As filed with the Securities and Exchange Commission on November 6, 2001
Registration No. 333-68858
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ADVANCE AUTO PARTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 5531 54-2049910
(State or other jurisdiction of (Primary Standard Industrial (Employer
incorporation or organization) Classification Code Number) Identification No.)
5673 Airport Road, Roanoke, VA 24012
(540) 362-4911
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Jimmie L. Wade
President and Chief Financial Officer
5673 Airport Road, Roanoke, VA 24012
(540) 362-4911
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies To:
Thomas M. Cleary, Esq. Gary I. Teblum, Esq.
Thomas A. Waldman, Esq. Trenam, Kemker, Scharf,
Riordan & McKinzie Barkin, Frye, O'Neill & Mullis, P.A.
300 South Grand Avenue, 29th Floor 101 E. Kennedy Boulevard, Suite 2700
Los Angeles, California 90071 Tampa, Florida 33602
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the transactions described herein have been satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
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Proposed
Maximum Proposed
Title of Each Class of Aggregate Maximum Amount of
Securities to be Amount to be Offering Offering Price Registration
Registered Registered(1)(2) Price(3) Per Share(4) Fee
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Common Stock, par value
$0.0001 per share..... 4,305,632 $109,019,197.60 $25.32 $27,255.00(5)
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(1) This Registration Statement relates to securities of the registrant
issuable to holders of common stock, par value $0.01 per share (the
Discount common stock), of Discount Auto Parts, Inc., a Florida
corporation (Discount), pursuant to the proposed merger of AAP Acquisition
Corporation, a Florida corporation and a wholly owned subsidiary of the
registrant, with and into Discount.
(2) Represents the maximum number of shares of Advance common stock issuable
upon completion of the merger described in this document, assuming the
conversion of each outstanding share of common stock (or common stock
equivalent) of Discount Auto Parts, Inc. into 0.2577 shares of Advance
common stock.
(3) Estimated solely for purposes of calculating the registration fee required
by Section 6(b) of the Securities Act and calculated pursuant to Rule
457(f) under the Securities Act. Pursuant to Rule 457(f)(1) and Rule
457(f)(3) under the Securities Act, the proposed maximum aggregate
offering price of the registrant's common stock was calculated based upon
(a) the market value of shares of Discount common stock (the securities to
be cancelled in the merger) in accordance with Rule 457(c) under the
Securities Act, determined as the product of (i) $14.025, the average of
the high and low prices per share of Discount common stock on August 24,
2001, as reported on the New York Stock Exchange, and (ii) 16,707,923, the
aggregate number of shares of Discount common stock outstanding as of
August 24, 2001, less (b) the cash to be paid by the registrant in
connection with the exchange of such aggregate number of shares of
Discount common stock.
(4) The Proposed Maximum Offering Price Per Share is derived by dividing the
number of shares of common stock to be registered into the Proposed
Maximum Aggregate Offering Price. There is no current market for Advance
common stock. The actual value of a share of Advance common stock issued
upon consummation of the merger may be higher or lower than the amount
shown here, and will reflect the market price of Discount common stock
immediately prior to consummation of the merger.
(5) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this proxy statement and prospectus is not complete and +
+may be subject to change. We may not sell these securities until the +
+registration statement filed with the Securities and Exchange Commission is +
+effective. This prospectus is not an offer to sell these securities and we +
+are not soliciting offers to buy these securities in any jurisdiction where +
+these activities are not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 6, 2001
[LOGO OF ADVANCE AUTO PARTS]
[LOGO OF DISCOUNT AUTO PARTS]
November 6, 2001
PROPOSED MERGER--YOUR VOTE IS VERY IMPORTANT
The board of directors of Advance Auto Parts, Inc. and Discount Auto Parts,
Inc. have each unanimously approved a merger transaction that will combine the
two companies. We believe that the merger will benefit the shareholders of
Discount Auto Parts, Inc. and we ask for your support in voting for the merger
proposal.
Under the terms of the proposed merger, Discount Auto Parts, Inc., or
Discount, will merge with a subsidiary of Advance Auto Parts, Inc., or Advance,
and continue as the surviving corporation and wholly owned subsidiary of
Advance. Immediately after the merger, Advance will contribute the common stock
of Discount received in the merger to Advance Stores Company, Incorporated, or
Advance Stores, a company that will have become a wholly owned subsidiary of
Advance as a result of a simultaneous merger of Advance Holding Corporation, or
Advance Holding, the current parent company of Advance Stores, into Advance.
You should read carefully the merger agreement, a copy of which is attached as
Annex A to the accompanying proxy statement and prospectus.
As a result of the merger, each share of Discount common stock will be
converted into the right to receive 0.2577 of a share of Advance common stock
and $7.50 in cash. Advance expects to issue approximately 4.3 million shares of
common stock to Discount shareholders in the merger, which will represent
approximately 13.2% of the total number of shares of Advance after the merger.
Discount's common stock is listed on the New York Stock Exchange. Advance's
common stock is not currently listed on an exchange or Nasdaq, but Advance has
applied for listing of its common stock on the New York Stock Exchange.
The affirmative vote of holders of a majority of Discount's outstanding
shares of common stock is necessary to approve the merger agreement and the
merger.
The accompanying proxy statement and prospectus provides you with a summary
of the merger agreement and additional information about the parties involved.
If the merger agreement is approved by the requisite holders of Discount's
common stock, the closing of the merger will occur after a special meeting of
Discount's shareholders and when all of the other conditions to the closing of
the merger are satisfied or waived.
This document provides you with detailed information about the merger and the
shareholders meeting. You can also obtain financial and other information about
Discount, Advance, Advance Holding and Advance Stores from documents filed with
the Securities and Exchange Commission. We encourage you to carefully read this
entire document.
Jimmie L. Wade Peter J. Fontaine
President and Chief Financial Officer Chairman and Chief Executive Officer
Advance Auto Parts, Inc. Discount Auto Parts, Inc.
See "Risk Factors" beginning on page 16 for a discussion of risks that should
be considered by Discount's shareholders before voting at the Discount special
meeting of shareholders.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the shares of Advance common stock to be
issued in the merger or determined if this proxy statement and prospectus is
accurate or adequate. Any representation to the contrary is a criminal offense.
This proxy statement and prospectus is dated November 6, 2001 and is first
being mailed to shareholders of Discount on or about November 7, 2001.
DISCOUNT AUTO PARTS, INC.
4900 Frontage Road South
Lakeland, Florida 33815
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on November 28, 2001
To the Shareholders of Discount Auto Parts, Inc.:
A special meeting of shareholders of Discount Auto Parts, Inc. will be held
at The Lakeland Center, 700 West Lemon Street, Lakeland, Florida, on Wednesday,
November 28, 2001 at 9:00 a.m. local time, for the following purposes:
1. To consider and vote upon a proposal to approve the merger of
Discount with a wholly owned subsidiary of Advance Auto Parts, Inc., or
Advance, and adopt the merger agreement, under which:
. Discount will be merged with a wholly owned merger subsidiary of
Advance, and Discount will continue as the surviving corporation
and be a wholly owned, indirect subsidiary of Advance;
immediately after the merger, Advance will contribute the common
stock of Discount received in the merger to Advance Stores
Company, Incorporated, or Advance Stores, a company that will
become a wholly owned subsidiary of Advance as a result of a
simultaneous merger of Advance Holding Corporation, or Advance
Holding, the current parent of Advance Stores, into Advance, and
Discount will become a wholly owned subsidiary of Advance Stores;
and
. each issued and outstanding share of Discount common stock will
be converted into and represent the right to receive 0.2577 of a
share of Advance common stock and $7.50 in cash and any cash in
lieu of a fractional share of Advance common stock.
2. To transact any other business or act on any other matter, including
any proposal to adjourn or postpone the meeting for the purpose of
soliciting additional proxies or for any other purpose, as may properly
come before the special meeting or any adjournment or postponement of the
special meeting.
Our board of directors has approved the merger agreement and the merger and
recommends that you vote FOR approval of the merger agreement and the merger.
These proposals are described in more detail in the accompanying proxy
statement and prospectus, which you should read in its entirety before voting.
A copy of the merger agreement is attached as Annex A to the accompanying proxy
statement and prospectus.
Only shareholders of record at the close of business on October 25, 2001 are
entitled to notice of the special meeting and to vote at the special meeting
and at any adjournments thereof. For ten days prior to the special meeting, a
complete list of shareholders entitled to vote at the special meeting will be
available for examination by any shareholder for any purpose relevant to the
special meeting during ordinary business hours at the principal executive
offices of Discount located in Lakeland, Florida.
All Discount shareholders are cordially invited to attend the special
meeting in person. However, to ensure your representation at the special
meeting, you are urged to complete, sign and return the enclosed proxy card as
promptly as possible in the enclosed postage-prepaid envelope. You may revoke
your proxy in the manner described in the accompanying proxy statement and
prospectus at any time before it is voted at the special meeting. If you fail
to return a properly executed proxy card or vote in person at the special
meeting, the effect will be a vote against the proposal to approve the merger
agreement and the merger.
Please do not send any stock certificates at this time.
By order of the board of directors,
C. Michael Moore
Secretary
Lakeland, Florida
November 6, 2001
TABLE OF CONTENTS
Page
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QUESTIONS AND ANSWERS ABOUT THE PROPOSALS................................ 1
SUMMARY.................................................................. 4
UNAUDITED COMPARATIVE PER SHARE DATA..................................... 15
RISK FACTORS............................................................. 16
Risk Factors Relating to the Merger...................................... 16
Risk Factors Relating to Advance's Business.............................. 19
Special Note Regarding Forward-Looking Statements........................ 23
THE SPECIAL MEETING...................................................... 24
Date, Place and Time..................................................... 24
Purpose of the Special Meeting........................................... 24
Record Date and Stock Entitled to Vote................................... 24
Quorum Requirement....................................................... 24
Vote Required............................................................ 24
Proxies.................................................................. 24
Proxy Solicitation....................................................... 25
No Appraisal Rights...................................................... 25
Other Matters Brought Before the Special Meeting; Adjournments and
Postponements........................................................... 25
THE MERGER............................................................... 27
Background of the Merger Between Advance and Discount.................... 27
Discount's Reasons for the Merger........................................ 32
Advance's Reasons for the Merger......................................... 34
Recommendation of the Board of Directors of Discount..................... 34
Opinion of Discount's Financial Advisor.................................. 35
Discount Standalone Analyses............................................. 38
Contribution Analysis.................................................... 40
Other Factors............................................................ 40
Miscellaneous............................................................ 40
Certain Financial Projections and Forecasts.............................. 41
Interests of Discount's Officers and Directors in the Merger............. 43
Accounting Treatment..................................................... 46
Material U.S. Federal Income Tax Consequences of the Merger.............. 46
Delisting and Deregistration of Discount Common Stock.................... 48
Regulatory Matters....................................................... 48
Restrictions on Sales by Discount Affiliates............................. 48
Financing Commitments.................................................... 49
THE MERGER AGREEMENT..................................................... 52
Structure of Merger and Certain Related Transactions..................... 52
Merger Consideration..................................................... 52
Post Closing Capitalization.............................................. 52
Effective Time of the Merger............................................. 52
Directors and Officers of Discount....................................... 52
Treatment of Discount Stock Options in the Merger........................ 53
Exchange Agent; Procedures for Exchange of Certificates.................. 53
Representations and Warranties........................................... 54
Definition of Material Adverse Effect.................................... 55
No Solicitation.......................................................... 55
Conduct of the Business.................................................. 57
i
TABLE OF CONTENTS--(Continued)
Page
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Meeting of Discount Shareholders; Obligations to Recommend............... 59
Filings; Other Actions................................................... 59
Proxy Statement; Registration Statement.................................. 60
Expenses................................................................. 60
Certain Employee Benefit Plan Obligations of Advance..................... 60
Cooperation and Access Between Advance and Discount...................... 60
Notification of Specified Events......................................... 61
Conditions to Obligation of Each Party to Complete the Merger............ 61
Additional Conditions to Obligations of Advance to Complete the Merger... 62
Additional Conditions to Obligations of Discount to Complete the Merger.. 62
Termination.............................................................. 62
Termination Fee and Expenses............................................. 63
Amendments to Merger Agreement; Extension and Waiver..................... 64
Indemnification, Exculpation and Insurance............................... 65
OTHER AGREEMENTS OR TRANSACTIONS......................................... 66
Voting Agreement......................................................... 66
Option Agreement......................................................... 66
Advance Voting Agreement................................................. 67
Reincorporation Merger Between Advance and Advance Holding............... 67
INFORMATION CONCERNING ADVANCE........................................... 68
Advance's Business....................................................... 68
Advance's History...................................................... 68
Store Operations....................................................... 69
Purchasing and Merchandising........................................... 71
Marketing and Advertising.............................................. 71
Warehouse and Distribution............................................. 71
Management Information Systems......................................... 72
Logistics and Purchasing Information Systems........................... 74
Employees.............................................................. 74
Competition............................................................ 74
Trade Names, Service Marks and Trademarks.............................. 75
Environmental Matters.................................................. 75
Properties............................................................. 76
Legal Proceedings...................................................... 76
Selected Historical Consolidated Financial and Other Data of Advance
Holding................................................................. 77
Management's Discussion and Analysis of Financial Condition and Results
of Operations of Advance Holding........................................ 81
General................................................................ 81
Acquisitions and Recapitalization...................................... 81
Recent Developments.................................................... 83
Results of Operations.................................................. 84
Net Sales.............................................................. 85
Cost of Sales.......................................................... 85
Selling, General and Administrative Expenses........................... 85
Liquidity and Capital Resources........................................ 89
Seasonality............................................................ 93
Quantitative and Qualitative Disclosures About Market Risks............ 93
Recent Accounting Pronouncements....................................... 94
ii
TABLE OF CONTENTS--(Continued)
Page
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Principal Stockholders of Advance Holding................................ 95
Related Party Transactions of Advance.................................... 97
INFORMATION CONCERNING DISCOUNT.......................................... 101
Discount's Business...................................................... 101
Operating Strategies................................................... 101
Utilizing Advanced Information Systems................................. 104
Growth Strategies...................................................... 105
Commercial Market Business............................................. 107
Store Operations....................................................... 108
Purchasing and Distribution............................................ 109
Advertising and Promotion.............................................. 109
Competition............................................................ 109
Team Members........................................................... 110
Trademarks............................................................. 110
Discount's Properties.................................................. 110
Legal Proceedings...................................................... 111
Selected Historical Consolidated Financial and Other Data of Discount.... 112
Management's Discussion and Analysis of Financial Condition and Results
of Operations of Discount............................................... 114
Results of Operations.................................................. 114
Liquidity and Capital Resources........................................ 117
Inflation and Seasonality.............................................. 119
Quantitative and Qualitative Disclosures about Market Risk............. 119
Principal Shareholders of Discount....................................... 120
Agreement and Plan of Merger--Potential Changes in Control............... 122
Related Party Transactions of Discount................................... 122
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA.......................... 124
MARKET FOR ADVANCE'S AND DISCOUNT'S COMMON STOCK AND DIVIDENDS........... 133
MANAGEMENT OF ADVANCE AFTER THE MERGER................................... 134
Directors and Executive Officers of Advance After the Merger............. 134
Executive Compensation................................................... 137
Executive Employment Contracts........................................... 138
Consulting Agreement..................................................... 138
Compensation of Directors................................................ 139
Stock Subscription Plans................................................. 139
Stock Option Plans....................................................... 139
Option Grants............................................................ 140
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Values.................................................................. 141
Compensation Committee Interlocks and Insider Participation.............. 141
DESCRIPTION OF THE CAPITAL STOCK OF ADVANCE.............................. 142
Common Stock............................................................. 142
Preferred Stock.......................................................... 142
Stockholders Agreement................................................... 142
Registration Rights of Stockholders...................................... 144
Potential Anti-takeover Effect of Delaware Law, Advance's Certificate of
Incorporation and Bylaws................................................ 144
Listing.................................................................. 145
Transfer Agent and Registrar............................................. 145
Lock-up Agreements....................................................... 145
iii
TABLE OF CONTENTS--(Continued)
Page
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Rule 144................................................................. 145
Rule 701................................................................. 146
Registration of Shares Under Stock Option Plans.......................... 146
COMPARISON OF RIGHTS BETWEEN DISCOUNT SHAREHOLDERS AND ADVANCE
STOCKHOLDERS............................................................ 147
LEGAL MATTERS............................................................ 154
EXPERTS.................................................................. 154
WHERE YOU CAN FIND MORE INFORMATION ABOUT ADVANCE AND DISCOUNT........... 154
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES............................... F-1
Annex A--Merger Agreement, dated August 7, 2001, among Advance Holding
Corporation, Advance Auto Parts, Inc., Advance Stores Company,
Incorporated, AAP Acquisition Corporation and Discount Auto
Parts, Inc.
Annex B--Opinion of Salomon Smith Barney Inc.
iv
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS
Q: What am I being asked to vote upon?
A: You are being asked to adopt a merger agreement that provides for a wholly
owned subsidiary of Advance to be merged into Discount. If the merger and
related transactions are completed, Discount will be an indirect, wholly
owned subsidiary of Advance. Discount will no longer be a publicly-traded
corporation, and you will no longer own shares of Discount common stock.
Upon the closing of the merger, Advance will become a public company and the
Advance shares that you will receive are expected to be listed for trading
on the New York Stock Exchange. Advance has applied for such listing.
Q: What will I receive in the merger?
A: If we complete the merger, you will receive $7.50 in cash and 0.2577 of a
share of Advance common stock for each share of Discount common stock you
hold on the date of the merger. Advance will not issue fractional shares in
the merger. Instead, you will receive cash in an amount determined by
multiplying the fraction of a share of Advance common stock to which you are
entitled by $29.11.
Q: Does Discount's board of directors recommend voting in favor of the merger
agreement and merger?
A: Yes. After careful consideration, your board of directors has determined
that the merger is fair to you and in your best interests as a shareholder
of Discount. Discount's board of directors has unanimously approved the
merger agreement and the merger and unanimously recommends that you vote in
favor of the merger agreement and the merger.
Q: Will I recognize taxable gain or loss for U.S. federal income tax purposes
in the merger?
A: Legal counsel to Discount has opined, subject to some assumptions and based
on certain representations of fact, that the merger should be treated for
U.S. federal income tax purposes as part of an exchange within the meaning
of Section 351 of the Internal Revenue Code, assuming the contemporaneous
merger of Advance Holding into Advance. Assuming that the merger so
qualifies, in general, a Discount shareholder will not recognize loss, but
will recognize gain to the extent of the lesser of (i) the excess, if any,
of (x) the sum of the fair market value (on the effective date of the
merger) of the Advance common stock and the cash received by you pursuant to
the merger over (y) your tax basis in your shares of Discount common stock,
and (ii) the cash received by you pursuant to the merger. Such gain, if any,
should be long-term capital gain if your Discount common stock was held for
more than one year at the time the merger becomes effective.
Tax matters are very complicated, and the tax consequences of the merger to
each Discount shareholder will depend on the shareholder's particular facts
and circumstances. We strongly encourage you to consult your own tax
advisor to determine your particular tax consequences.
For a more complete description of the tax consequences of the merger, see
the section entitled "Material U.S. Federal Income Tax Consequences of the
Merger."
Q: Are there risks I should consider in deciding whether to vote for the
merger?
A: Yes. The number of shares of Advance common stock that you will receive in
the merger will not be adjusted based on changes in the market price of
Discount common stock before the completion of the merger. Advance's common
stock is not currently publicly traded and therefore the value of the stock
cannot be precisely determined. As a result, you will not know the market
value of the Advance shares you would receive in the merger at the time you
vote on the merger. Discount is not permitted to "walk away" from the merger
or resolicit the vote of its shareholders based on changes in the market
price of
1
Discount common stock. You should carefully consider these and other factors
discussed in the section entitled "Risk Factors." You should also see the
sections entitled "The Merger--Discount's Reasons for the Merger" and "--
Recommendation of Discount's Board of Directors of Discount."
Q: Do I have dissenters' rights of appraisal?
A: No. Under Florida law, Discount shareholders are not entitled to dissenters'
rights of appraisal in connection with the merger.
Q: What do I need to do now?
A: We urge you to read this proxy statement and prospectus carefully, including
its annexes, and to consider how the merger affects you as a shareholder.
You may also want to review the documents referenced under "Where You Can
Find More Information About Advance And Discount."
Q: How do I vote?
A: Simply indicate on your proxy card how you want to vote, and sign and mail
your proxy card in the enclosed return envelope as soon as possible so that
your shares may be represented at the special meeting. If you do not include
instructions on how to vote your proxy, we will vote your shares "FOR"
approval and adoption of the merger agreement and the merger unless your
shares are held in a brokerage account (see the next Question and Answer
regarding shares held by brokers in "street name"). If you fail to return
your proxy card or to vote in person, the effect will be a vote against the
merger agreement and the merger. For a more complete description of voting
at the meeting, see the section entitled "The Special Meeting--Proxies."
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares only if you provide instructions on how to
vote in accordance with the information and procedures provided to you by
your broker. If you do not instruct your broker to vote your shares, it will
be equivalent to voting against the merger agreement and the merger.
For a more complete description of voting shares held in "street name," see
the section entitled "The Special Meeting--Proxies."
Q: What do I do if I want to change my vote?
A: If you want to change your vote, send the secretary of Discount a later-
dated, signed proxy card before the special meeting or attend the meeting
and vote in person. You may also revoke your proxy by sending a written
notice of revocation to the corporate secretary of Discount before the
meeting.
For a more complete description of how to change your vote, see the section
entitled "The Special Meeting--Proxies."
Q: Should I send in my stock certificates now?
A: No. After we complete the merger, we will send you written instructions for
exchanging your Discount stock certificates for Advance common stock
certificates and the cash portion of the merger consideration, which will be
paid by check.
Q: When do you expect to complete the merger?
A: Subject to shareholder approval and satisfaction of other important
conditions to closing, we expect to complete the merger promptly after the
special meeting.
For a description of the conditions to completion of the merger, see the
section entitled "The Merger Agreement--Conditions to Obligation of Each
Party to Complete the Merger."
2
Q: Whom should I call with questions?
A: You should call Discount's investor relations department at (863) 687-9226
or Discount's proxy solicitor, Mellon Investor Services LLC, at (917) 320-
6285 with any questions about the merger.
You may also obtain additional information about Discount and Advance,
Advance Holding and Advance Stores from documents filed by them with the
Securities and Exchange Commission by following the instructions in the
section entitled "Where You Can Find More Information About Advance and
Discount."
3
SUMMARY
The Companies
Advance Auto Parts, Inc.
5673 Airport Road
Roanoke, Virginia 24012
(540) 362-4911
As of July 14, 2001, Advance had 1,765 stores, 1,723 of which operate under
the "Advance Auto Parts" trade name in 37 states in the northeast, southeast
and midwest. In addition, Advance had 42 stores primarily located in Puerto
Rico and the Virgin Islands operating under the "Western Auto" trade name.
Advance is based in Roanoke, Virginia, and is the second largest specialty
retailer of automotive parts, accessories and maintenance items to "do-it-
yourself," or DIY, customers in the United States, based on store count and
sales. Advance is the largest or second largest specialty retailer of
automotive products in the majority of the states in which it currently
operates, based on store count.
Discount Auto Parts, Inc.
4900 Frontage Road South
Lakeland, Florida 33815
(863) 687-9226
Discount Auto Parts, Inc. is one of the Southeast's leading specialty
retailers and suppliers of automotive replacement parts, maintenance items and
accessories to both do-it-yourself consumers and professional mechanics and
service technicians, based on store count. Discount currently operates 671
stores located throughout Florida, Georgia, Mississippi, Alabama, Louisiana and
South Carolina.
The Proposed Merger and Related Transactions
In the merger, a wholly owned subsidiary of Advance, or Advance Merger Sub,
will merge with and into Discount, with Discount surviving the merger. Each
Discount shareholder will be entitled to receive for each share of Discount
common stock owned immediately prior to the merger $7.50 in cash and 0.2577 of
a share of Advance common stock. Advance will not issue fractional shares in
the merger. As a result, the total number of shares of Advance common stock
that each Discount shareholder receives in the merger will be rounded down to
the nearest whole number. Each of these shareholders will receive a cash
payment for any remaining fractional share.
Contemporaneous with the merger, Advance will effectuate the reincorporation
merger pursuant to which Advance Holding Corporation will merge with and into
Advance Auto Parts, Inc., with Advance Auto Parts, Inc. surviving the
reincorporation merger. As a result, Advance Auto Parts, Inc. will be the
parent corporation of Advance Stores Company, Incorporated. In addition,
immediately after the merger, Advance Auto Parts, Inc. will contribute the
common stock of Discount received in the merger to Advance Stores Company,
Incorporated, and Discount will become a wholly owned subsidiary of Advance
Stores Company, Incorporated.
It is a condition to the closing of the merger that the shares of Advance
common stock be listed for trading upon the New York Stock Exchange or the
Nasdaq National Market System. Advance has applied for listing of its common
stock on the New York Stock Exchange.
4
The following diagrams illustrate the structure of the proposed merger and
related transactions and the structure of Advance following completion of such
transactions.
[GRAPH APPEARS HERE]
Discount's Reasons for the Merger (see page 32)
After careful consideration, Discount's board of directors believes that the
terms of the merger agreement and the merger are fair to, and in the best
interests of, Discount and its shareholders. In reaching its decision,
Discount's board of directors considered various factors described more fully
in this proxy statement and prospectus beginning on page 32.
Opinion of Discount's Financial Advisor (see page 35)
In connection with the transaction, the Discount board of directors received
a written opinion dated August 7, 2001 from Salomon Smith Barney Inc.,
Discount's financial advisor, as to the fairness, from a financial point of
view, of the merger consideration. The full text of Salomon Smith Barney's
written opinion dated August 7, 2001 is attached to this proxy statement and
prospectus as Annex B. We encourage you to read this opinion carefully in its
entirety for a description of the assumptions made, matters considered and
limitations on the review undertaken. Salomon Smith Barney's opinion is
addressed to the Discount board and does not constitute a recommendation to any
shareholder with respect to any matters relating to the proposed transaction.
5
The Merger Agreement (see page 52)
We have attached the merger agreement that governs the merger to this proxy
statement and prospectus as Annex A. We encourage you to read the merger
agreement carefully.
Termination of the Merger Agreement (see page 62)
Advance and Discount can mutually agree to terminate the merger agreement at
any time before completing the merger. Both Advance and Discount can terminate
the merger agreement if:
. the requisite Discount shareholder approval is not obtained (other than
if the party attempting to terminate is in material breach of any of its
obligations);
. a final decree or injunction by a court or government entity prevents
the completion of the merger or if a private party action under the
antitrust laws is reasonably likely to have a material adverse effect
(as defined in the merger agreement);
. the merger is not completed by December 31, 2001 (other than if the
party attempting to terminate is in breach of any of its obligations and
the breach has been the primary reason for the failure of the merger to
be completed by December 31, 2001); or
. the other party materially breaches any of its representations,
warranties, covenants or agreements and the breach causes specified
conditions to fail to be satisfied.
Advance can terminate the merger agreement under additional circumstances,
including if:
. a tender offer or exchange offer for 50% or more of the Discount common
stock is commenced and the Discount board of directors recommends to you
that you tender or exchange your shares in that offer;
. the financial institutions that are parties to the financing commitments
for the transaction are not obligated to fund because all conditions to
such funding have not been satisfied or waived;
. the results of the physical inventory of the salable inventory at
Discount's Lakeland, Florida distribution center reflect a reduction of
greater than 5% of the inventory amount shown on the balance sheet
included in Discount's first quarter financial statements and reflected
in Discount's general ledger as of the date of Discount's first quarter
financial statements, subject to adjustment as provided in the merger
agreement, and Advance exercises its right to terminate within 15
business days after receiving such results (this condition has been
satisfied);
. Discount shall not have entered into the specifically identified
amendments to its Dapper Properties master leases in a manner
satisfactory to Advance;
. the Discount board of directors withdraws, modifies or qualifies its
recommendation to you for adoption of the merger agreement and the
merger in a manner adverse to Advance; or
. the Discount board of directors shall have approved or recommended to
you an alternative transaction that the Discount board of directors has
determined in good faith, after consultation with its advisors, would
result in a transaction more favorable to Discount shareholders from a
financial point of view and to do otherwise would be a breach of its
fiduciary duties.
Discount can terminate the merger agreement under additional circumstances,
including if:
. Discount receives a superior proposal and the Discount board of
directors determines that its fiduciary duties require it to terminate
the merger agreement in order to permit Discount to enter into an
agreement with respect to the superior proposal.
6
Termination Fee and Expenses (see page 63)
Discount agreed to pay Advance a termination fee of $9.0 million and/or
certain expense reimbursements up to $7.0 million if:
. the merger agreement is terminated by the Discount board in order to
enter into an agreement with respect to a superior proposal; or
. the merger agreement is terminated by Advance because of (a) the
Discount board (i) resolving to or having withdrawn or changed in a
manner adverse to Advance its approval or recommendation of the merger
agreement; (ii) failing to include its recommendation regarding the
merger in this proxy statement and prospectus; or (iii) approving or
recommending any other acquisition proposal or superior proposal; or (b)
a tender offer or exchange offer for 50% or more of Discount's shares is
begun and the Discount board recommends that Discount shareholders
tender their shares.
In addition, the merger agreement requires Discount to pay Advance the
following termination fees and/or expenses of Advance under other
circumstances, including:
. if the requisite Discount shareholder approval is not obtained and
Advance has not materially breached or failed to fulfill its material
obligations under the merger agreement ($2.5 million of expenses plus
50% of any such expenses over $4.0 million, up to a maximum of an
additional $1.0 million);
. prior to the Discount shareholder meeting there has been a superior
proposal and, within 12 months of the Discount shareholder meeting,
Discount enters into an agreement with respect to the superior proposal
($9.0 million and any expenses to the extent not previously paid, up to
$7.0 million when aggregated with any amount that was previously paid);
. prior to the Discount shareholder meeting there has been a superior
proposal and, within 12 months of the Discount shareholder meeting,
Discount does not enter into an agreement for the superior proposal, but
within such 12 month period consummates another acquisition transaction
($9.0 million and any expenses to the extent not previously paid, up to
$7.0 million when aggregated with any amount that was previously paid);
. prior to the Discount shareholder meeting there has been an acquisition
proposal which is not a superior proposal and, within 12 months of the
Discount shareholder meeting, Discount consummates an acquisition
transaction ($9.0 million and any expenses to the extent not previously
paid, up to $7.0 million when aggregated with any amount that was
previously paid);
. (a) there has been an acquisition proposal prior to December 31, 2001;
(b) the Discount shareholder meeting has not been held; (c) Advance
would be permitted to terminate the merger agreement because the merger
is not consummated prior to December 31, 2001; (d) either Advance or
Discount terminates the merger agreement because the merger is not
consummated prior to December 31, 2001; and (e) within 12 months of
December 31, 2001, Discount consummates an acquisition transaction with
the person who made an acquisition proposal or enters into an agreement
for an acquisition transaction with the person who made the acquisition
proposal, which is subsequently consummated ($9.0 million, and up to
$7.0 million of Advance's expenses);
. Advance terminates the merger agreement because of a material breach of
the merger agreement by Discount (up to $7.0 million of Advance's
expenses); or
. Advance terminates the merger agreement as a result of Discount's
failure to satisfy the closing condition regarding the physical
inventory of the Lakeland, Florida distribution center, or the closing
condition relating to the amendments to the Dapper Properties master
leases (in the case of termination resulting from the failure of the
closing condition regarding the physical inventory, up to
7
$1.0 million of Advance's expenses, and, in the case of a termination
resulting from the failure of the closing condition regarding the
amendments to the Dapper Properties master leases, up to $2.5 million of
Advance's expenses, plus an additional amount equal to 50% of any such
expenses over $4.0 million, up to a maximum additional amount of $1.0
million).
Discount Not to Engage in Discussions for Alternative Transactions (see page
55)
Until the parties complete the merger or terminate the merger agreement,
Discount has agreed not to take any of the following actions:
. initiate, solicit, encourage or facilitate the making of any offer or
proposal that is or is reasonably likely to lead to an alternative
transaction; or
. enter into any agreement regarding any alternative transaction.
However, if, prior to a shareholder vote, Discount receives an unsolicited
proposal for an alternative transaction, it may participate in discussions
regarding the transaction if Discount's board of directors determines such
proposal is a superior proposal and to not do so would be a breach of its
fiduciary duties and notifies Advance, as described in the merger agreement.
Material U.S. Federal Income Tax Consequences of the Merger (see page 46)
Assuming the contemporaneous merger of Advance Holding into Advance, the
merger is intended to be treated as part of an exchange within the meaning of
Section 351 of the Internal Revenue Code. If the merger so qualifies, in
general, a Discount shareholder will not recognize loss on the exchange, but
will recognize gain on the exchange to the extent of the lesser of (i) the
excess, if any, of (x) the sum of the fair market value (on the effective date
of the merger) of the Advance common stock and the cash received over (y) the
tax basis of the shareholder's shares of Discount common stock and (ii) the
cash received. Counsel to Discount has opined, subject to some assumptions and
based on certain representations of fact, that the merger should be treated as
part of an exchange within the meaning of Section 351 of the Internal Revenue
Code. The material U.S. federal income tax consequences of the merger to
Discount shareholders are described below under the heading "The Merger--
Material U.S. Federal Income Tax Consequences of the Merger."
Interests of Discount's Officers and Directors in the Merger (see page 43)
When considering the Discount board of directors' recommendation to vote
FOR the merger agreement, Discount shareholders should be aware of interests
that some of Discount's officers and directors have in the merger that are
different from or in addition to, and may conflict with, the interests of
Discount shareholders. The Discount board of directors was aware of these
interests and specifically considered them before approving and adopting the
merger agreement. These interests include the following:
. options held by Discount officers and directors will effectively become
fully vested as a result of the merger, and such officers and directors
will become entitled to receive cash for the designated value of any
options with an exercise price of less than $15.00 and will have any
options with an exercise price of $15.00 or greater converted into
options of Advance;
. each of the officers of Discount except for Peter Fontaine is a party to
a change of control employment agreement with Discount that provides
that, upon the closing of the merger, such officer is entitled to (1)
certain benefits upon a subsequent termination or constructive
termination of his employment that occurs during a specified period
following the merger, subject to certain exceptions, and (2) certain
salary and benefit protections during the officer's continued employment
following the merger; the officers who are parties to such agreements
are C. Michael Moore, Michael Harrah, Clement Bottino, Dave Viele, C.
Roy Martin, Tom Merk, Joe Villavicencio, Doug Snyder and Anthony
Bottino.
8
. certain officers of Discount are entitled to certain unfunded benefits
under Discount's Supplemental Executive Profit Sharing Plan that will
become 100% vested as a result of the consummation of the merger; the
officers who are parties to such agreements are C. Michael Moore,
Michael Harrah, Clement Bottino, Dave Viele, Tom Merk, Joe
Villavicencio, Doug Synder and Anthony Bottino.
. Peter J. Fontaine, the Chief Executive Officer of Discount, will become
a director of Advance effective as of the closing date, and will become
entitled to certain piggyback registration rights as to the shares of
Advance common stock that he and entities that he controls will receive
in the merger; and
. Discount's former president, William C. Perkins, will receive the
acceleration of certain separation payments and options upon the
consummation of the merger.
Conditions to the Merger (see page 61)
We will not complete the merger unless a number of conditions are satisfied
or waived, including the following:
. the holders of a majority of Discount's shares of common stock must
approve and adopt the merger agreement and the merger;
. the federal antitrust authorities must complete their review of the
merger and not seek to prohibit the merger;
. there must be no law or court order prohibiting the merger;
. the shares of Advance common stock issuable to Discount shareholders
must be listed on either the New York Stock Exchange or the Nasdaq
National Market (Advance has applied for listing of its common stock on
the New York Stock Exchange);
. Advance Holding and Advance must complete the reincorporation merger;
. the representations and warranties of each party in the merger agreement
are generally true and correct as of the closing of the merger;
. each party has performed in all material respects all of its obligations
under the merger agreement;
. Discount will have received the written opinion of Discount's legal
counsel that the merger should be treated for U.S. federal income tax
purposes as part of an exchange within the meaning of Section 351 of the
Internal Revenue Code;
. there shall not have occurred since the date of the merger agreement a
material adverse change in the financial condition, results of
operations, properties, assets, business or prospects of either party
and its subsidiaries;
. Discount shall have performed a physical inventory of its salable
inventory at its Lakeland, Florida distribution center, the results of
which shall reflect an aggregate inventory value which does not result
in a reduction greater than 5% (this condition has been satisfied);
. Discount shall have entered into certain identified amendments to each
of its three master leases between Discount and the respective Dapper
Properties lessor;
. the financial institutions who are parties to the financing commitments
shall be obligated to fund under the commitments because all conditions
to such funding have been, or at the closing thereof will be, satisfied
or waived; and
. Peter J. Fontaine shall be elected as a member of the board of directors
of Advance, and Discount's stockholders agreement with certain of its
stockholders shall have been amended to provide entities that Mr.
Fontaine controls with certain piggyback registration rights.
9
Regulatory Approvals (see page 48)
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, Advance and
Discount must furnish information and materials to the Department of Justice
(known as the DOJ) and the Federal Trade Commission (known as the FTC) and wait
a specified period of time before they can complete the merger. Each of the DOJ
and the FTC has the authority to challenge the merger on antitrust grounds
before or after Advance and Discount complete the merger. Advance and Discount
filed pre-merger notification forms with the DOJ and the FTC on August 17,
2001, and expiration of the HSR waiting period occurred on September 18, 2001.
In addition, both companies may be required to make filings with or obtain
approvals from other domestic or international regulatory authorities in
connection with the merger.
Accounting Treatment (see page 46)
The merger will be accounted for as a purchase in accordance with generally
accepted accounting principles.
Indemnification and Insurance (see page 65)
The merger agreement provides for the indemnification of Discount's
officers, directors and employees and for the continuation of directors and
officers liability insurance for six years following the merger.
Vote Required for the Merger (see page 24)
The affirmative vote of the holders of a majority of the shares of Discount
common stock outstanding on the record date for the special meeting is required
to approve the merger.
Voting by Discount Directors and Executive Officers
On the record date, directors and executive officers of Discount and their
affiliates owned and were entitled to vote 4,032,558 shares of Discount common
stock, or approximately 24.1% of the shares of Discount common stock
outstanding on the record date. Peter J. Fontaine controls virtually all these
shares which, as described below, are subject to the terms of a voting
agreement with Advance Stores and Advance Holding and are required to be voted
in favor of approval of the merger agreement and the merger. The other
directors and executive officers of Discount have indicated that they intend to
vote the Discount common stock owned by them in favor of the adoption of the
merger agreement.
Stock Price Information (see page 133)
Shares of Discount common stock are listed on the New York Stock Exchange.
