended
October 9, 1999 as compared to the comparable quarter of fiscal 1998. Net sales
for the Wholesale segment decreased 32.9% or $55.9 million, due to a decline in
the number of independently owned dealer stores and increased local competition
for the dealers.
During the forty weeks ended October 7, 2000, the Company opened 106
new stores, relocated 9 stores, and closed 21 stores, bringing the total retail
stores to 1,701. The Company has 1,216 stores participating in its commercial
delivery program, a result of adding 122 net stores during fiscal 2000.
Gross profit for the forty weeks ended October 7, 2000 was $699.4
million or 39.1% of net sales, as compared to $622.5 million or 35.9% of net
sales in the forty weeks ended October 9, 1999. The increase in the
14
<PAGE>
gross profit percentage is reflective of the realization of certain purchasing
synergies, fewer product liquidations, lower inventory shrinkage and freight
costs and the continued decline in the net sales of the lower margin Wholesale
segment. The higher shrinkage and freight costs in fiscal year 1999 were
primarily related to merchandise conversions and product liquidations resulting
from the Western Merger. The gross profit for the Retail segment was $681.6
million or 40.7% of net sales for the forty week period ended October 7, 2000,
as compared to $595.6 million or 38.0% of net sales for the forty week period
ended October 9, 1999.
Selling, general and administrative expenses, before integration
expenses and non-cash compensation, increased to $617.3 million or 34.5% of net
sales for the forty week period ended October 7, 2000, from $574.2 million or
33.1% of net sales for the forty week period ended October 9, 1999. The increase
in selling, general and administrative expenses is primarily attributable to the
continued sales decline in the Wholesale segment, which carries lower selling,
general and administrative expenses as a percentage of sales as compared to the
Retail segment. Additionally, the Company has incurred higher than expected
medical claims as well as higher payroll, insurance and depreciation expense,
partially offset by a decrease in net advertising costs, as a percentage of
sales, as compared to the forty week period ended October 9, 1999. The Company's
commitment to its goal of making human resources a core competency, which it
believes is critical to the Company's long-term success, has resulted in
additional staffing in the stores and increased medical plan costs. The Company
expects this commitment to increase the productivity of store personnel, which
will positively impact store profitability and customer service. The increase in
depreciation expense is primarily related to the change in an accounting
estimate to reduce the depreciable lives of certain property and equipment on a
prospective basis. Additionally, the decrease in net advertising costs is a
result of advertising dedicated to the converted Parts America store grand
openings during fiscal 1999.
Operating income, as adjusted for expenses associated with integration
expenses and non-cash compensation, in the forty weeks ended October 7, 2000 was
$82.1 million or 4.6% of net sales, as compared to $48.4 million or 2.8% of net
sales in the forty weeks ended October 9, 1999. The Retail segment contributed
$77.7 million to operating income, while the Wholesale segment contributed $4.4
million to operating income for the forty weeks ended October 7, 2000.
EBITDA (operating income plus depreciation and amortization), as
adjusted for integration expenses and non-cash compensation, was $132.7 million
in the forty week period ended October 7, 2000 or 7.4% of net sales, as compared
to $92.0 million or 5.3% of net sales in the forty week period ended October 9,
1999. 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's method for
calculating EBITDA may differ from similarly titled measures reported by other
companies. Management believes certain one-time expenses, expenses associated
with merger integration and non-cash compensation should be eliminated from the
EBITDA calculation to evaluate the operating performance of the Company.
Interest expense in the forty weeks ended October 7, 2000 was $44.2
million or 2.5% of net sales, as compared to $40.7 million or 2.3% of net sales
in the forty weeks ended October 9, 1999. The increase in interest is a result
of an increase in interest rates over the similar period of fiscal 1999 offset
by a decrease in net outstanding borrowings. During the third quarter of fiscal
2000, the Company repurchased $30.6 million of Senior Subordinated Notes. As a
result of the early extinguishment of debt, the Company expects to benefit from
lower interest expense in the future.
