<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 15, 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 August 25, 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 Twenty-Eight Week Periods Ended July 15, 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 July 15, 2000 and
January 1, 2000....................................................... 1
Condensed Consolidated Statements of Operations for the
Twelve and Twenty-Eight Week Periods Ended July 15, 2000 and
July 17, 1999......................................................... 2
Condensed Consolidated Statements of Cash Flows for the Twenty-
Eight Week Periods Ended July 15, 2000 and July 17, 1999.............. 3
Notes to the Condensed Consolidated Financial Statements.............. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 11
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
July 15, 2000 and January 1, 2000
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
July 15, January 1,
2000 2000
---------- ----------
Assets (unaudited)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 16,598 $ 22,577
Receivables, net 98,761 100,442
Inventories 766,998 749,447
Other current assets 22,518 15,268
---------- ----------
Total current assets 904,875 887,734
Property and equipment, net of accumulated
depreciation of $179,520 and $146,647 396,331 402,476
Assets held for sale 28,562 29,694
Other assets, net 18,778 24,974
---------- ----------
$1,348,546 $1,344,878
========== ==========
Liabilities and Stockholder's Equity
------------------------------------
Current liabilities:
Bank overdrafts $ 10,047 $ 12,182
Current portion of long-term debt 4,313 3,665
Accounts payable 374,473 341,188
Accrued expenses 132,561 148,215
Other current liabilities 37,973 26,172
---------- ----------
Total current liabilities 559,367 531,422
---------- ----------
Long-term debt 516,500 560,302
---------- ----------
Other long-term liabilities 54,663 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 2,377 1,777
Accumulated deficit (60,069) (72,901)
---------- ----------
Total stockholder's equity 218,016 202,528
---------- ----------
$1,348,546 $1,344,878
========== ==========
</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 Twenty-Eight Week Periods Ended
July 15, 2000 and July 17, 1999
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Twelve Week Twenty-Eight Week
Periods Ended Periods Ended
-------------------- ---------------------
July 15, July 17, July 15, July 17,
2000 1999 2000 1999
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $557,650 $542,320 $1,235,232 $1,212,773
Cost of sales 341,117 345,794 759,724 789,886
-------- -------- ---------- ----------
Gross profit 216,533 196,526 475,508 422,887
Selling, general and
administrative expenses 184,284 182,430 424,075 425,793
-------- -------- ---------- ----------
Operating income (loss) 32,249 14,096 51,433 (2,906)
Other (expense) income:
Interest expense (13,493) (12,608) (31,314) (28,517)
Other, net 224 82 394 269
-------- -------- ---------- ----------
Total other expense, net (13,269) (12,526) (30,920) (28,248)
-------- -------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes 18,980 1,570 20,513 (31,154)
Provision (benefit) for
income taxes 7,102 (1,999) 7,681 (11,329)
-------- -------- ---------- ----------
Net income (loss) $ 11,878 $ 3,569 $ 12,832 $ (19,825)
======== ======== ========== ==========
</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 Twenty-Eight Week Periods Ended
July 15, 2000 and July 17, 1999
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
July 15, July 17,
2000 1999
----------- ----------
<S> <C> <C>
Cash flows operating activities:
Net income (loss) $ 12,832 $ (19,825)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 34,402 29,391
Amortization of stock option compensation 600 1,009
Amortization of deferred debt issuance costs 1,636 1,820
Amortization of interest on capital lease
obligation 42 -
Provision (benefit) for deferred income taxes 7,194 (4,214)
Net loss (gain) on sales of property and
equipment 215 (4)
Net decrease (increase) in:
Receivables, net 1,684 (31,545)
Inventories (17,551) (45,780)
Other assets (6,301) (18,315)
Net increase (decrease) in:
Accounts payable 33,285 32,797
Accrued expenses (17,919) (29,406)
Other liabilities 3,032 27,551
--------- ---------
Net cash provided by (used in)
operating activities 53,151 (56,521)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (28,031) (53,538)
Other 2,531 2,012
--------- ---------
Net cash used in investing activities (25,500) (51,526)
--------- ---------
Cash flows from financing activities:
Decrease in bank overdrafts (2,135) (4,802)
Borrowing under note payable 2,313 -
Borrowings under credit facilities 191,200 252,500
Payments on credit facilities (233,200) (150,500)
Payment of debt issuance costs - (877)
Proceeds from issuance of Class A common stock 2,053 -
Other 6,139 3,708
--------- ---------
Net cash (used in) provided by
financing activities (33,630) 100,029
--------- ---------
Net decrease in cash and cash equivalents (5,979) (8,018)
Cash and cash equivalents at beginning of period 22,577 34,220
--------- ---------
Cash and cash equivalents at end of period $ 16,598 $ 26,202
========= =========
Supplemental cash flow information:
Interest paid $ 28,040 $ 22,922
Income taxes paid, net of refunds received 321 1,581
Non-cash transactions:
Conversion of capital lease obligation $ 3,509 $ -
Obligations under capital lease - 3,345
Debt issuance and acquisition costs accrued - 446
</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 Tweleve and Twenty-Eight Week Periods Ended
July 15, 2000 and July 17, 1999
(dollars in thousands, except per share data)
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 July 15, 2000, the condensed
consolidated statements of operations for the twelve and twenty-eight week
periods ended July 15, 2000 and July 17, 1999 and the condensed consolidated
statements of cash flows for the twenty-eight week periods ended July 15, 2000
and July 17, 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 twenty-eight week periods
are not necessarily indicative of the operating results to be expected for the
full fiscal year.