Shares of Advance common stock are not currently listed but, upon the closing
of the merger, are expected to be listed on the New York Stock Exchange.
Advance has applied for such listing. The following table presents the ten-day
average sale price or last reported sale price, as applicable, of one share of
Discount common stock, as reported on the New York Stock Exchange Composite
Transaction Tape on August 6, 2001, the last full trading day before the
execution of the merger agreement, and on November 2, 2001, the last day for
which such information could be calculated before the date of this proxy
statement and prospectus. Equivalent per share data for Discount common stock,
assuming the completion of the merger, is not meaningful because there is no
public market for Advance common stock. Each share of Discount common stock
will be converted into .2577 shares of Advance common stock and $7.50 in cash.
Date Discount Common Stock
---- ---------------------
Average sale price for the ten trading days up to and
including August 6, 2001 $13.52
Last reported sale price on August 6, 2001 $14.20
Last reported sale price on November 2, 2001 $17.91
10
Dividends
Advance does not expect to pay any dividends on its common stock for the
foreseeable future.
Restrictions on Your Ability to Sell Advance Common Stock
All shares of Advance common stock received by you in connection with the
merger will be freely transferable unless you are considered an "affiliate" of
Discount under the Securities Act of 1933. If you are an affiliate of Discount,
then prior to the first anniversary of the merger, sales may be made by you
only under a registration statement or an exemption under the Securities Act,
including Rule 145.
Voting Agreement (see page 66)
Fontaine Industries, a partnership controlled by Peter J. Fontaine, Chairman
of the Board and Chief Executive Officer of Discount, and Discount's largest
shareholder (holding approximately 24% of the outstanding shares of common
stock of Discount), entered into a voting agreement with Advance Stores whereby
Fontaine Industries has agreed to vote all of the shares of Discount common
stock beneficially owned by it in favor of the merger and the merger agreement.
Fontaine Industries also appointed Advance Stores as its proxy to vote the
shares beneficially owned by it in favor of the merger and the merger
agreement. As additional parties to the voting agreement, Mr. Fontaine and his
revocable trust have agreed to cause Fontaine Industries to maintain its stock
ownership of Discount pending the merger and to cause Fontaine Industries to
vote in favor of the merger and the merger agreement. Except for 1,000 shares
owned by Mr. Fontaine's wife and 1,000 shares owned by Mr. Fontaine's daughter,
neither Mr. Fontaine nor his revocable trust have beneficial interest in any
shares other than the shares owned by Fontaine Industries. There is no
commitment in the voting agreement with respect to how the shares owned by Mr.
Fontaine's wife and daughter are to be voted.
Option Agreement (see page 66)
Fontaine Industries also entered into an option agreement with Advance
Stores whereby Fontaine Industries granted to Advance Stores an option to
purchase all of the 4,021,509 shares of Discount common stock beneficially
owned by it, exercisable if:
. a third party has (a) begun a tender or exchange offer for shares of
Discount's common stock which would result in the acquisition of 50% or
more of the then outstanding voting equity of Discount, (b) acquired in
the aggregate 15% or more of the then outstanding voting equity of
Discount; or (c) entered into an agreement with Discount to acquire 15%
or more of the total assets of Discount or 15% or more of the
outstanding voting equity of Discount;
. any of the events described in section 9.1(e) of the merger agreement
that would allow Advance to terminate the merger agreement has occurred;
. a third party has made an acquisition proposal before December 31, 2001,
the meeting of the shareholders of Discount to vote on the acquisition
proposal has not been held, Advance would be permitted to terminate the
merger agreement under section 9.1(b) of the merger agreement, and
either Advance or Discount has terminated the merger agreement under
section 9.1(b) of the merger agreement; or
. Discount shall have terminated the merger agreement pursuant to section
9.1(g) of the merger agreement.
11
Financing Commitments (see page 49)
In connection with the merger, Advance Stores has secured financing
commitments to provide the funds necessary to close the merger. The following
table sets forth the estimated sources and uses of these funds at the closing
of the merger and the related financing.
Sources Amount
------- -------------
(in millions)
Revolving credit
facility(/1/)............ $ 9
Tranche A term loan
facility................. 180
Tranche B term loan
facility................. 305
New senior subordinated
notes.................... 186
----
Total................... $680
====
Uses Amount
---- -------------
(in millions)
Cash portion of merger.... $128
Repay existing Discount
debt(/2/)................ 251
Repay existing Advance
Stores senior debt(/1/).. 266
Estimated fees and
expenses................. 35
----
Total................... $680
====
--------------------
(/1/)Excludes approximately $18 million of outstanding letters of credit.
(/2/)Includes $34 million to purchase Discount's Gallman, Mississippi
distribution facility from the lessor and $6.3 million in debt prepayment
premiums.
12
Summary Consolidated Financial Data
The following table is a summary of historical consolidated financial data
of Advance for the periods presented, as well as pro forma financial data of
Advance, after giving effect to the merger and related financing transactions.
You should read this data along with the sections of this proxy statement and
prospectus titled "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Advance Holding," "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Discount," and
"Unaudited Pro Forma Consolidated Financial Data" and the consolidated
financial statements and related notes of Advance and Discount included
elsewhere in this proxy statement and prospectus. The unaudited pro forma
combined statement of operations data does not purport to represent what the
results of operations of Advance would have been if the transactions had
occurred as of the date indicated or what the results will be for future
periods. The results include the activities of the following acquired
businesses since their respective dates of acquisition, Western Auto Supply
Company, November, 1998 and Carport Auto Parts, Inc., April, 2001.
12 Months
Fiscal Year(1) Ended Six Months Ended
------------------------------------------- ---------- ---------------------
Pro Forma Pro Forma
Pro Forma July 14, July 14, July 14,
1998 1999 2000 2000 2001 2001 2001
---------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands, except ratios)
Statement of Operations
Data:
Net sales............... $1,220,759 $2,206,945 $2,288,022 $2,928,036 $3,057,651 $1,336,837 $1,684,434
Cost of sales........... 766,198 1,404,113 1,392,127 1,780,352 1,834,198 796,557 1,006,326
Selling, general and
administrative
expenses(2)............ 400,546 780,114 800,845 998,736 1,064,206 470,166 581,996
Expenses associated with
the
Recapitalization(3).... 14,277 -- -- -- -- -- --
Expenses associated with
the restructuring in
conjunction with the
Western merger(4)...... 6,774 -- -- -- -- -- --
Non-cash and other
employee
compensation(5)........ 1,135 2,483 2,261 2,261 3,031 2,195 2,195
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income........ $ 31,829 $ 20,235 $ 92,789 $ 146,687 $ 156,216 $ 67,919 $ 93,917
Other Financial Data:
EBITDA, as adjusted(6).. $ 92,612 $ 121,899 $ 161,876 $ 107,183
Capital
expenditures(7)........ 65,790 105,017 70,566 $ 123,411 $ 112,342 31,048 $ 51,824
Pro forma cash interest
expense(8)............. 79,383 78,058
Ratio of pro forma
EBITDA to pro forma
cash interest
expense(8)............. 2.98 3.19
Ratio of pro forma net
debt to pro forma
EBITDA(9).............. 3.98 3.79
(footnotes on the following page)
13
As of Pro Forma
---------------------------------- As of as of
January 2, January 1, December 30, July 14, July 14,
1999 2000 2000 2001 2001
---------- ---------- ------------ ---------- ----------
(In thousands)
Balance Sheet Data:
Net working capital
(10)................... $ 310,113 $ 355,608 $ 321,540 $ 327,024 $ 463,958
Total assets............ 1,265,355 1,348,629 1,356,360 1,364,314 1,988,197
Total net debt (11)..... 485,476 627,467 582,539 535,199 943,335(9)
Stockholders' equity.... 159,091 133,954 156,271 179,359 273,125
--------
(1) Advance's fiscal year consists of 52 or 53 weeks ending on the Saturday
nearest to December 31. All fiscal years presented are 52 weeks.
(2) Fiscal 1999 and fiscal 1998 amounts include certain merger integration and
Parts America conversion expenses related to the Western merger that total
$41,034 and $7,788, respectively. In addition, $845 is included in fiscal
1998 for private company expenses incurred prior to the Recapitalization
that relate primarily to compensation and benefits paid to Advance's
chairman that were eliminated after the Recapitalization. There are no
private company expenses in fiscal 1999, fiscal 2000, the twelve months
ended July 14, 2001 or the six months ended July 14, 2001 amounts.
(3) Represents expenses incurred in the Recapitalization related primarily to
bonuses paid to certain employees and professional services.
(4) Represents fiscal 1998 expenses primarily related to lease costs
associated with the 31 Advance Auto Parts stores closed in connection with
the Western merger.
(5) Represents interest component of net periodic postretirement benefit cost
related to Advance's unfunded post retirement benefit obligation and non-
cash compensation expenses related to stock options granted to certain of
Advance's employees.
(6) EBITDA, as adjusted, represents operating income plus depreciation and
amortization, non-cash and other employee compensation expenses and
certain one-time expenses, as described below, included in operating
income. Advance's EBITDA for 2000 includes a non-recurring net gain of
$3.3 million. Advance's EBITDA for the twenty-eight week period ended July
14, 2001 includes a non-recurring net gain of $3.2 million. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations of Advance Holding--Results of Operations--Fiscal Year 2000
Compared to Fiscal Year 1999" and "--Twenty-Eight Weeks Ended July 14,
2001 Compared to Twenty-Eight Weeks Ended July 15, 2000." EBITDA, as
adjusted, is 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. Advance has included EBITDA,
as adjusted, herein because Advance's management believes this information
is useful to investors, as such measure provides additional information
with respect to Advance's ability to meet its future debt service, capital
expenditure and working capital requirements and, in addition, certain
covenants in Advance's current and proposed indentures and credit facility
are based upon an EBITDA calculation. Advance's method for calculating
EBITDA, as adjusted, may differ from similarly titled measures reported by
other companies. Advance's management believes certain one-time expenses,
private company expenses, recapitalization expenses, non-cash and other
employee compensation expenses, restructuring expenses and merger
integration expenses should be eliminated from the EBITDA calculation to
evaluate the operating performance of Advance, and has done so in its
calculation of EBITDA, as adjusted. Advance leases substantially all of
its stores.
(7) Capital expenditures exclude $34 million for the purchase of Discount's
Gallman, Mississippi distribution facility from the lessor.
(8) Cash interest expense represents total interest expense, excluding
interest related to the Advance Holding discount debentures and
amortization of deferred debt issuance costs.
(9) Pro forma net debt represents pro forma total debt, including bank
overdrafts, less cash and cash equivalents.
(10) Net working capital represents total current assets less total current
liabilities.
(11) Net debt represents total debt (including current maturities and bank
overdrafts) less cash and cash equivalents.
14
UNAUDITED COMPARATIVE PER SHARE DATA
We have set forth below information concerning income per share from
continuing operations, cash dividends, declared and book value per share data
for Advance Holding and Discount on both historical and pro forma bases. We
have derived the pro forma income per share from continuing operations from the
Unaudited Pro Forma Consolidated Financial Data beginning on page 124. Discount
has not declared any cash dividends since its initial public offering in August
1992 and Advance Holding has not declared any cash dividends since fiscal 1998.
Advance's management does not expect to pay cash dividends for the foreseeable
future after the completion of the merger. Basic and diluted net income per
share from continuing operations and the book value per share for the pro forma
presentation is based upon outstanding shares of Advance common stock, adjusted
to include the estimated number of shares of Advance common stock to be issued
in the merger in exchange for outstanding shares of Discount common stock at
the time the merger is completed. The per share equivalent pro forma data for
shares of Discount common stock is based on the assumed conversion of each
share of Discount common stock into .2577 of a share of Advance common stock.
You should read the information set forth below in conjunction with the
respective audited and unaudited financial statements of Advance Holding and
Discount included in this proxy statement and prospectus and the Unaudited Pro
Forma Consolidated Financial Data and the notes thereto beginning on page 124.
See "Where You Can Find More Information About Advance and Discount" beginning
on page 154.
Fiscal Year Ended Six Month Period
December 30, 2000 Ended July 14, 2001
------------------- ---------------------
Advance Holding Historical Data:
Basic income per share from
continuing operations............. $ 0.59 $ 0.76
Diluted income per share from
continuing operations............. 0.58 0.74
Cash dividends per share........... -- --
Book value per share............... 5.52 6.33
Twelve Month Period
Ended November 28, Six Month Period
2000 Ended August 28, 2001
------------------- ---------------------
Discount Historical Data:
Basic income per share from
continuing operations............. $ 1.12 $ 0.88
Diluted income per share from
continuing operations............. 1.12 0.88
Cash dividends per share........... -- --
Book value per share............... 18.50 19.53
Fiscal Year Ended Six Month Period
December 30, 2000 Ended July 14, 2001
------------------- ---------------------
Pro Forma Combined Data:
Basic income per share from
continuing operations............. $ 1.04 $ 0.96
Diluted income per share from
continuing operations............. 1.03 0.94
Cash dividends per share........... -- --
Book value per share............... N/A 8.38
Pro Forma Equivalent Data:
Basic income per share from
continuing operations............. 0.27 0.25
Diluted income per share from
continuing operations............. 0.27 0.24
Cash dividends per share........... -- --
Book value per share............... N/A 2.16
15
RISK FACTORS
You should consider carefully all of the information set forth in this proxy
statement and prospectus. Please refer to "Where You Can Find More Information
About Advance and Discount" at page 154 of this proxy statement and prospectus
for further information about the proposals described herein. You should
evaluate the following risks before deciding to vote on the various proposals
described in this proxy statement and prospectus. If the merger occurs, you
will be receiving shares of Advance common stock. In that circumstance, Advance
will combine the businesses of Advance and Discount. Accordingly, you should
consider carefully the risks and uncertainties associated with the business and
operations of both Advance and Discount. Some statements in this proxy
statement and prospectus, including some of the following risk factors,
constitute forward-looking statements. Please refer to the section of this
proxy statement and prospectus below entitled "Special Note Regarding Forward-
Looking Statements."
Risk Factors Relating to the Merger
You cannot be certain of the market value or the average trading price of the
Advance common stock you will receive in the merger in exchange for your shares
of Discount common stock.
You will be entitled to receive in the merger 0.2577 of a share of Advance
common stock plus $7.50 in cash for each share of Discount common stock you
hold.
Advance common stock is not currently publicly traded. Therefore, you will
not be able to establish the market value of the Advance common stock you
receive by reference to a public trading price. The actual trading price of
Advance common stock you receive at the time of the closing of the merger may
be either higher or lower than the trading price prior to the merger of shares
of Discount common stock that were exchanged for the Advance common stock less
the cash consideration of $7.50 per Discount share you receive in the merger.
In addition, the average trading price of Advance common stock you receive
may vary after the merger because of factors such as:
. changes in the business, operating results, financial condition or
prospects of Advance;
. the success of the integration of Discount's operations;
. the prospects of Advance's operations after the merger; and
. general market and economic conditions and specific economic conditions
where Advance and Discount operate.
In addition, the exchange of the certificates representing shares of
Discount common stock for certificates representing shares of Advance common
stock will not take place immediately upon completion of the merger. If you do
not hold your shares in a brokerage account or another "book-entry" or
uncertificated form, you may be unable to sell your shares of Advance common
stock for a short period of time following the completion of the merger. The
market value of Advance common stock may be either lower or higher at the time
when you receive certificates representing shares of Advance common stock after
the merger.
Advance may not be able to successfully integrate Discount, which could harm
its business and results of operations.
Advance entered into the merger agreement to capitalize on Discount's
leading market position in the State of Florida, to increase Advance's store
base in its southeastern markets, and to create the opportunity for potential
cost savings through operational synergies. Achieving the expected benefits of
the merger will depend in large part on Advance's ability to successfully
integrate Discount's operations and personnel in a timely and efficient manner.
Some of the difficulties Advance will have to overcome include:
. successfully converting Discount's information and accounting systems to
those of Advance;
16
. integrating the two companies' respective distribution operations;
. implementing and maintaining uniform standards, controls procedures and
policies on a company-wide basis;
. properly identifying and eliminating or closing unnecessary stores,
operations and facilities; and
. maintaining good and profitable relationships with suppliers.
If Advance cannot overcome the challenges it faces integrating Discount, its
ability to effectively and profitably manage Discount's business could suffer.
In addition, key employees may leave, supplier relationships could be disrupted
and customer service standards could deteriorate. Moreover, the integration
process itself may be disruptive to Advance's and Discount's businesses as it
requires Advance to coordinate the integration of the information and
accounting systems and will divert the attention of management from its normal
operational responsibilities and duties.
Consequently, we cannot assure you that Discount can be successfully
integrated with Advance or that any of the anticipated efficiencies or cost
savings will be realized, or realized within the expected time frame, or that
revenues will not be lower than expected, any of which could harm Advance's
business, financial condition and operating results after the merger.
Advance's level of indebtedness and restrictions in its debt instruments may
limit Advance's ability to take certain actions, including paying any dividends
and obtaining additional financing in the future, that Advance would otherwise
consider in its best interest.
In connection with the merger, Advance intends to incur additional senior
and senior subordinated indebtedness in order to refinance indebtedness of
Advance and Discount and to fund a portion of the cash consideration prior to
closing. On August 7, 2001 Advance announced that it had received a total of
$830 million of committed financing. This financing is subject to the
fulfillment of certain conditions. See "The Merger--Financing Commitments" for
more information regarding the financing commitments and conditions.
The substantial amount of debt that Advance will have and that it may incur
in the future, could have important consequences to you. For example, it could:
. limit Advance's ability to obtain additional financing, if needed in the
future, for working capital, capital expenditures, acquisitions or other
purposes;
. increase Advance's vulnerability to adverse economic, industry and
business conditions;
. place Advance at a disadvantage compared to competitors that may have
less debt;
. restrict Advance's ability to adjust rapidly to changing market
conditions;
. cause Advance's interest expense to increase if interest rates in
general were to increase because a portion of the indebtedness is to
bear interest at a floating rate; and
. require Advance to dedicate a substantial portion of its cash flow from
operations to make principal and interest payments on its debt and
accordingly reduce funds available for the funding of operations, future
business opportunities or other purposes.
The instruments governing the planned and future indebtedness to be incurred
by Advance are expected to contain a number of covenants that may significantly
limit or prohibit Advance's ability to, among other things:
. pay dividends;
. borrow additional money;
. make capital expenditures and other investments;
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. merge, consolidate or dispose of assets; and
. enter into transactions with related entities.
In addition, Advance's current and future debt instruments contain and will
contain financial performance covenants, including some establishing a maximum
leverage ratio and requiring Advance to maintain a minimum interest coverage
ratio and a funded senior debt to current assets ratio. If Advance fails to
comply with these covenants, it will be in default under the applicable debt
instrument. A default, if not waived, could result in acceleration of
indebtedness, in which case the debt would become immediately due and payable.
If this occurs, Advance may not be able to repay its debt or borrow sufficient
funds to refinance it. Even if new financing is available, it may be on terms
that are unacceptable or which may be significantly more costly. Complying with
these covenants may cause Advance to take actions, with respect to the growth
and management of its business, that it otherwise would not take, or refrain
from actions that it otherwise would consider in its best interest.
Because of differences in the charter documents of Advance and Discount,
Discount shareholders will lose material shareholder rights if the merger is
approved.
A number of differences exist between Advance's certificate of incorporation
and bylaws and Discount's articles of incorporation and bylaws. As a result,
Discount's shareholders will lose the following shareholder rights if the
merger is approved:
. the right to call a special meeting of shareholders by holders of 25% of
the outstanding shares if certain notice requirements are met (Advance's
certificate of incorporation and bylaws provide that special meetings of
stockholders may only be called by the board of directors, the chairman
of the board or Advance's chief executive officer); and
. the right to act without a shareholder meeting (Advance's certificate of
incorporation and bylaws prohibit any action by stockholders unless
taken at an annual or special meeting).
The termination fee, voting agreement and option agreement may discourage other
companies from trying to acquire Discount, which could prevent you from
receiving a greater amount of consideration for your Discount common stock.
In the merger agreement, Discount agreed to pay Advance a termination fee of
$9.0 million and/or up to $7.0 million in expenses in specified circumstances,
including where a third party acquires or seeks to acquire Discount. This
provision could discourage other companies from trying to acquire Discount,
even if those other companies might be willing to offer a greater amount of
consideration to Discount shareholders than Advance has offered in the merger
agreement. Payment of the termination fee and/or the expenses may have a
material adverse effect on Discount's financial condition. In addition, in
connection with the execution of the merger agreement, Fontaine Industries,
which holds 24% of the outstanding shares of Discount common stock, entered
into a voting agreement and an option agreement with Advance Stores. The
principal shareholder agreed to vote its shares in favor of the merger
agreement and merger, granted Advance Stores and its designees an irrevocable
proxy to vote its shares in favor of the merger and merger agreement and
granted Advance Stores an option to purchase its shares, exercisable in certain
circumstances. These provisions may discourage other companies from trying to
acquire Discount.
If Discount does not complete the merger, it will incur significant expenses,
the price of its common stock could decline and it may not be able to find
another party willing to pay the same or a greater amount for your Discount
common stock.
If the merger is not completed, Discount may be subject to a number of
material risks, including the following:
. the market price of Discount common stock may decline if the merger is
not completed to the extent that the current market price of Discount
common stock reflects a market assumption that the merger will be
completed;
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. Discount, in some circumstances, may be required to pay Advance a
termination fee of $9.0 million and/or reimburse Advance for up to $7.0
million of certain expenses; and
. Discount's own costs related to the merger, such as legal and accounting
fees and expenses and certain financial advisor expenses, must be paid
even if the merger is not completed.
Further, if the merger agreement is terminated and Discount's board of
directors seeks another merger or business combination, we cannot assure you
that Discount will be able to find a party willing to pay an equivalent or more
attractive price than that which will be paid in the merger. In addition, while
the merger agreement is in effect, subject to limited exceptions, Discount is
prohibited from soliciting, cooperating with, or furnishing non-public
information regarding Discount to, or negotiating or entering into an agreement
with, any party other than Advance regarding any proposal for an alternative
transaction. For additional information regarding Discount's ability to enter
into an alternative transaction, see "The Merger Agreement--No Solicitation"
and "--Termination Fee and Expenses."
The merger and the contemporaneous merger of Advance Holding Corporation and
Advance Auto Parts, Inc., taken together, may fail to be treated for U.S.
federal income tax purposes as part of an exchange subject to Section 351 of
the Internal Revenue Code, resulting in the loss of tax-free treatment for the
Advance shares portion of the merger consideration.
Advance and Discount have structured the merger and the contemporaneous
merger of Advance Holding Corporation and Advance Auto Parts, Inc. to qualify
such transactions, taken together, as part of an exchange subject to
Section 351 of the Internal Revenue Code. Although the Internal Revenue Service
has not provided and will not be asked to provide a ruling on the matter,
Discount expects to obtain a legal opinion from its legal counsel that such
transactions, taken together, should qualify as part of an exchange subject to
Section 351 of the Internal Revenue Code. The opinion will not bind the
Internal Revenue Service or prevent the Internal Revenue Service from adopting
a contrary position. If the companies proceed with such transactions but such
transactions, taken together, were to fail unexpectedly to qualify as part of
an exchange subject to Section 351 of the Internal Revenue Code, a Discount
shareholder generally would recognize gain or loss on each share of Discount
common stock surrendered in an amount equal to the difference between the
shareholder's basis in that share and the sum of the per share cash
consideration and the fair market value of the Advance common stock received in
exchange for that share at the effective time of the merger.
Risk Factors Relating to Advance's Business
Advance may not be able to successfully implement its business strategy because
doing so depends on factors beyond its control, which could prevent it from
efficiently and profitably operating its business.
Advance's success depends on its ability to implement its business strategy
in order to increase its earnings and cash flow. Successful implementation
depends on factors specific to the retail automotive parts industry and
numerous other factors beyond its control. These include adverse changes in:
. general economic conditions and conditions in local markets, which could
reduce Advance's sales;
. the competitive environment in the automotive aftermarket parts and
accessories retail sector which may force Advance to reduce prices or
increase spending;
. the automotive aftermarket parts manufacturing industry, such as
consolidation, which may disrupt or sever one or more of Advance's
vendor relationships;
. Advance's ability to anticipate and meet changes in consumer preferences
for automotive products, accessories and services in a timely manner;
and
. Advance's continued ability to hire and retain qualified personnel,
which depends in part on the types of recruiting, training and benefit
programs we adopt.
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In addition, because of these and other factors, Advance may not be able to
implement its expansion and business plans within planned time periods and
budgets and may be unable to satisfy all of its obligations, including those
under its indebtedness. If Advance cannot implement its expansion and business
plans in a timely fashion or if there are delays or cost overruns or if Advance
is unable to service its indebtedness, it may be prevented from efficiently and
profitably operating its business and its financial condition and results of
operations will suffer.
Advance will not be able to expand its business if its growth strategy is not
successful.
Advance has significantly increased its store count from 536 stores at the
end of fiscal 1995 to 1,765 company-operated stores included in the retail
segment at July 14, 2001. Advance intends to continue to expand its base of
stores as part of its growth strategy, primarily by opening new stores. There
can be no assurance that this strategy will be successful. The actual number of
new stores to be opened and their success will be dependent on a number of
factors, including, among other things, the ability of Advance to manage such
expansion and hire, train and retain qualified sales associates, the
availability of potential store locations in highly visible, well-trafficked
areas, and the negotiation of acceptable lease terms for new locations. There
can be no assurance that Advance will be able to open and operate such stores
on a timely or profitable basis or that opening new stores in markets already
served by Advance will not harm existing store profitability or comparable
store sales. The newly opened and existing store's profitability will depend on
Advance's ability to properly merchandise, market and price the products
required in their respective markets.
Furthermore, Advance may acquire or try to acquire stores or businesses
from, make investments in, or enter into strategic alliances with, companies
which have stores or distribution networks in its current markets or in areas
into which it intends to expand its presence. Any future acquisitions,
investments, strategic alliances or related efforts will be accompanied by
risks such as:
. the difficulty of identifying appropriate acquisition candidates;
. the difficulty of assimilating the operations of the respective
entities;
. the potential disruption to Advance's ongoing business;
. the inability to maintain uniform standards, controls, procedures and
policies; and
. the impairment of relationships with employees and customers as a result
of changes in management.
We cannot assure you that Advance will be successful in overcoming these
risks or any other problems encountered with these acquisitions, investments,
strategic alliances or related efforts.
If demand for products sold by Advance's stores slows, then Advance's business
and operating results will suffer.
Demand for products sold by Advance's stores depends on many factors and may
slow for a number of reasons, including:
. the weather, as vehicle maintenance may be deferred during periods of
inclement weather; and
. the economy, as during periods of good economic conditions, more of
Advance's do-it-yourself customers may pay others to repair and maintain
their cars instead of working on their own cars. In periods of declining
economic conditions, both do-it-yourself and do-it-for-me customers may
defer vehicle maintenance or repair.
Advance depends on the services of its existing management team and may not be
able to attract and retain additional qualified management personnel.
Advance is dependent upon the services and experience of its executive
officers and senior management team. If for any reason Advance's senior
executives do not continue to be active in management, its operating
20
results could suffer. Additionally, Advance cannot assure you that it will be
able to attract and retain additional qualified senior executives as needed in
the future.
If Advance is unable to compete successfully against other companies in the
retail automotive parts industry, Advance could lose customers and its revenues
may decline.
The retail sale of automotive parts, accessories and maintenance items is
highly competitive in many areas, including price, name recognition, customer
service and location. Advance competes primarily with national and regional
retail automotive parts chains, wholesalers or jobber stores, independent
operators, automobile dealers that supply parts, discount stores and mass
merchandisers that carry automotive replacement parts, accessories and
maintenance items. Some of Advance's competitors possess certain advantages
over Advance, including substantially greater financial and marketing
resources, a larger number of stores, longer operating histories, greater name
recognition, larger and more established customer bases and more established
vendor relationships. Advance's response to these competitive disadvantages may
require it to reduce its prices or increase its spending, which would lower
revenue and profitability. Advance's response may also prevent it from
introducing new product lines or require it to discontinue current product
offerings or change some of its current operating strategies. If Advance does
not have the resources or expertise or otherwise fails to develop successful
strategies to address these competitive disadvantages, then its business and
results of operations will suffer.
Disruptions in Advance's relationships or in its vendors' operations could
increase its cost of goods sold.
Advance's business depends on developing and maintaining close relationships
with its vendors and upon the vendors' ability or willingness to sell products
to Advance at favorable prices and other terms. Many factors outside of
Advance's control may harm these relationships and the ability or willingness
of these vendors to sell these products on such terms. For example, financial
or operational difficulties that some of its vendors may face may increase the
cost of the products it purchases from them. In addition, the trend towards
consolidation among automotive parts suppliers may disrupt or sever Advance's
relationship with some vendors. In particular, some of Advance's vendor
contracts and Discount's vendor contracts require that Advance, Discount and
their respective affiliates purchase the automotive parts, accessories and
maintenance items that are the subject of these contracts exclusively from
these vendors. As a result of the merger, Advance will have multiple vendor
contracts for certain parts, accessories and maintenance items that contain
such exclusivity clauses, and the effect that this will have on Advance's
relationships with these vendors is unclear. A disruption of these vendor
relationships or in their operations could cause Advance's business and results
of operations to suffer.
Advance's existing stockholders will continue to have substantial control over
Advance after the merger, including control over a majority of the board of
directors and the ability to limit amendments to Advance's certificate of
incorporation and bylaws, and could limit your ability to influence the outcome
of matters requiring stockholder approval.
After the merger, Advance's existing stockholders, including management,
will collectively beneficially own 28,320,150 shares, or approximately 86.8% of
Advance's outstanding common stock. Holders of approximately 97% of these
shares are parties to a stockholders' agreement which provides, among other
things, that such stockholders, and, after the merger, Peter Fontaine and
entities he controls, will nominate and vote in favor of up to 9 of the 11 (or
up to 14 after the addition of independent directors) members of the Advance
board of directors, ensuring their election. In addition, the stockholders'
agreement provides that, without the approval of Nicholas Taubman, Advance may
not amend its certificate of incorporation or bylaws or the stockholders
agreement if it would adversely affect the rights and obligations of Mr.
Taubman, subject to certain exceptions. If the directors nominated by the
parties to the stockholders' agreement, or holders of a majority of Advance's
common stock, agree amongst themselves to take or refrain from taking any
course of action, the effect may be to act against the wishes of the
stockholders who are not a party to the stockholders' agreement.
21
Advance will have anti-takeover defense provisions in its certificate of
incorporation and bylaws that may deter potential acquirors and depress its
stock price.
Advance's certificate of incorporation and bylaws will contain provisions
that could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control
of Advance. These provisions:
. authorize Advance's board of directors to issue "blank check" preferred
stock and determine the powers, preferences and privileges of those
shares without prior stockholder approval;
. prohibit the right of Advance's stockholders to act by written consent;
. limit the calling of special meetings of stockholders; and
. impose a requirement that holders of 66% of the outstanding shares of
common stock are required to amend the provisions relating to actions by
written consent of stockholders and the limitations of calling special
meetings.
Advance's debt instruments also contain provisions that could have the
effect of making it more difficult or less attractive for a third party to
acquire, or of discouraging a third party from attempting to acquire, control
of Advance. Specifically, the terms of Advance's existing senior subordinated
notes and of the senior subordinated notes that it anticipates issuing in
connection with the merger require that they be redeemed at a premium over
their principal amount in the event that there is a change of control of
Advance. In addition, the terms of the senior credit facility that Advance also
intends to enter into in connection with the merger contains a covenant that
prohibits Advance from undergoing a change of control, which if it does, will
constitute an event of default under that facility and cause the related
indebtedness to become immediately due. The need to repay all of this
indebtedness may deter potential third parties from acquiring Advance.
Under these various provisions in Advance's certificate of incorporation,
bylaws and debt instruments, a takeover attempt or third-party acquisition of
Advance, including a takeover attempt that may result in a premium over the
market price for shares of Advance's common stock, could be delayed, deterred
or prevented. In addition, these provisions may prevent the market price of
Advance's common stock from increasing in response to actual or rumored
takeover attempts and may also prevent changes in its management. As a result,
these anti-takeover and change of control provisions may limit the price
investors are willing to pay in the future for shares of Advance's common
stock.
If Advance Stores fails to meet its payment or other obligations under its new
senior secured credit facility, the lenders could foreclose on, and acquire
control of, substantially all of its and its subsidiaries' assets.
In connection with the incurrence of indebtedness under Advance Stores' new
senior secured credit facility, upon the closing of the merger, the lenders
under the credit facility will receive a pledge of all of the equity interests
of Advance Stores' subsidiaries, including Discount and its subsidiaries.
Additionally, these lenders generally will have a first priority security
interest on substantially all of the accounts receivable, cash, general
intangibles, investment property and future acquired material property of
Advance, Advance Stores and Advance Stores' subsidiaries, including Discount
and its subsidiaries. As a result of these pledges and liens, if Advance Stores
fails to meet its payment or other obligations under this credit facility, the
lenders would be entitled to foreclose on substantially all of those assets and
liquidate these assets. Under those circumstances, holders of Advance common
stock may lose a portion of or the entire value of their investment.
Advance will be able to incur additional indebtedness.
Despite Advance's current and anticipated levels of indebtedness, Advance
and its subsidiaries will still be able to incur substantially more
indebtedness. Although the debt instruments will limit the amount of additional
indebtedness, they do not and will not prohibit Advance and its subsidiaries
from incurring certain amounts of additional indebtedness. If Advance incurs
such additional indebtedness, the related risks that it now faces and
22
that it expects to face after the merger, including those discussed elsewhere
in this proxy statement and prospectus, could intensify.
Special Note Regarding Forward-Looking Statements
In this proxy statement and prospectus there are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Exchange Act of 1934, which are usually identified by the
use of words such as "will," "anticipates," "believes," "estimates," "expects,"
"projects," "forecasts," "plans," "intends," "should" or similar expressions.
Advance and Discount intend those forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Reform Act of 1995 (it being understood that such statements
would not be covered by the safe harbor provisions to the extent they are
considered made in connection with an initial public offering of Advance's
stock) and are included in this statement for purposes of complying with these
safe harbor provisions.
These forward-looking statements reflect current views about the relevant
company's plans, strategies and prospects, which are based on the information
currently available and on current assumptions.
Although each company believes that its plans, intentions and expectations
as reflected in or suggested by those forward-looking statements are
reasonable, it can give no assurance that the plans, intentions or expectations
will be achieved. Listed below and discussed elsewhere in this proxy statement
and prospectus are some important risks, uncertainties and contingencies which
could cause each company's actual results, performances or achievements to be
materially different from the forward-looking statements made in this proxy
statement and prospectus. These risks, uncertainties and contingencies include,
but are not limited to, the following:
. the risk that the businesses of Advance and Discount will not be
integrated successfully or such integration may be more difficult, time-
consuming or costly than expected;
. expected efficiencies and cost savings from the merger may not be fully
realized or realized within the expected time frame;
. revenues following the merger may be lower than expected;
. operating costs, customer loss and business disruption following the
merger, including, without limitation, difficulties in maintaining
relationships with suppliers and employees, may be greater than
expected;
. inability to obtain or meet conditions imposed for governmental approval
for the merger or merger schedule;
. the failure of Discount's shareholders to approve the merger;
. recessionary trends in general or in specific areas where Advance and
Discount operate;
. competitive pricing and other competitive pressures;
. other economic, business, competitive and/or regulatory factors
affecting Advance's and Discount's business generally; and
. other factors discussed under the heading "Risk Factors" and elsewhere
in this proxy statement and prospectus.
Advance and Discount assume no obligation to update publicly any forward-
looking statements, whether as a result of new information, future events or
otherwise. In evaluating forward-looking statements, you should consider these
risks and uncertainties, together with the other risks described from time to
time in Advance's, Advance Stores' and Discount's reports and documents filed
with the Securities and Exchange Commission, and you should not place undue
reliance on those statements.
23
THE SPECIAL MEETING
We are furnishing this proxy statement and prospectus in connection with
Discount's solicitation of proxies from the holders of Discount common stock
for use at the special meeting of shareholders. We are first mailing this proxy
statement and prospectus and accompanying form of proxy to the shareholders of
Discount on or about November 7, 2001.
Date, Place and Time
The special meeting is scheduled to be held at The Lakeland Center, 700 West
Lemon Street, Lakeland, Florida, on Wednesday, November 28, 2001, at 9:00 a.m.
local time.
Purpose of the Special Meeting
The purpose of the special meeting is to consider and take action upon the
merger agreement and merger, and such other matters as may be appropriate for
consideration at the special meeting. The Discount board of directors has
determined that the merger is fair and advisable to and in the best interests
of Discount and the Discount shareholders and unanimously approved the merger
agreement and the merger and unanimously recommends that the shareholders of
Discount vote for approval and adoption of the merger agreement and the merger.
Record Date and Stock Entitled to Vote
Owners of record of shares of Discount common stock at the close of business
on October 25, 2001, the record date for the special meeting, are entitled to
receive notice of and to vote at the special meeting. Discount's common stock
is the only class of voting securities of Discount. On the record date,
approximately 16,707,903 shares of common stock were issued and outstanding and
entitled to vote at the special meeting. Owners of record of Discount common
stock on the record date are each entitled to one vote per share on the
approval and adoption of the merger agreement and the merger.
Quorum Requirement
A quorum of Discount shareholders is necessary to have a valid meeting. A
majority of the shares of Discount common stock issued and outstanding and
entitled to vote on the record date must be represented in person or by proxy
at the special meeting in order for a quorum to be established. Abstentions and
"non-votes" count as present for establishing a quorum. A broker "non-vote"
occurs on an item when a broker is not permitted to vote on that item without
instructions from the beneficial owner of the shares and no instructions are
given.
Vote Required
The affirmative vote of the holders of a majority of shares outstanding on
the record date is required to approve the merger agreement and the merger. An
abstention or a broker "non-vote" will have the same effect as a vote against
the proposal. Fontaine Industries, a limited partnership controlled by Peter J.
Fontaine, beneficially owns approximately 24% of Discount's common stock, and
is Discount's largest shareholder. Fontaine Industries has agreed to vote all
of its shares of Discount common stock in favor of the merger agreement and the
merger.
Proxies
Voting Your Proxies
You may vote your shares at the meeting or by proxy. Discount recommends you
vote by proxy, even if you plan on attending the special meeting. Voting
instructions are included on your proxy card. If you properly give your proxy
and submit it to Discount, your shares will be voted in favor of the merger
agreement and
24
merger. You may vote by proxy by completing the enclosed proxy card, signing,
dating and mailing it in the enclosed postage pre-paid envelope. If you sign a
proxy card and return it without specific voting instructions, the shares
represented by the proxy will be voted FOR the proposal presented at the
special meeting.
You may abstain from voting for any of the proposals by properly marking
the abstain box on the proxy for the proposal.