Income tax expense for the forty weeks ended October 7, 2000 was $14.4
million compared to a benefit of $10.1 million in the forty weeks ended October
9, 1999. This increase was primarily due to having income before taxes for the
forty week period ended October 7, 2000 as compared to a net loss for the forty
week period ended October 9, 1999.
The Company recorded net income of $26.8 million for the forty week
period ended October 7, 2000, as compared to a net loss of $18.3 million for the
forty week period ended October 9, 1999. In addition to the items previously
discussed, the Company also recorded an extraordinary gain related to the early
extinguishment of debt of $2.9 million, net of $1.8 million provided for income
taxes and $0.9 million of associated deferred debt issuance
15
<PAGE>
costs. As a percentage of sales, the net income for the forty week period ended
October 7, 2000 was 1.5% as compared to a net loss of 1.0% for the forty week
period ended October 9, 1999.
Liquidity and Capital Resources
The Company believes it will have sufficient liquidity to fund its
debt service obligations, including indebtedness incurred in connection with the
Western Merger, and implement its growth strategy over the next twelve months.
As of October 7, 2000, the Company had reduced its outstanding indebtedness by
$74.5 million since January 1, 2000 to $489.5 million consisting of $169.4
million of Senior Subordinated Notes (the "Senior Subordinated Notes"),
borrowings of $308.5 million under the bank credit facility (the "Credit
Facility"), $10.0 million of indebtedness under the McDuffie County Development
Authority Taxable Industrial Bonds ("IRB") and $1.6 million of other notes
payable.
The Company's primary capital requirements have been the funding of
its continued store expansion program, store relocations and remodels, inventory
requirements, the construction and upgrading of distribution centers and the
development and implementation of proprietary information systems. The Company
has financed its growth through a combination of internally generated funds,
borrowings under the Credit Facility and issuances of equity.
During fiscal 2000, the Company expects to open approximately 140 new
stores, of which 106 have been opened as of October 7, 2000. The average new
store opening requires capital expenditures of approximately $120,000 per store
and an inventory investment of approximately $350,000 per store, a portion of
which is held at a distribution facility. A substantial portion of these
inventories is financed through vendor payables. Pre-opening expenses,
consisting primarily of store set-up costs and training of new store employees,
average approximately $25,000 per store and are expensed when incurred.
Historically, the Company has negotiated extended payment terms from
suppliers to help 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.
The Company continually monitors store performance, which results in
closing certain store locations not meeting profitability objectives. During the
first three quarters of fiscal 2000, the Company closed five stores included in
the fiscal 1999 restructuring activities and made the decision to close or
relocate 18 additional stores not meeting profitability objectives, 16 of which
have been closed as of October 7, 2000.
As a result of the Western Merger, the Company decided to close
certain Advance Auto Parts stores due to store performance or because such
stores were in overlapping markets with Parts America stores. As part of normal
operations, the Company will continue to review store performance and close
additional stores not meeting profitability objectives. The Western Merger also
resulted in restructuring reserves recorded in purchase accounting for the
closure of certain Parts America stores, severance and relocation costs and
other facility exit costs. As of October 7, 2000, these reserves had a remaining
balance of $10.5 million. The Company also assumed certain restructuring and
deferred compensation liabilities previously recorded by Western Auto Supply
Company. At October 7, 2000, the total liability for the restructuring and
deferred compensation plans was $3.4 million and $5.7 million, respectively, of
which $2.0 million and $1.5 million, respectively, is recorded as a current
liability. The classification for deferred compensation is determined by
employee election, and can be changed upon 12 months' notice.
For the forty weeks ended October 7, 2000, net cash provided by
operating activities was $100.6 million. Of this amount, $26.8 million was
provided by net income. Depreciation provided an additional $50.6 million,
amortization of deferred debt issuance costs provided $2.4 million and $20.8
million was provided by a net decrease in working capital and other, primarily
attributable to the Company's efforts in maintaining extended payment terms from
its vendors. Net cash used in investing activities was $42.1 million and was
comprised primarily of net capital expenditures. Net cash used in financing
activities was $64.8 million and was comprised primarily of a decrease in net
borrowings under the credit facilities, including the repurchase of the
16
<PAGE>
Senior Subordinated Notes during the third quarter of fiscal 2000 with cash
flows provided by operating activities through the forty week period ended
October 7, 2000.
