<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 April 22, 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 June 2, 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
Sixteen Week Period Ended April 22, 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 April 22, 2000 and
January 1, 2000.............................................................. 1
Condensed Consolidated Statements of Operations for the Sixteen
Week Periods Ended April 22, 2000 and April 24, 1999......................... 2
Condensed Consolidated Statements of Cash Flows for the
Sixteen Week Periods Ended April 22, 2000 and April 24, 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.................. 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 18
Item 2. Changes in Securities and Use of Proceeds.................................... 18
Item 6. Exhibits and Reports on Form 8-K............................................. 18
SIGNATURE........................................................................................... S-1
</TABLE>
i
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
April 22, 2000 and January 1, 2000
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
April 22, January 1,
Assets 2000 2000
------ ----------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,803 $ 22,577
Receivables, net 107,115 100,442
Inventories 764,816 749,447
Other current assets 19,798 15,268
----------- ------------
Total current assets 907,532 887,734
Property and equipment, net of accumulated depreciation of $163,949
and $146,647 395,957 402,476
Assets held for sale 29,357 29,694
Other assets, net 20,903 24,974
----------- ------------
$ 1,353,749 $ 1,344,878
=========== ============
Liabilities and Stockholder's Equity
------------------------------------
Current liabilities:
Bank overdrafts $ 18,216 $ 12,182
Current portion of long-term debt 2,000 3,665
Accounts payable 363,062 341,188
Accrued expenses 121,791 148,215
Other current liabilities 31,464 26,172
----------- ------------
Total current liabilities 536,533 531,422
----------- ------------
Long-term debt 556,500 560,302
----------- ------------
Other long-term liabilities 54,826 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 2,129 1,777
Accumulated deficit (71,947) (72,901)
----------- ------------
Total stockholder's equity 205,890 202,528
----------- ------------
$ 1,353,749 $ 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 Sixteen Week Periods Ended
April 22, 2000 and April 24, 1999
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Sixteen Week Periods Ended
-------------------------------
April 22, April 24,
2000 1999
-------------- --------------
<S> <C> <C>
Net sales $ 677,582 $ 670,453
Cost of sales 418,607 444,092
-------------- --------------
Gross profit 258,975 226,361
Selling, general and administrative expenses 239,791 243,363
-------------- --------------
Operating income (loss) 19,184 (17,002)
Other (expense) income:
Interest expense (17,821) (15,909)
Other, net 170 187
-------------- --------------
Total other expense, net (17,651) (15,722)
-------------- --------------
Income (loss) before provision (benefit) for income taxes 1,533 (32,724)
Provision (benefit) for income taxes 579 (9,330)
-------------- --------------
Net income (loss) $ 954 $ (23,394)
============== ==============
</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 Sixteen Week Periods Ended
April 22, 2000 and April 24, 1999
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Sixteen Week Periods Ended
-----------------------------------------------
April 22, 2000 April 24, 1999
--------------------- --------------------
<S> <C> <C>
Cash flows used in operating activities:
Net income (loss) $ 954 $ (23,394)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation 19,234 17,223
Amortization of stock option compensation 352 557
Amortization of deferred debt issuance costs 934 1,118
Amortization of interest on capital lease obligation 42 -
Provision (benefit) for deferred income taxes 310 (5,130)
Net loss on sales of property and equipment 310 75
Net increase in:
Receivables, net (6,670) (56,656)
Inventories (15,369) (83,000)
Other assets (1,703) (8,401)
Net increase (decrease) in:
Accounts payable 21,874 93,841
Accrued expenses (28,139) (25,600)
Other liabilities 4,248 22,036
--------------------- --------------------
Net cash used in operating activities (3,623) (67,331)
--------------------- --------------------
Cash flows used in investing activities:
Purchases of property and equipment
(12,692) (29,224)
Other 1,294 2,144
--------------------- --------------------
Net cash used in investing activities (11,398) (27,080)
--------------------- --------------------
Cash flows provided by financing activities:
Increase in bank overdrafts 6,034 5,453
Borrowings under credit facilities 155,200 150,500
Payments on credit facilities (157,200) (74,500)
Payment of debt issuance costs - (627)
Proceeds from issuance of Class A common stock 2,053 -
Other 2,160 2,071
--------------------- --------------------
Net cash provided by financing activities 8,247 82,897
--------------------- --------------------
Net decrease in cash and cash equivalents (6,774) (11,514)
Cash and cash equivalents at beginning of period 22,577 34,220
--------------------- --------------------
Cash and cash equivalents at end of period $ 15,803 $ 22,706
====================== ====================
Supplemental cash flow information:
Interest paid $ 20,037 $ 16,764
Income taxes paid, net of refunds received 190 1,581
Non-cash transactions:
Conversion of capital lease obligation $ 3,509 $ -
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 Sixteen Week Periods Ended April 22, 2000 and April 24, 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 April 22, 2000, the