If you hold your shares in "street name" (i.e., in the name of a broker,
bank or other record holder), you must either direct the record holder of your
shares as to how to vote your shares or obtain a proxy from the record holder
to vote at the special meeting.
Revocation of Proxy
You may revoke a proxy at any time prior to the time the proxy is to be
voted at the special meeting by:
. delivering (including by telegram or facsimile) prior to the special
meeting a written notice of revocation of proxy to the corporate
secretary of Discount;
. delivering prior to the special meeting a duly executed proxy bearing a
later date than the initial proxy; or
. attending the special meeting and voting in person.
Your presence at the special meeting will not itself automatically revoke
your proxy. If not revoked, the proxy will be voted in accordance with the
instructions indicated on the proxy, or if no instructions are indicated on a
properly executed proxy, such proxy will be voted "FOR" the approval and
adoption of the merger agreement and the merger.
Proxy Solicitation
Discount and Advance will bear equally the costs of printing and mailing
this proxy statement and prospectus. Discount will bear the costs of
soliciting proxies from its shareholders. In addition to soliciting proxies by
mail, directors, officers and employees of Discount, without receiving
additional compensation, may solicit proxies by telephone, by facsimile or in
person. Arrangements may also be made with brokerage firms and other
custodians, nominees and fiduciaries to forward solicitation materials to the
beneficial owners of shares held of record by such persons, and Discount will
reimburse such brokerage firms, custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred by them in connection therewith.
Mellon Investor Services LLC will assist in the solicitation of proxies by
Discount. Discount will pay Mellon Investor Services LLC a fee of
approximately $6,500, plus reimbursement of certain out-of-pocket expenses,
and will indemnify Mellon Investor Services LLC against any losses arising out
of Mellon Investor Services LLC's proxy solicitation services on behalf of
Discount.
Holders of Discount common stock should not send their stock certificates
with their proxy cards. If the merger is completed, a separate letter of
transmittal will be mailed to shareholders which will enable each of them to
receive the merger consideration.
No Appraisal Rights
Under Florida law, Discount shareholders are not entitled to dissenters'
rights of appraisal in connection with the merger because, on the record date,
Discount common stock was designated and quoted for trading on the New York
Stock Exchange.
Other Matters Brought Before the Special Meeting; Adjournments and
Postponements
It is not expected that any matter not referred to in this proxy statement
and prospectus will be presented for action at the special meeting. If any
other matters are properly brought before the special meeting the persons
named in the proxies will, unless you indicate otherwise on the enclosed proxy
card, have discretion to vote on such matters according to their best
judgment, including any proposal to adjourn the meeting. Any adjournment of
the special meeting may be made without notice, other than by an announcement
made at the
25
special meeting, by approval of the holders of a majority of the outstanding
shares of Discount common stock present in person or represented by proxy at
the special meeting, whether or not a quorum exists. Adjournments may be made
for the purpose of, among other things, soliciting additional proxies in favor
of the merger transaction.
Discount is soliciting proxies to allow the individuals appointed as proxies
to exercise discretionary authority to vote in favor of adjournment or
postponement of the special meeting. In particular, discretionary authority may
be exercised if the purpose of the adjournment or postponement is to provide
additional time to solicit additional votes to adopt and approve the merger
agreement and the merger. The individuals acting as proxies will exercise their
discretion in voting upon the question of whether to adjourn or postpone the
meeting depending upon the circumstances at the time. It is likely that the
proxies will vote to adjourn or postpone the meeting if they believe that
adjourning or postponing the meeting will enable Discount to obtain the
additional votes necessary to obtain approval by the holders of a majority of
the shares of Discount common stock to adopt and approve the merger
transaction. It is unlikely that the proxies will vote to adjourn or postpone
the meeting if they do not believe that doing so would enable Discount to
obtain the additional necessary votes.
The grant of a proxy will also confer discretionary authority on the persons
named in the proxy as proxy appointees to vote in accordance with their best
judgment on matters incidental to the conduct of the special meeting.
26
THE MERGER
Background of the Merger Between Advance and Discount
From time to time over the past several years, Peter Fontaine, Chairman and
Chief Executive Officer of Discount, had been contacted by various parties,
particularly other specialty automotive parts retailers, expressing general
interest in exploring business combinations with Discount.
Throughout this period, Discount's board of directors was committed to a
strategy of independent growth, including expansion into markets outside of
Florida and the roll out and development of Discount's commercial delivery
operations. Discount's management team and Discount's board of directors
believed that remaining independent and implementing Discount's strategic plan
would, over the long term, maximize shareholder value. Accordingly, during the
past several years and until February 2001, Discount chose not to pursue any of
the general expressions of interest from third parties.
Starting in fiscal 1999, despite continued growth in its store base and
revenues, Discount's profit margins began declining on a quarter over quarter
basis, largely because its commercial delivery operations and its new stores
outside of Florida were significantly less profitable than its core retail
operations in Florida. Discount undertook a number of strategic initiatives to
improve profitability. Although Discount continued to experience positive
comparable store sales, promising growth in sales in its commercial delivery
business and continuing but slow movement towards marginal profitability of its
commercial delivery operations, Discount's profit margins continued to decline.
In fiscal 2001, as its rate of revenue growth began to slow, Discount's
absolute level of profit also began declining on a quarter over quarter basis.
In June 2000, Mr. Fontaine received a letter from Merritt A. Gardner (the
"Glenden Co-Trustee"), a co-trustee with Mr. Fontaine of several trusts that
then together, through a limited partnership, beneficially owned approximately
18% of the outstanding common stock of Discount. The Glenden limited
partnership had been engaged for several years in an effort to diversify its
assets through regular quarterly sales of Discount's common stock under Rule
144. The letter from the Glenden Co-Trustee expressed the co-trustee's view as
a trustee of the respective trusts that he was dissatisfied with the financial
performance of Discount and the performance of Discount's stock price.
Mr. Fontaine discussed the letter from the Glenden Co-Trustee with each of
the members of Discount's board and, based on these discussions, the board
engaged in preliminary discussions over the next several months with Discount's
management and legal and financial advisors concerning strategic alternatives.
The Discount board determined at that time to continue to focus on implementing
Discount's business strategy. The board acknowledged, however, that it should
not foreclose future consideration of other strategic alternatives if
management were to later determine that the successful implementation of the
business strategy was not achievable within a reasonable time frame.
In October 2000, Mr. Fontaine received another letter from the Glenden Co-
Trustee. The Glenden Co-Trustee reiterated his unhappiness with Discount's
financial performance and stock price. The letter suggested that Discount
pursue one of the following alternative courses of action: bringing in a new
qualified chief executive officer, selling the company or repurchasing the
shares of Discount common stock held by the Glenden limited partnership.
In early October 2000, after consultations among the directors and in part
because the October letter from the Glenden Co-Trustee suggested consideration
of specific courses of action and in part because implementation of the
business strategy was taking longer than management originally contemplated,
Discount retained Salomon Smith Barney as its financial advisor, to assist
management in a further review of strategic alternatives for Discount. At a
regular meeting of the Discount board on October 10, 2000, the directors
discussed generally with management and representatives of Salomon Smith Barney
various strategic alternatives, including continued implementation of
Discount's business strategy as well as the possibility of business
combinations and the specific courses of action suggested by the Glenden Co-
Trustee. At a special
27
meeting of the Discount board on October 16, 2000, Mr. Fontaine updated the
board on the general review of strategic alternatives by management and Salomon
Smith Barney. Management reviewed the progress that had been made in, and
evaluated the prospects for, the implementation of its business strategy. Based
on these reviews and deliberations, the board decided that it was still
appropriate and in the best interest of its shareholders to continue to execute
Discount's business strategy and that more time was needed to carry out that
strategy.
On November 21, 2000, the board adopted and implemented a stockholder rights
plan. The board arrived at this decision, after a series of meetings beginning
at its regular board meeting on October 10, 2000 and after consultation with
management and Discount's legal and financial advisors. The decision took into
account many factors, including the board's continued belief in its ability to
successfully implement the business strategy, the perceived need for additional
time to carry out that strategy and the desire to provide management with a
sufficient opportunity to implement that strategy. The board's decision was
based on its belief that such action would help the board to maximize
shareholder value for all Discount shareholders by providing effective defenses
against abusive takeover tactics, such as offers for inadequate value, deals
involving coercive or misleading terms, or deals which would interfere with or
distract management from the implementation of Discount's adopted business
strategy.
In January 2001, after observing no meaningful improvement in Discount's
ability to successfully implement its business strategy, Discount entered into
a separation agreement with William Perkins, Discount's President and Chief
Operating Officer, whereby Mr. Perkins agreed to step down from his positions
with Discount, including his position as a director. Discount also engaged an
executive search firm to conduct a search for a seasoned executive who could
devote his or her energies to performing the roles of both chief executive
officer and president.
During the next several weeks, as the executive search process was
proceeding, Mr. Fontaine was again contacted, informally and on an unsolicited
and confidential basis, by senior representatives of both Advance and another
third party, inquiring as to whether Discount might have any interest in
discussing a possible business combination. As a result of these preliminary
inquiries, together with the challenges and the time that was likely to be
involved in implementing Discount's business strategy, Mr. Perkin's departure,
the continued decline in Discount's profitability and the perception of
increased competitive pressures, Mr. Fontaine consulted with each of Discount's
independent directors relative to reexamining the strategic alternatives for
Discount.
As a result of these discussions and further evaluation with Discount's
management and financial advisor as to Discount's strategic alternatives, the
board decided at a special meeting of the board on February 28, 2001 that it
would be appropriate to explore opportunities for the acquisition of Discount
by a strategic buyer, but concluded that it was not likely to be productive to
contact any financial buyers because of, among other things, the more limited
ability of financial buyers to produce synergies, the debt structure required
for such a transaction, the perceived lack of availability of leveraged buy-out
debt, and the fact that financial buyers would not generally have in place an
already proven management team in the auto parts retailing business. The board
authorized Salomon Smith Barney to contact strategic buyer candidates on a
confidential basis in order to better inform the board as to whether such other
companies might be interested in exploring a business combination and in
receiving confidential information concerning Discount and its business.
Over the next several weeks, a confidential memorandum describing Discount
and its operations, financial performance and prospects was prepared for
distribution to potential buyers. Concurrently with the preparation of the
memorandum, Discount's management, with the assistance of Salomon Smith Barney,
identified five potential strategic buyers, including Advance, and Salomon
Smith Barney was instructed to contact each such potential strategic buyer to
ascertain its level of interest in pursuing a transaction with Discount. Four
of the five contacted parties, including Advance, signed confidentiality
agreements, following which they were provided with confidential information
and a letter setting forth bidding requirements and a deadline of April 23,
2001 for the submission of written preliminary indications of interest in
acquiring Discount. In addition, each of the parties which signed a
confidentiality agreement was offered the opportunity to meet separately with
members of Discount's management.
28
In April 2001, Discount's management had separate extended meetings with
representatives from Advance and one other potential buyer. These two potential
buyers and their respective advisors conducted preliminary due diligence.
Despite positive reception at the meetings and strong indications that the
other potential buyer was interested in pursuing a strategic acquisition of
Discount, the other potential buyer informed Salomon Smith Barney on April 23,
2001 that, because of factors unrelated to Discount, it would not be submitting
a written indication of interest. On April 23, 2001, Discount received a
written indication of interest from Advance. Advance's preliminary indication
of interest provided for a merger of Discount with Advance in which the holders
of Discount would receive between $11 and $13 in cash for each share of
Discount common stock.
Mr. Fontaine informally discussed Advance's preliminary indication of
interest with each of the members of the board and they each agreed that the
pricing proposed by Advance was not sufficient to merit further consideration.
On April 30, 2001, at the direction of Discount, Salomon Smith Barney
communicated to Advance through representatives of Freeman Spogli & Co. that
Advance's preliminary indication of interest had been rejected and that the
pricing would need to be meaningfully in excess of $13 before Discount would be
willing to further consider a possible business combination with Advance. In
response, on that date, representatives of Freeman Spogli & Co. communicated to
Salomon Smith Barney that Advance was willing to work towards a cash purchase
price meaningfully in excess of $13 per share.
Based on the communications from Freeman Spogli & Co. and further
discussions among representatives of Discount, on May 4, 2001, Advance was
delivered a letter outlining the terms and conditions under which Discount was
willing to continue to negotiate with Advance.
Between May 10, 2001 and May 31, 2001, Advance and its lenders and their
respective advisors and representatives conducted further financial and legal
due diligence, including data room review and additional meetings with
Discount's management. In addition, based on discussions among the parties and
in an effort to focus on the legal aspects and other terms of a proposed
transaction, on May 18, 2001, a draft form of merger agreement prepared by
Discount's legal advisors was distributed to Advance. The draft merger
agreement contemplated an all cash merger consideration for all Discount shares
(leaving the per share amount for negotiation), a cash payment for all
outstanding options, a fully financed transaction, and customary conditions to
closing.
Advance management and Freeman Spogli & Co. discussed the status of the
Discount discussions and the related financing discussions with the Advance
Holding board at its May 23, 2001 regularly scheduled board meeting.
On May 31, 2001, representatives of Advance contacted Salomon Smith Barney
and verbally communicated that Advance would not be able to support an offer in
excess of $13 per share in cash because the cost of obtaining the necessary
financing was prohibitive. After relaying this conversation to Discount's
management, Salomon Smith Barney was instructed by Discount's management, based
on prior directions from Discount's board, to inform Advance that a $13 per
share price would not be acceptable.
On June 1, 2001, Advance inquired as to whether Discount might be receptive
to a transaction involving part stock and part cash with a targeted value of
$15 per share. Advance emphasized that any such alternative bid remained
subject to Advance's ability to secure the necessary financing and to
completion of additional due diligence by both Advance and its lending sources.
Over the next several days, Discount's management reviewed the advantages
and disadvantages of a part stock, part cash alternative with Discount's legal
and financial advisors. Mr. Fontaine also explored this potential revised
structure in informal conversations with each of the other members of
Discount's board. At the same time, at Discount's request, representatives of
Salomon Smith Barney sought further details from Advance concerning the part
stock, part cash bid so that the proposal could be properly evaluated by
Discount's board.
On June 12, 2001, Advance submitted a non-binding offer letter outlining a
proposed transaction with a stated value of $15 per share, comprised of a
fractional share of stock of Advance with an expressed value of
29
$7.50 and cash of $7.50 for each share of Discount common stock. The new
proposal contemplated a fully financed merger transaction in which Discount's
stockholders would receive, in the aggregate, approximately 12.5% of the
primary common shares outstanding of the combined entity. The new proposal also
provided for the registration of the shares of common stock to be issued to
Discount's stockholders and contemplated the listing of such shares on a
recognized securities exchange or the Nasdaq National Market System. As a
result of this proposed transaction, Advance would become a public company. In
addition, Mr. Fontaine would become a member of the Advance board of directors.
Advance emphasized in its letter that the proposal remained subject to
satisfactory completion of its due diligence, negotiation of related business
terms and agreements, the receipt of financing commitments and other key
closing conditions.
Discount's management advised Advance that same day that Discount was
prepared to further consider the new proposal but, because of the stock
consideration element, would need to conduct its own financial and legal due
diligence with respect to Advance. Accordingly, on June 12, 2001, Discount
executed and delivered a confidentiality agreement to Advance.
On June 13, 2001, Advance management and representatives of Freeman Spogli &
Co. met with the Chief Financial Officer of Discount in Roanoke, Virginia and
with Discount's financial advisor telephonically, and Discount and its
financial advisor began their due diligence review of Advance with a
presentation from Advance management regarding its historical business and
preliminary operating and financial plan for integrating and operating the
combined company. At this time, Advance also presented to Discount and its
representatives draft commitment letters for its financing of the transaction.
On June 18, 2001, at a meeting of the Discount board, members of Discount's
senior management and Discount's legal and financial advisors reviewed with the
Discount board the overall efforts that had been made to effectuate an
acquisition of Discount by a strategic buyer and the status of the ongoing
discussions between Discount and Advance, including the terms and structure of
Advance's current written proposal. After considering these discussions and
engaging in additional deliberations, the Discount board directed management
and Salomon Smith Barney to pursue further discussions with Advance focused on
certain modifications to the financial terms of the proposal. The primary
modifications that were sought included an increase in the aggregate percentage
of ownership in the combined company that shareholders of Discount would
receive pursuant to the merger, the computation of such percentage on a fully
diluted basis by taking into account all outstanding options (including options
issued by Advance) and a $0.25 increase in the per share cash portion of the
merger consideration.
Over the next week, Discount's management and financial advisor had a number
of telephone conversations with representatives of Advance to further negotiate
the financial terms of the proposed merger, and Advance orally communicated a
revised proposal which did not provide for any increase in the per share cash
portion of the merger consideration but which increased to 13% the aggregate
percentage of ownership in the combined company that shareholders of Discount
would receive pursuant to the merger, computed on a fully diluted basis taking
into account all outstanding options of both Advance and Discount. This
proposal included a combination of stock and cash for those Discount options
with an exercise price below $15.00.
On June 21, 2001, a call was held with the Advance Holding board to update
the directors on the status of the proposed Discount transaction.
On June 25, 2001, the Discount board met and was updated on developments
since its June 18, 2001 meeting, including the revised financial proposal from
Advance which reflected an increase in the percentage ownership in the combined
entity of holders of Discount common stock and options from approximately 12.5%
to 13.0% calculated on the basis of fully diluted, rather than primary, common
shares outstanding of the combined entity. The Discount board responded
favorably to the general outline of the proposed economic terms in Advance's
latest proposal, subject to Discount's satisfactory completion of due diligence
with respect to Advance and receipt of additional information to assist the
board in making a determination as to whether there was a reasonable basis to
conclude that the stock portion of the consideration had a value equal to or
30
greater than the $7.50 per share value of the stock portion of the
consideration expressed by Advance. The board's position was communicated to
representatives of Advance.
During the period from June 28, 2001 to July 26, 2001, representatives of
Discount and Advance, together with their advisors, continued negotiations on
the various terms of the merger agreement and the related voting and option
agreements. These negotiations involved numerous conference calls and
discussions and an all day meeting on July 17, 2001. As part of the
negotiations, because of potential negative income tax consequences to
Discount's option holders, including directors, officers and other employees,
if such options were to be exchanged for shares of Advance, which consequences
shareholders of Discount would not experience upon the exchange, in lieu of
issuing common shares for payment of in-the-money options, Discount negotiated
to have Advance pay for the in-the-money options in cash. As a consequence, the
aggregate cash portion of the consideration increased and, because these
Discount optionees would not receive common shares of Advance, there was a
corresponding reduction in the aggregate percentage ownership that Discount
common stock and option holders would hold in the combined entity from
approximately 13% to approximately 12.7%. This reduction in the aggregate
percentage ownership impacted only option holders (who would no longer be
receiving stock in exchange for their options) and did not in any way reduce
the percentage interest or value that any individual shareholder would receive
pursuant to the merger. During the same period, the parties also continued to
conduct their legal and financial due diligence and Advance worked on
finalizing its commitment letters for the financing of the transaction.
On July 26, 2001, Discount convened a meeting of its board. At that meeting,
Discount's legal and financial advisors reviewed with the Discount board the
discussions that had occurred since the prior board meeting, reported on the
status of negotiations and due diligence investigations, and reviewed the
material terms of the proposed transaction and transaction documents. As part
of its deliberations, the board was informed as to, among other things, the
legal structure of the acquisition transaction, the amount of the cash and
stock portions of the merger consideration, the anticipated income tax
consequences to Discount shareholders of the merger consideration, the
treatment of Discount stock options, the provisions to be contained in the
voting agreement and the option agreement with Fontaine Industries, the
conditions to closing, restrictions on operations of each of the companies
during the pendency of the transaction, restrictions on Discount's ability to
solicit and consider acquisition proposals from other parties, termination
rights and break- up fees and expenses. The board provided advice and direction
to Discount's management and advisors, including a direction to negotiate for
further limits on Advance's ability to issue options and additional shares or
to effectuate other acquisition transactions during the pendency of the
transaction, for limits on Advance's right to immediately terminate the merger
agreement based on a withdrawal of the board's recommendation at a time when
Discount is obligated under the terms of the merger agreement to hold a
shareholders' meeting to consider the merger after having received a superior
proposal, and limits on how and when the termination fee and/or Advance's
expenses would need to be paid as a result of a termination of the merger
agreement.
From July 26, 2001, through and including August 7, 2001, the parties
continued negotiations on various terms in the merger agreement, the stock
option agreement and the voting agreement, and continued to conduct further due
diligence.
On August 1, 2001, Advance Holding held a special meeting of its board to
approve the Discount merger and all related transactions. The details of the
merger agreement and financing commitments were reviewed in detail and the
Advance Holding board voted unanimously to approve the transaction.
On August 7, 2001, the Discount board met by way of telephone conference
call to consider the proposed merger. At that meeting, Discount's legal and
financial advisors reviewed with the board the discussions and negotiations
that had occurred since the July 26, 2001 board meeting and the manner in which
the material open business and legal points had been resolved. In particular,
the Discount board was informed that in the revised merger agreement, Advance
was limited to issuing options largely to issuances consistent with its past
practices and to hire and retain senior executives or provide integration
incentives, Advance was limited to issuances of stock during the pendency of
the merger agreement which diluted all shareholders (including all
31
then existing Advance shareholders) on a pro rata basis, Advance relinquished
its right to immediately terminate the merger agreement based on a withdrawal
of the board's recommendation at a time when Discount is obligated under the
terms of the merger agreement to hold a shareholders' meeting to consider the
merger after having received a superior proposal, and some limits were
established and clarifications made relative to how and when the termination
fee and/or Advance's expenses would be paid as a result of a termination of
the merger agreement. Also, at the meeting, Salomon Smith Barney delivered to
the Discount board its oral opinion, which opinion was confirmed by delivery
of a written opinion dated August 7, 2001, to the effect that, as of that date
and based on and subject to the matters described in its opinion, the
consideration to be received by the holders of Discount common stock pursuant
to the merger agreement was fair, from a financial point of view, to such
holders. After further deliberations and taking into consideration the
material factors described below under "Discount's Reasons for the Merger,"
the Discount board determined that the terms of the merger were fair to, and
in the best interests of, the shareholders of Discount and unanimously
approved the merger agreement and the related voting and option agreements.
The board also unanimously approved an amendment to Discount's stockholder
rights plan in order to exempt the merger from the operation of the
stockholder rights plan, and thus enable the merger to proceed.
Late in the afternoon on August 7, 2001, following completion of the
definitive documentation (which was in all respects materially similar to the
merger agreement and related documents considered and approved earlier in the
day by the Discount board) and final confirmatory due diligence by the
parties, Discount, Advance Holding, Advance Auto Parts, Advance Stores and
Advance Merger Sub executed and delivered the merger agreement, and Fontaine
Industries, Peter J. Fontaine Revocable Trust, Peter Fontaine, Advance Holding
and Advance Stores executed and delivered the voting agreement and the option
agreement. Executed financing commitments from Advance's lenders were also
delivered that day.
Early in the evening on August 7, 2001, Advance and Discount publicly
announced the proposed merger.
Discount's Reasons for the Merger
In reaching the determination that the merger agreement and the terms of
the merger are fair to, and in the best interests of Discount and its
shareholders, the Discount board consulted with Discount's management, as well
as its legal and financial advisors and considered the short-term and long-
term interests of Discount. Although the Discount board considered all of
these factors, it did not make determinations with respect to each of the
factors. Rather, the Discount board made its judgment with respect to the
merger and the merger agreement based on the total mix of information
available to it, and the judgments of individual board members may have been
influenced to a greater or lesser degree by their individual views with
respect to different factors.
Positive factors considered by the Discount board of directors. In making
its determinations, the board of directors considered the following factors,
which the board considered to be the positive material factors in its decision
to recommend approval of the merger and the merger agreement:
. The fact that the merger will provide Discount shareholders with a
substantial premium over $7.25, the per share closing price of Discount
common stock on February 28, 2001, which was the date on which
Discount's board first decided to explore opportunities with respect to
a potential business combination.
. The fact that the merger will offer Discount shareholders the
opportunity to participate in a larger, more geographically diversified
company in the auto parts industry with a strengthened management team
and board of directors.
. The Discount board's belief that the merger should result in a company
with substantial gains from expected synergies, cost efficiencies and
earnings accretion which were estimated to be approximately $30 million
in the first full year of operations.
32
. The complementary industry expertise and business philosophy and family
ownership roots of the two companies.
. The fact that the merger will offer Discount shareholders immediate
liquidity of $7.50 in cash per share while at the same time providing
the opportunity to participate in the value that may be generated
through the combination of the two companies' businesses.
. The prospects for improved trading liquidity in the future if and when
Advance pursues subsequent equity offerings of its securities.
Discount's board believed that the combined company, with an expected
market capitalization approaching $1 billion, should attract greater
interest from investors and thus generate a larger trading volume if and
when Advance pursues and completes subsequent equity offerings.
. The discussions undertaken with other potential acquirors and the
board's belief, based on those discussions, that no other buyer would be
likely to provide a superior value to the Discount shareholders.
. The Discount board's belief that the merger presents a favorable
alternative, strategically and financially, to Discount's remaining an
independent company. As an independent company, Discount was facing
continued delays in its ability to implement its business strategy. In
addition, the combined company would be of a size and would have access
to resources that could be expected to enable it to more effectively
compete in each of the markets in which Discount has stores.
. The opinion dated August 7, 2001 of Salomon Smith Barney to the Discount
board as to the fairness, from a financial point of view and as of the
date of the opinion, of the merger consideration to the holders of
Discount common stock, as described at page 35 under "The Merger--
Opinion of Discount's Financial Advisor."
. The fact that Fontaine Industries Limited Partnership, a partnership
controlled by Peter J. Fontaine, Discount's Chairman and Chief Executive
Officer, and Discount's principal shareholder and beneficial owner of
approximately 24% of the outstanding shares, indicated that it would
enter into an agreement to vote all of its shares in favor of the merger
agreement and the merger. This support of the transaction from Peter
Fontaine, who has been involved in the auto parts business for over
25 years, was viewed as a strong testament to the propriety of the
transaction and helped to provide confidence that the transaction, if
pursued, could be consummated.
. A review of the terms of the merger agreement, including the likelihood
of satisfying the conditions to closing of the merger and the fact that
the merger agreement permits the Discount board to receive unsolicited
inquiries and proposals from, and, under certain circumstances,
negotiate and give information to, third parties.
Negative factors considered by the Discount board of directors. The Discount
board also considered the matters described in this proxy statement and
prospectus under the heading "Risk Factors" as well as the following
potentially material negative factors concerning the merger:
. The fact that consummation of the merger will deprive the holders of
Discount common stock of the opportunity to participate in any future
growth that Discount may have been able to achieve as an independent
company, except as part of a much larger Advance, and that the business
of Advance may not perform as well in the future as Discount may have
performed as an independent company.
. The fact that the "non-solicitation" provision and related provisions in
the merger agreement and other ancillary agreements might discourage
third parties from seeking to negotiate a superior proposal for the
acquisition of Discount.
. The risk that the merger would not be completed in a timely manner or at
all.
. The possible negative effects of the announcement of the merger upon
Discount's relationships with its employees, customers, and suppliers
and the possible impact that these negative effects would have upon
sales and earnings.
33
. The fact that certain officers and directors of Discount have interests
in the merger that are different from, and may conflict with, the
interests of Discount shareholders, as more fully described under "The
Merger--Interests of Discount's Officers and Directors in the Merger"
beginning on page 43.
. The fact that the merger is conditional upon the funding of Advance's
commitments for financing, which may not be received for reasons beyond
the control of Discount or Advance, in which case the merger would not
be completed.
. The fact that cash consideration to be received by some Discount
shareholders may result in taxable income to them.
. The terms in the merger agreement that provide that if Discount receives
a superior acquisition proposal from another prior to the merger, in
order to accept the offer Discount would be required to pay to Advance a
termination fee of $9.0 million and could be liable to Advance for
expense reimbursements of up to $7.0 million. The same termination fee
and expense reimbursements would be payable in most cases if Discount
receives another offer, the shareholders do not approve the merger, and,
within 12 months thereafter, Discount is sold to someone other than
Advance.
. The fact that there is likely to be limited initial float and limited
research sponsorship with respect to the Advance common stock for some
extended period of time following the closing of the merger.
. The fact that Florida law does not entitle Discount shareholders to
dissenters' rights if the merger is completed.
However, in the board's view, these factors were substantially outweighed by
the positive factors discussed above. Based upon its consideration of all of
the factors described above, the board arrived at its determination to approve
and adopt the merger agreement and recommend that the shareholders of Discount
approve the merger agreement.
Advance's Reasons for the Merger
In reaching its determination to approve the merger, the merger agreement
and the reincorporation merger, the Advance board of directors consulted with
Advance management, legal counsel and accountants and was advised by JP Morgan,
its financial advisor in this transaction, and considered the short-term and
long-term interests of Advance. In particular, the Advance board of directors
considered the following material factors, among others, all of which it deemed
favorable, in reaching its decision to approve the merger and the merger
agreement:
. Discount's leading position as a speciality retailer of automotive parts
and accessories in the State of Florida.
. Discount's complementary position to Advance's existing markets outside
of the State of Florida.
. The board's belief that the merger should result in a company with
strong synergy opportunities: the potential to increase same store sales
as a result of marketing, merchandising and inventory and other
efficiencies; increased commercial sales opportunities; purchasing
efficiencies; increased distribution system optimization; and the
ability to reduce overlapping administrative expenses.
. Discount's large number of owned properties and its favorable rent in
many locations.
. The strength and experience of Discount's field and store management
teams.
. The strong cultural fit of Discount and Advance.
Recommendation of the Board of Directors of Discount
The board of directors of Discount has determined that the merger is in the
best interests of Discount and its shareholders and has unanimously approved
and adopted the merger agreement. Accordingly, Discount's
34
board of directors recommends that the shareholders of Discount vote "FOR"
approval and adoption of the merger agreement and the merger.
Opinion of Discount's Financial Advisor
Discount retained Salomon Smith Barney to act as its financial advisor in
connection with the proposed transaction. In connection with its engagement,
Discount requested that Salomon Smith Barney evaluate the fairness, from a
financial point of view, of the merger consideration. On August 7, 2001, at a
meeting of the Discount board held to evaluate the proposed transaction,
Salomon Smith Barney delivered to the Discount board of directors an oral
opinion, which opinion was confirmed by delivery of a written opinion dated
August 7, 2001, to the effect that, as of that date and based on and subject to
the matters described in its opinion, the merger consideration was fair, from a
financial point of view, to the holders of Discount common stock.
In arriving at its opinion, Salomon Smith Barney:
. reviewed the merger agreement and related documents referred to in the
merger agreement;
. held discussions with senior officers, directors and other
representatives and advisors of Discount and with senior officers and
other representatives and advisors of Advance concerning the businesses,
operations and prospects of Discount, Advance and the combined company;
. examined publicly available business and financial information relating
to Discount and Advance and available business and financial information
relating to the combined company;
. examined financial forecasts and other information and data for
Discount, Advance and the combined company which were provided to or
otherwise discussed with Salomon Smith Barney by the managements of
Discount and Advance, including information relating to the potential
strategic implications and operational benefits anticipated by the
managements of Discount and Advance to result from the transaction;
. reviewed the financial terms of the transaction as described in the
merger agreement in relation to, among other things, current and
historical market prices and trading volumes of Discount common stock,
the financial condition and the historical and projected operating data
of Discount, Advance and the combined company, and the capitalization of
Discount, Advance and the combined company;
. considered, to the extent publicly available, the financial terms of
other transactions recently effected which Salomon Smith Barney
considered relevant in evaluating the transaction;
. analyzed financial, stock market and other publicly available
information relating to the businesses of other companies whose
operations Salomon Smith Barney considered relevant in evaluating those
of Discount and Advance; and
. conducted other analyses and examinations and considered other
financial, economic and market criteria as Salomon Smith Barney deemed
appropriate in arriving at its opinion.
In rendering its opinion, Salomon Smith Barney assumed and relied, without
independent verification, on the accuracy and completeness of all financial and
other information and data publicly available or furnished to or otherwise
reviewed by or discussed with it. With respect to financial forecasts and other
information and data, the managements of Discount and Advance advised Salomon
Smith Barney that the forecasts and other information and data were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the managements of Discount and Advance as to the future financial
performance of Discount, Advance and the combined company and the potential
strategic implications and operational benefits anticipated to result from the
transaction, including the amount, timing and achievability of those potential
benefits.
35
Salomon Smith Barney assumed, with Discount's consent, that the transaction
would be consummated in accordance with its terms, without waiver, modification
or amendment of any material term, condition or agreement. Salomon Smith Barney
did not express any opinion as to what the value of the Advance common stock
actually will be when issued in the transaction or the prices at which the
Advance common stock will trade or otherwise be transferable at any time.
Salomon Smith Barney did not make and was not provided with an independent
evaluation or appraisal of the assets or liabilities, contingent or otherwise,
of Discount, Advance and the combined company, and Salomon Smith Barney did not
make any physical inspection of the properties or assets of Discount, Advance
or the combined company.
In connection with its engagement, Salomon Smith Barney was requested to
solicit, and it held discussions with, third parties regarding the possible
acquisition of all or a part of Discount. Salomon Smith Barney expressed no
view as to, and its opinion does not address, the relative merits of the
transaction as compared to any alternative business strategies that might exist
for Discount or the effect of any other transaction in which Discount might
engage. Salomon Smith Barney's opinion was necessarily based on information
available to Salomon Smith Barney, and financial, stock market and other
conditions and circumstances existing and disclosed to Salomon Smith Barney, as
of the date of its opinion. Although Salomon Smith Barney evaluated the merger
consideration from a financial point of view, Salomon Smith Barney was not
asked to and did not recommend the specific consideration payable in the
transaction, which was determined through negotiations between Discount and
Advance and its affiliates. Discount imposed no other instructions or
limitations on Salomon Smith Barney with respect to the investigations made or
procedures followed by Salomon Smith Barney in rendering its opinion.
The full text of Salomon Smith Barney's written opinion dated August 7,
2001, which describes the assumptions made, matters considered and limitations
on the review undertaken, is attached to this proxy statement and prospectus as
Annex B and is incorporated into this proxy statement and prospectus by
reference. Salomon Smith Barney's opinion is directed to the Discount board of
directors and relates only to the fairness of the merger consideration from a
financial point of view, does not address any other aspect of the transaction
or any related transaction and does not constitute a recommendation to any
shareholder with respect to any matters relating to the proposed transaction.
In preparing its opinion, Salomon Smith Barney performed a variety of
financial and comparative analyses, including those described below. The
summary of these analyses is not a complete description of the analyses
underlying Salomon Smith Barney's opinion. The preparation of a fairness
opinion is a complex analytical process involving various determinations as to
the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances and, therefore, a
fairness opinion is not readily susceptible to summary description.
Accordingly, Salomon Smith Barney believes that its analyses must be considered
as a whole and that selecting portions of its analyses and factors or focusing
on information presented in tabular format, without considering all analyses
and factors or the narrative description of the analyses, could create a
misleading or incomplete view of the processes underlying its analyses and
opinion.
In its analyses, Salomon Smith Barney considered industry performance,
general business, economic, market and financial conditions and other matters
existing as of the date of its opinion, many of which are beyond the control of
Discount and Advance. No company or business used in those analyses as a
comparison is identical to Discount, Advance, the combined company or the
proposed transaction, and an evaluation of those analyses is not entirely
mathematical. Rather, the analyses involve complex considerations and judgments
concerning financial and operating characteristics and other factors that could
affect the acquisition, public trading or other values of the companies or
business segments analyzed.
The estimates contained in Salomon Smith Barney's analyses, including
financial projections provided by both Advance and Discount, and the valuation
ranges resulting from any particular analysis are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by its analyses. In
addition, analyses relating to the value of businesses or
36
securities do not necessarily purport to be appraisals or to reflect the prices
at which businesses or securities actually may be sold. Accordingly, Salomon
Smith Barney's analyses and estimates are inherently subject to substantial
uncertainty.
Salomon Smith Barney's opinion and analyses were only one of many factors
considered by the Discount board of directors in its evaluation of the
transaction and should not be viewed as determinative of the views of the
Discount board of directors or management with respect to the merger
consideration or the proposed transaction.
The following is a summary of the material financial analyses performed by
Salomon Smith Barney in connection with the rendering of its opinion dated
August 7, 2001. The financial analyses summarized below include information
presented in tabular format. In order to fully understand Salomon Smith
Barney's financial analyses, the tables must be read together with the text of
each summary. The tables alone do not constitute a complete description of the
financial analyses. Considering the data in the tables below without
considering the full narrative description of the financial analyses, including
the methodologies and assumptions underlying the analyses, could create a
misleading or incomplete view of Salomon Smith Barney's financial analyses.
Merger Consideration Analysis
In evaluating the equity component of the merger consideration, Salomon
Smith Barney computed an estimated valuation range for the merger consideration
by performing a trading multiples analysis and discounted cash flow analysis of
the pro forma company. These analyses are more fully described below. Salomon
Smith Barney then compared the implied valuation range derived for the merger
consideration to the implied equity reference ranges derived for Discount on a
standalone basis as more fully described below.
Pro Forma Trading Multiples Analysis
Using publicly available information, Salomon Smith Barney reviewed the
market values and trading multiples of selected companies in the aftermarket
automotive parts retail industry identified below in the selected companies
analysis performed by Salomon Smith Barney as part of its financial analysis of
Discount on a standalone basis. Salomon Smith Barney reviewed firm values,
calculated as equity value, plus straight debt, minority interests, straight
preferred stock and out-of-the-money convertible securities, less cash and
investments in unconsolidated affiliates, as a multiple of calendar year 2001
estimated earnings before interest, taxes, depreciation and amortization,
commonly referred to as EBITDA, and also reviewed equity values as a multiple
of calendar year 2002 estimated net income. Salomon Smith Barney then applied a
range of selected multiples derived from the selected companies of 7.0x to 8.0x
calendar year 2001 estimated EBITDA and 15.0x to 17.0x calendar year 2002
estimated EPS to corresponding financial data of the pro forma company, based
on internal estimates of the management of Advance. This analysis indicated an
implied equity reference range for the pro forma company of approximately
$29.93 to $40.09 per share and, based on the merger consideration of $7.50 in
cash and 0.2577 of a share of Advance common stock, an estimated implied value
range for the merger consideration of approximately $15.31 to $17.96 per share
of Discount common stock exchanged.
Pro Forma Discounted Cash Flow Analysis
Salomon Smith Barney performed a discounted cash flow analysis of the pro
forma company to estimate the present value of the unlevered, after-tax free
cash flows that the pro forma company could generate over fiscal years 2001
through 2005, based on internal estimates of the management of Advance. Salomon
Smith Barney derived an implied equity reference range for the pro forma
company by applying a range of selected EBITDA terminal value multiples of 6.5x
to 7.5x to the pro forma company's fiscal year 2005 estimated EBITDA. The
present value of the cash flows and terminal values were calculated using
discount rates ranging from 9.5% to 10.5%. This analysis indicated an implied
equity reference range for the pro forma company of approximately $47.22 to
$59.76 per share and, based on the merger consideration of $7.50 in cash and
0.2577
37
of a share of Advance common stock, an estimated implied value range for the
merger consideration of approximately $19.82 to $23.09 per share of Discount
common stock exchanged.
