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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 21, 2001
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 - 333-56031
__________________
ADVANCE HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
__________________
Virginia 54-1622754
(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 May 24, 2001, the registrant had outstanding 28,292,550 shares of
Class A Common Stock, par value $0.01 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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ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
Sixteen Week Period Ended April 21, 2001
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements of Advance Holding Corporation
and Subsidiaries:
Condensed Consolidated Balance Sheets as of April 21, 2001 and
December 30, 2000...................................................................... 1
Condensed Consolidated Statements of Operations for the Sixteen
Week Periods Ended April 21, 2001 and April 22, 2000................................... 2
Condensed Consolidated Statements of Cash Flows for the
Sixteen Week Periods Ended April 21, 2001 and April 22, 2000........................... 3
Notes to the Condensed Consolidated Financial Statements............................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks............................ 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 16
SIGNATURE................................................................................................. S-1
i
Advance Holding Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
April 21, 2001 and December 30, 2000
(dollars in thousands, except per share data)
April 21, December 30,
Assets 2001 2000
------ ----------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 16,643 $ 18,009
Receivables, net 94,308 80,578
Inventories 782,619 788,914
Other current assets 12,398 10,274
----------- -----------
Total current assets 905,968 897,775
Property and equipment, net of accumulated depreciation of
of $201,038 and $191,897 402,658 410,960
Assets held for sale 22,874 25,077
Other assets, net 18,254 22,548
----------- -----------
$ 1,349,754 $ 1,356,360
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Bank overdrafts $ 25,452 $ 13,599
Current portion of long-term debt 5,000 9,985
Accounts payable 354,598 387,852
Accrued expenses 124,985 124,962
Other current liabilities 43,002 42,794
----------- -----------
Total current liabilities 553,037 579,192
----------- -----------
Long-term debt 593,256 576,964
----------- -----------
Other long-term liabilities 41,388 43,933
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, 8% noncumulative, nonvoting, $10 par value,
redeemable by the Company at par; liquidation value at par;
100,000 shares authorized; no shares issued or outstanding - -
Common stock, Class A, voting, $.01 par value, 62,500,000
shares authorized; 28,273,550 and 28,288,550 issued
and outstanding 283 283
Common stock, Class B, nonvoting, $.01 par value,
21,875,000 shares authorized; no shares issued
or outstanding - -
Additional paid-in capital 371,971 372,169
Other 1,562 396
Accumulated deficit (211,743) (216,577)
----------- -----------
Total stockholders' equity 162,073 156,271
----------- -----------
$ 1,349,754 $ 1,356,360
=========== ===========
The accompanying notes to the condensed consolidated financial statements are an
integral part of these balance sheets.
1
Advance Holding Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
For the Sixteen Week Periods Ended
April 21, 2001 and April 22, 2000
(dollars in thousands)
(unaudited)
Sixteen Week Periods Ended
----------------------------
April 21, April 22,
2001 2000
---------- ----------
Net sales $ 729,359 $ 677,582
Cost of sales, including purchasing and warehousing costs 433,420 418,607
---------- ----------
Gross profit 295,939 258,975
Selling, general and administrative expenses 268,260 239,791
---------- ----------
Operating income 27,679 19,184
---------- ----------
Other (expense) income:
Interest expense (19,631) (20,766)
Other 174 230
---------- ----------
Total other expense, net (19,457) (20,536)
---------- ----------
Income (loss) before (provision) benefit
for income taxes 8,222 (1,352)
(Provision) benefit for income taxes (3,271) 396
---------- ----------
Net income (loss) $ 4,951 $ (956)
========== ==========
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
2
Advance Holding Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Sixteen Week Periods Ended
April 21, 2001 and April 22, 2000
(dollars in thousands)
(unaudited)
Sixteen Week Periods Ended
-------------------------------
April 21, April 22,
2001 2000
------------- -------------