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.
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.
Reclassifications
Certain 1999 amounts have been reclassified to conform with their 2000
presentation.
4
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Tweleve and Twenty-Eight Week Periods Ended
July 15, 2000 and July 17, 1999
(dollars in thousands, except per share data)
2. Receivables:
Receivables consist of the following:
<TABLE>
<CAPTION>
July 15, January 1,
2000 2000
------------- -------------
(unaudited)
<S> <C> <C>
Trade:
Wholesale $ 18,797 $ 22,221
Retail 16,664 10,525
Vendor 44,958 47,405
Installment 13,850 13,616
Related parties 5,005 6,970
Employees 230 348
Other 3,179 3,481
------------- -------------
Total receivables 102,683 104,566
Less - Allowance for doubtful accounts (3,922) (4,124)
------------- -------------
Receivables, net $ 98,761 $100,442
============= =============
</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 July 15, 2000 and
January 1, 2000 were $51,526 and $49,252, respectively. Inventories consist of
the following:
<TABLE>
<CAPTION>
July 15, January 1,
2000 2000
------------- -------------
(unaudited)
<S> <C> <C>
Inventories at FIFO $ 755,615 $735,762
Adjustment to state inventories at LIFO 11,383 13,685
------------- -------------
Inventories at LIFO $ 766,998 $749,447
============= =============
</TABLE>
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 and second quarters of fiscal 2000, the Company
closed four stores included in the fiscal 1999 restructuring activities and made
the decision to close or relocate 13 additional stores not meeting profitability
objectives, all of which have been closed as of July 15, 2000.
5
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Tweleve and Twenty-Eight Week Periods Ended
July 15, 2000 and July 17, 1999
(dollars in thousands, except per share data)
The Company assumed the restructuring accrual related to Western's
restructuring activities prior to the Western Merger. As of July 15, 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:
<TABLE>
<CAPTION>
Other Exit
Severance Costs
------------ -------------
<S> <C> <C>
Balance, January 1, 2000 $ 18 $ 9,963
New provisions - 1,205
Change in estimates 555
Reserves utilized (14) (2,968)
------------ -------------
Balance, July 15, 2000 (unaudited) $ 4 $ 8,755
============ =============
</TABLE>
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
July 15, 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:
<TABLE>
<CAPTION>
Other Exit
Severance Costs
------------ -------------
<S> <C> <C>
Balance, January 1, 2000 $ 3,510 $ 7,825
Change in estimates - (77)
Reserves utilized (2,449) (1,408)
------------ -------------
Balance, July 15, 2000 (unaudited) $ 1,061 $ 6,340
============ =============
</TABLE>
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.
5. 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.
6
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Tweleve and Twenty-Eight Week Periods Ended
July 15, 2000 and July 17, 1999
(dollars in thousands, except per share data)
6. Related Parties:
The following table presents the related party transactions with Sears
included in the condensed consolidated statements of operations for the twenty-
eight week periods ended July 15, 2000 and July 17, 1999 and the condensed
consolidated balance sheets as of July 15, 2000 and January 1, 2000:
<TABLE>
<CAPTION>
Twenty-Eight Week Periods Ended
-------------------------------
July 15, 2000 July 17, 1999
------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Net sales to Sears $3,976 $2,311
Shared services revenue - 1,711
Shared services expense - 842
Credit card fee expense 228 1,459
Sears Logistic Systems fee expense 68 -
</TABLE>
<TABLE>
<CAPTION>
July 15, 2000 January 1, 2000
------------- ---------------
(unaudited)
<S> <C> <C>
Receivables from Sears $4,672 $6,625
Payables to Sears 1,163 4,304
</TABLE>
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.