Discount Standalone Analyses
Selected Companies Analysis
Using publicly available information, Salomon Smith Barney reviewed the
market values and trading multiples of Discount and the following five selected
publicly traded companies in the aftermarket automotive parts retail industry:
. AutoZone, Inc.
. O'Reilly Automotive, Inc.
. CSK Auto Corporation
. Genuine Parts Company
. The Pep Boys--Manny, Moe & Jack
All multiples were based on closing stock prices on August 3, 2001.
Estimated financial data for the selected companies were based on public
filings and research analysts' estimates and estimated financial data for
Discount were based on internal estimates of Discount's management adjusted for
the sale/leaseback transactions effectuated by Discount, which occurred on
February 27, 2001. Salomon Smith Barney compared firm values of Discount and
the selected companies as multiples of latest 12 months revenues and latest
12 months and estimated calendar year 2001 EBITDA. Salomon Smith Barney also
compared equity values of Discount and the selected companies as a multiple of
calendar years 2001 and 2002 estimated earnings per share, commonly referred to
as EPS. Salomon Smith Barney then applied a range of selected multiples derived
from the selected companies of 0.55x to 0.65x latest 12 months revenues, 5.5x
to 6.5x latest 12 months EBITDA, 5.0x to 6.0x calendar year 2001 estimated
EBITDA, 8.0x to 10.0x calendar year 2001 estimated EPS and 6.0x to 8.0x
calendar year 2002 estimated EPS to corresponding financial data of Discount.
This analysis indicated the following implied mean per share equity reference
range for Discount, as compared to the estimated implied per share value range
for the merger consideration:
IpliedmMean Per Share Equity Reference Estimated Implied Per Share Merger
Range For Discount Consideration Value Range
--------------------------------------- ----------------------------------
$8.94-$12.20 $15.31-$23.09
38
Precedent Transactions Analysis
Using publicly available information, Salomon Smith Barney reviewed the
implied transaction value multiples paid or proposed to be paid in the
following 13 selected transactions in the aftermarket automotive parts, mall
based and standalone retail industry:
Aftermarket Automotive Parts Retailers
Target Acquiror
------ --------
.Al's and Grand Auto Supply, Inc. .CSK Auto Corporation
.Chief Auto Parts Inc. .AutoZone, Inc.
.Advance .Freeman Spogli & Co.
Mall Based Retailers
Target Acquiror
------ --------
.Sunglass Hut International, Inc. .Luxottica Group S.p.A.
.Musicland Stores Corporation .Best Buy Co., Inc.
.Piercing Pagoda, Inc. .Zale Corporation
.Babbage's Etc. LLC .Barnes & Noble, Inc.
Standalone Retailers
Target Acquiror
------ --------
.Sound Advice, Inc. .Tweeter Home Entertainment Group, Inc.
.PETCO Animal Supplies, Inc. .Investors Group Inc.
.Funco, Inc. .Barnes & Noble Inc.
.Eagle Hardware & Garden, Inc. .Lowe's Companies, Inc.
.Dart Group Corporation .Richfood Holdings, Inc.
.Hechinger Company .Leonard Green & Partners, LP
All multiples for the selected transactions were based on publicly available
financial information. Salomon Smith Barney compared firm values in the
selected transactions as multiples of latest 12 months revenue and EBITDA.
Salomon Smith Barney then applied a range of selected multiples derived from
the selected transactions of 0.55x to 0.70x latest 12 months revenue and 6.5x
to 7.5x latest 12 months EBITDA to corresponding financial data of Discount.
This analysis indicated the following implied mean per share equity reference
range for Discount, as compared to the estimated implied per share value range
for the merger consideration:
Implied Mean Per Share Equity Reference Estimated Implied Per Share Merger
Range For Discount Consideration Value Range
--------------------------------------- ----------------------------------
$11.58-$16.32 $15.31-$23.09
Discounted Cash Flow Analysis
Salomon Smith Barney performed a discounted cash flow analysis of Discount
to estimate the present value of the stand-alone, unlevered, after-tax free
cash flows that Discount could generate over fiscal years 2002 through 2005,
based on internal estimates of Discount's management. Salomon Smith Barney
derived an implied equity reference range for Discount by applying a range of
selected EBITDA terminal value multiples of 5.5x to 6.5x to Discount's fiscal
year 2005 estimated EBITDA. The present value of the cash flows and terminal
values were calculated using selected discount rates ranging from 10.5% to
11.5%. This analysis indicated the following implied equity reference range for
Discount, as compared to the estimated implied per share value range for the
merger consideration:
Implied Mean Per Share Equity Reference Estimated Implied Per Share Merger
Range For Discount Consideration Value Range
--------------------------------------- ----------------------------------
$13.91-$18.31 $15.31-$23.09
39
Contribution Analysis
Salomon Smith Barney reviewed the relative contributions of Discount and
Advance to the latest 12 months and estimated calendar years 2001 and 2002
revenues, EBITDA and net income of the pro forma company. Estimated financial
data for Discount and Advance were based on internal estimates of the
managements of Discount and Advance and its affiliates. Salomon Smith Barney
then compared the percentage contributions of Discount to these operational
metrics to the pro forma equity ownership in the combined company of holders
of Discount common stock assuming the cash portion of the merger consideration
constituted 50% of the merger consideration. This analysis indicated an
implied contribution reference range for Discount of between approximately
10.5% and 15.6%, with a mean contribution of approximately 12.8% and a median
contribution of approximately 12.5%, as compared to the pro forma equity
ownership percentage of Discount's shareholders immediately upon completion of
the merger of approximately 13%.
Other Factors
In rendering its opinion, Salomon Smith Barney also reviewed and considered
other factors, including:
. historical trading prices and trading volumes for Discount common stock
for the 24-month, 12-month and three-month periods ended August 3, 2001;
. the relationship between movements in Discount common stock, movements
in the common stock of selected companies in the aftermarket automotive
parts retail industry and movements in the S&P composite index; and
. Discount's recent and projected operating performance for fiscal years
2000 and 2001, EBITDA margin trends for the past three years and recent
market price to earnings multiples relative to selected companies in the
aftermarket automotive parts retail industry.
Miscellaneous
Under the terms of its engagement, Discount has agreed to pay Salomon Smith
Barney for its financial advisory services upon completion of the transaction
an aggregate fee based on a percentage of the total consideration, including
liabilities assumed, payable in the transaction. The fee payable to Salomon
Smith Barney is currently estimated to be approximately $3.0 million. Discount
also has agreed to reimburse Salomon Smith Barney for reasonable travel and
other expenses incurred by Salomon Smith Barney in performing its services,
including the reasonable fees and expenses of its legal counsel, and to
indemnify Salomon Smith Barney and related persons against liabilities,
including liabilities under the federal securities laws, arising out of its
engagement.
In the ordinary course of business, Salomon Smith Barney and its affiliates
may actively trade or hold the securities of Discount and Advance and its
affiliates for their own account or for the account of customers and,
accordingly, may at any time hold a long or short position in those
securities. Salomon Smith Barney and its affiliates in the past have provided
services to Discount and affiliates of Advance unrelated to the proposed
transaction, including acting as financial advisor to Discount in connection
with Discount's adoption of its stockholder rights plan for which Salomon
Smith Barney received a fee of $50,000. In addition, Salomon Smith Barney and
its affiliates, including Citigroup Inc. and its affiliates, may maintain
relationships with Discount, Advance and their affiliates.
Salomon Smith Barney is an internationally recognized investment banking
firm and was selected by Discount based on its experience, expertise and
familiarity with Discount and its business. Salomon Smith Barney regularly
engages in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive bids,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes.
40
Certain Financial Projections and Forecasts
Discount Projections
Discount does not, as a matter of course, make public forecasts or
projections as to its future financial performance. However, in connection with
Discount's efforts to identify interested strategic buyers, Discount made
available to Advance and its representatives certain nonpublic information
regarding Discount's projected operating performance, or the Projections. The
Projections are included in this proxy statement and prospectus solely because
such information was furnished to Advance by Discount.
The Projections were prepared early in the fourth quarter of Discount's 2001
fiscal year and were based, in part, on Discount's assumptions concerning its
operating performance in its fiscal year 2001 fourth quarter. The actual
operating results for such fourth quarter proved to be below the assumed
performance. The Projections did not take into account Discount's May 2001
settlement of certain litigation resulting in a pre-tax net gain of $6.5
million. Additionally, the Projections were based on a variety of assumptions,
including Discount remaining as an independent company engaged in, among other
things, new store development activities in new and existing markets, business
development activities related to establishing collaborations with third
parties, and other initiatives, and it is highly likely that the contribution
Discount's business will make to Advance's consolidated results will be
different from Discount's performance on a standalone basis. Accordingly,
Advance gave limited weight to the Projections provided by Discount in
evaluating the proposed merger, in developing its models for the combined
company, and in determining the amount it was willing to pay to acquire
Discount.
The Projections included, among other things, Discount's projections of
sales, gross profit, EBITDA and net income for Discount's fiscal years 2001
through 2005. The Projections for fiscal 2001 were presented on a pro forma
basis to take into account a full year of Discount's sale/leaseback
transaction, which was consummated in February 2001. Set forth below is a
summary of such Projections. The Projections should be read together with the
financial statements of Discount that are included in this proxy statement and
prospectus.
Fiscal Years Ending May,
------------------------------------
2001 2002 2003 2004 2005
------ ------ ------ ------ --------
(dollars in millions)
Sales................................... $664.8 $725.1 $812.7 $907.6 $1,010.1
Gross profit............................ $258.2 $290.0 $328.8 $371.2 $ 413.0
EBITDA.................................. $ 62.9 $ 81.5 $ 96.7 $114.3 $ 130.3
Net income.............................. $ 13.7 $ 26.4 $ 34.7 $ 44.4 $ 53.1
The assumptions used to prepare the Projections involve judgments with
respect to, among other things, future economic and competitive conditions, the
availability of suitable real estate locations, continued good relations with
key product vendors, and future business conditions in the automotive
aftermarket parts industry, which are inherently subject to significant
uncertainties and contingencies, many of which are beyond Discount's control.
In addition, if the merger is not consummated, Discount may not be able to
achieve the Projections. Accordingly, there can be no assurance that the
assumptions made in preparing the Projections would prove accurate, and actual
results may be materially greater or less than those contained in the
Projections. The Projections herein should not be regarded as an indication
that Discount, Advance, or any of their respective affiliates or
representatives considered or consider the Projections to be a reliable
prediction of future events, and the Projections should not be relied upon as
such. None of Discount, Advance or any of their respective affiliates, advisors
or representatives assumes any responsibility for the validity, reasonableness,
accuracy or completeness of the Projections. None of Discount, Advance or any
of their respective affiliates, advisors or representatives is under any
obligation to or has any intention to update the Projections at any future
time.
The Projections were prepared solely for internal use and not with a view to
public disclosure or compliance with the published guidelines of the SEC or the
American Institute of Certified Public Accountants regarding projections. The
Projections included in this proxy statement and prospectus have been prepared
by,
41
and are the responsibility of, Discount's management. Ernst & Young LLP has
neither examined nor compiled the Discount projected data and, accordingly,
Ernst & Young LLP does not express an opinion or any other form of assurance
with respect thereto. The Ernst & Young LLP report included in this proxy
statement and prospectus relates only to the historical financial statements of
Discount. The report does not extend to the Projections and should not be read
to do so.
Advance Pro Forma Forecast
Advance does not, as a matter of course, make public forecasts or
projections as to its future financial performance. However, in connection with
the negotiation of the merger and the arranging of the related financing,
Advance prepared and made available to Discount certain nonpublic financial
information regarding Advance, which included the pro forma impact of adding
Discount to its operations. On August 8, 2001, in connection with the public
conference call to discuss the merger, Advance and Discount provided, using a
range, a pro forma financial forecast for fiscal 2002, or the Forecast, to the
public via a presentation posted on the Discount website and through a
conference call/webcast and a filing with the SEC. The Forecast for Advance's
fiscal year 2002 is included in this proxy statement and prospectus solely
because such information was furnished to the public in a prior disclosure.
The Forecast was based upon a standalone forecast for Advance for fiscal
2002, adjusted to include the addition of the Discount operations, and based on
certain assumptions relating to Discount's store operations (both in Florida
and outside of Florida), logistics and purchasing operations, and overhead
structure. The Forecast also included the impact of the new capital structure,
and various cost savings and operating synergy assumptions which Advance and
Discount believe the combined company may achieve as a result of the merger,
but excludes certain one-time conversion costs. The table below presents a
summary of the Forecast.
Fiscal 2002 Combined(a)
(dollars in millions, except per share data)
Sales................................................... $3,100 to $3,325
EBIT.................................................... $ 200 to $ 215
EBITDA.................................................. $ 310 to $ 325
Net Income.............................................. $ 59 to $ 67
Diluted EPS............................................. $ 1.70 to $ 1.95
Net Debt................................................ $ 960 to $ 940
--------
(a) Includes $30 million of operational synergies; excludes one-time conversion
costs of approximately $50 million to $60 million to be incurred during the
first two years.
This Forecast was prepared during the course of Advance's due diligence on
Discount and was based on a variety of assumptions, including the successful
integration of Discount's operations into Advance's business, as well as, among
other things, the related costs to implement the integration and to obtain the
cost savings and operating synergies. The assumptions used to prepare the
Forecast involve judgments with respect to, among other things, future economic
and competitive conditions, the availability of suitable real estate locations,
continued good relations with key product vendors, the timing of the closing of
the merger and future business conditions in the automotive aftermarket parts
industry, which are inherently subject to significant uncertainties and
contingencies, many of which are beyond Advance's and Discount's control. In
addition, if the merger is not consummated, the Forecast will no longer be
relevant to Advance or Discount. There can be no assurance that the assumptions
made in preparing the Forecast will prove accurate, and actual results may be
materially greater or less than those contained in the Forecast. The Forecast
herein should not be regarded as an indication that Advance, Discount or any of
their respective affiliates, advisors or representatives considered or consider
the Forecast to be a reliable prediction of future events, and the Forecast
should not be relied upon as such. None of Advance, Discount, or any of their
respective affiliates, advisors or representatives assumes any responsibility
for the validity, reasonableness, accuracy or completeness of the Forecast.
None of Advance,
42
Discount, or any of their respective affiliates, advisors or representatives is
under any obligation to or has any intention to update the Forecast at any
future time.
The Forecast was originally prepared solely for internal use and not with a
view to public disclosure and has not been prepared in compliance with the
published guidelines of the SEC or the American Institute of Certified Public
Accountants regarding projections. The Forecast included in this proxy
statement and prospectus has been prepared by, and is the responsibility of,
Advance's management. Neither Arthur Andersen LLP nor Ernst & Young LLP has
examined or compiled the Forecast and, accordingly, neither Arthur Andersen LLP
nor Ernst & Young LLP express an opinion or any other form of assurance with
respect thereto. The Arthur Andersen LLP and Ernst & Young LLP reports included
in this proxy statement and prospectus relate only to the respective historical
financial statements of Advance and Discount. Their reports do not extend to
the Forecast and should not be read to do so.
Interests of Discount's Officers and Directors in the Merger
When considering the Discount board of directors' recommendation to vote FOR
the merger agreement, Discount shareholders should be aware of interests which
some of Discount's officers and directors have in the merger that are different
from or in addition to, and may conflict with, the interests of Discount
shareholders. The Discount board of directors was aware of these interests and
specifically considered them before approving and adopting the merger
agreement. These interests are discussed below.
Stock Options and Other Stock-Based Compensation
The treatment of outstanding options held by officers and directors of
Discount is in all respects equivalent to the treatment of outstanding options
held by Discount's employees generally. Under the terms of all such options,
the merger will have the effect of accelerating in full their vesting,
including all of the options held by officers and directors of Discount.
Although Discount shareholders will become entitled to receive merger
consideration comprised of part stock of Advance and part cash as a result of
the consummation of the merger, the officers and directors, as well as all
other Discount employees holding options, will become entitled to receive all
cash for the designated value of any options with an exercise price of less
than $15.00 and will have any options with an exercise price of $15.00 or
greater converted into equivalent options of Advance. For a description of how
outstanding options to acquire Discount common stock will be treated in the
merger, see "The Merger Agreement--Treatment of Discount Stock Options in the
Merger" at page 53. As of the record date, Discount executive officers and
directors held options to purchase Discount common stock as set forth below.
Number of Unvested Options Which
Number of Shares of Discount Accelerate at the
Common Stock Subject to Options Closing of the Merger
-------------------------------- --------------------------------
Name of Officer or Exercise Price Exercise Price of Exercise Price Exercise Price of
Director Under $15.00 $15.00 or More Under $15.00 $15.00 or More
------------------ -------------- ----------------- -------------- -----------------
Peter J. Fontaine....... -0- -0- -0- -0-
William C. Perkins(1)... 100,000 -0- -0- -0-
C. Michael Moore........ 90,000 46,500 90,000 39,500
Michael D. Harrah....... 5,000 43,500 5,000 28,750
Clement A. Bottino...... 5,000 73,306 5,000 24,750
David C. Viele.......... 5,000 68,356 5,000 18,500
Tom Merk................ 5,000 38,167 5,000 28,049
C. Roy Martin........... 10,000 -0- 10,000 -0-
David P. Walling........ 1,000 4,000 1,000 1,500
Charles W. Webster,
Jr. ................... 1,000 1,000 1,000 750
Donald Olson............ 1,000 -0- 1,000 -0-
--------
(1) As of January 17, 2001, Mr. Perkins' position as an officer and director of
Discount terminated.
43
Change of Control Employment Agreements and Severance Plan
Each of C. Michael Moore, Michael Harrah, Clement Bottino, David Viele, C.
Roy Martin, Tom Merk and certain non-executive officers of Discount has a
change of control employment agreement with Discount that provides that upon
the closing of the merger each such officer is entitled to severance benefits
upon a subsequent termination or constructive termination of his employment
that occurs during a specified period following the merger, unless such
termination is by the officer for other than good reason (as defined in the
agreements) prior to one year following the change of control or is by Discount
for cause.
The extent of the severance benefits and the manner in which they are paid
are dependent on the position and tenure of the officer (which determines the
applicable employment period) and why the officer's employment was terminated.
The applicable employment period for Mr. Moore is set at thirty-six months and
the applicable employment period for each of the other officers is determined
based on a formula which gives specified credit for the executive's position
with Discount and separate credit for the executive's tenure with Discount.
If termination results from a disability occurring after the closing of the
merger, the officer's base salary and benefits continue through the balance of
the applicable employment period. If the termination is by Discount without
cause or by the officer either for good reason or after the one year
anniversary of the closing of the merger or as a result of the officer's death,
the officer is entitled to a lump sum payment equal to a specified or computed
multiple times the sum of the officer's base salary and the highest amount of
the annual incentive compensation, including annual bonus, received or
deferred, by the officer for the most recent three full fiscal years
immediately prior to the fiscal year in which the termination of employment
occurs. In the case of termination as a result of death, the multiple is
generally the number of years plus any portion remaining of the employment
period at the time of death. In the case of termination by Discount without
cause or by the officer either for good reason or after the one year
anniversary of the closing of the merger, the multiple for Mr. Moore is three
times and for each of the other officers is generally the number of years plus
any portion of a year remaining of the employment period at the time of
termination, with certain reductions if at least 12 months have passed since
the change of control. In addition, such officers would be entitled to company-
paid medical insurance benefits for one year following termination and then
employee-paid medical insurance benefits for an additional eighteen months. The
agreement with Mr. Moore provides for a payment, if necessary, intended to make
him whole for any excise tax imposed under Section 4999 of the Internal Revenue
Code of 1986, as amended, with respect to any payment or benefit that he may
receive under such agreement or with respect to the change of control.
The approximate lump sum severance payment that would be due under the
Change of Control Employment Agreements for Messrs. Harrah, Bottino, Viele,
Martin and Merk, if their employment were to be terminated without cause by
Advance immediately after the merger would be $255,400, $358,500, $379,800,
$176,800, and $247,900, respectively. The approximate lump sum severance
payment that would be due under the Change of Control Employment Agreement for
Mr. Moore, if his employment were to be terminated without cause by Advance
immediately after the merger would be $866,800, plus any applicable "gross-up"
payment required to compensate him for any excise tax imposed on him, as
discussed above.
In addition to the above benefits that may accrue upon termination of the
officer following the closing of the merger, the change of control employment
agreements provide for benefits during the officer's continued employment
following the closing of the merger. These benefits include salary protections
and provisions that entitle the officer to receive similar benefits as those
offered to other officers, including with respect to: participation in bonus
and incentive compensation plans and programs; medical, life, and other
insurance benefits; vacation; reimbursement of expenses; and indemnification
and director and officer liability insurance.
The total cost for all severance payments and benefits that would be owed
under all of these change of control employment agreements and arrangements, if
each participant's employment were to be terminated without cause immediately
after the merger, and any "gross-up" payment required to be made to Mr. Moore,
as described above, would be approximately $13.5 million.
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The change of control employment agreements also provide that for a period
of time during the continued employment of the officer following the closing of
the merger or following termination of employment of the officer, the officer
(a) will not act in any manner or capacity in or for any business entity that
competes with Discount, (b) will not divulge any confidential information of
Discount to a third party, except for the benefit of Discount or when required
by law, and (c) will not solicit or hire away any person who was an employee of
Discount on the effective date of the merger.
Supplemental Executive Profit Sharing Plan
Each of C. Michael Moore, Michael Harrah, Clement Bottino, David Viele, Tom
Merk and certain non-executive officers are participants in Discount's
supplemental executive profit sharing plan. The plan provides unfunded
retirement benefits. Under the terms of the plan, such unfunded benefits will
become 100% vested as a result of the consummation of the merger.
Separation Agreement with William C. Perkins
In connection with the departure of William C. Perkins from Discount in
January 2001, Mr. Perkins entered into a separation agreement dated January 17,
2001. The separation agreement provided for, among other items, continuation of
Mr. Perkins' salary for a period of two years following the date of separation
and the grant of 100,000 fully vested stock options with an exercise price of
$7.00 per share. In the separation agreement, Mr. Perkins provided Discount
with certain releases and agreed to certain confidentiality, non-competition
and non-solicitation provisions. Mr. Perkins also agreed to provide consulting
services to Discount for up to 20 hours per month until January 31, 2003. Under
the terms of the separation agreement, upon the consummation of the merger, the
remaining salary continuation payments will be accelerated and will become
payable in a lump sum. The approximate lump sum that would become payable to
Mr. Perkins, assuming the merger were to close in November 2001, would be
$370,000. In addition, because the option exercise price of the options granted
to Mr. Perkins is less than $15.00, Mr. Perkins' outstanding stock options will
be converted into the right to receive a total of $800,000 upon the
consummation of the merger.
Board of Directors
As a condition to the closing of the merger, Peter J. Fontaine must be
elected to the Advance board effective as of the closing date and must continue
to be elected to the Advance board until the earlier of 2004, Mr. Fontaine's
resignation from the Advance board, his removal from the Advance board for
cause, Mr. Fontaine's no longer having beneficial interest in at least 50% of
the Advance shares he acquires beneficial ownership of in the merger, or the
termination of certain voting rights of parties to the stockholders agreement
among certain of the existing stockholders of Advance. In addition, the same
stockholders agreement will be amended to provide Peter J. Fontaine and certain
entities he controls with certain piggyback registration rights as to shares of
Advance common stock received in the merger. See "Description of the Capital
Stock of Advance--Stockholders Agreement" at page 142.
Indemnification
Discount's articles of incorporation and bylaws and indemnification
agreements with its officers and directors obligate it to indemnify its
directors and certain of its officers against claims brought against them in
their capacities as such and any related expenses. In the merger agreement,
Advance has agreed to fulfill those obligations after the merger with respect
to any claims brought against the current officers and directors in respect of
periods prior to or up to six years after the merger. In addition, Advance has
agreed to maintain officer's and director's liability insurance for six years
after the merger covering periods prior to the merger, with certain
limitations.
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Voting Agreement and Option Agreement
Under the voting agreement and the option agreement, Peter J. Fontaine, who
beneficially owns approximately 24% of the Discount common stock through his
interest in Fontaine Industries Limited Partnership, has granted Advance Stores
(a) an irrevocable proxy to vote all of the partnership's shares of Discount
common stock for approval of the merger agreement and the merger, and against
any competing transaction and (b) an option to purchase all, but not less than
all of the partnership's shares under certain circumstances at a price per
share equal to $15.00 plus 25% of the amount, if any, by which the fair market
value of the per share consideration paid under an acquisition proposal (a
proposal made by a third party to acquire all of the securities or assets of
Discount) exceeds $15.00.
Accounting Treatment
The merger will be accounted for under the purchase method of accounting,
with Advance treated as the acquiror. As a result, Advance will record the
assets and liabilities of Discount at their estimated fair values at the
closing date. The estimated total excess fair value over the purchase price
will be allocated to non-current assets, primarily property and equipment. From
the date of the merger, the operating results of Discount will be combined with
the results of Advance for financial accounting purposes.
Material U.S. Federal Income Tax Consequences of the Merger
The following discussion summarizes the material United States federal
income tax consequences of the merger to holders of Discount common stock who
hold their Discount common stock as a capital asset within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended, or the Code.
Because the following discussion is a summary, it does not address all of the
United States federal income tax consequences that may be relevant to
particular shareholders in light of their individual circumstances or to
shareholders who are subject to special rules, such as financial institutions,
tax-exempt organizations, insurance companies, dealers in securities or foreign
currencies, foreign holders, persons who hold such shares as a hedge against
currency risk, or as part of a constructive sale or conversion transaction, or
holders who acquired their shares upon the exercise of employee stock options
or otherwise as compensation. Furthermore, tax consequences under state, local
and foreign laws are not addressed.
The following summary is not binding on the Internal Revenue Service. It is
based upon the Code, laws, regulations, rulings and decisions in effect as of
the date of this proxy statement and prospectus, all of which are subject to
change, possibly with retroactive effect. Also, although there is substantial
authority, involving analogous situations, supporting the conclusions reached
in the opinion, there is no specific authority that addresses the tax
consequences in a factual context that is identical in all respects to the
factual context of the merger. As a result, there is a possibility, although
relatively small, that the tax consequences as set forth in the following
summary and in the opinion described below will not be fully realized.
Holders of Discount common stock are strongly urged to consult their tax
advisors as to the specific tax consequences to them of the merger, including
the applicability and effect of federal, state, local and foreign income and
other tax laws in their particular circumstances.
Based on representations contained in representation letters provided by
Discount, Advance Auto Parts, Inc. and AAP Acquisition Corporation, all of
which must continue to be true and accurate in all material respects as of the
closing date of the merger, and customary limitations and assumptions set forth
in the opinion filed as an exhibit to the registration statement of which this
proxy statement and prospectus is a part, Trenam, Kemker, Scharf, Barkin, Frye,
O'Neill & Mullis, Professional Association, counsel to Discount, has opined
that (1) the merger between Discount and AAP Acquisition Corporation and the
contemporaneous merger of Advance Holding Corporation and Advance Auto Parts,
Inc., taken together, should be treated for U.S. federal income tax purposes as
part of an exchange subject to Section 351 of the Code and (2) the material
United States federal income tax consequences of the transaction to the United
States holders of Discount common stock should be as follows.
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Tax Consequences to Discount Shareholders. Subject to the discussion below
concerning fractional shares, Discount shareholders will recognize gain (but
not loss) measured by the lesser of (i) the excess, if any, of (x) the sum of
the fair market value (on the effective date of the merger) of Advance common
stock and the cash consideration over (y) the tax basis of their shares of
Discount common stock and (ii) the cash consideration. Such gain, if any, will
be long-term capital gain if Discount common stock was held for more than one
year at the time of the consummation of the merger. A Discount shareholder who
holds more than one block of Discount common stock (i.e. shares acquired at
different times or prices) will determine the amount of gain recognized and
loss not recognized pursuant to the merger separately with respect to each such
block of Discount common stock. For this purpose, all of the cash consideration
and Advance common stock received by a holder of Discount common stock will be
allocated proportionately among the blocks of Discount common stock surrendered
by the holder.
The aggregate tax basis of the shares of Advance common stock received by
Discount shareholders, including the fractional shares deemed to be received,
will be the same as the aggregate tax basis of the shares of Discount common
stock exchanged therefor increased by the gain recognized (as calculated above)
and decreased by the cash consideration received. The holding period of the
shares of Advance common stock received by Discount shareholders will include
the holding period of the shares of Discount common stock surrendered therefor.
Discount shareholders who receive cash with respect to fractional shares
will be treated as having received such fractional shares pursuant to the
merger and then as having sold those fractional shares in the market for cash.
Such Discount shareholders will recognize gain or loss with respect to such
fractional shares in an amount equal to the difference between the tax basis
allocated to such fractional shares (as calculated above), and the cash
received in respect thereof. Any such gain or loss will be capital gain or loss
and will constitute long-term capital gain or loss if the holding period of
such fractional shares (as determined above) exceeds one year.
Completion of the merger is conditioned upon, among other things, the
receipt by Discount of a tax opinion of Trenam, Kemker, Scharf, Barkin, Frye,
O'Neill & Mullis, P.A., dated as of the closing date of the merger, to the
effect that the exchange of Advance common stock and cash for Discount common
stock in the merger, assuming the contemporaneous merger of Advance Holding
into Advance Auto Parts, Inc., should be treated as part of an exchange subject
to Section 351 of the Internal Revenue Code. This opinion is in addition to the
opinion in this section. This opinion will be based on updated representations
made by Discount, Advance Stores, Advance Holding and Advance Auto Parts, Inc.
to be delivered at the time of closing, all of which must continue to be true
and accurate in all material respects as of the closing, and on customary
limitations and assumptions, including that the transaction will be completed
according to the terms of the merger agreement. An opinion of counsel
represents counsel's best legal judgment and is not binding on the Internal
Revenue Service or any court.
No ruling has been or will be sought from the Internal Revenue Service as to
the United States federal income tax consequences of the merger.
Backup Withholding. Noncorporate holders may be subject to backup
withholding at a rate of 31% on payments of cash consideration including as to
cash with respect to fractional shares. Backup withholding will not apply,
however, to a stockholder who furnishes a correct taxpayer identification
number or certificate of foreign status and makes any other required
certification or who otherwise is exempt from backup withholding. Generally, a
Discount shareholder will provide such certification on Form W-9 (Request for
Taxpayer Identification Number and Certification) or on the appropriate Form W-
8 (Certificate of Foreign Status).
Reporting Requirements. Each Discount shareholder will be required to retain
records and file with its U.S. federal income tax return a statement setting
forth certain facts relating to the merger. It is also expected that such
shareholders will be asked to indicate in the letter of transmittal their tax
basis in the shares surrendered by them pursuant to the merger.
47
Tax Consequences to Discount. No income, gain or loss will be recognized by
Discount pursuant to the merger.
Tax Consequences of an Investment in Advance Common Stock. Any cash
dividends that are paid in respect of the Advance common stock, to the extent
paid out of Advance Auto Parts, Inc.'s current or accumulated earnings and
profits, will be taxable as ordinary income. Corporate stockholders of Advance
Auto Parts, Inc. generally will qualify for the intercorporate dividends-
received deduction with respect to such dividends, subject to a minimum holding
period and other applicable requirements. To the extent that Advance Auto
Parts, Inc. does not have sufficient current or accumulated earnings and
profits, all or a portion of any distribution made with respect to Advance
common stock in any particular year will not qualify as dividends for United
States federal income tax purposes and, as a result, will not be eligible for
the dividends received deduction. A distribution in respect of the Advance
common stock that does not constitute a dividend for United States federal
income tax purposes will represent a non-taxable distribution to the extent of
the stockholder's basis in Advance common stock (correspondingly reducing such
stockholder's basis in such shares of stock) and, to the extent such
distributions exceed the stockholder's basis in such stock, as capital gain.
Delisting and Deregistration of Discount Common Stock
Discount common stock is currently listed on the New York Stock Exchange
under the symbol "DAP." Upon completion of the merger, Discount common stock
will be delisted from the NYSE and deregistered under the Exchange Act.
Regulatory Matters
Advance and Discount must furnish information and materials to the Antitrust
Division of the United States Department of Justice (known as the DOJ) and the
Federal Trade Commission (known as the FTC) pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, and wait a specified period of time before
they can complete the merger. Advance and Discount filed pre-merger
notification forms with the DOJ and the FTC on August 17, 2001, and expiration
of the HSR waiting period occurred on September 18, 2001.
Notwithstanding the expiration of the waiting period, at any time before or
after the completion of the merger, the FTC or the Antitrust Division of the
DOJ could take such action under the antitrust laws as it deems necessary or
desirable to protect the public's interest. For example, they could seek to
enjoin the consummation of the merger or require the divestiture of assets or
businesses of Advance or Discount. State governmental officials and private
parties may also bring actions under antitrust laws under certain
circumstances. There can be no assurance that a challenge to the merger on
antitrust grounds will not be made or if such challenge is made, that it would
not be successful.
Advance and Discount are not aware of any other governmental or regulatory
approvals required for consummation of the merger, other than compliance with
federal securities laws and applicable securities laws and "blue sky" laws of
various states.
Restrictions on Sales by Discount Affiliates
The shares of Advance common stock that will be issued in the merger will be
registered under the Securities Act and will be freely transferable under the
Securities Act, except for shares of Advance common stock issued to any person
deemed to be an "affiliate" of Discount at the time of the special meeting.
Persons who may be deemed to be affiliates of Discount include individuals or
entities that directly or indirectly, through one or more intermediaries,
controls, or is controlled by, or is under common control with Discount. These
entities and individuals may include some of its officers and directors, as
well as principal stockholders. Any person deemed to be an affiliate of
Discount at the time of the special meeting may only sell their shares of
Advance common stock acquired in the merger pursuant to:
. an effective registration statement under the Securities Act covering
the resale of those shares;
. an exemption under paragraph (d) of Rule 145 under the Securities Act;
or
. any other applicable exemption under the Securities Act.
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Advance's registration statement, of which this proxy statement and prospectus
forms a part, does not cover the resale of shares of Advance common stock to be
received by affiliates of Discount in the merger.
Financing Commitments
In connection with the merger, Advance Stores has secured financing
commitments to provide the funds necessary to pay the cash portion of the
merger consideration to be paid to Discount shareholders and in-the-money
option holders, refinance the existing senior credit facilities of Advance
Stores ($285.3 million at July 14, 2001), repay Discount's senior indebtedness
($210.8 million at August 28, 2001 plus $6.3 million in debt prepayment
premiums), purchase Discount's Gallman distribution facility from the lessor
(for a purchase price of approximately $34 million), and pay approximately $35
million in related fees and expenses. In order to finance these obligations and
its ongoing operations, Advance Stores has received a binding commitment,
subject to customary conditions, for a senior secured credit facility
consisting of $485 million of term loan facilities and a $160 million revolving
credit facility (a portion of which can be used for the issuance of letters of
credit). Upon the closing of the merger, Advance Stores will borrow the entire
$485 million of the term loans and anticipates making an initial borrowing of
approximately $9 million under the revolving credit facility. In addition,
Advance Stores expects to have approximately $18 million in letters of credit
outstanding at the closing of the merger, which will reduce availability under
the revolving credit facility to approximately $133 million. The undrawn
amounts under the revolving credit facility will be available for working
capital and other general corporate purposes. In addition, Advance Stores
completed an offering of its senior subordinated notes, which resulted in gross
proceeds of approximately $186 million, before deducting commissions and
expenses related to that offering. The proceeds from that offering are
currently being held in escrow until the closing of the merger, at which point
the escrowed funds will be released to provide a portion of the funds needed to
complete merger.
Senior Secured Credit Facilities
Subject to the terms of a commitment letter, dated August 7, 2001, among
Advance Stores and JP Morgan Securities Inc., The Chase Manhattan Bank (Chase),
Credit Suisse First Boston (CSFB) and Lehman Commercial Paper Inc. (LCPI),
Chase, CSFB and LCPI have agreed to provide the following senior secured credit
facilities, a portion of which are expected to be syndicated to other lending
institutions before the closing of the merger:
. a tranche A term loan facility of $180 million;
. a tranche B term loan facility of $305 million; and
. a revolving credit facility of $160 million, including a letter of
credit subfacility.
The senior secured credit facilities will be jointly and severally
guaranteed by Advance and all of Advance Stores' existing and future domestic
subsidiaries (including Discount and its subsidiaries) and will be secured by
substantially all of Advance Stores' assets, the assets of its existing and
future domestic subsidiaries (including Discount and its subsidiaries), as well
as the assets of Advance. The credit facility requires Advance Stores to meet
financial ratios and benchmarks and to comply with other restrictive covenants.
The tranche A term loan facility will mature on November 30, 2006 and, under
the terms of the commitment letter, is specified to amortize by $11 million at
the end of year one, and then in semi-annual installments aggregating $27
million in year two, $44 million in year three, and $49 million in each of
years four and five. The tranche B term loan facility will mature on November
30, 2007 and, under the terms of the commitment letter, is specified to
amortize in semi-annual installments of $2.5 million and a payment of
$280 million on the final payment date. The revolving credit facility will
mature on November 30, 2006.
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Borrowings under the credit facilities will bear interest at varying rates
based on, at Advance Stores' option:
. in the case of the tranche A facility and the revolving facility, either
an adjusted LIBOR rate with a floor of 3.00% or an alternative base
rate, in each case, plus a margin tied to Advance's Leverage Ratio (as
defined in the senior credit facilities); and
. in the case of the tranche B facility, either adjusted LIBOR plus 4.00%
or the alternate base rate plus 3.00%.
The alternate base rate will be equal to the higher of (1) Chase's prime rate,
(2) the federal funds effective rate plus 1/2 of 1% or (3) the base CD rate
plus 1%.
The senior secured credit facilities will include affirmative, negative and
financial covenants and events of default customary for credit facilities of a
size and type similar to the senior secured credit facilities.