Cash flows from operating activities:
Net income (loss) $ 4,951 $ (956)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation 20,856 19,234
Amortization of stock option compensation 1,109 352
Amortization of deferred debt issuance costs 981 992
Amortization of bond discount 3,292 2,887
Amortization of interest on capital lease obligation - 42
Losses on sales of property and equipment, net 1,308 310
Impairment of assets held for sale 1,600 -
Provision (benefit) for deferred income taxes 1,140 (666)
Net (increase) decrease in:
Receivables, net (13,730) (6,587)
Inventories 6,295 (15,369)
Other assets (2,792) (1,698)
Net (decrease) increase in:
Accounts payable (33,254) 21,874
Accrued expenses 4,151 (28,141)
Other liabilities (34) 4,248
--------- ---------
Net cash used in operating activities (4,127) (3,478)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (17,627) (12,692)
Proceeds from sales of property and equipment 908 1,294
--------- ---------
Net cash used in investing activities (16,719) (11,398)
--------- ---------
Cash flows from financing activities:
Increase in bank overdrafts 11,853 5,750
Payment of note payable (784) -
Borrowings under credit facilities 147,300 155,200
Payments on credit facilities (138,501) (157,200)
(Repurchases of) proceeds from Class A common stock under the
stockholder subscription plan (999) 2,192
Other 611 2,160
--------- ---------
Net cash provided by financing activities 19,480 8,102
--------- ---------
Net decrease in cash and cash equivalents (1,366) (6,774)
Cash and cash equivalents, beginning of period 18,009 22,577
--------- ---------
Cash and cash equivalents, end of period $ 16,643 $ 15,803
========= =========
Supplemental cash flow information:
Interest paid $ 17,678 $ 20,037
Income taxes paid 113 190
Non-cash transactions:
Accrued purchases of property and equipment 5,912 1,910
Equity transactions under the stockholder subscription and
employee stock option plans 226 934
Conversion of capital lease obligation - 3,509
========= =========
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
3
Advance Holding Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 21, 2001 and April 22, 2000
(dollars in thousands)
1. Basis of Presentation:
The accompanying condensed consolidated financial statements include
the accounts of Advance Holding Corporation 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 21, 2001, the
condensed consolidated statements of operations for the sixteen week periods
ended April 21, 2001 and April 22, 2000 and the condensed consolidated
statements of cash flows for the sixteen week periods ended April 21, 2001 and
April 22, 2000, 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
December 30, 2000.
The results of operations for the sixteen-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 FASB Statement No. 133," which
delayed the effective date of SFAS No. 133 to fiscal years beginning after June
15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Derivative
Instruments and Certain Hedging - an Amendment of SFAS No. 133," which amended
the accounting and reporting standards for certain risks related to normal
purchases and sales, interest and foreign currency transactions addressed by
SFAS No. 133. The Company adopted SFAS No. 133 on December 31, 2000 with no
material impact on its financial position or the results of its operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing Financial Assets and Extinguishment of Liabilities".
This statement replaces SFAS No. 125, but carries over most of the provisions of
SFAS No. 125 without reconsideration. The Company implemented SFAS No. 140
during first quarter of fiscal 2001. The implementation had no impact on the
Company's financial position or the results of its operations.
4
Advance Holding Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 21, 2001 and April 22, 2000
(dollars in thousands)
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 2000 amounts have been reclassified to conform with their 2001
presentation.
2. Accounts Receivable:
Receivables consist of the following:
April 21, December 30,
2001 2000
-------------- ------------
(unaudited)
Trade:
Wholesale $ 25,754 $ 12,202
Retail 16,276 15,666
Vendor 39,342 36,260
Installment 14,095 14,197
Related parties 780 3,540
Employees 467 607
Other 2,863 3,127
-------- --------
Total receivables 99,577 85,599
Less: Allowance for doubtful accounts (5,269) (5,021)
-------- --------
Receivables, net $ 94,308 $ 80,578
======== ========
5
Advance Holding Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 21, 2001 and April 22, 2000
(dollars in thousands)
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 21, 2001 and December 30, 2000 were $56,643 and $56,305, respectively.