Balances and transactions are as follows:
<TABLE>
<CAPTION>
July 15, 2000 January 1, 2000
------------- ---------------
(unaudited)
<S> <C> <C>
Receivables from Parent $13,664 $22,540
Payables to Parent 7,498 14,043
</TABLE>
7
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Tweleve and Twenty-Eight Week Periods Ended
July 15, 2000 and July 17, 1999
(dollars in thousands, except per share data)
7. Segment and Related Information:
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires entities to report financial and descriptive information
related to segments within the organization.
The Company has the following 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 10% 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.
8
<PAGE>
Advance Stores Company, Incoporated and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended
July 15, 2000 and July 17, 1999
(dollars in thousands, except per share data)
The accounting policies of the consolidated company have been consistently
applied to the reportable segments listed below.
<TABLE>
<CAPTION>
Twelve Week Periods Ended
-----------------------------------------
July 15, 2000 (unaudited) Retail Wholesale Totals
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 525,249 $ 32,401 $ 557,650
Income before provision
for income taxes 18,963 17 18,980
Segment assets (b) 1,284,113 64,433 1,348,546
July 17, 1999 (unaudited)
-------------------------------------------------------------------------------------
Net sales $ 492,654 $ 49,666 $ 542,320
Income (loss) before provision (benefit)
for income taxes 1,638 (68) 1,570
Segment assets (a) (b) 1,259,977 120,701 1,380,678
<CAPTION>
Twenty-Eight Week Periods Ended
-----------------------------------------
July 15, 2000 (unaudited) Retail Wholesale Totals
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,150,318 $ 84,914 $1,235,232
Income (loss) before provision (benefit)
for income taxes 22,438 (1,925) 20,513
Segment assets (b) 1,284,113 64,433 1,348,546
July 17, 1999 (unaudited)
-------------------------------------------------------------------------------------
Net sales $1,080,160 $132,613 $1,212,773
Loss before benefit
for income taxes (24,244) (6,910) (31,154)
Segment assets (a) (b) 1,259,977 120,701 1,380,678
</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 to Retail.
(b) Excludes investment in equity in net earnings or losses of subsidiaries.
9
<PAGE>
Advance Stores Company, Incoporated and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended
July 15, 2000 and July 17, 1999
(dollars in thousands, except per share data)
8. 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 Twenty-Eight Week Periods Ended
----------------------------- -------------------------------
July 15, July 17, July 15, July 17,
2000 (b) 1999 (a) (b) 2000 (b) 1999 (a) (b)
----------- ------------ ----------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 75,463 $ 96,343 $186,518 $240,700
Gross profit 18,935 25,986 46,629 54,361
Royalty income from the Company 9,698 11,241 21,094 21,817
Operating income 7,087 12,396 16,174 18,724
Net income (loss) (3,545) 3,195 (7,189) (4,318)
<CAPTION>
July 15, January 1,
2000 (b) 2000 (a) (b)
----------- ------------
(unaudited)
<S> <C> <C>
Current assets $349,639 $282,419
Non-current assets 60,912 82,390
Current liabilities 265,431 238,924
Non-current liabilities 671,188 662,302
</TABLE>
(a) During fiscal 1999, certain assets, liabilities and the corresponding
activity related to the Parts America store operations were transferred to
Advance Stores through a dividend to Advance Stores.
(b) Reflects the push down of guaranteed debt, deferred debt issuance costs and
related interest and amortization.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Advance Stores Company, Incorporated (the "Company") is a wholly owned
subsidiary of Advance Holding Corporation ("Holding"). The Company was formed in
1929. In the 1980s, the Company sharpened its marketing focus to target sales of
automotive parts and accessories to "do-it-yourself" ("DIY") customers and
accelerated its growth strategy. From the 1980s through the present, the Company
has grown significantly through new store openings, 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 July 15, 2000, the Company had 1,674 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 620
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 logistic
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 expects to begin selling products 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; restrictions, imposed by 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;
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
11
<PAGE>
hire, train and retain qualified employees; and environmental risks. Forward-
looking statements regarding revenues, expenses, cash flows and liquidity are
particularly subject to a variety of assumptions, some or all of which may not
be realized. Given these uncertainties, prospective investors are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce the
results of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.