The obligations of Chase, CSFB and LCPI to provide the financing
contemplated by the commitment letter are subject to, among other things:
. the merger and reincorporation merger shall be consummated
simultaneously with the initial borrowing under the senior credit
facility;
. receipt of pro forma consolidated balance sheets of Advance, which shall
not be inconsistent with forecasts previously provided;
. reasonable satisfaction as to the amount and nature of any environmental
and employee health and safety exposures to which Discount and its
subsidiaries may be subject and the plans of Advance to deal with such
exposure;
. the absence of litigation or administrative proceeding that would
reasonably be expected to have a material adverse effect of the
business, assets, operations, prospects or condition of Advance and its
subsidiaries;
. reasonable satisfaction with the results of Chase's examination of the
inventory of Advance and its subsidiaries and the systems of Advance
Stores providing for the monitoring and reporting of the inventory;
. receipt of satisfactory title insurance policies, current certified
surveys, evidence of zoning and other legal compliance, certificates of
occupancy and other permits, legal opinions and other customary
documentation;
. the absence of any material adverse change in, or any material adverse
condition affecting, the business, assets, operations, prospects or
conditions (financial or otherwise) of Advance or Discount, together
with their subsidiaries;
. receipt by Advance Stores of a rating of its senior subordinated debt
from Moody's Investors Service, Inc. of BB or better and a rating from
Standard & Poor's Rating Service of at least B- or better, with each
rating having an outlook of "stable" or better; and
. other conditions customary in a facility of this type.
Senior Subordinated Notes of Advance Stores
In addition to borrowings under the senior secured credit facilities,
Advance Stores completed an offering of its senior subordinated notes on
October 31, 2001, which resulted in gross proceeds of approximately
$186 million, before deducting commissions and expenses related to that
offering. The proceeds from that offering are currently being held in escrow
until the closing of the merger, at which point the escrowed funds will be
released to provide a portion of the funds needed to complete merger. The notes
are unsecured
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obligations of Advance Stores and will mature in 2008. The indenture governing
the notes contains affirmative and negative covenants applicable to Advance
Stores and its subsidiaries that are customary for these types of securities.
The commitment to provide the senior secured credit facility will expire if
the merger is not completed by December 31, 2001. In addition, the senior
subordinated notes issued by Advance Stores on October 31, 2001 are subject to
redemption in the event the merger is not completed on or prior to December 31,
2001 or, if in Advance Stores' sole judgment, the merger will not be completed
by December 31, 2001. In the event of such a redemption, the offering proceeds
currently being held in escrow, plus additional amounts placed into the same
escrow account by Advance Stores, will be used to fund the redemption.
51
THE MERGER AGREEMENT
The following is a brief summary of the significant provisions of the merger
agreement, a copy of which is attached to this proxy statement and prospectus
as Annex A. We urge you to read the complete merger agreement for the precise
terms of the merger agreement and other information that may be important to
you.
Structure of Merger and Certain Related Transactions
At the time the merger becomes effective, a newly formed, wholly owned
subsidiary of Advance Auto Parts, Inc. will merge with and into Discount, with
Discount continuing as the surviving corporation. Contemporaneously with the
merger, Advance Holding will reincorporate into Delaware by merging with and
into Advance Auto Parts, Inc., a Delaware corporation. Immediately after the
merger, Advance Auto Parts, Inc. will contribute the capital stock of Discount
received in the merger to Advance Stores, and Discount will become a wholly
owned subsidiary of Advance Stores.
Merger Consideration
Discount shareholders will receive in the merger, for each outstanding share
of Discount common stock, $7.50 in cash and 0.2577 of a share of Advance common
stock.
All per-share consideration may be adjusted if Discount or Advance engages
in any transaction that has the effect of changing the outstanding shares of
Discount or Advance, such as a reclassification, recapitalization or stock
split. In that case, the shares of Advance common stock to be received by
Discount's shareholders will be adjusted to preserve the merger consideration
provided for under the merger agreement.
Advance will not issue fractional shares in the merger. As a result, the
total number of shares of Advance common stock that each Discount shareholder
receives in the merger will be rounded down to the nearest whole number. Each
Discount shareholder will also receive a cash payment in lieu of a fractional
share equal to the fractional share multiplied by $29.11.
Post Closing Capitalization
Following the merger, Advance Auto Parts, Inc. will have approximately 32.6
million shares of common stock outstanding. Discount shareholders will own
approximately 13.2% of the outstanding common stock of Advance. The remaining
approximately 86.8% of Advance's outstanding common stock will be owned by the
current common shareholders of Advance Holding or their transferees as of
immediately prior to the merger.
The calculations contained in the preceding two paragraphs do not take into
account the exercise of any additional outstanding stock options or the
conversion of any convertible securities that would result in the issuance of
the common equity of any of the companies involved.
Effective Time of the Merger
Promptly after the satisfaction or waiver of the conditions of the merger in
the merger agreement, Advance will file articles of merger with the Department
of State of the State of Florida. When this filing has been made, a newly
formed subsidiary of Advance will be merged with and into Discount, and the
separate corporate existence of the merger subsidiary will cease, and Discount
will continue as the surviving corporation in the merger.
Directors and Officers of Discount
Immediately following the merger, the sole director of Advance's merger
subsidiary (Lawrence P. Castellani) will be appointed as the sole director of
Discount. Immediately following the merger, the officers
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of Discount immediately prior to the merger will continue as the officers of
Discount, specifically Peter J. Fontaine (Chief Executive Officer), C. Michael
Moore (Executive Vice President--Finance, Chief Financial Officer and
Secretary), Clement A. Bottino (Vice President--Human Resources), Michael D.
Harrah (Vice President--Information Systems), C. Roy Martin (Vice President--
Supply Chain and Logistics), Thomas A. Merk (Vice President--Sales and
Marketing), David C. Viele (Vice President--Purchasing), Joe Villavicancio
(Vice President--Operations), Doug Snyder (Vice President--Operations) and
Anthony Bottino (Vice President--Operations).
Treatment of Discount Stock Options in the Merger
At or immediately prior to the effective time of the merger, each
outstanding option to purchase shares of Discount common stock with a per share
exercise price of less than $15.00 per share will be cancelled and converted
into the right to receive cash for each share underlying the option, whether or
not then exercisable, equal to $15.00 minus the per share exercise price of the
shares purchasable under the option.
Each outstanding option to purchase shares of Discount common stock, whether
or not then exercisable, with a per share exercise price equal to or greater
than $15.00 per share at the effective time of the merger will be converted
into an option to acquire, on substantially the same terms and conditions as
were applicable under such fully converted option, and which shall be
considered issued under Advance's 2001 Executive Stock Option Plan, the number
of shares of Advance common stock determined by multiplying the number of
shares of Discount common stock that were purchasable immediately prior to the
effective time of the merger upon the exercise of such fully assumed option by
0.5154 (the "Option Exchange Ratio") at an exercise price per share equal to
(a) the exercise price per share of Discount common stock immediately prior to
the effective time of the merger under such fully converted option divided by
(b) the Option Exchange Ratio; provided that with respect to a fully converted
option with the same exercise price, the number of shares of Advance common
stock to be represented by the fully converted option shall be computed on an
aggregate basis so as to create options for whole shares of Advance common
stock with any then remaining fractional share rounded up to the nearest whole
share.
Shortly after the effective time of the merger, Advance will file a
registration statement on Form S-3 or S-8 to register the shares underlying the
fully converted options.
Exchange Agent; Procedures for Exchange of Certificates
Advance will appoint an exchange agent to act as exchange agent for the
payment of merger and option consideration upon surrender of the Discount
common stock certificates and agreements for the Discount options with an
exercise price of less than $15.00 per share after the merger. Once the merger
is complete, Advance will deposit with the exchange agent the certificates
representing Advance common stock and the aggregate cash consideration,
including the cash to be provided instead of fractional shares, for issuance in
exchange for Discount common stock and options converted into the right to
receive cash payment.
Promptly after the closing of the merger, the exchange agent will mail to
each holder of Discount common stock or options converted into the right to
receive a cash payment a letter of transmittal for use in the exchange and
instructions explaining how to surrender certificates or option agreements to
the exchange agent. Holders who surrender their certificates or option
agreements to the exchange agent, together with a properly completed letter of
transmittal, will receive the appropriate merger or option consideration.
Holders of unexchanged stock certificates or option certificates or agreements
will receive any dividends or other distributions payable by Advance after the
merger only after their certificates or option certificates or agreements are
surrendered. Discount shareholders and option holders should not return stock
certificates or option certificates or agreements with the enclosed proxy card.
No certificates or scrip representing Advance common stock will be issued
upon surrender for exchange of Discount certificates. Cash will be issued
instead of fractional shares of Advance common stock otherwise issuable upon
surrender of those certificates equal to the fractional share multiplied by
$29.11.
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If Discount stock certificates or option certificates or agreements have
been lost, stolen or destroyed, Discount shareholders or option holders will
only be entitled to obtain Advance common stock and the cash consideration, or
cash consideration in the case of option holders, by providing an affidavit of
loss and, if required by Advance, posting a bond in an amount sufficient to
protect Advance against claims related to the Discount certificates or option
certificates or agreements.
Representations and Warranties
Representations and Warranties
The merger agreement contains representations and warranties of each of
Discount, Advance, Advance Holding, Advance Stores and Advance Merger Sub, many
of which are qualified by a materiality threshold specified in the merger
agreement, relating to:
. due organization, good standing and existence;
. capital structure and capital structure of subsidiaries;
. corporate power and authority to execute, deliver and perform its
obligations under the merger agreement;
. authorization, execution, delivery, performance and enforceability of
the merger agreement;
. required consents, approvals, orders and authorizations of governmental
entities relating to execution and delivery of the merger agreement and
related matters;
. absence of material conflicts and violations of organizational documents
and contracts and with applicable law relating to the execution and
delivery of the merger agreement and related matters;
. required SEC filings, accuracy of information contained in SEC filings
and financial statements filed with the SEC;
. filing of tax returns and payment of taxes;
. absence of any undisclosed suits, claims or judgments or injunctions or
notice of any suits or claims;
. disclosure of material employee benefit plans, required employee plan
filings, absence of undisclosed employee benefits and absence of claims
or liabilities involving employee benefit plans;
. compliance with laws, no conflicts with laws and receipt of necessary
governmental approvals and permits;
. absence of collective bargaining agreements or threatened material labor
disputes;
. accuracy of information supplied for use in the registration statement,
this proxy statement and prospectus and in any other regulatory filings;
. absence of liabilities under environmental laws and compliance with
environmental laws;
. absence of any material undisclosed liabilities;
. absence of undisclosed brokers' and finders' fees with respect to the
merger; and
. absence of undisclosed changes and conduct out of the ordinary course of
business.
Additional Representations and Warranties by Advance
Advance, Advance Holding, Advance Stores and Advance Merger Sub made
additional representations and warranties in the merger agreement relating to,
among other things:
. receipt of binding written commitments to obtain funds necessary to pay
the merger consideration and option consideration, repay or refinance
credit facilities of Advance Stores and indebtedness of Discount and pay
related fees and expenses; and
. absence of negotiations for the acquisition of any material interests of
any other business.
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Additional Representations and Warranties by Discount
Discount made additional representations and warranties in the merger
agreement relating to, among other things:
. organization, good standing and existence of Discount's subsidiaries;
. absence of material changes or events concerning Discount and its
subsidiaries since May 29, 2001;
. Discount's owned and leased real property and the condition of its real
property;
. Discount's material intellectual property and the absence of any
material infringement claims;
. Discount's material contracts and the absence of any material defaults
under the contracts;
. maintenance of insurance and absence of defaults and notices of
cancellations or non-renewals;
. termination of discussions and negotiations regarding acquisition
proposals;
. receipt of an opinion from Discount's financial advisor;
. required actions necessary to satisfy Florida anti-takeover laws and no
violation of Discount's stockholder rights agreement;
. absence of undisclosed non-competition agreements;
. absence of receipt of any notice of cancellation of material supplier or
vendor relationships; and
. absence of undisclosed arrangements or agreements with affiliates of
Discount.
Definition of Material Adverse Effect
A material adverse effect, when used with respect to Advance or to Discount
after giving effect to any benefits available in connection with the
availability of any insurance, contractual reimbursement or indemnity, is
defined to mean a change in or effect on the business of Advance or Discount
that is or is reasonably likely to be materially adverse to the results of
operations, properties, financial condition, assets or business of Advance and
its subsidiaries or Discount and its subsidiaries, in each case taken as a
whole with their parent. Exceptions are provided to the extent that such change
or effect results from changes in general economic conditions in the countries
in which Advance, Discount, or their subsidiaries operate, sell or source
products or from matters generally affecting the industries in which Advance,
Discount or any of their subsidiaries operate.
No Solicitation
Discount has agreed to terminate and to cause its subsidiaries and
affiliates and their respective officers, directors, employees, investment
bankers, attorneys, accountants and other advisors, to terminate activities,
discussions or negotiations relating to any acquisition proposal that was
ongoing at the time of the signing of the merger agreement. Discount also has
agreed, except as described below, that it will not, and will not authorize or
permit its subsidiaries and affiliates and their respective officers,
directors, affiliates, employees, attorneys, accountants, financial advisors,
independent representatives, independent agents, or any other advisors or
representatives to, solicit, initiate, encourage, or take any action to
facilitate (including by way of furnishing information or engaging in
discussions or negotiations) any inquiries, proposals or offers that constitute
an acquisition proposal or any inquiries, proposals or offers that could
reasonably be expected to lead to an acquisition proposal. An "acquisition
proposal" means a proposal or offer to acquire any assets, business or
properties of Discount or its subsidiaries other than in the ordinary course of
business or as otherwise permitted by the merger agreement, or any capital
stock of Discount or its subsidiaries, whether by merger, share purchase or
exchange, reorganization, recapitalization, liquidation, dissolution,
consolidation, business combination, purchase of assets, tender offer, exchange
offer or similar transaction, whether for cash, securities or any other
consideration.
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However, prior to the approval of the merger and merger agreement by
Discount's shareholders, Discount may furnish non-public information to, and
enter into discussions or negotiations with, any person that makes an
unsolicited written acquisition proposal if:
. after consultation with its outside legal counsel, the Discount board
determines in good faith that failure to do so is necessary for the
Discount board to comply with its fiduciary duties to Discount
shareholders under applicable law;
. the Discount board determines in good faith that the proposal is not
subject to a financing contingency that is more uncertain or conditional
than the financing applicable to the merger and merger agreement;
. the proposal if consummated would constitute a superior proposal; and
. Discount enters into a confidentiality agreement with the person making
the proposal.
A "superior proposal" means any bona fide unsolicited written proposal made
by a third party to acquire all or substantially all the equity securities or
assets of Discount, pursuant to a tender offer or exchange offer, a merger, a
consolidation, a liquidation or dissolution, a recapitalization, a sale of all
or substantially all of its assets or a similar transaction, (i) on terms which
the board of directors of Discount determines in its good faith judgment is
more favorable from a financial point of view for the holders of Discount
common stock than the merger, after consultation with its outside counsel and
financial advisor, taking into account all the terms and conditions of such
proposal and the merger agreement (including any proposal in the form of a firm
commitment by Advance to amend the terms of the merger) and (ii) that is not
subject to a financing contingency that is more uncertain or conditioned than
the financing contingency applicable to the merger that is contained in the
financing commitments of Advance and is reasonably capable of being completed,
taking into account all financial, regulatory, legal and other aspects of such
proposal and the person making such proposal.
The board of directors of Discount may not withdraw, modify or qualify (or
propose to withdraw, modify or qualify) the Discount recommendation of the
approval of the merger agreement and merger to Discount's shareholders in any
manner adverse to Advance, or take any action or make any statement in
connection with the Discount special meeting of shareholders inconsistent with
the Discount recommendation. However, at any time prior to the Discount
shareholder vote on the merger agreement and the merger, the board of directors
of Discount may, in response to a superior proposal that was unsolicited and
did not otherwise result from a breach of Discount's obligations to Advance
under the merger agreement, withdraw, modify or qualify the Discount
recommendation if the board of directors of Discount determines, in good faith,
after consultation with outside counsel, that its fiduciary obligations require
it to do so.
For any superior proposal that Discount receives, Discount agreed to notify
Advance of the identity of the entity making the proposal and the material
terms of the proposal and to provide Advance with a copy of any written
proposal. Additionally, Discount agreed to inform Advance of, and provide
Advance with copies of, any material changes to the proposal. Discount agreed
not to terminate the merger agreement nor enter into any agreement regarding a
superior proposal unless Discount furnishes to Advance prior written notice of
its intent to terminate the merger agreement and causes its financial and legal
advisors to negotiate with Advance in an effort to adjust the terms of the
merger agreement to enable Discount to proceed with the merger.
If Discount notifies Advance of any superior proposal after a rating date,
Advance shall have the right to call and hold a special meeting of Discount
shareholders, in which event (i) Discount shall not have the right to terminate
the merger agreement based on a desire to accept the superior proposal and (ii)
Advance shall not have the right to terminate the merger agreement due to (x)
any approval or recommendation by the board of directors of Discount of such
superior proposal reasonably considered necessary as a result of such superior
proposal or adoption of a resolution to such effect, (y) any withdrawal or
modification or qualification of its recommendation or qualification of its
approval of the merger agreement, or the merger by the board of directors of
Discount in a manner adverse to the interests of Advance reasonably considered
necessary as a
56
result of such superior proposal or adoption of a resolution to such effect, or
(z) any failure to include in the proxy statement and prospectus the
recommendation without adverse modification or qualification that the
stockholders of Discount approve the merger agreement, and the merger
reasonably considered necessary as a result of such superior proposal. A
"rating date" means the earlier of (A) thirty (30) days after the date of the
merger agreement or (B) the date on which Advance delivers to Discount copies
of letters from each of Standard & Poors Rating Service and Moody's Investors
Service, Inc. which confirm that, with respect to Advance Stores' senior
subordinated facility, Advance Stores' senior subordinated debt, on a pro forma
basis, after giving effect to the financing transactions, has been issued
ratings from each of S&P and Moody's, with such ratings (1) being B- or better,
in the case of S&P, and B3 or better, in the case of Moody's and (2) each
having an "outlook" of stable or better.
If Discount enters into an agreement with respect to a superior proposal
with a third party, it has agreed to pay to Advance Stores a $9.0 million
termination fee plus reimburse Advance for its expenses of up to $7.0 million.
Conduct of the Business
Conduct of Business by Discount
Until the earlier of the termination of the merger agreement or the
effective time of the merger, Discount generally agreed to:
. carry on its business in the usual, regular and ordinary course in
substantially the same manner as previously conducted;
. pay its debts and taxes when due;
. pay or perform its other obligations when due, and use commercially
reasonable efforts to preserve intact its present business organization;
. keep available the services of its present officers and key employees;
and
. preserve its relationships with customers, suppliers, distributors, and
others having business dealings with it.
Discount also generally agreed that it would not, without the written
consent of Advance:
. declare or pay any dividends on or make any other distributions in
respect of any of its capital stock, or split, combine or reclassify any
of its capital stock;
. grant any options to acquire securities of Discount or accelerate or
change the period of vesting of any outstanding Discount options or
authorize cash payments in exchange for any Discount options or purchase
any shares of Discount common stock;
. issue, deliver or sell any shares of its capital stock or securities
convertible into shares of its capital stock, or subscriptions, rights,
warrants or options to acquire any such shares or other convertible
securities;
. acquire or agree to acquire by merging or consolidating with, or by
purchasing any interest in or assets of, any business or any other
business organization or division, other than in the ordinary course of
business;
. sell, lease, license, mortgage or otherwise encumber or otherwise
dispose of any of its material properties or assets, except as required
to carry on Discount's business in the usual, regular and ordinary
course;
. (i) increase or agree to increase the compensation payable or to become
payable to its officers or employees, except for increases in salary or
wages of non-officer employees in accordance with past
57
practices and increases disclosed in a schedule to the merger agreement,
(ii) grant any additional severance or termination pay to, or enter into
or amend any employment, retention, change of control or severance
agreements or arrangements with, any employees or officers, (iii) enter
into any collective bargaining agreement, (iv) establish, adopt, enter
into or amend any bonus, profit sharing, thrift, compensation, stock
option, restricted stock, pension, retirement, deferred compensation,
employment, termination, severance, retention, change of control or
other plan, trust, fund, policy or arrangement for the benefit of any
directors, officers or employees, (v) pay any bonuses to any directors,
officers or employees, except for certain performance-based bonuses
described in the merger agreement, or (vi) elect or appoint any new
director or hire any new officer level employee, except in certain
instances where such person is engaged as a replacement for a director
or officer who has resigned;
. amend or propose to amend the charter documents of Discount or its
subsidiaries;
. incur any indebtedness for borrowed money or guarantee any indebtedness
of another person;
. initiate, compromise, or settle any material litigation or arbitration
proceeding;
. enter into, or otherwise modify, amend or violate in any material
respect, or terminate any Discount material contract or waive, release
or assign any material rights or claims;
. make or change any material tax election, settle, adopt or change any
material accounting method in respect of taxes (except as required by
GAAP), enter into any closing agreement, consent to any extension or
waiver of the limitation period applicable to any claim or assessment in
respect of any material taxes, or compromise any material tax liability
or claim or amend any material tax return;
. materially change its methods of accounting (except as required by
GAAP);
. make or commit to make any capital expenditures, except to the extent
consistent with and within the limits of Discount's capital expenditures
budget;
. adopt, implement or amend any stockholder rights plan that could have
the effect of impeding or restricting the consummation of the merger and
related transactions;
. open any new store or enter into or commit to enter into any lease or
purchase contract related to the opening of a new store except as
disclosed by Discount;
. materially change the amount of any insurance coverage provided by
existing insurance policies;
. fail to give all notices and other information required to be given by
Discount or any of its subsidiaries to the employees of Discount or any
of its subsidiaries, any collective bargaining unit representing any
group of employees of Discount, and any applicable governmental
authority under the WARN Act, or other governmental act or regulation in
connection with the transactions provided for in the merger agreement
where the effect of such failure would be reasonably likely to have a
material adverse effect;
. revalue any of its assets, other than in the ordinary course of
business, except to the extent required by GAAP; or
. take, or agree in writing or otherwise to take any of the above listed
actions.
Conduct of Business by Advance
Until the earlier of the termination of the merger agreement or the
effective time of the merger, Advance generally agreed to:
. carry on its business in the usual, regular and ordinary course in
substantially the same manner as previously conducted;
. pay its debts and taxes when due;
58
. pay or perform its respective other obligations when due;
. use commercially reasonable efforts to preserve intact its present
business organization; and
. preserve its relationships with customers, suppliers, distributors and
others having business dealings with it.
Advance also generally agreed that it would not, without the written consent
of Discount:
. grant any options to acquire securities of Advance or accelerate or
change the period of vesting of any options issued under any of the
Advance option plans or authorize cash payments in exchange for any
Advance options or purchase any shares of Advance common stock, subject
to certain exceptions set forth in the merger agreement;
. issue, deliver or sell any shares of its capital stock or securities
convertible into shares of its capital stock, or subscriptions, rights,
warrants or options to acquire any such shares or other convertible
securities, subject to certain exceptions set forth in the merger
agreement;
. enter into any transaction or series of related transactions with any
affiliate unless such transaction is entered into and consummated on
terms that are no less favorable to Advance than are available from an
unaffiliated third party and is not otherwise prohibited;
. materially change its methods of accounting as in effect on April 21,
2001, except as required by GAAP;
. adopt, implement or amend any stockholder rights plan that could have
the effect of impeding or restricting the consummation of the merger and
related transactions;
. (i) amend its certificate of incorporation or bylaws in any manner that
is material and adverse to Discount's stockholders, (ii) amend the terms
of or reclassify, or effect a stock split or combination with respect
to, any of its capital stock, distribute to stockholders any material
assets or securities of Advance or any of its respective subsidiaries,
or, except in connection with the financing of this transaction or as
necessary to consummate another permitted acquisition, otherwise
materially alter its capital structure, (iii) pay any dividend to
stockholders of Advance, or (iv) adopt a plan of liquidation or
dissolution or sell all or substantially all of its assets;
. permit Advance to have any operations or incur any liabilities, other
than liabilities arising out of the organization of the respective
companies and liabilities incurred in connection with the transactions
contemplated by the merger agreement; or
. take, or agree in writing or otherwise to take any of the above listed
actions.
Meeting of Discount Shareholders; Obligations to Recommend
Discount has agreed to take all actions necessary to convene a meeting of
its shareholders and to consider and vote upon the approval of the merger
agreement and the merger. The Discount board has agreed to recommend to its
shareholders the adoption and approval of the merger agreement and the merger,
subject to its fiduciary duties. The Discount board is not permitted to
withdraw or modify its recommendation unless:
. Discount has complied with the restrictions of solicitation in the
merger agreement;
. there is a pending superior proposal; and
. the Discount board determines in good faith that, after consultation
with its legal counsel, the action is necessary to comply with its
fiduciary duties.
Filings; Other Actions
Advance and Discount have agreed to take all actions, to resist any private
party action (unless determined by the parties that it would reasonably be
likely to have a material adverse effect on the parties after the
59
merger), to make all necessary government filings, including those under
federal securities laws and U.S. antitrust laws, to contest any private party
order, and to use all reasonable efforts to obtain all consents and approvals
required in connection with the closing of the transactions contemplated by the
merger agreement. Discount has also agreed, if requested by Advance, to use its
reasonable efforts to obtain any material designated consents, and Discount may
not amend any material designated consents without Advance's prior written
consent.
If a private party action or order is reasonably likely to have a material
adverse effect on the parties after the merger, each party may terminate the
merger agreement. Advance shall not be required to divest any of Discount's
assets or take any actions if any antitrust authorities seek an injunction to
enjoin the merger.
Proxy Statement; Registration Statement
Advance and Discount agreed to cooperate in the preparation and filing of
the proxy statement and prospectus.
Expenses
Whether or not the merger is consummated, all expenses incurred in
connection with the merger agreement and the transactions contemplated by the
merger agreement will be paid by the party incurring the expenses, except as
described under the section of this proxy statement and prospectus entitled
"The Merger Agreement--Termination Fees and Expenses."
Certain Employee Benefit Plan Obligations of Advance
For 12 months following the merger, Advance agreed to provide the employees
of Discount with benefits (other than stock and stock-based benefits and the
value thereof) that are in the aggregate substantially equivalent to or more
favorable than the benefits provided to Discount employees immediately before
the effective time of the merger by Discount, other than any changes in benefit
plans required by law or in the ordinary course of business of Advance.
Advance has agreed to honor all written individual employment, termination,
severance, bonus, change in control, post-employment and other written
compensation agreements, arrangements and plans between a Discount employee and
Discount existing prior to the execution of the merger agreement and all
legally imposed obligations relating to employment matters under applicable
law.
No employee will have the right to continued employment by Advance, Discount
or any of its subsidiaries for any period of time after the closing of the
merger that is not otherwise required by law or contract.
To the extent that any employee of Discount or any of its subsidiaries
becomes a participant in any employee benefit plan maintained by Advance or any
of its subsidiaries, Advance agreed to give the Discount employees full credit
for their service with Discount for the purposes of eligibility, vesting,
benefit accrual and other benefits under Advance's employee benefits plans to
the same extent recognized by Discount immediately prior to the closing of the
merger.
Cooperation and Access Between Advance and Discount
Prior to the effective time of the merger, and subject to applicable law,
Advance and Discount have agreed to confer on a regular basis and to provide
each other notice in connection with SEC and government filings.
Advance and Discount have agreed to provide designated representatives of
the other party, upon reasonable notice, and subject to any relevant antitrust
laws, full access within reasonable times in a manner that will not materially
disrupt their business to all of their properties, officers, books, records and
contracts until the closing of the merger.
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Notification of Specified Events
Advance and Discount have agreed to promptly notify each other of any notice
from any person alleging their consent is required in connection with the
merger, any notice from any governmental entity in connection with the merger
or a party's SEC filings, or any suits pending or threatened against the party
relating to the merger.
Conditions to Obligation of Each Party to Complete the Merger
Advance's and Discount's obligations to complete the merger are subject to
the satisfaction of the following conditions, as applicable:
. The holders of a majority of the shares of Discount's common stock will
have duly adopted the merger agreement and the merger;
. The waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act will have expired or terminated (this condition has been satisfied);
. All authorizations, consents, orders or approvals of, or declarations or
filings with, or expirations of waiting periods imposed by, any
governmental entity, the failure of which to file, obtain or occur is
reasonably likely to have a material adverse effect, have been filed,
been obtained or occurred;
. No governmental entity or federal, state or foreign court of competent
jurisdiction shall have issued or entered any government order or
statute, rule, or regulation which has the effect of making the merger
illegal or otherwise prohibiting consummation of the merger;
. The registration statement, of which this proxy statement and prospectus
are a part, will have been declared effective and the SEC will not have
issued any stop order suspending its effectiveness, nor will it have
started or threatened any proceedings for that purpose;
. The Advance common stock to be issued in connection with the merger and
upon exercise of the options will have been approved for listing on the
NYSE or Nasdaq;
. At the effective time of the merger, Advance Holding shall have merged
with and into Advance Auto Parts, Inc. to complete the reincorporation
merger;
. Certain representations and warranties of each party set forth in the
merger agreement shall be true and correct in all material respects as
of the closing of the merger, and all other representations and
warranties of each party will be true and correct except where the
failures to be true and correct have not had and would not reasonably be
expected to have a material adverse effect;
. Each party will have performed in all material respects all its
obligations under the merger agreement;
. Each party will have received a legal opinion from the other party's
legal counsel;
. All material consents, authorizations, orders and approvals of, or
filings or registrations with, any governmental commission, board, other
governmental entity or third parties required to be made or obtained by
the parties and its subsidiaries and affiliated entities in connection
with the execution, delivery and performance of the merger agreement
will have been obtained or made;
. There shall not have occurred since the date of the merger agreement a
material adverse change in the financial condition, results of
operations, properties, assets, business or prospects of the other party
and its subsidiaries; and
. Each party shall have executed and delivered each of the other
agreements and instruments to be delivered by it pursuant to the merger
agreement.
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Additional Conditions to Obligations of Advance to Complete the Merger
The obligation of Advance to complete the merger is also subject to the
following conditions:
. Discount shall have performed a physical inventory of its salable
inventory at its Lakeland, Florida distribution center, the results of
which shall reflect an aggregate inventory value which does not, on a
historical cost basis, result in a reduction greater than 5% of the
portion of the inventory amount shown on the balance sheet included in
Discount's first quarter financial statements and reflected in
Discount's general ledger as of the date of Discount's first fiscal
quarter 2002 financial statements, subject to adjustment as provided in
the merger agreement (this condition has been satisfied);
. Discount shall have entered into the specifically identified amendments
to each of its Dapper Properties master leases in a manner satisfactory
to Advance; and
. The financial institutions who are parties to the financing commitments
shall be obligated to fund because all conditions to such funding have
been, or at the closing thereof will be, satisfied or waived.
Additional Conditions to Obligations of Discount to Complete the Merger
The obligation of Discount to complete the merger is also subject to the
following conditions:
. Discount will have received the written opinion of Discount's legal
counsel that the merger should be treated for U.S. federal income tax
purposes as part of an exchange within the meaning of Section 351 of the
Internal Revenue Code;
. Peter J. Fontaine shall be elected as a member of the board of directors
of Advance, and Advance's stockholders agreement shall have been amended
to provide Mr. Fontaine and entities he controls with certain piggy-back
registration rights with respect to the shares of Advance common stock
received in the merger, and to obligate Mr. Fontaine and such entities
to agree, subject to certain exceptions, not to sell such shares for
certain time periods following certain public offerings by Advance; and
. The exchange agent for the Advance common stock shall have certified to
Discount that the deposit required to be made by Advance into the
exchange fund has been made or is being made immediately following the
closing.
Termination
The merger agreement may be terminated at any time prior to the closing of
the merger by mutual written consent. In addition, the merger agreement may be
terminated:
. by either Advance or Discount if the merger shall not have been
consummated by December 31, 2001 (provided that the right to terminate
is not available to any party whose breach of or failure to fulfill any
of its obligations under the merger agreement has been the primary cause
of, or resulted in, the failure of the merger to occur on or before
December 31, 2001);
. by either Advance or Discount, if a court or other governmental entity
shall have issued a non-appealable final government order or taken any
other non-appealable final action having the effect of permanently
restraining, enjoining or otherwise prohibiting the merger or if by such
party pursuant to its right to terminate because a private party action
or order would have a material adverse effect;
. by either Advance or Discount, if, at the Discount shareholder meeting,
the requisite shareholder approval shall not have been obtained
(provided that the right to terminate shall not be available to any
party who is in material breach of or has materially failed to fulfill
any of its material obligations under the merger agreement);
. by Advance, (a) if (i) the board of directors of Discount shall have
withdrawn or modified or qualified its recommendation or qualified its
approval of the merger agreement or the merger in a
62
manner adverse to the interests of Advance or shall have adopted a
resolution to such effect; (ii) the board of directors of Discount shall
have failed to include in the proxy statement and prospectus its
recommendation, without adverse modification or qualification, that the
shareholders of Discount approve the merger agreement and the merger; or
(iii) the board of directors of Discount shall have approved or
recommended to the shareholders of Discount an acquisition proposal or a
superior proposal or adopted a resolution to such effect; or (b) a
tender offer or exchange offer for 50% or more of the outstanding shares
of Discount common stock is commenced and the board of directors of
Discount recommends that the shareholders of Discount tender their
shares in such tender or exchange;
. by either Advance or Discount, if there has been a material breach of
any representation, warranty, covenant or agreement by the other party,
which causes the conditions concerning representations and warranties or
covenants of the other party not to be satisfied, and such breach shall
not have been cured within 30 days following receipt by the other party
of written notice of breach;
. by Discount if, at any time prior to the Discount shareholder vote on
the merger agreement and the merger, and after it has received a
superior proposal in compliance with its obligations under the merger
agreement, the board of directors of Discount determines in good faith,
after consultation with outside counsel, that its fiduciary obligations
require Discount to terminate the merger agreement in order to permit
Discount to enter into an agreement with respect to such superior
proposal; or
. by Advance, if either the condition to closing regarding the physical
inventory of the Lakeland, Florida distribution center, or the condition
to closing regarding the amendments to the Dapper Properties master
leases is not satisfied; provided that Advance's right to terminate with
respect to the physical inventory condition expires 15 business days
after Discount delivers the results of the physical inventory.
Termination Fee and Expenses
The merger agreement requires Discount to pay Advance a termination fee of
$9.0 million in cash and/or Advance's expenses incurred in connection with the
merger agreement up to $7.0 million if:
. the merger agreement is terminated by the Discount board in order to
enter into an agreement with respect to a superior proposal; or
. the merger agreement is terminated by Advance as a result of (a) the
Discount board (i) resolving to or having withdrawn, modified or changed
in a manner adverse to Advance its approval or recommendation of the
merger agreement; (ii) failing to include its recommendation regarding
the merger in this proxy statement and prospectus; or (iii) approving or
recommending any other acquisition proposal or superior proposal; or (b)
a tender offer or exchange offer for 50% or more of Discount's shares is
commenced and the Discount board recommends that Discount shareholders
tender their shares;
If the requisite Discount shareholder approval is not obtained and Advance
has not materially breached or failed to fulfill its material obligations
under the merger agreement, Discount has agreed to pay to Advance up to $2.5
million of Advance's expenses plus 50% of any such expenses over $4.0 million
up to a maximum of an additional $1.0 million being paid by Discount.
If prior to the Discount shareholder meeting there has been a superior
proposal and, within 12 months of the Discount shareholder meeting, Discount
enters into an agreement with respect to the superior proposal, then
concurrently with entering into the agreement with respect to the superior
proposal, Discount shall pay to Advance $9.0 million and any expenses to the
extent not previously paid by Discount up to $7.0 million when aggregated with
any amount that was previously paid by Discount to Advance.
If prior to the Discount shareholder meeting there has been a superior
proposal and, within 12 months of the Discount shareholder meeting, Discount
does not enter into an agreement for the superior proposal, but
63
within such 12 month period consummates another acquisition transaction,
Discount shall pay to Advance upon the closing of such acquisition transaction
$9.0 million and any expenses to the extent not previously paid by Discount up
to $7.0 million when aggregated with any amount that was previously paid by
Discount to Advance.
If prior to the Discount shareholder meeting there has been an acquisition
proposal which is not a superior proposal and, within 12 months of the Discount
shareholder meeting, Discount consummates an acquisition transaction, Discount
shall pay to Advance upon the closing of such acquisition transaction $9.0
million and any expenses to the extent not previously paid by Discount up to
$7.0 million when aggregated with any amount that was previously paid by
Discount to Advance.
Discount shall pay to Advance, upon the closing of the subject acquisition
transaction, $9.0 million, and up to $7.0 million of Advance's expenses: if (i)
there has been an acquisition proposal prior to December 31, 2001; (ii) the
Discount shareholder meeting has not been held; (iii) Advance would be
permitted to terminate the merger agreement because the merger is not
consummated prior to December 31, 2001; (iv) either Advance or Discount
terminates the merger agreement because the merger is not consummated prior to
December 31, 2001; and (v) within twelve (12) months of December 31, 2001,
Discount consummates an acquisition transaction with the person who made an
acquisition proposal or enters into an agreement for an acquisition transaction
with the person who made the acquisition proposal, which is subsequently
consummated.
If Advance terminates the merger agreement because of a material breach of
the merger agreement by Discount, Discount shall pay Advance its expenses up to
$7.0 million.
If Advance terminates the merger agreement as a result of Discount's failure
to satisfy the closing condition regarding the physical inventory of the
Lakeland, Florida distribution center, or the closing condition relating to the
amendments to the Dapper Properties master leases, Discount shall pay to
Advance, in the case of termination resulting from the failure of the closing
condition regarding the physical inventory, up to $1.0 million of Advance's
expenses, and, in the case of a termination resulting from the failure of the
closing condition regarding the amendments to the Dapper Properties master
leases, up to $2.5 million of Advance's expenses, plus an additional amount
equal to 50% of any such expenses over $4.0 million, up to a maximum additional
amount of $1.0 million.
An "acquisition transaction" means the occurrence of any of the following
events: (i) the acquisition of Discount by merger, tender offer, exchange
offer, consolidation or otherwise by any person or entity other than Advance;
(ii) the acquisition by any person or entity other than Advance of all or a
substantial portion of the assets of Discount and its subsidiaries; (iii) the
acquisition by any person or entity other than Advance of 50% of more of the
outstanding shares of common stock of Discount; (iv) the adoption by Discount
of a plan of liquidation or the declaration or payment of an extraordinary
dividend; or (v) the repurchase by Discount or any subsidiary of Discount of
50% or more of the outstanding shares of common stock of Discount.
Amendments to Merger Agreement; Extension and Waiver
Advance and Discount may amend the merger agreement at any time before or
after the necessary approval by the shareholders of Discount; provided that,
after the adoption of the merger agreement by Discount shareholders, no
amendment may be made which by law requires further approval by the Discount
shareholders without obtaining their approval. Discount may not amend the
merger agreement, without the requisite shareholder approval, if any changes
would materially adversely affect the holders of Discount common stock.
At any time before the merger is completed, any party may, by written
instrument signed by the waiving party, extend the time for performance of the
obligations of any other party to the merger agreement, waive inaccuracies in
representations and warranties of any other party contained in the merger
agreement, waive compliance by any other party with any agreements in the
merger agreement, or waive any condition to the
64
waiving party's obligation to complete the transactions contemplated in the
merger agreement, other than those imposed by law, provided that Discount may
not waive any condition if such waiver would materially adversely affect the
holders of Discount common stock.