condensed consolidated statements of operations for the 16-week periods ended
April 22, 2000 and April 24, 1999 and the condensed consolidated statements of
cash flows for the 16-week periods ended April 22, 2000 and April 24, 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 16-week period 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 Sixteen Week Periods Ended April 22, 2000 and April 24, 1999
(dollars in thousands, except per share data)
2. Receivables:
Receivables consist of the following:
<TABLE>
<CAPTION>
April 22, January 1,
2000 2000
---------------- --------------
(unaudited)
<S> <C> <C>
Trade:
Wholesale $ 32,809 $ 22,221
Retail 12,685 10,525
Vendor 43,778 47,405
Installment 13,343 13,616
Related parties 5,196 6,970
Employees 252 348
Other 3,277 3,481
---------------- --------------
Total receivables 111,340 104,566
Less - Allowance for doubtful accounts (4,225) (4,124)
---------------- --------------
Receivables, net $ 107,115 $ 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 April 22, 2000 and
January 1, 2000 were $50,535 and $49,252, respectively. Inventories consist of
the following:
<TABLE>
<CAPTION>
April 22, January 1,
2000 2000
-------------- -------------
(unaudited)
<S> <C> <C>
Inventories at FIFO $ 752,446 $ 735,762
Reserve to state inventories at LIFO 12,370 13,685
-------------- -------------
Inventories at LIFO $ 764,816 $ 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 quarter of fiscal 2000, the Company closed two
stores included in the fiscal 1999 restructuring activities and made the
decision to close or relocate 13 additional stores not meeting profitability
objectives, 12 of which were closed during the first quarter of fiscal 2000. The
Company expects to close the remaining facilities during fiscal 2000.
5
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 22, 2000 and April 24, 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 April 22, 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 are currently not involved in the
production of 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 243
Reserves utilized (14) (1,996)
---------------- -----------------
Balance, April 22, 2000 (unaudited) $ 4 $ 9,415
================ =================
</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
April 22, 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 (1,616) (732)
---------------- ---------------
Balance, April 22, 2000 (unaudited) $ 1,894 $ 7,016
================ ===============
</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 it has been 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 suit 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
can not 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 the final outcome of such
claims and lawsuits will not have a material adverse effect on the Company's
financial position or results of operations.
6
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 22, 2000 and April 24, 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 sixteen
week periods ended April 22, 2000 and April 24, 1999 and the condensed
consolidated balance sheets as of April 22, 2000 and January 1, 2000:
<TABLE>
<CAPTION>
Sixteen Week Periods Ended
-----------------------------------------
April 22, 2000 April 24, 1999
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Net sales to Sears $ 2,086 $ 1,052
Shared services revenue - 1,079
Shared services expense - 744
Credit card fee expense 128 885
Sears Logistic Systems fee expense 38 -
April 22, 2000 January 1, 2000
------------------ ------------------
(unaudited)
Receivables from Sears $ 4,863 $ 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>
April 22, January 1,
2000 2000
----------------- -----------------
(unaudited)
<S> <C> <C>
Receivables from Parent $ 13,665 $ 23,298
Payables to Parent 7,490 17,386
</TABLE>
7
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 22, 2000 and April 24, 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 approximates 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.
The accounting policies of the consolidated company have been consistently
applied to the reportable segments listed below.
<TABLE>
<CAPTION>
Sixteen Weeks Ended
April 22, 2000 (unaudited) Retail Wholesale Totals
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 625,069 $ 52,513 $ 677,582
Loss before provision
for income taxes 3,475 (1,942) 1,533
Segment assets (b) 1,277,664 76,085 1,353,749
<CAPTION>
Sixteen Weeks Ended
April 24, 1999 (unaudited) Retail Wholesale (a) Totals
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 587,506 $ 82,947 $ 670,453
Loss before provision
for income taxes (25,882) (6,842) (32,724)
Segment assets (b) 1,268,059 141,843 1,409,902
</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.
8
<PAGE>
Advance Stores Company, Incorporated and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 22, 2000 and April 24, 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>
Sixteen Week Periods Ended
---------------------------------------
April 22, April 24,
2000 (b) 1999 (a) (b)
----------------- -----------------
(unaudited) (unaudited)
<S> <C> <C>
Net sales $ 111,055 $ 144,357
Gross profit 27,694 28,376
Royalty income from the Company 11,396 10,583
Operating income 9,087 6,549
Net loss (3,644) (7,513)
</TABLE>
<TABLE>
<CAPTION>
April 22, January 1,
2000 (b) 2000 (a) (b)
----------------- -----------------
(unaudited)
<S> <C> <C>
Current assets $ 328,966 $ 282,419
Non-current assets 60,577 82,390
Current liabilities 258,184 238,924
Non-current liabilities 683,882 662,302
</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.