12
<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 Twenty-Eight Week Periods Ended
(dollars in thousands) (dollars in thousands)
(unaudited) (unaudited)
------------------------- -------------------------------
July 15, July 17, July 15, July 17,
2000 1999 2000 1999
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 557,650 $ 542,320 $ 1,235,232 $ 1,212,773
Cost of sales 341,117 345,794 759,724 789,886
------------ ----------- ------------- -------------
Gross profit 216,533 196,526 475,508 422,887
Selling, general and administrative expenses 184,036 173,743 423,475 399,631
------------ ----------- ------------- -------------
Operating income, as adjusted 32,497 22,783 52,033 23,256
Expenses associated with merger integration - 8,235 - 25,153
Expenses associated with non-cash compensation 248 452 600 1,009
------------ ----------- ------------- -------------
Operating income (loss), as reported 32,249 14,096 51,433 (2,906)
Interest expense (13,493) (12,608) (31,314) (28,517)
Other income, net 224 82 394 269
Provision (benefit) for income taxes 7,102 (1,999) 7,681 (11,329)
------------ ----------- ------------- -------------
Net income (loss) $ 11,878 $ 3,569 $ 12,832 $ (19,825)
============ =========== ============= =============
<CAPTION>
Twelve Week Periods Ended Twenty-Eight Week Periods Ended
(unaudited) (unaudited)
------------------------- -------------------------------
July 15, July 17, July 15, July 17,
2000 1999 2000 1999
------------ ---------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 61.2 63.8 61.5 65.1
------------ ---------- ------------- -------------
Gross profit 38.8 36.2 38.5 34.9
Selling, general and administrative expenses 33.0 32.0 34.3 33.0
------------ ---------- ------------- -------------
Operating income, as adjusted 5.8 4.2 4.2 1.9
Expenses associated with merger integration - 1.5 - 2.0
Expenses associated with non-cash compensation - 0.1 0.1 0.1
------------ ---------- ------------- -------------
Operating income (loss), as reported 5.8 2.6 4.1 (0.2)
Interest expense (2.4) (2.3) (2.5) (2.4)
Other income, net 0.0 0.0 0.0 0.0
Provision (benefit) for income taxes 1.3 (0.4) 0.6 (1.0)
------------ ---------- ------------- -------------
Net income (loss) 2.1 % 0.7 % 1.0 % (1.6)%
============ ========== ============= =============
</TABLE>
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 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.
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.
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,
13
<PAGE>
professional expenses and other related expenses.
Twelve Weeks Ended July 15, 2000 Compared to Twelve Weeks Ended July 17, 1999
Net sales for the twelve weeks ended July 15, 2000 were $557.7 million, an
increase of $15.3 million or 2.8% over net sales for the twelve weeks ended July
17, 1999. Net sales for the Retail segment increased $32.6 million or 6.6%.
The net sales increase for the Retail segment was due to an increase in the
comparable store sales of 3.0%, contributions from new stores opened with the
last year and increased net sales from converted Parts America stores not
included in the comparable store sales calculation. The comparable sales
increase of 3.0% was primarily a result of growth in both the DIY and DIFM
customer base, 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 10.3% for the twelve weeks ended
July 17, 1999 as compared to the comparable period of fiscal 1998. Net sales
for the Wholesale segment decreased $17.3 million or 34.8%, reflecting the
continued decline of this segment due to increased competition coupled with a
decline in the independently owned dealer stores.
During the twelve weeks ended July 15, 2000, the Company opened 29 new
stores, relocated four stores, and closed two stores, bringing the total retail
stores to 1,674. The Company has 1,216 stores participating in its commercial
delivery program, as a result of adding three stores during the second quarter
of fiscal 2000.
Gross profit for the twelve weeks ended July 15, 2000 was $216.5 million or
38.8% of net sales, as compared to $196.5 million or 36.2% of net sales in the
twelve weeks ended July 17, 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 a decline in the
net sales of the lower margin Wholesale segment. The higher shrinkage and
freight costs in fiscal year 1999 were related to merchandise conversions and
product liquidations resulting from the Western Merger. The gross profit for the
Retail segment was $211.2 million or 40.2% of net sales for the twelve week
period ended July 15, 2000, as compared to $186.6 million or 37.9% of net sales
for the twelve week period ended July 17, 1999.