Indemnification, Exculpation and Insurance
Advance has agreed that all rights to indemnification, expense advancement
and exculpation from liabilities for acts or omissions occurring at and/or
prior to the effective time of the merger existing in favor of the current or
former directors, officers, employees or agents of Discount and its
subsidiaries as provided in their respective charter documents and any
indemnification agreements or arrangements of Discount or any of its
subsidiaries shall survive the merger and shall be assumed in all respects by
and will be fulfilled and honored by Advance and guaranteed by its subsidiaries
and shall continue in full force and effect, without amendment, for at least
six years after the effective time of the merger; provided, that all rights to
indemnification in respect of any claim asserted or made within such period
shall continue until the final disposition of the claim. Advance has also
agreed to pay any expenses of any indemnified person in advance of the final
disposition of any action, proceeding or claim relating to any act or omission
to the fullest extent permitted under applicable law upon receipt from the
applicable indemnified person to whom advances are to be advanced of an
undertaking to repay such advances required under applicable law. In addition,
from and after the effective time of the merger, directors or officers of
Discount and its subsidiaries who become directors or officers of Advance and
its subsidiaries will be entitled to the same indemnity rights as are afforded
to other directors and officers of Advance.
Advance has agreed that for at least six years after the effective time of
the merger, Advance will maintain in effect Discount's current director's and
officer's liability insurance covering acts or omissions occurring at or prior
to the effective time of the merger on no less favorable terms as Discount's
existing director's and officer's liability insurance policy, provided that
Advance will not be required to pay more than 150% of the current annual
premiums paid by Discount for the insurance.
65
OTHER AGREEMENTS OR TRANSACTIONS
Voting Agreement
In connection with the execution of the merger agreement, Advance Holding,
Advance Stores and the principal shareholder of Discount (Fontaine Industries
Limited Partnership), which holds 4,021,509 shares of Discount common stock
(approximately 24% of the voting power of Discount's outstanding common stock),
executed a voting agreement whereby the principal shareholder agreed to:
. vote its shares in favor of the merger, the merger agreement and the
transactions contemplated by the merger agreement;
. vote against any business combination other than the merger; and
. grant, and did grant, Advance Stores an irrevocable proxy to vote its
shares as required by the voting agreement;
In addition, the principal shareholder further agreed not to solicit,
initiate, encourage (including by way of furnishing information or assistance)
or take any other action to facilitate, any inquiry or the making of any
proposal which constitutes, or could reasonably be expected to lead to, any
acquisition proposal or agree to or endorse any acquisition proposal, except
that such agreement would not operate to keep Peter J. Fontaine from
discharging his fiduciary duty as a director of Discount. The principal
shareholder also agreed not to tender, sell, assign, pledge or otherwise
transfer its shares of Advance common stock received in the merger for up to
180 days after the closing of the merger or 180 days after any public offering
of securities by Advance under specified circumstances. The voting agreement
terminates upon the earliest to occur of the closing of the transactions
contemplated by the merger agreement or the date the merger agreement is
terminated in accordance with its terms.
Mr. Fontaine and his revocable trust are also parties to the voting
agreement. As such, Mr. Fontaine and his revocable trust have agreed to cause
Fontaine Industries to maintain its stock ownership of Discount pending the
merger and to cause Fontaine Industries to vote in favor of the merger and the
merger agreement. Except for 1,000 shares owned by Mr. Fontaine's wife and
1,000 shares owned by Mr. Fontaine's daughter, neither Mr. Fontaine nor his
revocable trust has beneficial interest in any shares other than the shares
owned by Fontaine Industries. There is no commitment in the voting agreement
with respect to how the shares owned by Mr. Fontaine's wife and daughter are to
be voted.
Option Agreement
Advance Holding, Advance Stores and the principal shareholder of Discount
also entered into a stock option agreement pursuant to which the principal
shareholder granted to Advance Stores an option to purchase all of the
4,021,509 shares of Discount common stock beneficially owned by the principal
shareholder. Under the terms of the option agreement, Advance Stores has an
irrevocable option to purchase all, but not less than all, of the principal
shareholder's shares at any time prior to the termination of the voting
agreement. The purchase price per share under the option agreement will equal
the sum of a base amount of $15.00 and 25% of the amount by which the fair
market value of the per share consideration paid under any superior proposal
exceeds the base amount. In the event that Advance pays a price for Discount's
common stock under the merger agreement with an agreed upon aggregate per share
value higher than $15.00 per share, the base amount shall be increased to
reflect such higher price.
Advance Stores may exercise its option to purchase the principal
shareholder's shares at any time prior to the termination of the voting
agreement if:
. any third party has (i) commenced a bona fide tender or exchange offer
for any shares of Discount's common stock, the consummation of which
would result in beneficial ownership by such third party (together with
its affiliates) of 50% or more of the then outstanding voting equity of
Discount,
66
(ii) acquired beneficial ownership of shares of Discount's common stock
that, when aggregated with any shares of Discount's common stock already
owned by such third party (together with its affiliates) would result in
the aggregate beneficial ownership by such third party being equal to or
greater than 15% or more of the then outstanding voting equity of
Discount; or (iii) entered into an agreement with Discount that
contemplates the acquisition by such third party (together with its
affiliates) of 15% or more of the total assets of Discount or 15% or
more of the outstanding voting equity of Discount;
. any of the events described in section 9.1(e) of the merger agreement
that would allow Advance to terminate the merger agreement has occurred;
. a third party has submitted an acquisition proposal before December 31,
2001, the meeting of the shareholders of Discount to vote on the
acquisition proposal has not been held, Advance would be permitted to
terminate the merger agreement under section 9.1(b) thereof, and either
Advance or Discount has terminated the merger agreement under section
9.1(b) thereof; or
. Discount shall have terminated the merger agreement pursuant to section
9.1(g) thereof.
The option agreement also provides that the principal shareholder will not
sell or otherwise encumber its shares, trade or take any position, hedge or
otherwise, with respect to its shares, enter into any other voting agreement
with respect to its shares, deposit its shares into a voting trust, or take
any action that would make any of the representations or warranties of the
principal shareholder in the option agreement untrue or incorrect or have the
effect of preventing or impeding the principal shareholder from performing any
of its obligations under the option agreement.
Advance Voting Agreement
As a condition to the willingness of Discount to enter into the merger
agreement, Discount has required that certain shareholders of Advance Holding
enter into a voting agreement with Advance Holding. Pursuant to the Advance
voting agreement, the particular Advance Holding stockholders (representing
approximately 87% of the shares of Advance Holding) have agreed to vote all of
the shares of Advance Holding beneficially owned by such Advance Holding
stockholders in favor of the merger of Advance Holding into Advance Auto
Parts, Inc. Such Advance stockholders also appointed an officer and certain
directors of Advance Holding and Advance as their proxies to vote their shares
in favor of the merger of Advance Holding into Advance Auto Parts, Inc.
Reincorporation Merger Between Advance and Advance Holding
Contemporaneously with the effective time of the Discount merger, Advance
Holding will merge into Advance Auto Parts, Inc. As a result of such
reincorporation merger, each issued and outstanding share of Advance Holding
Class A common stock will automatically be converted into the right to receive
one share of Advance common stock. The officers and directors of Advance
Holding immediately prior to the reincorporation merger will continue to be
the officers and directors of Advance Auto Parts, Inc. after such merger.
Advance Holding and Advance Auto Parts, Inc. have agreed to engage in the
reincorporation merger for the purpose of allowing the stockholders of Advance
Holding and the shareholders of Discount to own stock of a corporation that is
subject to the flexible and comprehensive corporate laws of the State of
Delaware and to facilitate the acquisition of Discount.
67
INFORMATION CONCERNING ADVANCE
Advance's Business
Overview
Advance conducts all of its operations through its wholly owned subsidiary,
Advance Stores Company, Incorporated and its subsidiaries. As of July 14, 2001,
Advance had 1,723 stores, operating under the "Advance Auto Parts" trade name
in 37 states in the northeastern, southeastern and mid-western regions of the
United States. In addition, Advance had 42 stores operating under the "Western
Auto" trade name primarily located in Puerto Rico and the Virgin Islands.
Advance is based in Roanoke, Virginia, and is the second largest specialty
retailer of automotive parts, accessories and maintenance items to DIY
customers in the United States, based on store count and sales. Advance is the
largest or second largest specialty retailer of automotive products in the
majority of the states in which it currently operates, based on store count. In
addition to Advance's DIY business, Advance serves DIFM customers. Sales to DIY
and DIFM customers represented approximately 85% and 15% of Advance's retail
sales for the twelve months ended July 14, 2001. Advance also operates a
wholesale distribution network which includes distribution services of
automotive parts and accessories and other merchandise to approximately 470
independently owned dealer stores in 48 states operating under the
"Western Auto" trade name. Since fiscal 1999, Advance has derived over 90% of
its total revenues from the retail sale of automotive parts and accessories.
For fiscal 1998 and prior (before the merger in November 1998 of Western Auto
Supply Company and Advance), 100% of Advance's total revenues were derived from
the retail sale of automotive parts and accessories.
Advance's History
Advance was formed in 1929 and operated as a retailer of general merchandise
until the 1980s. In the 1980s, Advance sharpened its marketing focus to target
sales of automotive parts and accessories to "do-it-yourself", or "DIY",
customers and accelerated its growth strategy. From the 1980s through the
present, Advance has grown significantly through new store openings, strong
comparable store sales growth and strategic acquisitions. In 1996, Advance
began to aggressively expand its sales to "do-it-for-me" or "DIFM" customers by
implementing a commercial sales program in the retail segment. The commercial
delivery program includes marketing that is specifically designed to attract
DIFM customers and consists of the delivery of automotive parts and accessories
to professional installers, such as independent garages, service stations and
auto dealers.
In April 1998, Freeman Spogli and Ripplewood Partners, L.P. acquired a
majority ownership interest in Advance through a recapitalization. Freeman
Spogli and Ripplewood purchased an 80% ownership interest in Advance, and
Advance's management purchased a 6% ownership interest. In the
recapitalization, Nicholas F. Taubman and the Arthur Taubman Trust, the
existing shareholders of Advance, retained a 14% ownership interest in Advance.
In November 1998, Advance completed a plan of merger to acquire Western Auto
Supply Company, or Western, from Sears, Roebuck and Co., or Sears. Western
operated over 600 stores under the "Parts America" and "Western Auto" trade
names as well as a wholesale distribution network. As consideration for the
Western merger, Advance issued 11,474,606 shares of common stock of Advance to
Sears (at a then current value of $193 million) and paid Sears $185.0 million
in cash. Several of the existing stockholders of Advance, including Freeman
Spogli & Co., Ripplewood Partners and its affiliates and Nicholas Taubman
invested an additional $70.0 million in Advance Holding to fund a portion of
the cash purchase price. The remainder of the cash proceeds paid to Sears was
funded through additional borrowings under Advance's credit facility.
The integration of Western included converting 545 Parts America stores (net
of closures) to the Advance Auto Parts store format and name, adding 39 Western
Auto stores located primarily in the Virgin Islands and Puerto Rico to
Advance's retail segment, and adding the wholesale segment (which consists of a
distribution network supplying independent dealer stores using the Western Auto
trade name). In addition, Advance
68
consolidated duplicative facilities, integrated certain administrative and
support functions into its corporate headquarters, terminated or relocated
certain employees and integrated the management information systems of the
combined companies.
On April 23, 2001, Advance completed its acquisition of the assets used in
the operation of Carport Auto Parts, Inc. retail auto parts stores located
throughout Alabama and Mississippi. Advance converted 30 net Carport stores to
the Advance Auto Parts format by July 7, 2001. Comparable store sales growth
for these stores was 23.5% during the eight weeks following completion of the
conversion.
Store Operations
The following discussion will focus on Advance's reportable segment
operations, which are further quantified in footnote 25 to Advance's financial
statements for the year ended December 30, 2000.
Retail Operations. Advance's domestic stores are generally located in
freestanding buildings in high traffic areas with good visibility and easy
access to major roadways. Advance's stores generally range in size from 5,000
to 10,000 square feet, averaging approximately 7,500 square feet, and stock
between 16,000 and 21,000 stock keeping units, or SKUs. In addition,
approximately 105,000 SKUs that are not stocked at the store level are
available on a next day or same day basis to virtually all domestic stores
through Advance's PDQ(R) network. During fiscal 2000, Advance initiated a local
area warehouse concept that utilizes existing space in certain stores to ensure
rapid availability of regionally specific products to all stores in a specific
market. On average, a local area warehouse provides an additional 7,500 to
12,000 SKUs to stores in these markets on a same day basis.
Additionally, as of July 14, 2001, Advance had approximately 1,200 of its
retail stores participating in its commercial delivery program. The commercial
delivery program utilizes store employees to take orders from commercial
customers, consisting of professional mechanics and service technicians, and
deliver the SKUs ordered in designated vehicles assigned to the participating
stores. Commercial delivery sales to DIFM customers were $330 million for the
twelve months ended July 14, 2001.
Advance's domestic retail stores are divided into three divisions, each of
which is managed by a senior vice president who are supported by regional vice
presidents. Reporting to the regional vice presidents are district managers who
have direct responsibility for store operations in a specific district, which
typically consists of 10 to 15 stores. Depending on store size and sales
volume, each store is staffed by 8 to 30 employees under the leadership of a
store manager. Stores are generally open seven days a week from 8:00 a.m. to
9:00 p.m.
Stores located in Puerto Rico, the Virgin Islands and California, all of
which operate under the Western Auto name, comprise a fourth division of the
retail segment. These stores are managed by a senior vice president who is
supported by a regional vice president, six district managers, store managers
and field personnel. These stores average approximately 16,000 square feet and
stock approximately 21,000 SKUs consisting of automotive parts, accessories and
tires, and also service vehicles. These stores are staffed with up to 60
employees, depending on store size and sales volume. The store hours are
generally 7:00 a.m. to 8:00 p.m. seven days a week.
69
Advance's retail segment stores are located in the following states and
territories:
Number of Number of Number of
Stores as of Stores as of Stores as of
Location July 14, 2001 Location July 14, 2001 Location July 14, 2001
-------- ------------- -------- ------------- -------- -------------
Alabama 90 Maine 7 Puerto Rico 39
Arkansas 20 Maryland 30 Rhode Island 3
California 1 Massachusetts 20 South Carolina 95
Colorado 15 Michigan 44 South Dakota 6
Connecticut 24 Mississippi 23 Tennessee 115
Delaware 5 Missouri 36 Texas 47
Florida 24 Nebraska 16 Vermont 2
Georgia 130 New Hampshire 4 Virgin Islands 2
Illinois 23 New Jersey 17 Virginia 125
Iowa 24 New York 96 West Virginia 61
Indiana 66 North Carolina 165 Wisconsin 16
Kansas 25 Ohio 134 Wyoming 2
Kentucky 63 Oklahoma 2
Louisiana 23 Pennsylvania 125
The following table sets forth information concerning increases in the
number of Advance's stores during the past five fiscal years:
1996 1997 1998 1999 2000
---- ---- ----- ----- -----
Beginning Stores............................ 536 649 814 1,567 1,617
New Stores(/1/)............................. 115 170 821 (/2/) 102 140
Stores Closed............................... (2) (5) (68)(/2/) (52) (28)
--- --- ----- ----- -----
Ending Stores............................... 649 814 1,567 1,617 1,729
--------
(/1/) Does not include stores that opened as relocations of previously existing
stores within the same general market area or substantial renovations of
stores.
(/2/) Includes 560 Parts America stores (net of 52 closures) acquired as part
of the Western Merger in November 1998. Subsequent to 1998, Advance
closed an additional 15 Western stores resulting in a net 545 stores
obtained in the Western Merger. Three Advance stores were also closed
during fiscal 1998 in connection with the Western Merger.
Wholesale Operations. The wholesale dealer operations are managed by one
senior vice president (who is also responsible for the Western Auto retail
stores), a vice president, a national sales manager, an operations manager and
various field and support personnel. The wholesale dealer operations consist of
a network of independently owned locations, which include associate, licensee,
sales center and franchise dealers. Associate, licensee and franchise stores
have rights to the use of the "Western Auto" name and certain services provided
by Advance. Sales centers only have the right to purchase certain products from
Western. Advance and Western also provide services to the wholesale dealer
network through various administrative and support functions, as specified by
each independent location. Advance's wholesale operations generated
approximately 4.5% of Advance's net sales for the twelve months ended July 14,
2001.
Recruiting, Training and Turnover. Advance invests substantial resources in
the recruiting and training of its employees. As a part of its training,
Advance provides formal classroom workshops, seminars and Automotive Service
Excellence certification designed to build technical, managerial and customer
service skills. In addition, in 2000, Advance enhanced its human resources
management capabilities by hiring an experienced senior vice president of human
resources and by introducing new training programs and software systems. As a
result of these initiatives, Advance's level of employee turnover decreased
12.4% when comparing employee turnover during 2000 with employee turnover for
the twelve month period ended July 14, 2001. For these
70
purposes, employee turnover is measured by the ratio of the total number of
employees who leave employment with Advance during the period to the average
number of active employees during the same period.
Purchasing and Merchandising
Merchandise is selected and purchased for all stores in the retail and
wholesale segments by personnel at Advance's corporate offices in Roanoke,
Virginia and Kansas City, Missouri. In fiscal 2000, Advance purchased
merchandise from over 200 vendors, with no single vendor accounting for 8% or
more of purchases. Advance's purchasing strategy involves negotiating multi-
year agreements with certain vendors. In connection with the Western merger,
Advance entered into several long-term agreements that provided more favorable
terms and pricing, which will continue through the current term of the
agreements, generally three to five years.
Advance's purchasing team is currently led by a group of six senior
professionals, who have an average of over 15 years of automotive purchasing
experience and over 20 years in retail. This team is skilled in sourcing
products globally and maintaining high quality levels while streamlining costs
associated with the handling of merchandise through the supply chain. The
purchasing team has developed strong vendor relationships in the industry and
is currently involved in implementing a "best-in-class" category management
process to improve comparable store sales, gross margin and inventory turns.
Advance's merchandising strategy is to carry a broad selection of high
quality, brand name automotive parts and accessories such as Monroe, Bendix,
Purolator and AC Delco, that generate customer traffic and appeal to Advance's
commercial delivery customers. In addition to such branded products, Advance
stocks a wide selection of high quality private label products that appeal to
value conscious customers. Sales of replacement parts account for approximately
60% of Advance's sales and typically generate higher gross profit margins than
maintenance items or general accessories. Advance adjusts its product mix based
on a merchandising program designed to identify the optimal inventory mix at
each individual store based on that store's historical and projected sales mix
and regionally specific needs.
Marketing and Advertising
Advance has an extensive marketing and advertising program designed to
communicate its merchandise offerings, product assortment, competitive prices
and commitment to customer service. The program is focused on establishing
Advance as the solution for a customer's automotive needs. Advance utilizes a
combination of tools to reinforce its brand image, including print, promotional
signage, television, radio and outdoor media, plus its proprietary in-store
television network and Internet site.
Advance's advertising plan is based on a monthly program built around a
promotional theme and a feature product campaign. The plan is supported by
print and in-store signage. Advance's television advertising is targeted on a
regional basis to sports programming. Radio advertising, which is used as a
supplementary medium, generally airs during peak drive times. Advance also
sponsors sporting events, racing teams and other events at all levels in a
grass-roots effort to impact individual communities.
Warehouse and Distribution
Advance currently operates six distribution centers that service Advance
Auto Parts stores in the United States. Advance also operates a separate
distribution center in the United States that supports the Western Auto retail
stores and the wholesale dealer operations. All distribution centers are
equipped with technologically advanced material handling equipment, including
carousels, "pick to light" systems, radio frequency technology and automated
sorting systems.
Advance offers approximately 25,000 SKUs on a next day basis to
substantially all of its domestic retail stores via its nine PDQ(R) warehouses.
Stores place orders to these facilities through an on-line ordering system, and
ordered parts are delivered to substantially all stores the next day through
Advance's dedicated PDQ(R)
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trucking fleet. In addition, Advance operates a PDQ(R) warehouse that stocks
approximately 80,000 SKUs consisting of harder to find automotive parts and
accessories. This facility is known as the "Master PDQ(R)" warehouse and
utilizes existing PDQ(R) distribution infrastructure to provide next day
service to substantially all of the Advance Auto Parts stores. During fiscal
2000, Advance embarked on a new local area warehouse distribution concept that
utilizes store space to provide certain markets with an additional customized
mix of approximately 7,500 to 12,000 SKUs. As of July 14, 2001, Advance
operated six local area warehouse facilities.
The following table sets forth certain information relating to Advance's
distribution facilities:
Size
Opening (Sq.
Distribution Facility Date Area Served ft.)
--------------------- ------- ----------- -------
Main Distribution Centers:
Roanoke, Virginia................. 1988 Mid-Atlantic 440,000
Gadsden, Alabama.................. 1994 South 240,000
Jeffersonville, Ohio(1)........... 1996 Mid West 383,000
Gastonia, North Carolina(2)....... 1969 Western Auto Retail Stores,
Wholesale Dealer Network 663,000
Salina, Kansas(2)................. 1971 West 441,000
Delaware, Ohio(2)................. 1972 Northeast 510,000
Thomson, Georgia.................. 1999 Southeast 383,000
PDQ(R) Warehouses:
Salem, Virginia................... 1983 Mid-Atlantic 50,400
Smithfield, North Carolina........ 1991 Southeast 42,000
Jeffersonville, Ohio(3)........... 1996 Mid West 50,000
Thomson, Georgia(3)............... 1998 South, Southeast 50,000
Goodlettesville, Tennessee........ 1999 Central 41,900
Youngwood, Pennsylvania........... 1999 East 49,000
Riverside, Missouri............... 1999 West 45,000
Guilderland Center, New York...... 1999 Northeast 47,400
Temple, Texas(2)(4)............... 1999 Southwest 100,000
Master PDQ(R) Warehouse:
Andersonville, Tennessee.......... 1998 All 116,000
--------
(1) This facility is scheduled to be closed completely as a distribution center
by the end of 2001.
(2) Advance acquired these facilities in the Western merger in November 1998.
(3) This facility is located within the main distribution center.
(4) Total capacity of this facility is approximately 550,000 square feet of
which 100,000 is currently being used as a PDQ(R) warehouse. This facility
was once also used as a distribution center. This facility is currently for
sale.
Management Information Systems
Advance has developed a flexible technology infrastructure that supports its
current and future growth strategy. The Information Technology infrastructure
is comprised of software and hardware designed to integrate store, distribution
and vendor services into a seamless customer service network. All stores,
corporate and regional offices, and distribution centers are linked via a
communications network, which is based on frame relay technology among all
locations within the United States. Stores in Puerto Rico are linked to the
communications network via satellite. Electronic documents transferred between
Advance and the vendor expedite the ordering, receiving, and merchandise
payable process.
Store Based Information Systems. Advance's store based information systems,
which are designed to improve the efficiency of its operations and enhance
customer service, are comprised of Point-of-Sale, or POS,
72
Electronic Parts Catalog, or EPC, Store Level Inventory Management, or SLIM,
and a Store Intranet, or STORENET. These systems are tightly integrated and
together provide real time, comprehensive information to store and
merchandising personnel, resulting in improved customer service levels and in-
stock availability.
Point-of-Sale. The POS system was originally installed in 1981, enhanced
over the years and reengineered in 1995. This system has improved store
productivity and customer service by streamlining store procedures. POS
information is used to formulate pricing, marketing and merchandising
strategies as well as to rapidly replenish inventory.
Advance is installing a new POS system in all stores. This system is
currently being installed in all new stores and a limited number of existing
stores. A full conversion schedule will commence in September 2001 and is
expected to be completed in the second quarter of 2002.
The new POS system is designed to improve customer check-out time and
decrease the time required to train new store associates. In addition, the new
POS system will provide additional customer purchase and warranty history,
which will be used for customer demographics analysis.
Electronic Parts Catalog. The EPC system is a software system that enables
Advance's sales associates to identify the application, location, and
availability of over 20 million application uses for automotive parts and
accessories. The EPC system enables sales associates to assist customers in
parts selection and ordering based on the year, model, engine type and
application needed. The EPC system displays an identified part, its inventory
status and its availability through the PDQ(R) system, if the part is not
available at the store. The EPC system also displays related parts for sales
associates to recommend to a customer, which leads to increased average sales
per customer. The integration of this system with the POS system improves
customer service by reducing time spent at the cash register and fully
automating the sales process between the parts counter and the POS register.
Additionally, this system enables sales associates to order parts and
accessories electronically from Advance's PDQ(R) system with immediate
confirmation of price, availability and delivery schedule. Information about a
customer's automobile can be entered into a permanent customer database that
can be accessed immediately whenever the customer visits or telephones the
store.
In conjunction with the rollout of the new POS system, Advance is also
installing a new EPC in its stores. This new catalog, which is fully integrated
with the new POS system, will provide store associates with additional product
information including graphics and system diagrams. Parts lookup capabilities
will be improved with search engines and easier to use navigation tools.
To ensure ongoing improvement of EPC information in all stores, Advance has
developed a corporate based EPC data management system that allows Advance to
reduce the cycle time for cataloging and delivering updated product data to
stores. This system also provides the capability of cataloging non-application
specific parts and additional product information such as technical bulletins,
images of parts, and related diagrams of automobiles and expanded lists of
related parts for the item being purchased.
Store Level Inventory Management System. The store level inventory
management system provides real-time inventory tracking at the store level.
With the store level system, store personnel can check the quantity of on-hand
inventory for any SKU, automatically process returns and defective merchandise,
designate SKUs for cycle counts and track merchandise transfers. Advance is
testing the effectiveness and viability of radio frequency hand held devices in
approximately 200 of its retail stores that should increase inventory
utilization and ensure the accuracy of inventory movements.
Store Intranet. Installed in June of 1998, the STORENET system delivers
product information, electronic manuals, forms, and internal communications to
all store employees. Financial reports are delivered to the store managers via
STORENET each accounting period. The Advance On Line Learning Center deliveries
on line training programs to all employees. A tracking and reporting function
provides human resources and management with an overview of training schedules
and results by employee.
73
Customer Contact Center. In the first quarter of fiscal 2001, Advance
established a Customer Contact Center and consolidated all support centers. New
call routing software and customer service software has been installed. The
implementation of the Customer Contact Center has resulted in substantial
improvement in speed of call answers, reduction in calls to voice mail, and
number of outbound calls required to respond to voice mail.
Financial Reporting. In fiscal 2000, Advance implemented the Hyperion
Financial Reporting system. The benefits resulting from this implementation
include online operating statements for all levels of management. Budget
planning and publication has also been improved by the implementation of this
system and integration with STORENET.
PeopleSoft Financials/Human Resources. In June 2001, Advance completed the
installation of PeopleSoft Financial and Human Resources systems. The
implementation of these systems and the best practice business processes that
were developed in conjunction with the systems enable Advance to leverage
current staffing levels by streamlining processes, and automating many manual
processes.
Logistics and Purchasing Information Systems
Distribution Center Management System. The distribution management system,
or DCMS, provides real-time inventory tracking through the processes of
receiving, picking, shipping and replenishment at the distribution center
level. The DCMS, integrated with material handling equipment, significantly
reduces warehouse and distribution costs while improving efficiency. All of
Advance's logistic facilities currently operate using this technology. As a
result, Advance has the capacity to service over 2,500 stores from its
six retail distribution centers that serve Advance stores and to support the
Puerto Rico Stores and the Wholesale segment from its Gastonia distribution
center. Advance is currently in the process of enhancing the DCMS and inventory
systems to support service of multiple segments from the same distribution
center.
Replenishment Systems. The E3 Replenishment System, or E3, which was
implemented in 1994, monitors the distribution center and PDQ(R) warehouse
inventory levels and orders additional products when appropriate. In addition,
the system tracks sales trends by SKU, allowing Advance to adjust future orders
to support seasonal and demographic shifts in demand. Advance is currently in
the process of enhancing this system to improve support of transfer of
merchandise among distribution centers. Advance recently completed the
implementation of a store level replenishment version of E3 for its Advance
Auto Parts stores.
Employees
As of July 14, 2001, Advance employed approximately 15,100 full-time
employees and 9,700 part-time employees. Approximately 85% of Advance's
workforce is employed in store level operations, 11% in distribution and 4% in
Advance's corporate offices in Roanoke, Virginia and Kansas City, Missouri.
Advance has never experienced any labor disruption, is not a party to any
collective bargaining agreements, and believes that its labor relations are
good.
Competition
Advance competes in the automotive aftermarket parts industry, which
consists of replacement parts, maintenance items and accessories, and which,
according to industry estimates, generates approximately $100 billion in sales
per year. Advance competes for both do-it-yourself and do-it-for-me customers.
Although the number of competitors and the level of competition vary by market
area, both markets are highly fragmented and generally very competitive.
Advance competes primarily with national and regional retail automotive parts
chains (such as AutoZone, Inc., O'Reilly Automotive, Inc. and The Pep Boys--
Manny, Moe & Jack), wholesalers or jobber stores (some of which are associated
with national automotive parts distributors or associations, such as NAPA),
independent operators, automobile dealers and mass merchandisers that carry
automotive replacement parts, maintenance items and accessories (such as Wal-
Mart Stores, Target
74
and K-Mart). Advance believes that chains of automotive parts stores, such as
Advance, with multiple locations in regional markets, have competitive
advantages in customer service, marketing, inventory selection, purchasing and
distribution as compared to independent retailers and jobbers that are not part
of a chain or associated with other retailers or jobbers. The principal
competitive factors that affect Advance's business are store location, customer
service and product selection, availability, quality and price.
Trade Names, Service Marks and Trademarks
Advance owns and has registrations for the trade names "Advance Auto Parts,"
"Western Auto" and "Parts America" and the trademark "PDQ(R)" with the United
States Patent and Trademark Office for use in connection with the automotive
parts retailing business. In addition, Advance owns and has registered a number
of trademarks with respect to its private label products. Advance believes that
its various trade names, service marks and trademarks are important to its
merchandising strategy, but that its business is not otherwise dependent on any
particular service mark, trade name or trademark. There are no infringing uses
known by Advance that materially affects the use of such marks.
Environmental Matters
Advance is subject to various federal, state and local laws and governmental
regulations relating to the operation of its business, including those
governing recycling of batteries and used lubricants, and regarding ownership
and operation of real property. Advance handles hazardous materials during its
operations, and its customers may also use hazardous materials on Advance's
properties or bring hazardous materials or used oil onto Advance's properties.
Advance currently provides collection and recycling programs for spent
automotive batteries and used lubricants at certain of its stores as a service
to its customers pursuant to agreements with third party vendors. Pursuant to
these agreements, spent batteries and used lubricants are collected by Advance
employees, deposited into vendor supplied containers/pallets and stored by
Advance until collected by the third party vendors for recycling or proper
disposal. Persons who arrange for the disposal, treatment or other handling of
hazardous or toxic substances may be liable for the costs of removal or
remediation at any affected disposal, treatment or other site affected by such
substances.
Advance owns and leases real property. Under various environmental laws and
regulations, a current or previous owner or operator of real property may be
liable for the cost of removal or remediation of hazardous or toxic substances
on, under, or in such property. Such laws often impose joint and several
liability and may be imposed without regard to whether the owner or operator
knew of, or was responsible for, the release of such hazardous or toxic
substances. Certain other environmental laws and common law principles also
could be used to impose liability for releases of hazardous materials into the
environment or work place, and third parties may seek recovery from owners or
operators of real properties for personal injury or property damage associated
with exposure to released hazardous substances. Compliance with such laws and
regulations has not had a material impact on its operations to date, but there
can be no assurance that future compliance with such laws and regulations will
not have a material adverse effect on Advance or its operations. Advance
believes it is currently in material compliance with such laws and regulations.
75
Properties
The following table sets forth certain information concerning Advance's
principal facilities:
Size Nature of
Primary Use Location (Sq. ft.) Occupancy
----------- -------- --------- ---------
Corporate offices............ Roanoke, Virginia 49,000 Leased(1)
Corporate offices............ Kansas City, Missouri 12,500 Leased
Administrative offices....... Roanoke, Virginia 40,000 Leased
Distribution center.......... Roanoke, Virginia 440,000 Leased(2)
Distribution center.......... Gadsden, Alabama 240,000 Owned
Distribution center.......... Salina, Kansas 441,000 Owned
Distribution center.......... Delaware, Ohio 510,000 Owned
Distribution center.......... Gastonia, North Carolina 663,000 Owned
Distribution center and
regional PDQ(R) warehouses.. Jeffersonville, Ohio 383,000 Owned(3)
Distribution center and
regional PDQ(R) warehouses.. Thomson, Georgia 383,000 Leased(4)
Regional PDQ(R) Warehouse.... Temple, Texas 100,000 Owned(5)
Regional PDQ(R) Warehouse.... Salem, Virginia 50,400 Leased
Regional PDQ(R) Warehouse.... Smithfield, North Carolina 42,000 Leased
Regional PDQ(R) Warehouse.... Goodlettesville, Tennessee 41,900 Leased
Regional PDQ(R) Warehouse.... Youngwood, Pennsylvania 49,000 Leased
Regional PDQ(R) Warehouse.... Riverside, Missouri 45,000 Leased
Regional PDQ(R) Warehouse.... Guilderland Center, New York 47,400 Leased
Master PDQ(R) Warehouse...... Andersonville, Tennessee 116,000 Leased
--------
(1) This facility is owned by Ki, L.C., a Virginia limited liability company
owned by two trusts for the benefit of a child and grandchild of Nicholas
F. Taubman. See "Related Party Transactions of Advance."
(2) This facility is owned by Nicholas F. Taubman. See "Related Party
Transactions of Advance."
(3) This facility is scheduled to be closed completely as a distribution center
by the end of 2001.
(4) The construction of this facility was financed in fiscal 1997 by a $10.0
million industrial revenue bond issuance from the Development Authority of
McDuffie County of the State of Georgia, from which Advance leases the
facility. Advance has an option to purchase this facility for $10.00 at the
end of five years or upon prepayment of the outstanding bonds.
(5) Total capacity of this facility is approximately 550,000 square feet, of
which 100,000 square feet is currently being used as a PDQ(R) warehouse.
This facility was once also used as a distribution center. This facility is
currently for sale.
At July 14, 2001, 134 of Advance's stores were owned and 1,631 were leased.
The expiration dates (including renewal options) of the store leases are
summarized as follows:
Years Stores(1)
----- ---------
2001-2002...................................................... 37
2003-2007...................................................... 165
2008-2012...................................................... 317
2013-2022...................................................... 1003
2023-2032...................................................... 83
2033-2048...................................................... 26
--------
(1) Of these stores, 23 are owned by affiliates of Advance. See "Related Party
Transactions of Advance."
Legal Proceedings
Coalition for a Level Playing Field, et. al. v. AutoZone, Inc. et. al, Case
No. 00-0953 in and for the United District Court, Eastern District of New York.
In February 2000, the Coalition for a Level Playing Field and
76
over one hundred independent automotive parts and accessories aftermarket
warehouse distributors and jobbers filed a lawsuit in the United States
District for the Eastern District of New York against various automotive
retailers. In March 2000, Advance was notified that it had been named in the
lawsuit. The plaintiffs claim that the defendants have knowingly induced volume
discounts, rebates, slotting and other allowances, fees, free inventory, sham
advertising and promotional payments, a share in the manufacturers' profits,
and excessive payments for services purportedly performed for the manufacturers
in violation of the Robinson-Patman Act. The complaint seeks injunctive and
declaratory relief, unspecified treble damages on behalf of each of the
plaintiffs, as well as attorneys' fees and costs. The defendants, including
Advance, filed a motion to dismiss in late October 2000. On October 18, 2001,
the court denied the motion to dismiss on all but one count. It is expected
that the discovery phase of the litigation will now commence (including with
respect to Advance); however, determinations as to the discovery schedule and
scope remain to be determined. Advance 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.
In January 1999, Advance was notified by the United States Environmental
Protection Agency that Western may have potential liability under the
Comprehensive Environmental Response Compensation and Liability Act relating to
two battery salvage and recycling sites that were in operation in the 1970s and
1980s. This matter has since been settled for an amount not material to
Advance's current financial position or future results of operations.
In November 1997, Joe C. Proffitt, Jr. on behalf of himself and all others
in the states of Alabama, California, Georgia, Kentucky, Michigan, North
Carolina, Ohio, South Carolina, Tennessee, Texas, Virginia and West Virginia
who purchased batteries from Advance from November 1, 1991 to November 5, 1997
filed a class action complaint and motion of class certification against
Advance in the circuit court for Jefferson County, Tennessee, alleging the sale
by Advance of used, old or out-of-warranty automotive batteries as new. The
complaint seeks compensatory and punitive damages. In September 2001, the court
granted Advance's motion for summary judgment against the plaintiff and
dismissed all claims against Advance. The court has not yet entered a formal
order, and the period for appeal has not yet run. Advance believes it has no
liability for such claims and intends to continue to defend them vigorously, if
necessary.
In addition to the above, Advance currently and from time to time is
involved in litigation incidental to the conduct of its business. The damages
claimed against Advance in some of these proceedings are substantial. Although
the amount of liability that may result from these matters cannot be
ascertained, Advance does not currently believe that, in the aggregate they
will result in liabilities material to Advance's consolidated financial
condition, future results of operations or cash flow.
Selected Historical Consolidated Financial and Other Data of Advance Holding
The following table sets forth selected historical consolidated statement of
operations, balance sheet and other operating data of Advance Holding and its
wholly owned subsidiaries. The selected historical consolidated financial and
other data as of and for fiscal 1998, fiscal 1999 and fiscal 2000 have been
derived from, and should be read together with, Advance Holding's audited
consolidated financial statements and the related notes included elsewhere in
this proxy statement and prospectus. The historical consolidated financial and
other data as of and for 1996 and 1997 have been derived from Advance Holding's
audited consolidated financial statements and the related notes, which have not
been included in this proxy statement and prospectus. The historical
consolidated financial and other data as of and for the twenty-eight week
periods ended July 15, 2000 and July 14, 2001 have been derived from, and
should be read together with, Advance Holding's unaudited consolidated
financial statements and the related notes included elsewhere in this proxy
statement and prospectus. In the opinion of Advance Holding's management, all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the financial position of Advance Holding, the results of
its operations and cash flows have been made. The results of operations for the
twenty-eight week period ended July 14, 2001 are not necessarily indicative of
the operating results to be expected for the full fiscal year. The data
presented below should be read in conjunction with the consolidated financial
statements of Advance Holding and the notes thereto included herein, the other
financial information included herein and
77
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Holding." The following financial data includes certain expenses
related to the integration of the Western merger and Parts America conversion
incurred in fiscal 1998 and fiscal 1999 and certain private company expenses
that were eliminated in the Recapitalization. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Holding" for a
detailed discussion of the Recapitalization and these expenses.