9
<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"). As of April 22, 2000,
the Company had 1,647 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 630 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).
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 and strategic acquisitions. 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.
The Company continually monitors store performance, which results in
closing certain store locations not meeting profitability objectives. During
the first quarter of fiscal 2000, the Company closed two stores included in the
fiscal 1999 restructuring activities and made the decision to close or relocate
13 additional stores not meeting profitability objectives, 12 of which were
closed during the first quarter of fiscal 2000.
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 by
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.
10
<PAGE>
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 on the Company's ability to
pursue its business strategies imposed by restrictive loan covenants; 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 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.
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>
Sixteen Week Periods Ended
(dollars in thousands)
(unaudited)
-------------------------------------------
April 22, April 24,
2000 1999
------------------- --------------------
<S> <C> <C>
Net sales $ 677,582 $ 670,453
Cost of sales 418,607 444,092
---------- ----------
Gross profit 258,975 226,361
Selling, general and administrative expenses 239,439 225,888
---------- ----------
Operating income, as adjusted 19,536 473
Expenses associated with merger integration - 16,918
Expenses associated with non-cash compensation 352 557
---------- ----------
Operating income (loss), as reported 19,184 (17,002)
---------- ----------
Interest expense (17,821) (15,909)
Other, net 170 187
Provision (benefit) for income taxes 579 (9,330)
---------- ----------
Net income (loss) $ 954 $ (23,394)
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Sixteen Week Periods Ended
(unaudited)
--------------------------------------
April 22, April 24,
2000 1999
--------------- ---------------
<S> <C> <C>
Net sales 100.0 % 100.0 %
Cost of sales 61.8 66.2
--------------- ---------------
Gross profit 38.2 33.8
Selling, general and administrative expenses 35.3 33.7
--------------- ---------------
Operating income, as adjusted 2.9 0.1
Expenses associated with merger integration - 2.5
Expenses associated with non-cash compensation 0.1 0.1
--------------- ---------------
Operating income (loss), as reported 2.8 (2.5)
--------------- ---------------
Interest expense (2.6) (2.4)
Other, net 0.0 0.0
Provision (benefit) for income taxes 0.1 (1.4)
--------------- ---------------
Net income (loss) 0.1 % (3.5)%
=============== ===============
</TABLE>
12
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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.
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, professional expenses and other related
expenses.
Sixteen Weeks Ended April 22, 2000 Compared to Sixteen Weeks Ended April 24,
1999
Net sales for the sixteen weeks ended April 22, 2000 were $677.6 million,
an increase of $7.1 million or 1.1% over net sales for the sixteen weeks ended
April 24, 1999. Net sales for the Retail segment increased $37.5 million or
6.4%. The net sales increase for the Retail segment was due to an increase in
the comparable store sales of 4.4%, 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 4.4% 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 13.9% for the sixteen weeks ended
April 24, 1999 as compared to the comparable quarter of fiscal 1998. Net sales
for the Wholesale segment decreased $30.4 million or 36.7%, reflecting the
continued decline of this segment.
During the sixteen weeks ended April 22, 2000, the Company opened 45 new
stores, relocated two stores, and closed 14 stores. The Company also added 119
stores to its commercial delivery program, bringing the total to 1,213 stores.
Gross profit for the sixteen weeks ended April 22, 2000 was $259.0 million
or 38.2% of net sales, as compared to $226.4 million or 33.8% of net sales in
the sixteen weeks ended April 24, 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 the merchandise
conversions and product liquidations resulting from the Western Merger. The
gross profit for the Retail segment was $252.5 million or 40.4% of net sales for
the sixteen week period ended April 22, 2000, as compared to $218.3 million or
37.2% of net sales for the sixteen week period ended April 24, 1999.
Selling, general and administrative expenses, before integration expenses
and non-cash compensation, increased to $239.4 million or 35.3% of net sales for
the sixteen week period ended April 22, 2000, from $225.9 million or 33.7% of
net sales for the sixteen week period ended April 24, 1999. The increase in
selling, general and administrative expenses as a percent of sales is primarirly
attributable to the net sales decline in the Wholesale segment, which as a
percent of sales contributes lower operating costs. Additionally, the Company's
decision to close stores not meeting profitability objectives and the incurrence
of slightly higher professional fees contributed to the increase in selling,
general and administrative expenses as a percentage of sales.
Operating income, as adjusted for expenses associated with integration
expenses and non-cash compensation, in the sixteen weeks ended April 22, 2000
was $19.5 million or 2.9% of net sales, as compared to $0.5 million or 0.1% of
net sales in the sixteen weeks ended April 24, 1999. The Retail segment
contributed $19.6 million to operating income, which was partially offset by an
operating loss in the Wholesale segment of $0.1
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million.