Selling, general and administrative expenses, before integration expenses
and non-cash compensation, increased to $184.0 million or 33.0% of net sales for
the twelve week period ended July 15, 2000, from $173.7 million or 32.0% of net
sales for the twelve week period ended July 17, 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 occupancy costs, offset by a
decrease in professional fees, as a percentage of sales, as compared to the
twelve week period ended July 17, 1999.
Operating income, as adjusted for expenses associated with integration
expenses and non-cash compensation, in the twelve weeks ended July 15, 2000 was
$32.5 million or 5.8% of net sales, as compared to $22.8 million or 4.2% of net
sales in the twelve weeks ended July 17, 1999. The Retail segment contributed
$31.1 million to operating income, while the Wholesale segment contributed $1.4
million to operating income.
EBITDA (operating income plus depreciation and amortization), as adjusted
for integration expenses and non-cash compensation, was $47.7 million in the
twelve week period ended July 15, 2000 or 8.5% of net sales, as compared to
$35.0 million or 6.4% of net sales in the twelve week period ended July 17,
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 July 15, 2000 was $13.5 million
or 2.4% of net sales, as compared to $12.6 million or 2.3% of net sales in the
twelve weeks ended July 17, 1999. Interest expense increased as a result of
higher interest rates, offset by a reduction in average borrowings during the
twelve week period ended July 15, 2000.
14
<PAGE>
Income tax expense for the twelve weeks ended July 15, 2000 was $7.1
million compared to a benefit of $2.0 million in the twelve weeks ended July 17,
1999. This increase was primarily due to having positive income before taxes for
the twelve weeks ended July 15, 2000.
As a result of the above factors, the Company recorded net income of $11.9
million in the twelve weeks ended July 15, 2000, as compared to net income of
$3.6 million in the twelve weeks ended July 17, 1999. As a percentage of sales,
the net income for the twelve week period ended July 15, 2000 was 2.1% as
compared to net income of 0.7% for the twelve week period ended July 17, 1999.
Twenty-Eight Weeks Ended July 15, 2000 Compared to Twenty-Eight Weeks Ended July
17, 1999
Net sales for the twenty-eight weeks ended July 15, 2000 were $1,235.2
million, an increase of $22.5 million or 1.9% over net sales for the twenty-
eight weeks ended July 17, 1999. Net sales for the Retail segment increased
$70.2 million or 6.5%. The net sales increase for the Retail segment was due to
an increase in the comparable store sales of 3.7%, contributions from new stores
opened with the last year and increased net sales from converted Parts America
stores not included in the comparable store sales calculation. The comparable
sales increase of 3.7% was primarily a result of growth in both the DIY and DIFM
customer base, 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 12.7% for the twenty-eight weeks
ended July 17, 1999 as compared to the comparable quarter of fiscal 1998. Net
sales for the Wholesale segment decreased $47.7 million or 36.0%, reflecting the
continued decline of this segment due to increased competition coupled with a
decline in the independently owned dealer stores.
During the twenty-eight weeks ended July 15, 2000, the Company opened 74
new stores, relocated six stores, and closed 16 stores, bringing the total
retail stores to 1,674. The Company has 1,216 stores participating in its
commercial delivery program, as a result of adding 122 stores during fiscal
2000.
Gross profit for the twenty-eight weeks ended July 15, 2000 was $475.5
million or 38.5% of net sales, as compared to $422.9 million or 34.9% of net
sales in the twenty-eight weeks ended July 17, 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 a decline in the net sales of the lower margin Wholesale segment. The
higher shrinkage and freight costs in fiscal year 1999 were related to
merchandise conversions and product liquidations resulting from the Western
Merger. The gross profit for the Retail segment was $463.6 million or 40.3% of
net sales for the twenty-eight week period ended July 15, 2000, as compared to
$403.9 million or 37.4% of net sales for the twenty-eight week period ended July
17, 1999.
Selling, general and administrative expenses, before integration expenses
and non-cash compensation, increased to $423.5 million or 34.3% of net sales for
the twenty-eight week period ended July 15, 2000, from $399.6 million or 33.0%
of net sales for the twenty-eight week period ended July 17, 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 costs, closed store expense, insurance
costs and occupancy costs as a percentage of sales.
Operating income, as adjusted for expenses associated with integration
expenses and non-cash compensation, in the twenty-eight weeks ended July 15,
2000 was $52.0 million or 4.2% of net sales, as compared to $23.3 million or
1.9% of net sales in the twenty-eight weeks ended July 17, 1999. The Retail
segment contributed $50.7 million to operating income, while the Wholesale
segment contributed $1.3 million to operating income for the twenty-eight weeks
ended July 15, 2000.