Twenty-Eight Week
Periods Ended
Fiscal Year (unaudited)
------------------------------------------------------ ----------------------
July 15, July 14,
1996 1997 1998 1999 2000 2000 2001
-------- -------- ---------- ---------- ---------- ---------- ----------
(dollars and share amounts in thousands, except per share data)
Consolidated Statement
of Operations Data:
Net sales............... $705,983 $848,108 $1,220,759 $2,206,945 $2,288,022 $1,235,232 $1,336,837
Cost of sales........... 437,615 524,586 766,198 1,404,113 1,392,127 759,724 796,557
-------- -------- ---------- ---------- ---------- ---------- ----------
Gross profit............ 268,368 323,522 454,561 802,832 895,895 475,508 540,280
Selling, general and
administrative
expenses(2)............ 228,113 280,900 400,546 780,114 800,845 422,650 470,166
Expenses associated with
the
Recapitalization(3).... -- -- 14,277 -- -- -- --
Expenses associated with
the restructuring in
conjunction with the
Western merger(4)...... -- -- 6,774 -- -- -- --
Non-cash and other
employee
compensation(5)........ 113 195 1,135 2,483 2,261 1,425 2,195
-------- -------- ---------- ---------- ---------- ---------- ----------
Operating income........ 40,142 42,427 31,829 20,235 92,789 51,433 67,919
Interest expense........ 4,891 6,086 35,038 62,792 66,640 36,601 33,074
Other income (expense),
net.................... 187 (321) 943 4,647 1,012 532 569
-------- -------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... 35,438 36,020 (2,266) (37,910) 27,161 15,364 35,414
Income tax expense
(benefit).............. 14,174 14,733 (84) (12,584) 10,535 5,939 14,010
-------- -------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item..... 21,264 21,287 (2,182) (25,326) 16,626 9,425 21,404
Extraordinary item, gain
on debt extinguishment,
net of $1,759 income
taxes.................. -- -- -- -- 2,933 -- --
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 21,264 $ 21,287 $ (2,182) $ (25,326) $ 19,559 $ 9,425 $ 21,404
======== ======== ========== ========== ========== ========== ==========
Fully diluted net income
(loss) per share
(unaudited)............ $ 0.87 $ 0.87 $ (0.12) $ (0.90) $ 0.68 $ 0.33 $ 0.74
======== ======== ========== ========== ========== ========== ==========
Fully diluted weighted
number of common shares
outstanding............ 24,287 24,288 18,606 28,269 28,611 28,510 28,760
======== ======== ========== ========== ========== ========== ==========
Other Data:
EBITDA, as adjusted(6).. $ 60,236 $ 68,361 $ 92,612 $ 121,899 $ 161,876 $ 87,260 $ 107,183
Capital expenditures.... 44,264 48,864 65,790 105,017 70,566 28,031 31,048
Percentage increase in
comparable store net
sales(7)............... 2.1% 5.7% 7.8% 10.3% 4.4% 3.7% 6.2%
Commercial delivery
sales.................. 11,000 62,401 107,323 198,928 305,947 160,097 184,289
Net cash provided by
(used in) operating
activities............. 26,518 42,478 44,022 (20,976) 103,951 53,304 102,616
Net cash (used in)
investing activities... (44,121) (48,607) (230,672) (113,824) (64,940) (25,500) (51,139)
Net cash provided by
(used in) financing
activities............. 12,548 6,759 207,302 121,262 (43,579) (33,783) (49,866)
Stores open at end of
period................. 649 814 1,567 1,617 1,729 1,675 1,765
Balance Sheet Data:
Net working capital(8).. $110,080 $121,140 $ 310,113 $ 355,608 $ 321,540 $ 344,911 $ 327,024
Total assets............ 394,395 461,257 1,265,355 1,348,629 1,356,360 1,350,312 1,364,314
Total net debt(9)....... 91,028 95,633 485,476 627,467 582,539 592,580 535,199
Stockholders' equity.... 122,323 143,548 159,091 133,954 156,271 146,627 179,359
78
(1) Advance's fiscal year consists of 52 or 53 weeks ending on the Saturday
nearest to December 31. All fiscal years presented are 52 weeks except for
fiscal 1997, which consists of 53 weeks.
(2) Fiscal 1999 and fiscal 1998 amounts include certain merger integration and
Parts America conversion expenses related to the Western merger that total
$41,034 and $7,788, respectively. Fiscal 1997 amount includes an unusual
medical claim that exceeded Advance's stop loss insurance coverage. The
pre-tax amount of this claim, net of related increased insurance costs,
was $882. Advance has increased its stop loss coverage effective January
1, 1998 to a level that would provide insurance coverage for a medical
claim of this magnitude. In addition, amounts are included for all fiscal
years for private company expenses incurred prior to the Recapitalization
that relate primarily to compensation and benefits paid to Advance's
chairman that were eliminated after the Recapitalization. These amounts
are $2,482, $3,056 and $845 for fiscal 1996, fiscal 1997 and fiscal 1998,
respectively. There are no private company expenses in the fiscal 1999,
fiscal 2000 or fiscal 2001 amounts.
(3) Represents expenses incurred in the Recapitalization related primarily to
bonuses paid to certain employees and professional services.
(4) Represents fiscal 1998 expenses primarily related to lease costs
associated with the 31 Advance Auto Parts stores closed in overlapping
markets in connection with the Wester merger.
(5) Represents interest component of net periodic postretirement benefit cost
related to Advance's unfunded post retirement benefit obligation and non-
cash compensation expenses related to stock options granted to certain of
Advance's employees.
(6) EBITDA, as adjusted, represents operating income plus depreciation and
amortization, non-cash and other employee compensation expenses and
certain one-time expenses, as described below, included in operating
income. EBITDA, as adjusted, 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. Advance has included EBITDA, as adjusted, herein because
Advance's management believes this information is useful to investors, as
such measure provides additional information with respect to Advance's
ability to meet its future debt service, capital expenditure and working
capital requirements and, in addition, certain covenants in the indentures
and credit facility are based upon an EBITDA calculation. Advance's method
for calculating EBITDA, as adjusted, may differ from similarly titled
measures reported by other companies. Advance's management believes
certain one-time expenses, private company expenses, recapitalization
expenses, non-cash and other employee compensation expenses, restructuring
expenses and merger integration expenses should be eliminated from the
EBITDA calculation to evaluate the operating performance of Advance, and
has done so in its calculation of EBITDA, as adjusted. Advance leases
substantially all of its stores.
79
The following table reflects the effect of these items:
Twenty-Eight Week
Periods Ended
Fiscal Year(1) (unaudited)
------------------------- -----------------
July 15, July 14,
1998 1999 2000 2000 2001
------- -------- -------- -------- --------
(dollars in thousands)
Other Data:
EBITDA........................... $61,793 $ 78,382 $159,615 $85,835 $104,988
Private company expenses(a)...... 845 -- -- -- --
Recapitalization expenses(b)..... 14,277 -- -- -- --
Non-cash and other employee
compensation (see note 5
above).......................... 1,135 2,483 2,261 1,425 2,195
Restructuring expenses in
conjunction with the Western
merger (see note 4 above)....... 6,774 -- -- -- --
Merger integration expenses(c)... 7,788 41,034 -- -- --
------- -------- -------- ------- --------
EBITDA, as adjusted.............. $92,612 $121,899 $161,876 $87,260 $107,183
======= ======== ======== ======= ========
--------
(a) Reflects Advance's estimate of expenses primarily related to
compensation and other benefits of Advance's chairman, who prior to
the Recapitalization was Advance's principal stockholder, that were
eliminated after the Recapitalization.
(b) Represents non-recurring management bonuses and other expenses
incurred in connection with the Recapitalization.
(c) Represents certain expenses related to the Western merger integration
and conversion of the Parts America stores.
(d) EBITDA, as adjusted, for fiscal 2000 includes a non-recurring net gain
of $3.3 million. EBITDA, as adjusted, for the twenty-eight week period
ended July 14, 2001 includes a non-recurring net gain of $3.2 million.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Advance Holding--Results of Operations--
Fiscal Year 2000 Compared to Fiscal Year 1999" and "--Twenty-Eight
Weeks Ended July 14, 2001 Compared to Twenty-Eight Weeks Ended July
15, 2000."
(7) Comparable store net sales is calculated based on the change in net sales
starting once a store has been opened for thirteen complete accounting
periods (each period represents four weeks). Relocations are included in
comparable store net sales from the original date of opening.
Additionally, each converted Parts America store acquired in the Western
merger and subsequently converted is included in the comparable store net
sales calculation after thirteen complete accounting periods following its
physical conversion to an Advance Auto Parts store. Advance does not
include net sales from the 42 Western Auto retail stores in its comparable
store net sales calculation.
(8) Net working capital represents total current assets less total current
liabilities.
(9) Net debt represents total debt (including current maturities and bank
overdrafts) less cash and cash equivalents.
80
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Advance Holding
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated historical
financial statements of Advance Holding, the unaudited pro forma consolidated
financial information of Advance and Discount, and the notes to those
statements that appear elsewhere in this proxy statement and prospectus.
Advance Holding's fiscal year ends on the Saturday nearest December 31 of each
year. Advance Holding's first quarter consists of 16 weeks, and the other three
quarters consist of 12 weeks. For purposes of this Management's Discussion and
Analysis, notwithstanding the meaning attributed to other references in this
proxy statement and prospectus, Advance shall mean, collectively, Advance
Holding, Advance Stores and their subsidiaries.
General
Advance conducts all of its operations through Advance's wholly owned
subsidiary, Advance Stores Company, Incorporated and its subsidiaries. Advance
was formed in 1929 and operated as a retailer of general merchandise until the
1980s. In the 1980's, Advance sharpened its marketing focus to target sales of
automotive parts and accessories to "do-it-yourself", or "DIY", customers and
accelerated its growth strategy. From the 1980's through the present, Advance
has grown significantly through new store openings, strong comparable store
sales growth, strategic acquisitions and the Western merger. Additionally, in
1996, Advance began to aggressively expand its sales to "do-it-for-me", or
"DIFM", customers by implementing a commercial delivery program that supplies
parts and accessories to third party automotive service and repair providers.
As of July 14, 2001, Advance had 1,723 stores operating under the "Advance
Auto Parts" trade name, in 37 states in the northeastern, southeastern and mid-
western regions of the United States. In addition, Advance had 42 stores
operating under the "Western Auto" trade name primarily located in Puerto Rico
and the Virgin Islands. Advance is the second largest specialty retailer of
automotive parts, accessories and maintenance items to DIY customers in the
United States, based on store count and sales. Advance currently is the largest
or second largest retailer of automotive products in the majority of the states
in which it operates, based on store count.
Advance's combined operations are conducted in two operating segments,
retail and wholesale. The retail segment consists of the retail operations of
Advance operating under the trade names "Advance Auto Parts" in the United
States and "Western Auto" in Puerto Rico and the Virgin Islands. Advance also
operates a wholesale distribution network which includes distribution services
of automotive parts and accessories to approximately 470 independently owned
dealer stores in 48 states operating under the "Western Auto" trade name.
Acquisitions and Recapitalization
Discount Acquisition. On August 7, 2001, Advance signed a definitive merger
agreement to acquire Discount. Discount shareholders will receive $7.50 per
share in cash plus 0.2577 shares of Advance common stock for each share of
Discount common stock. Accordingly, upon consummation of the merger, Discount
shareholders will own approximately 13% of the total shares outstanding of the
combined company.
At July 14, 2001, Discount had 666 stores in six states, including the
leading market position in Florida, with 436 stores. On a pro forma basis,
Advance would have had approximately 2,400 stores in the same 37 states in
which Advance currently operates Advance Auto Parts stores, and Advance's net
sales for the twelve months ended July 14, 2001 would have been $3.1 billion.
Advance expects to achieve ongoing purchasing, distribution and administrative
savings as a result of the merger. Purchasing savings will be derived primarily
through volume discounts to be negotiated with Advance's existing vendors. In
addition, Advance expects to achieve significant savings from the optimization
of Advance's combined distribution systems,
81
including more efficient capacity utilization at Discount's Mississippi
distribution center, as well as from the reduction of overlapping
administrative functions. During 2002, Advance expects these savings to result
in approximately $30 million of incremental EBITDA, excluding certain one-time
integration expenses. Advance expects these one-time expenses to total
approximately $53 million from the close of the merger through the end of 2003,
$41 million of which Advance expects to incur in 2002. The merger will be
accounted for under the purchase method of accounting.
Carport Acquisition. On April 23, 2001, Advance completed its acquisition of
the assets used in the operation of Carport Auto Parts, Inc. retail auto parts
stores located throughout Alabama and Mississippi. Based upon store count, this
makes Advance the largest retailer of automotive parts in this market. Upon the
closing, of the acquisition, Advance made the decision to close 21 Carport
stores not expected to meet long-term profitability objectives. The remaining
30 Carport locations were converted to the Advance Auto Parts store format by
July 7, 2001. The acquisition has been accounted for under the purchase method
of accounting. The purchase price of $21.5 million has been allocated to the
assets acquired and the liabilities assumed, based on their fair values at the
date of acquisition. This allocation resulted in the recognition of $3.2
million in goodwill.
Western Auto Acquisition. On November 2, 1998, Advance acquired Western Auto
Supply Company from Sears. The purchase price included the payment of
11,474,606 shares of Advance Holding common stock and $185.0 million in cash.
Certain existing stockholders of Advance Holding invested an additional
$70.0 million in equity to fund a portion of the cash portion of the purchase
price, the remainder of which was funded through additional borrowings under
Advance Stores' then existing credit facility, and cash on hand. The Western
merger has been accounted for under the purchase method of accounting.
Accordingly, the results of operations of Western for the periods from November
2, 1998 are included in the accompanying consolidated financial statements. The
purchase price has been allocated to assets acquired and liabilities assumed
based on their respective fair values. The final purchase price allocation
resulted in total excess fair value over the purchase price of $4.7 million and
was allocated to non-current assets, primarily property and equipment.
Advance has achieved significant benefits from the combination with Western
through improved product pricing and terms from vendors, consolidated
advertising, distribution and corporate support efficiencies. The Western
merger resulted in the addition of a net 545 Advance Auto Parts stores, 39
Western Auto stores, and the wholesale operations.
Related Restructuring Costs and Integration Expenses. Following the Western
merger and the Carport acquisition, Advance closed certain Advance Auto Parts
stores not meeting profitability objectives. The Western merger and the Carport
acquisition also resulted in restructuring reserves recorded in purchase
accounting for the closure of certain stores, severance and relocation costs
and other facility exit costs. As of July 14, 2001, these reserves had a
remaining balance of $12.4 million. In addition, Advance also assumed certain
restructuring and deferred compensation liabilities previously recorded by
Western. At July 14, 2001, the total liability for the restructuring and
deferred compensation plans was $2.2 million and $4.5 million, respectively, of
which $1.2 million and $1.3 million, respectively, is recorded as a current
liability. The classification for deferred compensation is determined by
payment terms elected by plan participants, primarily former Western employees,
which can be changed upon 12 months' notice.
In addition, as a result of the Western acquisition, Advance recorded
expenses related to the integration of the Western acquisition of approximately
$7.8 million and $41.0 million in 1998 and 1999. In 1998, Advance recorded
expenses of approximately $6.8 million primarily related to lease costs
associated with the 31 Advance Auto Parts stores closed in connection with the
Western acquisition.
As part of normal operations, Advance continually monitors store
performance, which results in closing certain store locations not meeting
profitability objectives. During the twenty-eight weeks ended July 14, 2001
Advance closed two stores included in the fiscal 2000 restructuring activities
and made the decision to close or
82
relocate 24 additional stores not meeting profitability objectives, 18 of which
were closed or relocated as of July 14, 2001. Following the merger, Advance may
decide to close certain Discount and Advance stores that are not expected to
meet long-term profitability objectives.
Recapitalization. On April 15, 1998, Advance Holding consummated its
Recapitalization pursuant to a merger agreement. As part of the
Recapitalization, Freeman Spogli & Co. acquired a controlling interest in
Advance Stores and Advance Holding. A portion of the Advance Holding common
stock and all of the preferred stock of Advance Holding was converted into the
right to receive in the aggregate approximately $351 million in cash and
certain stock options. Certain shares representing approximately 14% of the
outstanding Class A common stock remained outstanding upon consummation of the
Recapitalization. Immediately prior to the Recapitalization, Freeman Spogli &
Co. purchased approximately $80.5 million of the common stock of Advance
Holding, which was converted in the Recapitalization into approximately 64% of
the Advance Holding's outstanding common stock, and Ripplewood Partners, L.P.
and its affiliates purchased approximately $20 million of the common stock of
Advance Holding, which was converted in the Recapitalization into approximately
16% of Advance Holding's outstanding common stock. In connection with the
Recapitalization, management purchased approximately $8,000,000, or
approximately 6%, of Advance Holding's outstanding common stock. The purchase
of common stock by management resulted in stockholder subscription receivables.
The notes provide for annual interest payments, at the prime rate, with the
entire principal amount due on April 15, 2003.
On April 15, 1998, Advance Stores entered into a credit facility that
provides for (i) three senior secured term loan facilities in the aggregate
amount of $250 million and (ii) a secured revolving credit facility of up to
$125 million. At the closing of the Recapitalization, $125 million was borrowed
under one of the term loan facilities. On April 15, 1998, Advance Stores also
issued $200 million of senior subordinated notes and Advance Holding issued
approximately $112 million in face amount of senior discount debentures. In
connection with these transactions, Advance Stores extinguished a substantial
portion of its existing notes payable and long-term debt. These transactions
collectively represent the "Recapitalization." Advance Holding has accounted
for the Recapitalization for financial reporting purposes as the sale of common
stock, the issuance of debt, the redemption of common and preferred stock and
the repayment of notes payable and long-term debt.
Recent Developments
For the eight weeks ended September 8, 2001 Advance's comparable store sales
growth was 7.8% when compared with the same period of the prior year. In
addition, Advance's net sales and EBITDA increased 9.5% and 25.7%, to $406.7
million and $39.2 million, respectively, when compared with the eight weeks
ended September 9, 2000. Retail sales for this period rose approximately 11.0%
to $394.5 million from $355.4 million for the same period of the prior year.
The increase in retail sales was partially offset by lower sales in the
wholesale segment, as Advance expected. Both the DIY and DIFM businesses showed
continued sales growth.
Sales for the thirty-six weeks ended September 8, 2001 were $1,743.5
million, an increase of 8.5% over $1,606.5 million for the same period of the
prior year. Retail sales for this period increased 10.2% to $1,670.1 million
from $1,515.7 million for the same period of the prior year. Comparable store
sales increased 6.6%. EBITDA for the thirty-six weeks ended September 8, 2001
was $146.4 million, an increase of 23.6% over EBITDA of $118.4 million for the
same period last year. The year-to-date results included two non-recurring
items that increased EBITDA by $3.2 million. Excluding these non-recurring
items, EBITDA increased 20.9% to $143.2 million for the thirty-six week, year-
to-date period. Net debt at September 8, 2001 was $535.0 million, a reduction
of $27.3 million from the same time last year.
While sales slowed during the week of September 11th, Advance's average
comparable store sales levels for the weeks following the week of September 11
have been in line with Advance's comparable store sales trends for the thirty-
six weeks ended September 8, 2001.
83
Advance has recently undertaken a review of its supply chain and logistics
operations, including its distribution costs and inventory stocking levels. As
part of this review, Advance expects to identify a portion of its inventory
that it may offer in the future only in certain store locations or regions.
Advance may generate significant cash proceeds as a result of this initiative
by reducing its inventory investment while continuing to maintain high levels
of customer service and in-stock positions. Advance may also record a charge in
connection with this initiative, related primarily to restocking costs and
inventory handling charges. In addition, Advance has closed and may close
additional distribution facilities and may write-down the value of these
facilities in connection with its supply chain initiative. Advance expects to
complete this review prior to the end of the first quarter of 2002 and would
record any related charges in its consolidated statements when it identifies
that such charges would be required.
Results of Operations
The following tables set forth certain operating data for Advance Holding
expressed in dollars and as a percentage of net sales for the periods
indicated.
Twenty-Eight Week
Period Ended
Fiscal Year (unaudited)
---------------------------------- ----------------------
July 15, July 14,
1998 1999 2000 2000 2001
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
Statement of Operations
Data:
Net sales............... $1,220,759 $2,206,945 $2,288,022 $1,235,232 $1,336,837
Cost of sales........... 766,198 1,404,113 1,392,127 759,724 796,557
---------- ---------- ---------- ---------- ----------
Gross profit............ 454,561 802,832 895,895 475,508 540,280
Selling, general and
administrative
expenses(1)............ 391,913 739,080 800,845 422,650 470,166
Expenses associated with
the Recapitalization... 14,277 -- -- -- --
Expenses associated with
the restructuring in
conjunction with the
Western merger......... 6,774 -- -- -- --
Expenses associated with
merger integration..... 7,788 41,034 -- -- --
Expenses associated with
private company........ 845 -- -- -- --
Non-cash and other
employee compensation.. 1,135 2,483 2,261 1,425 2,195
---------- ---------- ---------- ---------- ----------
Operating income........ 31,829 20,235 92,789 51,433 67,919
Interest expense........ (35,038) (62,792) (66,640) (36,601) (33,074)
Other income, net....... 943 4,647 1,012 532 569
Income tax benefit
(expense).............. 84 12,584 (10,535) (5,939) (14,010)
---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item..... (2,182) (25,326) 16,626 9,425 21,404
Extraordinary item, gain
on debt extinguishment,
net of $1,759
income taxes........... -- -- 2,933 -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ (2,182) $ (25,326) $ 19,559 $ 9,425 $ 21,404
========== ========== ========== ========== ==========
--------
(1) Selling, general and administrative expenses are adjusted for certain non-
recurring and other items.
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Twenty-Eight Week
Period Ended
Fiscal Year (unaudited)
--------------------- ------------------
July 15, July 14,
1998 1999 2000 2000 2001
----- ----- ----- -------- --------
Net sales.......................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales...................... 62.8 63.6 60.8 61.5 59.6
----- ----- ----- ----- -----
Gross profit....................... 37.2 36.4 39.2 38.5 40.4
Selling, general and administrative
expenses(1)....................... 32.1 33.5 35.0 34.2 35.2
Expenses associated with the
Recapitalization.................. 1.2 -- -- -- --
Expenses associated with the
restructuring in conjunction with
the Western merger................ 0.5 -- -- -- --
Expenses associated with merger
integration....................... 0.6 1.9 -- -- --
Expenses associated with private
company........................... 0.1 -- -- --
Non-cash and other employee
compensation...................... 0.1 0.1 0.1 0.1 0.2
----- ----- ----- ----- -----
Operating income................... 2.6 0.9 4.1 4.2 5.0
Interest expense................... (2.9) (2.8) (2.9) (3.0) (2.5)
Other income, net.................. 0.1 0.2 0.0 0.1 0.1
Income tax benefit (expense)....... 0.0 0.6 (0.5) (0.5) (1.0)
----- ----- ----- ----- -----
Income (loss) before extraordinary
item.............................. (0.2) (1.1) 0.7 0.8 1.6
Extraordinary item, gain on debt
extinguishment, net of $1,759
income taxes...................... -- -- 0.1 -- --
----- ----- ----- ----- -----
Net income (loss).................. (0.2)% (1.1)% 0.8 % 0.8 % 1.6 %
===== ===== ===== ===== =====
--------
(1) Selling, general and administrative expenses are adjusted for certain non-
recurring and other items.
Net Sales
Net sales consist primarily of comparable store net sales, new store net
sales, service net sales, net sales to the wholesale dealer network 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 13 complete
accounting periods (each period represents four weeks). Relocations are
included in comparable store net sales from the original date of opening.
Additionally, each converted Parts America store that was acquired in the
Western merger and subsequently converted to an Advance Auto Parts store has
been included in the comparable store net sales calculation after 13 complete
accounting periods following the completion of its physical conversion to an
Advance Auto Parts store. Advance currently does not include net sales from the
42 Western Auto retail stores in its comparable store net sales calculation.
Cost of Sales
Advance's cost of sales includes merchandise costs and warehouse and
distribution expenses as well as service labor costs of Advance's Western Auto
stores. Gross profit as a percentage of net sales may be affected by variations
in Advance's product mix, price changes in response to competitive factors and
fluctuations in merchandise costs and vendor programs. Advance 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
Selling, general and administrative expenses are comprised of store payroll,
store occupancy (including rent), net advertising expenses, other store
expenses and general and administrative expenses, including salaries
85
and related benefits of corporate employees, administrative office expenses,
data processing, professional expenses and other related expenses. Advance
leases substantially all of its stores.
Twenty-Eight Weeks Ended July 14, 2001 Compared to Twenty-Eight Weeks Ended
July 15, 2000
Net sales for the twenty-eight weeks ended July 14, 2001 were $1,336.8
million, an increase of $101.6 million or 8.2% over net sales for the twenty-
eight weeks ended July 15, 2000. Net sales for the retail segment increased
$115.3 million or 9.9%. The net sales increase for the retail segment was due
to an increase in the comparable store sales of 6.2% and contributions from new
stores that were not yet included within the comparable stores sales base. The
comparable sales increase of 6.2% was primarily a result of growth in both the
do-it-yourself and do-it-for-me customer base, as well as the continued
maturation of new stores. Comparable store sales increased 3.7% for the twenty-
eight weeks ended July 15, 2000 as compared to the comparable period in fiscal
1999. Net sales for the wholesale segment decreased $13.7 million or 18.2%,
reflecting the continued decline of this segment due to increased competition
coupled with a decline in the number of independently owned dealer stores. The
wholesale segment accounted for 4.6% of total net sales in 2001 compared to
6.1% in 2000.
During the twenty-eight weeks ended July 14, 2001, Advance opened 53 new
stores, relocated nine stores and closed 17 stores, bringing the total retail
store count to 1,765. Advance has approximately 1,200 stores participating in
its commercial delivery program, as a result of consolidating nine stores
during the twenty-eight weeks ended July 14, 2001.
Gross profit for the twenty-eight weeks ended July 14, 2001 was $540.3
million or 40.4% of net sales, as compared to $475.5 million or 38.5% of net
sales in the twenty-eight weeks ended July 15, 2000. The increase in the gross
profit percentage is reflective of an $8.3 million net gain recorded as a
reduction to cost of sales during the first quarter of fiscal 2001 as a result
of a vendor settlement. The increase in the gross profit percentage is also
reflective of a 0.9% aggregate increase resulting from a positive shift in
product mix and a decline in net sales of the lower margin Wholesale segment.
Additionally, lower inventory shrinkage and our ability to leverage logistics
costs primarily contributed to the remainder of the increased margin. The gross
profit for the Retail segment was $532.7 million or 41.8% of net sales for the
twenty-eight week period ended July 14, 2001, as compared to $467.9 million or
40.3% of net sales for the twenty-eight week period ended July 15, 2000.
Selling, general and administrative expenses, before non-cash and other
employee compensation, increased to $470.2 million or 35.2% of net sales for
the twenty-eight week period ended July 14, 2001, from $422.7 million or 34.2%
of net sales for the twenty-eight week period ended July 15, 2000. Selling,
general and administrative expenses have increased due to non-recurring closed
store expenses associated with the decision to close certain store locations
not meeting profitability objectives and the write down of an administrative
facility obtained in the Western merger totalling $5.1 million. Additionally,
as a percentage of sales, the increase in selling, general and administrative
expenses is attributable to the planned investment in store personnel and the
continued decline in the wholesale segment, which carries lower selling,
general and administrative expenses as a percentage of sales as compared to the
retail segment.
EBITDA (operating income plus depreciation and amortization, as adjusted for
non-cash and other employee compensation), was $107.2 million in the twenty-
eight week period ended July 14, 2001 or 8.0% of net sales, as compared to
$87.3 million or 7.1% of net sales in the twenty-eight week period ended July
15, 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. Advance's method for calculating
EBITDA may differ from similarly titled measures reported by other companies.
Advance's 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
Advance.
86
Interest expense for the twenty-eight week period ended July 14, 2001 was
$33.1 million or 2.5% of net sales, as compared to $36.6 million or 3.0% of net
sales for the twenty-eight week period ended July 15, 2000. The decrease in
interest expense is a result of the reduction in net outstanding borrowings as
well as a significant decrease in interest rates over the similar period of
fiscal 2000.
Income tax expense for the twenty-eight weeks ended July 14, 2001 was $14.0
million compared to $5.9 million in the twenty-eight weeks ended July 15, 2000.
This increase was primarily due to an increase in income before taxes for the
twenty-eight week period ended July 14, 2001 as compared to the twenty-eight
week period ended July 15, 2000.
As a result of the above factors, Advance recorded net income of $21.4
million for the twenty-eight week period ended July 14, 2001, as compared to
$9.4 million for the twenty-eight week period ended July 15, 2000. As a
percentage of sales, net income for the twenty-eight week period ended July 14,
2001 was 1.6% as compared to 0.8% for the twenty-eight week period ended July
15, 2000.
Fiscal Year 2000 Compared to Fiscal Year 1999
Net sales for fiscal 2000 were $2,288.0 million, an increase of $81.1
million or 3.7% over net sales for fiscal 1999. Net sales for the retail
segment increased $149.9 million or 7.5%. The net sales increase for the retail
segment was due to an increase in the comparable store sales of 4.4% and
contributions from new stores that were acquired or were not yet included
within the comparable stores sales base. The comparable store sales increase of
4.4% was primarily a result of growth in both the do-it-yourself and do-it-for-
me customer base, as well as the continued maturation of new stores and the
converted Parts America stores. Net sales for the wholesale segment decreased
33.1% or $68.8 million due to a decline in the number of dealer stores serviced
by Advance and lower average sales to each dealer.
During fiscal 2000, Advance opened 140 new stores, relocated 10 stores and
closed 28 stores, bringing the total retail segment store count to 1,728. At
year end, Advance had 1,210 stores participating in commercial delivery, a
result of adding 116 net stores to the program during fiscal 2000.
Additionally, as of December 30, 2000, Advance supplied approximately 590
independent dealers through the wholesale dealer network and one company-owned
store in California.
Gross profit for fiscal 2000 was $895.9 million or 39.2% of net sales, as
compared to $802.8 million or 36.4% of net sales in fiscal 1999. The increase
in the gross profit percentage is a result of an increase of 180 basis points
due to the realization of certain purchasing synergies, fewer product
liquidations and a decline in net sales of the lower margin Wholesale segment
of 33.1%. Additionally, lower inventory shrinkage of approximately 60 basis
points and lower logistics costs of 30 basis points primarily contributed to
the remainder of the increased margin. The higher shrinkage and logistics costs
in fiscal year 1999 were related to merchandise conversions and product
liquidations resulting from the Western merger. The gross profit for the Retail
segment was $873.1 million or 40.6% of net sales for fiscal 2000, as compared
to $784.1 million or 39.2% of net sales for fiscal 1999. During the fourth
quarter of fiscal 2000, the Company recorded a gain as a reduction to cost of
sales of $3.3 million related to a lawsuit against a supplier. The gain
represents actual damages incurred under an interim supply agreement with the
supplier, which provided for higher merchandise costs. Subsequent to December
30, 2000, the Company agreed to a cash settlement of $16.6 million from the
supplier. The remainder of the cash settlement over the originally recorded
gain, less higher product costs incurred under the interim supply agreement,
was recognized as an $8.3 million reduction of cost of sales during the first
quarter of fiscal 2001.
Selling, general and administrative expenses, before integration expenses
and non-cash and other employee compensation, increased to $800.8 million or
35.0% of net sales for fiscal 2000, from $739.1 or 33.5% of net sales for
fiscal 1999. The increase in selling, general and administrative expenses is
primarily attributable to the continued sales decline in the wholesale segment,
which carries lower selling, general and administrative expenses as a
percentage of sales as compared to the retail segment. Additionally, Advance
has incurred higher than expected medical claims as well as higher payroll,
insurance and depreciation expense, partially offset by a
87
decrease in net advertising costs, as a percentage of sales, as compared to
fiscal 1999. Advance has made certain investments in personnel and labor, which
it believes is critical to Advance's long-term success. Advance expects this
commitment to increase the productivity of store personnel, which will
positively impact store profitability and customer service. The increase in
depreciation expense is primarily related to the change in an accounting
estimate to reduce the depreciable lives of certain property and equipment on a
prospective basis.
EBITDA (operating income plus depreciation and amortization), as adjusted
for non-cash and other employee compensation and integration expenses (fiscal
1999 only), was $161.9 million in fiscal 2000 or 7.1% of net sales, as compared
to $121.9 million or 5.5% of net sales in fiscal 1999.
Interest expense for fiscal 2000 was $66.6 million or 2.9% of net sales, as
compared to $62.8 million or 2.8% of net sales fiscal 1999. The increase in
interest expense was a result of an increase in interest rates over fiscal 1999
offset by a decrease in net outstanding borrowings. During fiscal 2000, Advance
repurchased $30.6 million of senior subordinated notes on the open market for
$25.0 million.
Advance's effective income tax rate was 38.8% of pre-tax income for fiscal
2000 and 33.2% of pre-tax loss for fiscal 1999. This increase is due to Advance
having pre-tax income in fiscal 2000 and pre-tax loss in fiscal 1999 and the
resulting effect of permanent differences between book and tax reporting
treatment on total income tax expense (benefit). Due to uncertainties related
to the realization of deferred tax assets for certain net operating loss
carryforwards, Advance recognized additional valuation allowances of $0.9
million during fiscal 2000.
Advance recorded net income of $19.6 million on a consolidated basis for
fiscal 2000, as compared to a net loss of $25.3 million for fiscal 1999. In
addition to the items previously discussed, Advance also recorded an
extraordinary gain related to the early extinguishment of debt of $2.9 million,
net of $1.8 million provided for income taxes and $0.9 million for the write-
off of associated deferred debt issuance costs. As a percentage of sales, net
income for fiscal 2000 was 0.8% as compared to a net loss of 1.1% for fiscal
1999.
Fiscal Year 1999 Compared to Fiscal Year 1998
Fiscal 1999 results include a full fiscal year of the operations acquired in
the Western merger as compared to fiscal 1998 results, which include Western
operating results from November 2, 1998.
Net sales for fiscal 1999 were $2,206.9 million, an increase of $986.2
million or 80.8% over net sales for fiscal 1998. Net sales for the retail
segment increased $812.8 million or 68.5%. The net sales increase for the
retail segment was a result of the Western merger, opening of new stores and a
10.3% increase in comparable store sales over fiscal 1998. The comparable store
sales increase was due to maturation of stores opened in 1997 and 1998,
increased product availability, continued growth in the commercial sales
program and the closure of Parts America and Advance Auto Parts stores in
overlapping markets. Net sales for the wholesale segment increased $173.4
million due to the inclusion of the wholesale segment for all of fiscal 1999
following the Western merger in November 1998.
During fiscal 1999, Advance opened 99 new stores, reopened three closed
locations, relocated 13 stores and closed 52 stores in addition to the stores
closed due to relocations (33 of which were Parts America and Advance Auto
Parts stores in overlapping markets closed in connection with the Western
merger). Also, Advance added 562 stores to commercial delivery, bringing the
total to 1,094 stores. As of January 1, 2000, Advance operated 1,617 stores in
38 states, Puerto Rico and the Virgin Islands and supplied approximately
670 independent dealers through the wholesale dealer network.
Gross profit for fiscal 1999 was $802.8 million or 36.4% of net sales,
compared with $454.6 million or 37.2% of net sales, in fiscal 1998. The
decrease in the gross profit percentage resulted largely from increased
shrinkage and logistics costs of approximately 70 basis points associated with
the Parts America Conversion and the liquidation of certain product lines
related to the Merchandise Conversion. Additionally, the lower margins
associated with the Western operations which realized a gross profit percentage
of 22% as compared to
88
the Advance retail store operation's gross profit percentage of approximately
40%, contributed to the decrease in margin offset slightly by better pricing
from vendors in fiscal 1999 compared to fiscal 1998, due to vendor agreements
entered into as a result of the Western Merger. The better pricing will
continue through the current term of these vendor agreements, generally three
to five years.
Selling, general and administrative expenses, before expenses associated
with the Recapitalization, restructuring, merger integration, private company
and non-cash and other employee compensation, increased to $739.1 million or
33.5% of net sales, in fiscal 1999 from $391.9 million or 32.1% of net sales in
fiscal 1998. The increase as a percentage of sales was due primarily to
increased costs realized by the retail segment related to higher store labor,
an increase in advertising and costs associated with Advance's national
manager's conference.
EBITDA (operating income plus depreciation and amortization, as adjusted for
expenses associated with the Recapitalization, merger integration, private
company and non-cash and other employee compensation) was $121.9 million for
fiscal 1999, or 5.5% of net sales, as compared to $92.6 million or 7.6% of net
sales for fiscal 1998.
Interest expense in fiscal 1999 was $62.8 million compared to $35.0 million
in fiscal 1998. The increase in interest in fiscal 1999 was primarily due to
the additional debt incurred in the Western merger, the increase in borrowings
under Advance's revolving and delayed draw credit facilities and higher
interest rates.
Other income in fiscal 1999 was $4.6 million compared to $0.9 million in
fiscal 1998. The increase in other income was primarily the result of the
Advance Stores segment recognizing the settlement of a dispute between Advance
and a vendor due to non-performance by the vendor under a supply agreement.
Income tax benefit for fiscal 1999 was $12.6 million as compared to a
benefit of $0.1 million in fiscal 1998, with effective tax rates of 33.2% and
3.7%, respectively. In fiscal 1999, Advance recognized federal and state net
operating loss carryforwards of approximately $22.1 million. Advance believes
it will utilize these through a combination of the reversal of temporary
differences, projected future taxable income during the net operating loss
carryforward periods and available tax planning strategies. Due to
uncertainties related to the realization of deferred tax assets for certain
state net operating losses, Advance recorded a valuation allowance of $0.6
million as of January 1, 2000. The amount of deferred income tax assets
realizable, however, could change in the near future if estimates of future
taxable income are changed.
As a result of the above factors, Advance incurred a net loss of $25.3
million in fiscal 1999 as compared to a net loss of $2.2 million in fiscal
1998. As a percentage of net sales, net loss for fiscal 1999 was 1.1% as
compared to a net loss of 0.2% for fiscal 1998.
Liquidity and Capital Resources
As a holding company, Advance Holding relies on dividends from Advance
Stores as its primary source of liquidity. Advance Holding does not have, and
in the future may not have, any assets other than the capital stock of Advance
Stores. The ability of Advance Stores to pay cash dividends to Advance Holding
when required is restricted by law and the terms of Advance Stores' debt
instruments, including the credit facility and the senior subordinated notes
(see below). No assurance can be made that Advance Stores will be able to pay
cash dividends to Advance Holding when required to redeem the debentures.