Inventories consist of the following:
April 21, December 30,
2001 2000
-------------- --------------
(unaudited)
Inventories at FIFO $ 772,284 $ 779,376
Adjustments to state inventories at LIFO 10,335 9,538
-------------- --------------
Inventories at LIFO $ 782,619 $ 788,914
============== ==============
4. Restructuring Liabilities:
The Company's restructuring activities relate to the ongoing analysis
of the profitability of store locations and the settlement of restructuring
activities undertaken as a result of the fiscal 1998 merger with Western Auto
Supply Company ("Western") ("Western Merger"). 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 2001, the Company closed one store included in the
fiscal 2000 restructuring activities and made the decision to close or relocate
18 additional stores not meeting profitability objectives, of which 10 had been
closed as of April 21, 2001. As of April 21, 2001, this liability represents the
current value required for certain facility exit costs, which will be settled
over the remaining terms of the underlying lease agreements.
A reconciliation of activity with respect to these restructuring
accruals is as follows:
Other Exit
Costs
---------------
Balance, December 30, 2000 $ 6,788
New provisions 2,668
Change in estimates 40
Reserves utilized (1,485)
---------------
Balance, April 21, 2001 (unaudited) $ 8,011
===============
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 21, 2001, this restructuring reserve represents the current value required
for certain facility exit costs, which will be settled over the remaining terms
of the underlying lease agreements.
6
Advance Holding Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 21, 2001 and April 22, 2000
(dollars in thousands)
A reconciliation of activity with respect to these restructuring
accruals is as follows:
Other Exit
Costs
---------------
Balance, December 30, 2000 $ 3,797
Purchase accounting adjustments (73)
Reserves utilized (482)
---------------
Balance, April 21, 2001 (unaudited) $ 3,242
===============
5. Assets Held for Sale:
During the first quarter of fiscal 2001, the Company recorded an
impairment charge of $1,600 reducing the carrying value of the facility to
$6,000. The facility, which is held in the Wholesale segment, consists of excess
space not required by the Company's current needs. The Company expects to
dispose of this property during fiscal 2001.
6. Related Parties:
The following table presents the related party transactions with Sears,
Roebuck & Co. ("Sears") included in the condensed consolidated statements of
operations for the sixteen week periods ended April 21, 2001 and April 22, 2000
and the condensed consolidated balance sheets as of April 21, 2001 and December
30, 2000:
Sixteen Week Periods Ended
-------------------------------
April 21, April 22,
2001 2000
-------------- ---------------
(unaudited) (unaudited)
Net sales to Sears $ 2,023 $ 2,086
Credit card fees expense 101 128
April 21, December 30,
2001 2000
-------------- ---------------
(unaudited)
Receivables from Sears $ 635 $ 3,160
Payables to Sears 1,220 1,321
7. Segment and Related Information:
The Company has the following operating segments: Holding, Retail and
Wholesale. Holding has no operations but holds certain assets and liabilities.
Retail consists of the retail operations of the Company, operating under the
trade name "Advance Auto Parts" and "Western Auto" 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 and
franchisees all operating under the "Western Auto" trade name.
7
Advance Holding Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 21,2001 and April 22, 2000
(dollars in thousands)
During the first quarter of fiscal 2001, the Company realigned its retail
operations to include the Company-owned store operating under the "Western Auto"
trade name in California, which was previously included in the Wholesale
segment. Therefore, the following segment disclosures for the sixteen weeks
ended April 22, 2000 have been restated to reflect this new structure.
The accounting policies of the consolidated company have been consistently
applied to the reportable segments listed below.