The Senior Subordinated Notes bear interest at a rate of 10.25%,
payable semiannually, and require no principal payments until maturity in April
2008. The indenture governing the Senior Subordinated Notes contains certain
covenants that limit, among other things, the ability of the Company and its
restricted subsidiaries to incur additional indebtedness and issue preferred
stock, pay dividends or certain other distributions, issue stock of
subsidiaries, make certain investments, repurchase stock and certain
indebtedness, create or incur liens, engage in transactions with affiliates,
enter into new businesses, sell stock of restricted subsidiaries and restrict
the Company from engaging in certain mergers or consolidations and sell assets.
The IRB bears interest at a variable rate, payable monthly, and will require no
principal payments until maturity in November 2002.
During third quarter of fiscal 2000, the Company repurchased $30.6
million face value of Senior Subordinated Notes at a price ranging from 81.5 to
82.5 percent of their face value. Accordingly, the Company recorded a gain
related to the extinguishment of this debt of $2.9 million, net of $1.8 million
provided for income taxes and $.9 million of associated deferred debt issuance
costs.
The Company has access to a total of $463.5 million through the Credit
Facility in addition to its operating cash flow. The Credit Facility provides
for (i) a $124.0 million Tranche B term loan, which was made at the closing of
the recapitalization; (ii) a revolver with maximum borrowings including letters
of credit of approximately $125.0 million, of which $11.9 million was
outstanding for letters of credit, at October 7, 2000, (iii) a $124.5 million
delayed draw term loan of which $94.5 million was borrowed at October 7, 2000
and (iv) a $90.0 million deferred term loan facility which was drawn at the
closing of the Western Merger. The term loan facilities, other than the Tranche
B term loan, will mature on the sixth anniversary of initial borrowing, and the
Tranche B term loan will mature on the eighth anniversary of initial borrowing.
Annual principal payments on the term loan facilities prior to the sixth
anniversary of initial borrowing will be nominal; thereafter, required principal
payments will be approximately $236.5 million in 2004, $60.0 million in 2005 and
$30.0 million in 2006, assuming the term loan facilities have been fully
borrowed. The revolving loan facility will mature on the sixth anniversary of
initial borrowing. The interest rates under the delayed draw facilities and the
revolver are determined by reference to a pricing grid that will provide the
applicable interest rate margins based on the Company's trailing total debt to
EBITDA ratio (as defined in the Credit Facility). Based upon the Company's
operating ratios at October 7, 2000, the margins were 1.75% and 0.75% for
Eurodollar and base rate borrowings, respectively. Additionally, at October 7,
2000, the margin under the Tranche B term loan and the deferred term loan
facility was 2.50% on a Eurodollar rate and 1.50% on the base rate borrowings.
Borrowings under the 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 Credit Facility in respect
thereof will have a material effect on its operating strategy. With respect to
growth through acquisitions, the operation of this covenant may result in the
application of cash resources for prepayments which would require the Company to
secure additional equity or debt financing to fund an acquisition, but while no
assurance can be given, the Company does not anticipate that this would have a
material effect on its ability to finance acquisitions in the future. The
Company did not make any mandatory prepayments in fiscal 1999, and does not
anticipate any mandatory prepayments in fiscal 2000.
The loans under the 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, delayed draw term
and deferred term loans are subject to a borrowing base formula, which is based
on certain percentages of the Company's inventories and certain debt covenants.
As of October 7, 2000, $142.4 million was available under these facilities. The
Company intends to use borrowings under the revolver and delayed draw term
loans, as well as internally generated funds, for store expansion and funding of
working capital.