EBITDA (operating income plus depreciation and amortization), as adjusted
for integration expenses and non-cash compensation, was $86.4 million in the
twenty-eight week period ended July 15, 2000 or 7.0% of net sales, as compared
to $52.6 million or 4.3% of net sales in the twenty-eight week period ended July
17, 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
15
<PAGE>
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 twenty-eight weeks ended July 15, 2000 was $31.3
million or 2.5% of net sales, as compared to $28.5 million or 2.4% of net sales
in the twenty-eight weeks ended July 17, 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.
Income tax expense for the twenty-eight weeks ended July 15, 2000 was $7.7
million compared to a benefit of $11.3 million in the twenty-eight weeks ended
July 17, 1999. This increase was primarily due to having income before taxes for
the twenty-eight week period ended July 15, 2000 as compared to a net loss for
the twenty-eight week period ended July 17, 1999.
As a result of the above factors, the Company recorded net income of $12.8
million in the twenty-eight weeks ended July 15, 2000, as compared to a net loss
of $19.8 million in the twenty-eight weeks ended July 17, 1999. As a
percentage of sales, the net income for the twenty-eight week period ended July
15, 2000 was 1.0% as compared to a net loss of 1.6% for the twenty-eight week
period ended July 17, 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 July 15, 2000, the Company had reduced its outstanding indebtedness by
$42.0 million since January 1, 2000 to $518.5 million consisting of $200.0
million of Senior Subordinated Notes (the "Senior Subordinated Notes"),
borrowings of $308.5 million under the bank credit facility (the "Credit
Facility") and $10.0 million of indebtedness under the McDuffie County
Development Authority Taxable Industrial Bonds ("IRB").
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 150 new stores, of which 74
have been opened as of July 15, 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 and second quarters of fiscal 2000, the Company closed four stores
included in the fiscal 1999 restructuring activities and made the decision to
close or relocate 13 additional stores not meeting profitability objectives, all
of which have been closed as of July 15, 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
16
<PAGE>
for the closure of certain Parts America stores, severance and relocation costs
and other facility exit costs. As of July 15, 2000, these reserves had a
remaining balance of $12.3 million. The Company also assumed certain
restructuring and deferred compensation liabilities previously recorded by
Western Auto Supply Company. At July 15, 2000, the total liability for the
restructuring and deferred compensation plans was $3.9 million and $5.7 million,
respectively, of which $1.7 million and $1.4 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 twenty-eight weeks ended July 15, 2000, net cash provided by
operating activities was $53.2 million. Of this amount, $12.8 million was
provided by net income. Depreciation provided an additional $34.4 million,
amortization of deferred debt issuance costs provided $1.6 million and $4.4
million was provided by a net increase in working capital and other, primarily
attributable to the Company's efforts in negotiating extended payment terms from
its vendors. Net cash provided by investing activities was $25.5 million and
was comprised primarily of net capital expenditures. Net cash used in financing
activities was $33.6 million and was comprised primarily of a decrease in net
borrowings under the credit facilities.
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 $10.0 million principal
amount IRB bears interest at a variable rate and will require no principal
payments until maturity in November 2002.
The Company has access to a total of $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 $12.1 million was
outstanding for letters of credit, at July 15, 2000, (iii) a $124.5 million
delayed draw term loan of which $94.5 million was borrowed at July 15, 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 for reductions
in 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 July 15, 2000, the margins were 1.75% and 0.75%
for Eurodollar and base rate borrowings, respectively. Additionally, at July
15, 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 under this provision in fiscal 2000.
17
<PAGE>
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 July 15, 2000, $123.9 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.
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 July 15, 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 DISCLOSURE 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 increased during the first quarter of fiscal 2000 due to increases in these
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 July 15, 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
July 15, 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
----------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed rate........ $ - $ - $ - $ - $ - $200,000 $200,000 $162,000
Weighted average
interest rate.. - - - - - 11.2% 11.2%
Variable rate..... $1,000 $3,000 $14,000 $4,000 $206,500 $ 90,000 $318,500 $318,500
Weighted average
interest rate.. 8.9% 9.1% 9.3% 9.5% 9.6% 9.6% 9.2%
</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.
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
August 25, 2000 By: /s/ Jimmie L. Wade
------------------------------------------------
Jimmie L. Wade
President and Chief Financial Officer, Secretary
(as principal executive and accounting officer)
S-1