Sixteen Weeks Ended Advance
April 21, 2001 (unaudited) Holding Retail Wholesale Eliminations Totals
------------------------------------------------------------------------------------------------------------------
Net sales $ - $ 688,786 $ 40,573 $ - $ 729,359
(Loss) income before benefit
(provision) for income taxes (3,330) 13,599 (2,047) - 8,222
Segment assets (a) 11,304 1,306,309 49,382 (17,241) 1,349,754
Sixteen Weeks Ended Advance
April 22, 2000 (unaudited) Holding Retail Wholesale Eliminations Totals
------------------------------------------------------------------------------------------------------------------
Net sales $ - $ 630,390 $ 47,192 $ - $ 677,582
(Loss) income before benefit
(provision) for income taxes (2,885) 3,401 (1,868) - (1,352)
Segment assets (a) 14,409 1,282,907 83,757 (22,748) 1,358,325
(a) Excludes investment in and equity in net earnings or losses of
subsidiaries.
8. Contingencies:
During the first quarter of fiscal 2001, the Company recorded a net gain of
$8,300 as a result of a settlement reached with a vendor, in which the vendor
repudiated a long-term supply agreement. This gain was recognized as a reduction
to cost of sales in the accompanying statement of operations.
The Company received notification from Sears during the first quarter of
fiscal 2001 that certain environmental matters of Western Auto Supply Company,
existing as of the merger date and fully indemnified by Sears, have been
settled. Accordingly, the Company reversed $2,500 of a receivable due from Sears
and reduced the corresponding environmental liability.
9. Subsequent Event:
On April 23, 2001, the Company signed a definitive agreement to acquire
substantially all the assets of Carport Auto Parts, Inc. ("Carport") and assume
selected liabilities. Upon signing the definitive agreement, the Company assumed
the operation of 51 auto parts stores in Alabama and Mississippi. The
acquisition will be accounted for under the purchase method of accounting and,
accordingly, the results of operations for Carport will be included in the
Company's financial records beginning April 23, 2001.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Advance Holding Corporation ("Holding") conducts all of its operations
through its wholly owned subsidiary, Advance Stores Company, Incorporated and
its subsidiaries (the "Company"). The Company was formed in 1929. In the 1980's,
the Company sharpened its marketing focus to target sales of automotive parts
and accessories to "do-it-yourself" ("DIY") customers and accelerated its growth
strategy. From the 1980's through the present, the Company has grown
significantly through new store openings, strategic acquisitions and a merger
with Western Auto Supply Company (the "Western Merger"). Additionally, in 1996,
the Company began to aggressively expand its sales to "do-it-for-me" ("DIFM")
customers by implementing a commercial delivery program that supplies parts and
accessories to third party automotive service and repair providers.
As of April 21, 2001, the Company had 1,733 stores in 38 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 530
independently owned dealer stores and three franchisees in 48 states operating
under the "Western Auto" trade name (the "Wholesale" segment).
The Company continually monitors store performance, which results in
closing certain store locations not meeting profitability objectives. During the
first quarter of fiscal 2001, the Company closed one store included in the
fiscal 2000 restructuring activities and made the decision to close or relocate
18 additional stores not meeting profitability objectives, 10 of which were
closed in the first quarter of fiscal 2001.
On April 23, 2001, the Company signed a definitive agreement to purchase
certain assets of Carport Auto Parts, Inc. ("Carport") and assume selected
liabilities. Upon signing the definitive agreement, the Company assumed the
operation of 51 auto parts stores in Alabama and Mississippi, which makes the
Company the largest retailer of automotive parts in this market. The Company
plans to integrate the Carport operations into its current operations of the
Retail Segment by the end of fiscal 2001. The acquisition will be accounted for
under the purchase method of accounting.