17
<PAGE>
The Credit Facility contains covenants restricting the ability of the
Company and its subsidiaries to, among others things, (i) pay dividends on any
class of capital stock or make any payment to purchase, redeem, retire, acquire,
cancel or terminate capital stock, (ii) prepay, redeem, retire, acquire, cancel
or terminate debt, (iii) incur liens or engage in sale-leaseback transactions,
(iv) make loans, investments, advances or guarantees, (v) incur additional debt
(including hedging arrangements), (vi) make capital expenditures, (vii) engage
in mergers, acquisitions and asset sales, (viii) engage in transactions with
affiliates, (ix) enter into any agreement which restricts the ability to create
liens on property or assets or the ability of subsidiaries to pay dividends or
make payments on advances or loans to the Company or other subsidiaries, (x)
change the nature of the business conducted by the Company and its subsidiaries,
(xi) change the passive holding company status of Holding and (xii) amend
existing debt agreements or the Company's or Holding's certificate of
incorporation, by-laws or other organizational documents. The Company is also
required to comply with financial covenants in the Credit Facility with respect
to (a) limits on annual aggregate capital expenditures, (b) a maximum leverage
ratio, (c) a minimum interest coverage ratio and (d) a minimum retained cash
earnings test. The Company is generally prohibited from paying dividends
(including to Holding) except that as long as no defined event of default under
the 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 Senior
Discount Debentures (the "Debentures") commencing October 15, 2003. The Company
believes it is in compliance with the above covenants under the Credit Facility
as of October 7, 2000.
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.
18
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company currently utilizes no material derivative financial
instruments that expose it to significant market risk. The Company is exposed to
cash flow and fair value risk due to changes in interest rates with respect to
its long-term debt. While the Company cannot predict the impact that interest
rate movements will have on its debt, exposure to rate changes is managed
through the use of fixed and variable rate debt. The Company's exposure to
interest rate risk decreased during the first three quarters of fiscal 2000 due
to decreased outstanding borrowings offset by increased interest rates.
The Company's fixed rate debt consists primarily of outstanding
balances on the Senior Subordinated Notes. The Company's variable rate debt
relates to borrowings under the Credit Facility and the IRB. The Company's
variable rate debt is primarily vulnerable to movements in the LIBOR, Prime,
Federal Funds and Base CD rates.
The table below presents principal cash flows and related weighted
average interest rates on the Company's long-term debt at October 7, 2000 by
expected maturity dates. Expected maturity dates approximate contract terms.
Fair values included herein have been determined based on quoted market prices.
Weighted average variable rates are based on implied forward rates in the yield
curve at October 7, 2000. Implied forward rates should not be considered a
predictor of actual future interest rates.
<TABLE>
<CAPTION>
Fair
Fiscal Fiscal Fiscal Fiscal Fiscal Market
2000 2001 2002 2003 2004 Thereafter Total Value
------- ------- ------- --------- ----------- ---------- --------- ---------
Long-term debt: (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate $ -- $ -- $ -- $ -- $ -- $ 169,450 $ 169,450 $ 135,560
Weighted average
interest rate -- -- -- -- -- 10.3% 10.3%
Variable rate $1,000 $ 3,000 $14,000 $ 4,000 $ 206,500 $ 90,000 $ 318,500 $ 318,500
Weighted average
interest rate 9.2% 8.7% 8.7% 8.9% 8.9% 9.0% 8.7%
</TABLE>
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 2000, the Company was notified that it was named in a lawsuit
filed on behalf of independent retailers and jobbers against the Company and
others for various claims under the Robinson-Patman Act. The litigation is in
preliminary stages. The Company believes these claims are without merit and
intends to defend them vigorously; however, the ultimate outcome of this matter
cannot be ascertained at this time.
The Company is also involved in various other claims, lawsuits and
environmental issues arising in the normal course of business. The damages
claimed against the Company in some of these proceedings are substantial.
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 future results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
20
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCE STORES COMPANY, INCORPORATED
a Virginia corporation
November 16, 2000 By: /s/ Jimmie L. Wade
_______________________________
Jimmie L. Wade
President and Chief Financial
Officer, Secretary (as principal
executive and accounting officer)
S-1