EBITDA (operating income plus depreciation and amortization), as adjusted
for merger integration expenses and non-cash compensation, was $38.8 million in
the sixteen week period ended April 22, 2000 or 5.7% of net sales, as compared
to $17.7 million or 2.6% of net sales in the sixteen week period ended April 24,
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 sixteen weeks ended April 22, 2000 was $17.8
million or 2.6% of net sales, as compared to $15.9 million or 2.4% of net sales
in the sixteen weeks ended April 24, 1999. The increase in interest is a result
of increased borrowings over the similar period of the fiscal year 1999 and an
increase in interest rates.
Income tax expense for the sixteen weeks ended April 22, 2000 was
$0.6 million compared to a benefit of $9.3 million in the sixteen weeks ended
April 24, 1999. This increase was primarily due to the increase in income before
taxes. Effective income tax rates were 38.0% and 29.0% for the sixteen week
period ended April 22, 2000 and April 24, 1999, respectively.
As a result of the above factors, the Company recorded net income of $1.0
million in the sixteen weeks ended April 22, 2000, as compared to a net loss of
$23.4 million in the sixteen weeks ended April 24, 1999. As a percentage of
sales, the net income for the sixteen week period ended April 22, 2000 was 0.1%
as compared to a net loss of 3.5% for the sixteen week period ended April 24,
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 April 22, 2000, the Company had outstanding indebtedness consisting of
$200.0 million of Senior Subordinated Notes (the "Senior Subordinated Notes"),
borrowings of $348.5 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 45
have been opened as of April 22, 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.
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
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for the closure of certain Parts America stores, severance and relocation costs
and other facility exit costs. As of April 22, 2000, these reserves had a
remaining balance of $14.3 million. The Company also assumed certain
restructuring and deferred compensation liabilities previously recorded by
Western Auto Supply Company. At April 22, 2000, the total liability for the
restructuring and deferred compensation plans was $4.0 million and $6.2 million,
respectively, of which $1.6 million and $1.8 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 sixteen weeks ended April 22, 2000, net cash used in operating
activities was $3.6 million. This amount consisted of $1.0 million of net
income, offset by depreciation and amortization of $19.2 million, amortization
of deferred debt issuance costs of $.9 million, and $25.6 million was used as a
result of a net increase in working capital, primarily inventory, receivables
and accrued expenses. Net cash used for investing activities was $11.4 million
and was comprised primarily of net capital expenditures. Net cash provided by
financing activities was $8.2 million and was comprised primarily of the
increase in bank overdrafts and proceeds from the issuance of common stock,
offset partially by a decrease in net borrowings.
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 $40.0 million was borrowed
and $12.1 million was outstanding for letters of credit, at April 22, 2000,
(iii) a $124.5 million delayed draw term loan of which $94.5 million was
borrowed at April 22, 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 April 22, 2000, the
margins were 2.25% and 1.25% for Eurodollar and base rate borrowings,
respectively, and can step down to 1.75% and 0.75%, respectively, if the
Company's total debt to EBITDA ratio is less than or equal to 4.00 to 1.00.
Additionally, at April 22, 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
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<PAGE>
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.
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 April 22, 2000, $70.3 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 April 22, 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.
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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 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 April 22, 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 April 22, 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
------- ------- ------- ------- --------- --------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt: (dollars in thousands)
Fixed rate.......... $ - $ - $ - $ - $ - $ 200,000 $ 200,000 $ 164,000
Weighted average
interest rate... - - - - - 10.3% 10.3%
Variable rate....... $1,000 $3,000 $14,000 $4,000 $ 246,500 $ 90,000 $ 358,500 $ 360,500
Weighted average
interest rate... 9.0% 9.7% 9.7% 9.7% 9.7% 10.0% 9.5%
</TABLE>
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 2000, the Company was notified it has been 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 Company believes
these claims are without merit and intends to defend them vigorously; however,
the ultimate outcome of this matter can not be ascertained at this time.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In March 2000, the Company issued and sold two shares of its Class A common
stock, $100 par value per share (the "Shares"), at a price per share of
approximately $1.0 million or an aggregate purchase price of $2.0 million to
Holding. As consideration for the Shares, the Company received approximately
$2.0 million in cash.
The sale and issuance of the securities described above was exempt from the
registration under Section *4(2)* of the Securities Act of 1933, as amended, as
a transaction not involving a public offering. The Company did not engage in
any general solicitation in connection with the issuance of the Shares described
above, and Holding acquired the securities for investment only and not with a
view to distribute. Appropriate legends were affixed to the stock certificates
issued in these transactions. No underwriter was employed with respect to these
transactions.
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.
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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
June 2, 2000 By: /s/ Jimmie L. Wade
-----------------------------------------
Jimmie L. Wade
President and Chief Financial Officer, Secretary
(Duly Authorized Officer and Principal
Financial Officer)
S-1