The following discussion of the consolidated historical results of
operations and financial condition of Holding should be read in conjunction with
the unaudited condensed consolidated financial statements of Holding and the
notes thereto included elsewhere in this Form 10-Q. Holding'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; Holding's and the Company's
substantial leverage and debt service obligations; restrictive loan covenants on
Holding's and the Company's ability to pursue its business strategies; changes
in business strategy or development plans; competition; weather conditions;
extent of the market demand for auto parts; availability of inventory supply;
unexpected fluctuation in merchandise costs; adequacy and perception of customer
service, product quality and defect experience; availability of and ability to
take advantage of vendor pricing programs and incentives; rate of new store
openings; cannibalization of store sites; mix and types of merchandise sold;
governmental regulation of
9
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.
Holding 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.
10
Results of Operations
The following tables set forth the statement of operations data for Holding
expressed in dollars and as a percentage of net sales for the periods indicated.
Sixteen Week Periods Ended
(dollars in thousands)
(unaudited)
--------------------------
April 21, April 22,
2001 2000
--------- ---------
Net sales $ 729,359 $ 677,582
Cost of sales 433,420 418,607
--------- ---------
Gross profit 295,939 258,975
Selling, general and administrative expenses 266,664 238,968
Non-cash and other employee compensation 1,596 823
--------- ---------
Operating income 27,679 19,184
Interest expense (19,631) (20,766)
Other income, net 174 230
(Provision) benefit for income taxes (3,271) 396
--------- ---------
Net income (loss) $ 4,951 $ (956)
========= =========
Sixteen Week Periods Ended
(unaudited)
--------------------------
April 21, April 22,
2001 2000
--------- ---------
Net sales 100.0% 100.0%
Cost of sales 59.4 61.8
--------- ---------
Gross profit 40.6 38.2
Selling, general and administrative expenses 36.6 35.3
Non-cash and other employee compensation 0.2 0.1
--------- ---------
Operating income 3.8 2.8
Interest expense (2.7) (3.1)
Other income, net 0.0 0.0
(Provision) benefit for income taxes (0.4) 0.1
--------- ---------
Net income (loss) 0.7% (0.2)%
========= =========
Net sales consist primarily of comparable store net sales, new store net
sales, Service Store net sales, net sales for Wholesale and finance charges on
installment sales. Comparable store net sales is calculated based on the change
in net sales starting once a store has been opened for thirteen complete
accounting periods (each period represents four weeks). Relocations are included
in comparable store net sales from the original date of opening. Holding has not
included the Service Stores in the comparable store net sales calculation but
does plan to in the future.
11
Holding'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
Holding's product mix, price changes in response to competitive factors and
fluctuations in merchandise costs and vendor programs. The Company seeks to
avoid fluctuation in merchandise costs by entering into long-term purchasing
agreements with vendors in exchange for pricing certainty, but there can be no
assurance such measures will in fact mitigate the effect of fluctuations in
merchandise costs on gross profits.
Selling, general and administrative expenses are comprised of store
payroll, store occupancy, net advertising expenses, depreciation and
amortization, other store expenses and general and administrative expenses,
including salaries and related benefits of corporate employees, administrative
office expenses, data processing, professional expenses and other related
expenses.
Sixteen Weeks Ended April 21, 2001 Compared to Sixteen Weeks Ended April 22,
2000
Net sales for the sixteen weeks ended April 21, 2001 were $729.4
million, an increase of $51.8 million or 7.6% over net sales for the sixteen
weeks ended April 22, 2000. Net sales for the Retail segment increased $58.4
million or 9.3%. The net sales increase for the Retail segment was due to an
increase in the comparable store sales and contributions from new stores opened
within the last year. The comparable store sales increase of 5.7% was primarily
a result of growth in both the DIY and DIFM market segments. Comparable store
sales increased 4.4% for the sixteen weeks ended April 22, 2000 as compared to
the comparable period of fiscal 1999. Net sales for the Wholesale segment
decreased 14.0% or $6.6 million due to a decline in the number of dealer stores
serviced by the Company and lower average sales to each dealer.
During the sixteen weeks ended April 21, 2001, the Company opened 15
new stores, relocated four stores and closed 11 stores, bringing the total
retail stores to 1,733. During the first quarter of fiscal 2001, the Company
reduced the total number of stores participating in its commercial delivery
program to 1,193 through the consolidation of 16 programs.
Gross profit for the sixteen weeks ended April 21, 2001 was $295.9
million or 40.6% of net sales, as compared to $259.0 million or 38.2% of net
sales in the sixteen weeks ended April 22, 2000. The increase in the gross
profit percentage is reflective of a net gain recorded as a reduction to cost of
sales during the first quarter of fiscal 2001. The gain of $8.3 million is a
result of a settlement reached between the Company and a vendor in which the
vendor had repudiated a long-term supply agreement entered into with the
Company. The remaining increase in gross profit is a result of a positive shift
in product mix, reduction in logistics cost and a net sales decline of the lower
margin Wholesale segment. The gross profit for the Retail segment was $291.6
million or 42.3% of net sales for the sixteen week period ended April 21, 2001,
as compared to $254.3 million or 40.3% of net sales for the sixteen week period
ended April 22, 2000.
Selling, general and administrative expenses, before non-cash and
other employee compensation, increased to $266.7 million or 36.6% of net sales
for the sixteen week period ended April 21, 2001, from $239.0 million or 35.3%
of net sales for the sixteen week period ended April 22, 2000. Selling, general
and administrative expenses have increased due to the closure of certain store
locations not meeting profitability objectives and the devaluation of an
administrative facility obtained in the Western Merger totaling $5.1 million.
Additionally, as a percentage of sales, the increase in selling, general and
administrative expenses is attributable to increased store labor costs and the
continued sales decline in the Wholesale segment, which carries lower selling,
general and administrative expenses as a percentage of sales compared to the
Retail segment.
EBITDA (operating income plus depreciation and amortization), as
adjusted for non-cash and other employee compensation, was $50.1 million in the
sixteen week period ended April 21, 2001 or 6.9% of net sales, as compared to
$39.2 million or 5.8% of net sales in the sixteen week period ended April 22,
2000. 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. Holding'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 and other employee compensation should be eliminated
from the EBITDA calculation to evaluate the operating performance of the
Company.
12
Interest expense for the sixteen week period ended April 21, 2001 was
$19.6 million or 2.7% of net sales, as compared to $20.8 million or 3.1% of net
sales for the sixteen week period ended April 22, 2000. Interest expense
decreased as a result of an overall reduction in average borrowings and a
significant decrease in interest rates for the sixteen week period ended April
21, 2001 as compared to the sixteen week period ended April 22, 2000.
Income tax expense for the sixteen weeks ended April 21, 2001 was $3.3
million compared to a benefit of $0.4 million in the sixteen weeks ended April
22, 2000. This increase was primarily due to the increase in income before taxes
for the sixteen weeks ended April 21, 2001 as compared to the sixteen weeks
ended April 22, 2000.
Holding recorded net income of $5.0 million for the sixteen week
period ended April 21, 2001, as compared to a net loss of $1.0 million for the
sixteen week period ended April 22, 2000. As a percentage of sales, net income
for the sixteen week period ended April 21, 2001 was 0.7% as compared to net
loss of 0.2% for the sixteen week period ended April 22, 2000.
Liquidity and Capital Resources
As a holding company, Holding relies on dividends from the Company as
its primary source of liquidity. Holding does not have and in the future may not
have any assets other than the capital stock of the Company. The ability of the
Company to pay cash dividends to Holding when required is restricted by law and
the terms of the Company's debt instruments, including the Credit Facility and
the Senior Subordinated Notes (see below). No assurance can be made that the
Company will be able to pay cash dividends to Holding when required to redeem
the Debentures (see below).
Holding and the Company believe they will have sufficient liquidity to
fund its debt service obligations and implement its growth strategy over the
next twelve months. As of April 21, 2001, Holding and the Company had
outstanding indebtedness consisting of $87.5 million of Senior Discount
Debentures (the "Debentures"), $169.5 million of Senior Subordinated Notes (the
"Senior Subordinated Notes"), borrowings of $331.3 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 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 portions of the Credit Facility
are subject to a borrowing base formula, which is based on certain percentages
of the Company's inventories, and certain debt covenants. The Company was in
compliance with the above covenants under the Credit Facility as of April 21,
2001. As of April 21, 2001, $100.8 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, including funding of the restructuring program.
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, the
development and implementation of proprietary information systems and the
Western Merger. The Company has financed its growth through a combination of
internally generated funds, borrowings under the Credit Facility and issuances
of equity.
The Company's new Advance Auto Parts stores require capital
expenditures of approximately $120,000 per store and an inventory investment of
approximately $300,000 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. The Company expects to open approximately 130 new stores
through internal growth or strategic acquisitions during fiscal 2001, of which
15 have been opened as of April 21, 2001.
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.
13
As a result of the Western Merger, the Company closed certain Advance
Auto Parts stores in overlapping markets with Parts America stores or stores not
meeting profitability objectives. As part of normal operations, the Company will
continue to review store performance and close additional stores not meeting
profitability objectives. The Western Merger also resulted in restructuring
reserves recorded in purchase accounting for the closure of certain Parts
America stores, severance and relocation costs and other facility exit costs. As
of April 21, 2001, these reserves had a remaining balance of $11.3 million. The
Company also assumed certain restructuring and deferred compensation liabilities
previously recorded by Western Auto Supply Company. At April 21, 2001, the total
liability for the restructuring and deferred compensation plans was $2.5 million
and $4.8 million, respectively, of which $1.4 million and $1.5 million,
respectively, is recorded as a current liability. The classification for
deferred compensation is determined by payment terms elected by the employee,
which can be changed upon 12 months' notice.
For the sixteen weeks ended April 21, 2001, net cash used in operating
activities was $4.1 million. Of this amount, $5.0 million was provided by net
income. Depreciation and amortization provided an additional $20.9 million,
amortization of deferred debt issuance costs and bond discount provided $4.4
million and $34.4 million was used as a result of a net increase in working
capital. Net cash used for investing activities was $16.7 million and was
comprised primarily of net capital expenditures. Net cash provided by financing
activities was $19.4 million and was comprised primarily of an increase in net
borrowings.
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.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Holding currently utilizes no material derivative financial
instruments that expose it to significant market risk. Holding is exposed to
cash flow and fair value risk due to changes in interest rates with respect to
its long-term debt. While Holding 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. Holding's exposure to interest rate risk
decreased during the first quarter of fiscal 2001 due to decreased interest
rates.
Holding's fixed rate debt consists primarily of outstanding balances
on the Debentures and Senior Subordinated Notes. Holding's variable rate debt
relates to borrowings under the Credit Facility and the IRB. Holding'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 Holding's long-term debt at April 21, 2001 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 21, 2001. Implied forward rates should not be considered a predictor of
actual future interest rates.
Fair
Fiscal Fiscal Fiscal Fiscal Fiscal Market
2001 2002 2003 2004 2005 Thereafter Total Value
-------- ------- ------- --------- --------- ------------ -------- --------
Long-term debt: (dollars in thousands)
Fixed rate............................ $ - $ - $ - $ - $ - $281,450 $ 281,450 $ 222,003
Weighted average
interest rate..................... - - - - - 11.3% 11.3%
Variable rate......................... $ 3,000 $ 14,000 $ 4,000 $ 232,711 $ 60,000 $ 27,588 $ 341,299 $ 341,299
Weighted average
interest rate..................... 6.2% 6.8% 7.7% 8.4% 8.6% 8.6% 7.1%
15
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
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 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.
16
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 HOLDING CORPORATION,
a Virginia corporation
May 24, 2001 By: /s/ Jimmie L. Wade
-------------------------------------
Jimmie L. Wade
President and Chief Financial Officer,
Secretary (as principal executive and
accounting officer)
S-1