Advance Holding believes it and Advance Stores will have sufficient
liquidity to fund their debt service obligations, including indebtedness
incurred in connection with the Western merger, and implement its growth
strategy over the next twelve months. As of July 14, 2001, Advance Holding and
Advance Stores had outstanding indebtedness consisting of $90.0 million of
senior discount debentures, $169.5 million of senior subordinated notes,
borrowings of $285.3 million under the bank credit facility, and $10.0 million
of indebtedness under the McDuffie County Development Authority Taxable
Industrial Bonds.
89
The debentures accrete at a rate of 12.875%, compounded semi-annually, to an
aggregate principal amount of $112.0 million by April 15, 2003. Commencing
April 15, 2003, cash interest on the debentures will accrue and be payable
semi-annually at a rate of 12.875% per annum. The indenture governing the
debentures contains certain covenants that, among other things, limit the
ability of Advance Holding and its restricted subsidiaries to incur
indebtedness and issue preferred stock, repurchase stock and certain
indebtedness, engage in transactions with affiliates, create or incur certain
liens, pay dividends or certain other distributions, make certain investments,
enter into new businesses, sell stock of restricted subsidiaries, sell assets
and engage in certain mergers and consolidations.
The senior subordinated notes bear interest at a rate of 10.25%, payable
semi-annually, and require no principal payments until maturity. The indenture
governing the senior subordinated notes contains certain covenants that limit,
among other things, the ability of Advance Stores 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 Advance Stores from engaging in
certain mergers or consolidations and asset sales.
The $10.0 million principal amount of the industrial revenue bonds bears
interest at a variable rate and will require no principal payments until
maturity in November 2002.
In addition to its operating cash flow, Advance Stores has access to a
credit facility that includes a revolving credit facility with a maximum
borrowing capacity (including letters of credit) of $125.0 million, of which
none was borrowed, and $17.3 million was outstanding for stand-by letters of
credit as of July 14, 2001. In addition, the credit facility includes (i) a
Tranche B term loan that was incurred in connection with the Recapitalization,
of which $104.2 million was outstanding as of July 14, 2001, (ii) a delayed
draw term loan, of which $104.9 million was outstanding as of July 14, 2001,
and (iii) a deferred term loan facility that was incurred in connection with
the Western merger, of which $76.2 million was outstanding as of July 14, 2001.
The term loan facilities, other than the Tranche B term loan, will mature in
April 2004, and the Tranche B term loan will mature in October 2006. Required
principal payments on the term loan facilities will be approximately $207.1
million in 2004, $60.0 million in 2005 and $12.2 million in 2006. The revolving
credit facility will mature in April 2004. The interest rates under the delayed
draw facilities and the revolving credit facility are determined by reference
to a pricing grid that will provide for reductions in the applicable interest
rate margins based on Advance Stores' trailing total debt to EBITDA ratio (as
defined in the credit facility). Based upon Advance Stores' operating ratios at
July 14, 2001, the margins were 1.75% for Eurodollar borrowings and 0.75% for
base rate borrowings. Additionally, at July 14, 2001, 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
Advance Stores and its subsidiaries (including certain insurance and
condemnation proceeds), subject to certain exceptions (including exceptions for
(i) reinvestment of certain asset sale proceeds within 270 days of such sale
and (ii) certain sale-leaseback transactions), (c) 100% of the net proceeds of
issuances of debt obligations of Advance Stores and its subsidiaries, and (d)
100% of the net proceeds of issuance of equity of Advance Stores and its
subsidiaries. Because increases in net working capital, capital expenditures
and debt repayments are deducted in calculating excess cash flow, Advance
Stores 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 Advance Stores to secure additional equity or debt financing to
fund an acquisition, but while no assurance can be given, Advance Stores does
not anticipate that this would have a material effect on its ability to finance
acquisitions in the future. Advance Stores was required to make mandatory
prepayments of $6.2 million in fiscal 2001.
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The loans under the credit facility are secured by a first priority security
interest in substantially all tangible and intangible assets of Advance Stores.
Amounts available to Advance Stores under portions of the credit facility are
subject to a borrowing base formula, which is based on certain percentages of
Advance Stores inventories, and certain debt covenants. As of July 14, 2001,
$107.7 million was available under these facilities. Advance Stores 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 credit facility contains covenants restricting the ability of Advance
Stores 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 Advance
Stores or other subsidiaries, (x) change the nature of the business conducted
by Advance Stores and its subsidiaries, (xi) change the passive holding company
status of Advance and (xii) amend existing debt agreements or Advance Stores or
Advance's certificate of incorporation, by-laws or other organizational
documents. Advance Stores 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. Advance Stores is
generally prohibited from paying dividends (including to Advance Holding)
except that as long as no defined event of default under the credit facility
then exists, Advance Stores will be permitted to pay dividends to Advance
Holding in an amount sufficient to cover the cash interest due on the
Debentures commencing October 15, 2003. Advance Stores was in compliance with
the above covenants under the credit facility as of July 14, 2001.
Advance Stores' 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, the Western
merger and the Carport acquisition. From fiscal 1996 through fiscal 2000,
Advance Stores opened 581 stores, seven new PDQ(R)s, six local area warehouses
and a Master PDQ(R), completed the Western merger (adding 545 net stores),
constructed two new distribution centers and expanded its Roanoke distribution
center. Advance Stores has financed its growth through a combination of
internally generated funds, borrowings under the credit facility and issuances
of equity. Capital expenditures for fiscal year 2000 were $70.6 million as
compared to $105.0 million in 1999. The capital expenditures for 1999 included
conversion and integration capital expenditures related to the Western merger.
In connection with the merger, Advance Stores has secured financing
commitments to provide the funds necessary to pay the cash portion of the
merger consideration to be paid to Discount shareholders and in-the-money
option holders, refinance the existing senior credit facilities of Advance
Stores ($285.3 million at July 14, 2001), repay Discount's senior indebtedness
and premiums ($210.8 million at August 28, 2001 plus $6.3 million in prepayment
premiums), purchase Discount's Gallman distribution facility from the lessor
(for a purchase price of approximately $34 million), and pay approximately $35
million in related transaction fees and expenses. In order to finance these
obligations and its ongoing operations, Advance Stores has received a binding
commitment, subject to customary conditions, for a senior secured credit
facility consisting of a $180 million tranche A term loan due 2006, a $305
million tranche B term facility due 2007, and a $160 million revolving credit
facility (including a letter of credit subfacility). The credit facility will
be jointly and severally guaranteed by Advance and all of Advance Stores'
existing and future domestic subsidiaries (including Discount and its
subsidiaries) and will be secured by substantially all of Advance Stores'
assets, the assets of its existing and future domestic subsidiaries (including
Discount and its subsidiaries), as well as the assets of Advance. Upon the
closing of the merger, Advance Stores will borrow the entire $485 million of
the
91
tranche A and B term loans to fund the merger and anticipates making an initial
borrowing of approximately $9 million under the revolving credit facility. In
addition, Advance Stores expects to have approximately $18 million in letters
of credit outstanding at the closing of the merger, which will reduce
availability under the revolving credit facility to approximately $133 million.
The balance of the revolving credit facility will be available for working
capital and other general corporate purposes.
In addition, Advance Stores completed an offering of its senior subordinated
notes on October 31, 2001, which resulted in gross proceeds of approximately
$186 million, before deducting commissions and expenses related to the
offering. The proceeds from that offering are currently being held in escrow
until the closing of the merger, at which point the escrowed funds will be
released to provide a portion of the funds needed to complete the merger. The
notes are unsecured obligations of Advance Stores and will mature in 2008. The
indenture governing the notes contains affirmative and negative covenants
applicable to Advance Stores and its subsidiaries that are customary for these
types of securities.
Advance Stores' new Advance Auto Parts stores, if leased, require capital
expenditures of approximately $120,000 per store and an inventory investment of
approximately $150,000 per store, net of vendor payables. A portion of the
investment in inventory is held at a distribution facility. 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.
Advance's future capital requirements will depend on the number of new
stores Advance opens and the timing of those openings within a given fiscal
year. Advance Stores opened 140 new stores during fiscal 2000 and anticipates
opening approximately 115 to 130 new stores though internal growth or strategic
acquisitions (excluding the Discount acquisition) during fiscal 2001, of which
53 have been opened or acquired as of July 14, 2001. In addition, Advance
anticipates opening approximately 125 new stores through internal growth or
strategic acquisitions during 2002. Advance expects its capital expenditures to
be approximately $80 million in 2001 (excluding the Carport and Discount
acquisitions). These amounts will relate to the new store openings, as well as
to the upgrade of Advance's information systems (including Advance's new POS
and EPC system), and to remodels and relocations of existing stores. In 2002,
Advance anticipates that its capital expenditures will be approximately $116
million, of which approximately $31 million will involve conversion and other
integration related expenditures.
Historically, Advance Stores has negotiated extended payment terms from
suppliers that help finance inventory growth, and Advance Stores believes that
it will be able to continue financing much of its inventory growth through such
extended payment terms. Advance Stores anticipates that inventory levels will
continue to increase primarily as a result of new store openings.
For the twenty-eight weeks ended July 14, 2001, net cash provided by
operating activities was $102.6 million. Of this amount, $21.4 million was
provided by net income. Depreciation and amortization provided an additional
$37.1 million, amortization of deferred debt issuance costs and bond discount
provided $7.6 million, and $36.5 million was provided as a result of net
increase in working capital and other operating activities. Net cash used for
investing activities was $51.1 million and was comprised of capital
expenditures and the purchase of net assets related to the Carport acquisition.
Net cash used in financing activities was $49.9 million and was comprised
primarily of payments on the existing credit facilities.
In fiscal 2000, net cash provided by operating activities was $104.0
million. This amount consisted of $19.6 million in net income, depreciation and
amortization of $66.8 million, amortization of deferred debt issuance costs and
bond discount of $13.1 million and a decrease of $4.5 million in net working
capital and other operating activities. Net cash used for investing activities
was $65.0 million and was comprised primarily of capital expenditures. Net cash
used in financing activities was $43.6 million and was comprised primarily of
net repayments of long-term debts.
In fiscal 1999, net cash used in operating activities was $21.0 million.
This amount consisted of a $25.3 million net loss, offset by depreciation and
amortization of $58.1 million and amortization of deferred
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debt issuance costs and bond discount of $12.2 million, and an increase of
$66.0 million in net working capital and other operating activities. Net cash
used for investing activities was $113.8 million and was comprised primarily of
capital expenditures of $105.0 million and cash consideration of $13.0 million
in the Western merger. Net cash provided by financing activities was $121.3
million and was comprised primarily of net borrowings.
In fiscal 1998, net cash provided by operating activities was $44.0 million.
This amount consisted of a $2.2 million net loss, offset by depreciation and
amortization of $30.0 million and amortization of deferred debt issuance costs
and bond discount of $7.7 million, and a decrease of $8.5 million of net
working capital and other operating activities. Net cash used for investing
activities was $230.7 million and was comprised primarily of capital
expenditures of approximately $65.8 million and cash consideration of
approximately $171.0 million in the Western merger. Net cash provided by
financing activities was $207.3 million and was comprised primarily of net
borrowings and issuance of equity.
Seasonality
Advance's business is somewhat seasonal in nature, with the highest sales
occurring in the spring and summer months. In addition, Advance's business can
be 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 automotive parts to
fail.
Quantitative and Qualitative Disclosures About Market Risks
Advance Holding currently utilizes no material derivative financial
instruments that expose it to significant market risk. Advance Holding is
exposed to cash flow and fair value risk due to changes in interest rates with
respect to its long-term debt. While Advance Holding 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. Advance Holding's
future exposure to interest rate risk decreased during the first and second
quarters of fiscal year 2001 and fiscal year 2000 due to decreased interest
rates and reduced variable rate debt.
Advance Holding's fixed rate debt consists primarily of outstanding balances
on the debentures and senior subordinated notes. Advance Holding's variable
rate debt relates to borrowings under the credit facility and the industrial
revenue bonds. Advance 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 Advance Holding's long-term debt at July 14, 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
July 14, 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
------ ------- ------ -------- ------- ---------- -------- --------
(dollars in thousands)
Long-term debt:
Fixed rate............ $ -- $ -- $ -- $ -- $ -- $281,450 $281,450 $245,581
Weighted average
interest rate........ -- -- -- -- -- 11.3% 11.3%
Variable rate......... $ -- $12,000 $4,000 $207,140 $60,000 $ 12,159 $295,299 $295,299
Weighted average
interest rate........ 5.9% 6.3% 7.6% 8.4% 8.7% 8.6% 6.9%
93
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses accounting
and reporting for all business combinations and requires the use of the
purchase method for business combinations. SFAS No. 141 also requires
recognition of intangible assets apart from goodwill if they meet certain
criteria. SFAS No. 142 establishes accounting and reporting standards for
acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and
intangibles with indefinite useful lives are no longer amortized but are
instead subject to at least an annual assessment for impairment by applying a
fair-value based test. SFAS No. 141 applies to all business combinations
initiated after June 30, 2001. SFAS No. 142 is effective for existing goodwill
and intangible assets beginning on December 30, 2001. SFAS No. 142 is effective
immediately for goodwill and intangibles acquired after June 30, 2001. Although
Advance Holding is currently evaluating the impact of SFAS Nos. 141 and 142,
management does not expect that the adoption of these statements will have a
material impact on existing goodwill or intangibles. For the twenty-eight week
period ended July 14, 2001, Advance Holding had amortization expense of
approximately $150,000 related to existing goodwill. Such amortization will be
eliminated upon adoption of SFAS No. 142. Advance Holding had no goodwill
expense during the fiscal years ended December 30, 2001, January 1, 2000 and
January 2, 1999.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 establishes accounting standards for
recognition and measurement of an asset retirement obligation and an associated
asset retirement cost and is effective for fiscal years beginning after June
15, 2002. Advance does not expect SFAS No. 143 to have a material impact on its
financial statements.
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Principal Stockholders of Advance Holding
A beneficial owner of a security includes any person who directly or
indirectly has or shares voting power and/or investment power with respect to
such security or has the right to obtain such voting power and/or investment
power within 60 days. Except as otherwise noted, each designated beneficial
owner in the table below has sole voting power with respect to the shares
beneficially owned by such person. The following table sets forth certain
information, as of October 25, 2001 with respect to the beneficial ownership of
common stock of Advance Holding by:
. each person who beneficially owns more than 5% of such shares;
. each of the executive officers named in the summary compensation table
and certain other executive officers;
. each member of the board of directors of Advance Holding; and
. all executive officers and directors of Advance Holding as a group.
Amount of
Beneficial Percent of
Name Ownership Class
---- ---------- ----------
Freeman Spogli & Co. LLC(1).......................... 11,022,652 39.0%
John M. Roth(1).................................... --
Mark J. Doran(1)................................... --
Ronald P. Spogli(1)................................ --
WA Holding Co.(2).................................... 11,474,606 40.6%
Jeffrey B. Conner(4)............................... --
Ripplewood Partners, L.P. and affiliates(3).......... 2,891,795 10.2%
Timothy C. Collins(3).............................. --
William L. Salter(4)................................. 5,000 *
Nicholas F. Taubman(5)............................... 1,398,632 4.1%
Arthur Taubman Trust dated July 13, 1964(6).......... 1,148,633 3.2%
Garnett E. Smith(8)(9)............................... 492,666 1.7%
Lawrence P. Castellani(7)(8)(9)...................... 535,000 1.8%
Jimmie L. Wade(8)(9)................................. 55,334 *
David R. Reid(8)(9).................................. 48,667 *
Paul W. Klasing(8)(9)................................ 46,334 *
Eric M. Margolin..................................... 14,300 *
S. Lynn Stevens(8)(9)................................ 40,000 *
Jeffrey T. Gray...................................... 21,500 *
Robert E. Hedrick.................................... 14,300 *
All directors and officers as a group (16
individuals)........................................ 29,209,419 98.9%
--------
* Less than 1%
(1) 11,022,652 shares of common stock of Advance Holding are held of record by
FS Equity Partners IV, L.P., or FSEP IV. As general partner of FSEP IV, FS
Capital Partners LLC has the sole power to vote and dispose of the shares
owned by FSEP IV. Messrs. Doran, Roth, Spogli, Bradford M. Freeman, Todd W.
Halloran, Jon D. Ralph, Charles P. Rullman, J. Frederick Simmons and
William M. Wardlaw are the managing members of FS Capital Partners LLC, and
Messrs. Doran, Freeman, Halloran, Ralph, Roth, Rullman, Simmons, Spogli and
Wardlaw are the members of Freeman Spogli & Co. LLC, and as such may be
deemed to be the beneficial owners of the shares of common stock of Advance
Holding and rights to acquire common stock of Advance Holding owned by FSEP
IV. Freeman Spogli & Co. and its members
(footnotes continued on the following page)
95
have, in addition, sole power to vote 2,891,795 shares of common stock of
Advance Holding owned of record by Ripplewood Partners, L.P. and Ripplewood
Advance Auto Parts Employee Fund I L.L.C. pursuant to an irrevocable proxy
delivered to Freeman Spogli & Co. under the terms of the stockholders
agreement. Such irrevocable proxy will expire upon an initial public
offering by Advance Holding (or by Advance Auto Parts, Inc. following the
merger) (the issuance of shares in the merger will not be considered an
initial public offering for this purpose). Freeman Spogli & Co. neither has
shared nor sole power to dispose of shares held by Ripplewood Partners or
the Ripplewood employee fund. The business address of Freeman Spogli & Co.,
FSEP IV, FS Capital, and Messrs. Freeman, Spogli, Wardlaw, Simmons, Roth,
Rullman, Ralph, Halloran and Doran is 11100 Santa Monica Boulevard, Suite
1900, Los Angeles, California 90025.
(2) 11,474,606 shares of common stock of Advance Holding are held of record by
WA Holding Co., or WAH, a wholly owned subsidiary of Sears Roebuck & Co.
As the sole stockholder of WAH, Sears has the sole power to vote and
dispose of the shares owned by WAH. As Vice President, Business
Development of Sears, Mr. Conner has the power to direct the voting of the
shares of common stock of Advance Holding held by WAH, and as such may be
deemed to be the beneficial owner of the shares of common stock of Advance
Holding owned by WAH. The business address of WAH is 3333 Beverly Road,
Hoffman Estates, Illinois 60179.
(3) 2,763,110 shares of common stock of Advance Holding are held of record by
Ripplewood Partners, and 128,685 shares of common stock of Advance Holding
are held of record by the Ripplewood employee fund. Ripplewood Holdings,
L.L.C. is the sole general partner of Ripplewood Partners and the sole
managing member of the Ripplewood employee fund and, therefore, has the
sole power to dispose of the shares owned by Ripplewood Partners or the
Ripplewood employee fund. Until an initial public offering by Advance
Holding (or by Advance Auto Parts, Inc. following the merger) pursuant to
the stockholders agreement and an irrevocable proxy required by the terms
thereof, Freeman Spogli & Co. has sole voting power over all of the shares
of common stock of Advance Holding (or of Advance Auto Parts, Inc.
following the merger) held by Ripplewood Partners and the Ripplewood
employee fund. Mr. Collins is the Senior Managing Director and Chief
Executive Officer of Ripplewood Holdings L.L.C. and as such may be deemed
to be the beneficial owner of the shares of common stock of Advance
Holding and the rights to acquire common stock of Advance Holding owned by
Ripplewood Partners and the Ripplewood employee fund. The business address
of Ripplewood Holdings L.L.C., Ripplewood Partners, the Ripplewood
employee fund, and Mr. Collins is 1 Rockefeller Plaza, 32nd Floor, New
York, New York 10020.
(4) The business address of Messrs. Salter and Conner is 3333 Beverly Road,
Hoffman Estates, Illinois 60179.
(5) Includes 250,000 shares subject to immediately exercisable options. Mr.
Taubman's business address is 5673 Airport Road, Roanoke, Virginia 24012.
(6) Includes 250,000 shares subject to immediately exercisable options. The
trustees of the Arthur Taubman Trust dated July 13, 1964 are Eugenia
Taubman, who is the spouse of Nicholas F. Taubman, Grace W. Taubman, who
is his mother, and First Premier Bank. The business address of the trust
is 5673 Airport Road, Roanoke, Virginia 24012.
(7) Includes an aggregate of 11,890 shares held by Mr. Castellani's children.
(8) Includes 448,600 shares, which have been acquired by Messrs. Smith,
Castellani, Klasing, Reid, Wade, Gray, Margolin, Stevens and Hedrick
pursuant to the stock subscription plans.
(9) Includes shares of common stock of Advance Holding subject to options
beneficially owned by the following persons and exercisable within 60 days
of October 25, 2001: Mr. Smith--242,666 options; Mr. Castellani--350,000
options; Mr. Klasing--26,334 options; Mr. Reid--28,667 options; Mr. Wade--
30,334 options; Mr. Margolin--no options; Mr. Gray--11,333 options; Ms.
Stevens--20,000 options; Mr. Hedrick--no options; and Mr. Salter--5,000
options.
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Related Party Transactions of Advance
Affiliated Leases
Advance leases its Roanoke, Virginia distribution center, an office and
warehouse facility, two warehouses, 20 of its stores and three former stores
from Nicholas F. Taubman or members of his immediate family, and its corporate
headquarters from Ki, L.C., a Virginia limited liability company owned by two
trusts for the benefit of a child and a grandchild of Mr. Taubman. Rents for
the affiliated leases may be slightly higher than rents for non-affiliated
leases, but Advance does not believe the amount of such difference to be
material. In addition, terms of the affiliated leases may be more favorable to
the landlord than those contained in leases with non-affiliates. For example,
the rent payable during the option term is not fixed or required to be
commensurate with prevailing market rents then in effect. Instead, rent during
the option term is subject to negotiation between the landlord and tenant. The
leases also provide that the tenant, and not the landlord, is responsible for
structural maintenance. However, in connection with the Recapitalization,
certain other terms of the leases with affiliates (including provisions
relating to assignment, damage by casualty and default cure periods) were
amended so that they would be no less favorable to Advance than non-affiliated
leases. All affiliated leases are on a triple net basis. Lease expense for
affiliated leases was $2.9 million for fiscal 1998 and $3.3 million for each of
fiscal 1999 and 2000.
Three Western Auto stores in Puerto Rico are on the premises of Sears stores
and the buildings are subleased from Sears. The rental rates were established
prior to the Western merger by arm's-length negotiation between Advance and
Sears, and Advance believes that the rent and terms of the subleases reflect
market rates and terms at the time of the Western merger. During fiscal 1999
and 2000, Advance paid Sears approximately $681,000 and $660,000, respectively,
for the use of these facilities.
Stockholders Agreement
Mr. Taubman and the Arthur Taubman Trust Dated July 13, 1964, Freeman Spogli
& Co., Ripplewood Partners, L.P. and Ripplewood Advance Auto Parts Employee
Fund I L.L.C., WAH and Advance Holding have entered into a stockholders
agreement that will continue in force following the merger as to the stock and
options of Advance Auto Parts, Inc. Under the stockholders agreement, Freeman
Spogli & Co., the Ripplewood entities, WAH and Mr. Taubman and the Taubman
Trust have the right to purchase their pro rata share of certain new issuances
of securities, including capital stock, by Advance Holding (and by Advance Auto
Parts, Inc. following the consummation of the merger). Prior to an initial
public offering, any transfers of common stock of Advance Holding (and as to
Advance common stock following consummation of the merger) are subject to
rights of first refusal in favor of (i) Freeman Spogli & Co. and WAH on a pro
rata basis, in the case of a transfer by Ripplewood, (ii) WAH, in the case of a
transfer by Freeman Spogli & Co. and (iii) Freeman Spogli & Co., in the case of
a transfer by WAH. The stockholders agreement further provides tag-along rights
such that (i) upon transfers of common stock of Advance Holding (and as to
Advance common stock following consummation of the merger) by Freeman Spogli &
Co. (excluding transfers to affiliates), Mr. Taubman, the Taubman Trust, the
Ripplewood entities and WAH will have the right to participate in such sales on
a pro rata basis, (ii) upon transfers of common stock of Advance Holding (and
as to Advance common stock following the merger) by WAH (excluding transfers to
affiliates of WAH), Freeman Spogli & Co., Mr. Taubman, the Taubman Trust, and
the Ripplewood entities will have the right to participate in such sales on a
pro rata basis and (iii) upon transfers of common stock of Advance Holding (and
to Advance common stock, following the merger) by the Ripplewood entities
(excluding transfers to their affiliates), Freeman Spogli & Co. will have the
right to participate in such sales on a pro rata basis, and if Freeman Spogli &
Co. exercises such right, Mr. Taubman, the Taubman Trust, and WAH will have the
right to participate in such sales on a pro rata basis. In addition, if Freeman
Spogli & Co. sells all of its holdings of common stock of Advance Holding (and
as to Advance common stock after consummation of the merger), Ripplewood, Mr.
Taubman and the Taubman Trust will be obligated to sell all of their shares of
common stock of Advance Holding (and as to Advance common stock after
consummation of the merger) at the request of Freeman Spogli & Co. Without the
consent of the majority of the other stockholders, Sears will not sell WAH to a
third party so as to dispose of its indirect interest in Advance.
97
The stockholders agreement further provides that the parties will vote at
each annual meeting of Advance Holding (and of Advance Auto Parts, Inc.
following the consummation of the merger) to elect to the board of directors:
the chief executive officer of Advance, three nominees of Freeman Spogli & Co.,
three nominees of WAH, one nominee of Ripplewood and Mr. Taubman. Certain
transfers of common stock of Advance Holding (and as to Advance common stock
after consummation of the merger) by either Freeman Spogli & Co. or WAH will
reduce the number of directors such parties are entitled to nominate.
Ripplewood has granted Freeman Spogli & Co. an irrevocable proxy to vote
Ripplewood's stock in Advance Holding (and in Advance Auto Parts, Inc.
following the consummation of the merger) on all matters, expiring upon an
initial public offering of common stock by Advance (the issuance of common
stock in the merger is not an initial public offering), but Freeman Spogli &
Co. will nominate one director designated by Ripplewood. The Ripplewood
director will agree to vote with the Freeman Spogli & Co. directors on all
matters prior to an initial public offering of common stock by Advance.
Pursuant to the stockholders agreement, without the approval of Mr. Taubman,
Advance Holding (Advance following consummation of the merger) may not (i)
issue any capital stock for consideration at less than fair market value,
unless the capital stock is issued in a financing transaction fair to and in
the best interests of Advance Holding (and of Advance following consummation of
the merger), subject to certain specified exceptions, (ii) enter into any
transaction with any affiliate of Freeman Spogli & Co., Ripplewood, or Sears,
except on terms no less favorable to Advance Holding (Advance following
consummation of the merger) than are available from an unaffiliated party, or
(iii) amend the articles of incorporation or bylaws of Advance Holding (and of
Advance following consummation of the merger) or the stockholders agreement in
a manner which would adversely affect the rights and obligations of Mr.
Taubman, subject to certain specified exceptions.
At the closing of the merger, the stockholders agreement will be amended to
provide for the election of Peter J. Fontaine, Discount's current Chairman and
Chief Executive Officer, as a member of the board of directors of Advance and
provide entities that Mr. Fontaine controls with the right to participate in
certain demand registrations initiated by others and unlimited piggyback
registrations with respect to the shares of Advance common stock received in
the merger, and to obligate Mr. Fontaine and such entities to agree, subject to
certain exceptions, not to sell such shares for certain time periods following
certain public offerings by Advance.
Options Granted to Mr. Taubman and the Taubman Trust
In connection with the Recapitalization, Advance Holding entered into an
option agreement with Mr. Taubman and the Taubman Trust and granted immediately
exercisable options to purchase 250,000 shares of common stock of Advance
Holding (which will be as to Advance common stock after consummation of the
merger) to each of Mr. Taubman and the Taubman Trust. The options have an
initial exercise price of $10.00, with the exercise price increasing by $2.00
on each anniversary of the Recapitalization. Both the exercise price and the
number of shares which may be purchased pursuant to the options, are subject to
certain adjustments. The options will expire if not exercised by the seventh
anniversary of the Recapitalization. Shares received upon exercise of all or
any part of the option by Mr. Taubman or the Taubman Trust will be subject to
the stockholders agreement.
Registration Rights
Freeman Spogli & Co., WAH, the Ripplewood entities, Mr. Taubman and the
Taubman Trust, under the stockholders agreement, have registration rights with
respect to approximately 27.4 million shares of the Advance Holding common
stock that they hold. Under the stockholders agreement, beginning 180 days
after the consummation of an initial public offering of Advance Holding's
stock, these stockholders may require Advance Holding to register for resale
under the Securities Act their shares of common stock. The merger is not an
initial public offering for this purpose. These registration rights include the
following provisions:
Demand Registration Rights. Advance Holding has granted three demand
registrations to Freeman Spogli & Co. and WAH, two demand registrations to Mr.
Taubman and the Taubman Trust, and one demand registration to Ripplewood.
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Piggyback Registration Rights. All holders of shares with demand
registration rights also have unlimited piggyback registration rights.
Other Rights. Advance Holding granted WAH the right, beginning 180 days
after the consummation of an initial public offering, to distribute its shares
of common stock to stockholders of Sears, Roebuck & Co.
Expenses. Advance Holding is responsible for paying all registration
expenses, excluding underwriting discounts and commissions.
Indemnification. Advance Holding has agreed to indemnify Freeman Spogli &
Co., WAH, Ripplewood, Mr. Taubman and the Taubman Trust, and the control person
of each of these against certain liabilities under the Securities Act.
At the closing of the merger, the stockholders agreement will be amended to
grant to Peter Fontaine, and the entities he controls, unlimited piggyback
registration rights. The obligations of Advance Holding will be binding on
Advance Auto Parts, Inc. after the merger.
In connection with the purchase of an aggregate of $6 million principal
amount of senior subordinated notes of Advance Stores by an affiliate of Mr.
Taubman and an affiliate of the Taubman Trust in Advance Stores' October 31,
2001 notes offering, Advance Stores granted such affiliates one demand
registration right for the filing of a shelf registration statement with
respect to those notes. See "The Merger--Financing Commitments."
Indemnification Agreements
Advance has offered indemnification agreements to its directors since the
Recapitalization.
Certain Payments and Loans
In connection with the Recapitalization, a portion of the shares of common
stock and all of the shares of preferred stock of Advance Holding then issued
and outstanding were converted into the right to receive in the aggregate
approximately $351.0 million in cash and certain options to purchase shares of
common stock of Advance Holding. In addition, Freeman Spogli & Co. and
Ripplewood, stockholders of Advance Holding, received collectively a $5.0
million fee for arranging the financing, performing advisory and consulting
services and negotiating the Recapitalization, and Freeman Spogli & Co.,
Ripplewood and Mr. Taubman and the Taubman Trust received collectively a $3.5
million fee for performing similar services with respect to the Western merger.
In connection with the Recapitalization, certain employees of Advance Holding,
including the executive officers, received an aggregate of approximately $11.5
million in bonuses, with Mr. Smith receiving $7.0 million and Messrs. Reid,
Wade and Klasing and Ms. Stevens receiving $150,000 each.
In September 2001 Advance loaned Garnett E. Smith, Vice Chairman of the
Board, $1.3 million. This loan is evidenced by a full recourse promissory note
bearing interest at prime rate, with such interest payable annually, and due in
full in five years from its inception. Payment of the promissory note is
secured by a stock pledge agreement that grants Advance a security interest in
all shares of Advance common stock acquired by Mr. Smith under Advance's stock
subscription plan.
Other Transactions with Sears
On November 2, 1998, Western merged into a subsidiary of Advance Stores. In
the Western merger, WAH was issued 11,474,606 shares of common stock of Advance
Holding, representing approximately 40.6% of the outstanding common stock of
Advance Holding. In connection with the Western merger, WAH became entitled,
under the stockholders agreement described above, to nominate three directors
to the board of directors of Advance Holding. At December 30, 2000, Jeffrey N.
Boyer, Jeffrey B. Conner and William L. Salter served on the board of directors
as WAH nominees. Mr. Boyer has since resigned from the Board of Directors.
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In connection with the Western merger, Western entered into agreements with
Sears in order to continue to obtain supplies of certain products bearing
trademarks owned by Sears for the wholesale segment and the service stores for
three years. Pursuant to these agreements, Western purchased directly from the
manufacturers approximately $9.2 million, $13.5 million and $6.0 million of
these products in fiscal 2000, 1999 and fiscal 1998, respectively, and Advance
believes that Sears received fees in association with such sales. The prices
paid per unit for the products sold in the Western Auto stores were determined
prior to the Western merger by arm's-length negotiation between Advance and
Sears.
In connection with the Western merger, Western entered into agreements with
Sears and its affiliates whereby consumers can make retail purchases at the
Western Auto retail stores and the independent dealer stores supplied by the
wholesale segment using the Sears credit card and other Western private label
credit cards. The Sears affiliates are paid a discount fee on each retail
transaction that is competitive with the fees paid by Western and Advance to
third party credit card providers such as Visa, MasterCard and American
Express. Under this agreement, Western incurred approximately $405,000,
$348,000 and $657,000 in discount fees in fiscal 2000, 1999 and fiscal 1998,
respectively. In addition, a portion of a service store and certain Western
employees were leased to Sears during fiscal 1999 and 1998, for use in Sears'
administration of the credit card program. The lease payments, which aggregated
approximately $2.3 million and $697,000 in fiscal 1999 and fiscal 1998,
respectively, are intended to reimburse Advance for its expense in connection
with the facility and the employees. The leasing arrangement was terminated
prior to fiscal 2000.
In connection with the Western merger, Sears provided certain services,
including payroll and accounts receivable, to effect an orderly transition of
Western Auto Supply Company from a subsidiary of Sears to a subsidiary of
Advance Stores. As of January 1, 2000, these services were transitioned to
Advance. Pursuant to this arrangement, Advance incurred $887,000 and $844,000
for services performed by Sears for Advance in fiscal 1999 and fiscal 1998, of
which $844,000 was accrued at January 2, 1999. As of January 1, 2000, all
amounts under this arrangement had been paid.
During fiscal 1999, Advance signed an agreement with Sears Logistic Systems,
an affiliate of Sears, to provide Advance with billing administration services
related to certain courier firms used by Advance. Sears Logistic Systems
manages the invoice processing procedure and bills Advance for the courier
services provided by the outside firm plus a four percent administration fee.
During fiscal 1999, Advance paid Sears Logistic Systems approximately $62,000.
Under the terms of an insurance program established by a Sears subsidiary on
behalf of Western prior to the Western merger, with respect to certain
insurable losses where Advance may otherwise have a retention obligation or
deductible under the applicable insurance policy providing coverage, Advance
will be entitled to be reimbursed by Sears for its losses. No material payments
were made under the insurance program in fiscal 1999 or fiscal 1998. Advance
received approximately $1.5 million during fiscal 2000 for a claim processed
under the insurance program.
In connection with the Western merger, Sears and Advance entered into an
agreement under which Advance may be given a priority position as a local
supplier to up to approximately 250 Sears Auto Centers or National Tire &
Battery stores that are located near Advance stores. Under this agreement, upon
request from a Sears Auto Center or National Tire Store, Advance will deliver
parts and charge a price negotiated at arm's-length prior to the Western merger
between Advance and Sears. In addition, if the volume of activity under this
agreement meets certain agreed-upon thresholds, Sears will receive rebates on
its purchases. The supply arrangement was phased in by Advance and Sears during
late fiscal 1998; therefore, no material purchases were made by Sears in fiscal
1998. During fiscal 2000 and 1999, Advance sold $7.5 million and $5.3 million
net, respectively, of merchandise to Sears under the supply agreement.
In connection with the Western merger, Sears arranged to buy from Advance
certain products in bulk for its automotive centers, at cost plus a set
handling fee. In fiscal 1998, Advance shipped approximately $2.1 million in
products to Sears. During the first quarter of fiscal 1999, Advance made final
shipments to Sears under this arrangement totaling $530,000.
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INFORMATION CONCERNING DISCOUNT
Discount's Business
General
Discount Auto Parts, Inc., which operates directly and through its wholly
owned subsidiaries, is one of the Southeast's leading specialty retailers and
suppliers of automotive replacement parts, maintenance items and accessories to
both DIY consumers and DIFM consumers, or professional mechanics and service
technicians, based on store count. As of August 28, 2001, Discount operated a
chain of 668 Discount Auto Parts stores, with 436 stores located throughout
Florida, 118 stores in Georgia, 46 stores in Louisiana, 42 stores in
Mississippi, 19 stores in Alabama, and seven stores in South Carolina. As of
August 28, 2001, 168 of the 668 stores provided commercial delivery service.
Each Discount Auto Parts store carries an extensive line of brand name
replacement "hard" parts, such as starters, alternators, brake pads, brake
shoes and water pumps, for domestic and imported cars, vans and light trucks,
as well as brand name maintenance items and accessories. Discount is not in the
business of selling tires or performing automotive repairs or installations.
Discount has achieved revenue growth in each of its five latest fiscal
years. Net sales have increased to $661.7 million in fiscal 2001 from $405.2
million in fiscal 1997. However, over the same period, income from operations
has fluctuated, increasing from $47.2 million in fiscal 1997 to $57.1 million
in fiscal 2000, but decreasing to $42.2 million in fiscal 2001. The number of
stores has increased to 666 as of the end of fiscal 2001 from 400 at the end of
fiscal 1997.
Discount has sought to implement clear and effective operating and growth
strategies. Discount's operating strategies include building a highly
knowledgeable and motivated work force, developing customers for a lifetime,
attaining leading market share in each of its existing markets and utilizing
advanced information systems. With respect to growth strategies, Discount has
emphasized new store openings, and has sought to standardize new store formats
and continually improve merchandising concepts. Effectively executing these
strategies has helped Discount provide customers with superior service, value
and parts selection at conveniently located, well-designed stores. The
continued implementation and expansion of a commercial delivery program has
also become an important part of Discount's growth strategy.
In 1971, Discount was founded with a single 800 square foot store in Winter
Haven, Florida by Herman Fontaine, his son, Denis L. Fontaine, and other
members of the Fontaine family. Since Discount's inception, members of the
Fontaine family, including Herman Fontaine, Denis L. Fontaine and Peter J.
Fontaine, managed Discount and played key roles in formulating and carrying out
its business strategies. Herman Fontaine served as President from 1972 until
1978 and as the Chairman of the Board from 1972 until 1986, at which time he
became Chairman Emeritus. Although he no longer serves as an executive officer
or director, Discount continues to have the benefit of Herman Fontaine's advice
and counsel. Denis L. Fontaine assumed the roles of Chief Executive Officer and
President in 1978 and held such positions until his death in June 1994. Peter
J. Fontaine, who has been with Discount for over 26 years and previously served
as Chief Operating Officer, was elected as President and Chief Executive
Officer in 1994 and continues to hold the position of Chief Executive Officer.
William C. Perkins, who had been with Discount for over 16 years and served as
Chief Financial Officer from 1992 to 1996, assumed the position of Chief
Operating Officer in 1994 and President on February 1, 1997, holding such
positions until he left Discount in January 2001.
Operating Strategies
Building the Team
Guided by the principle "First build the team, then the team will build the
business," Discount has made a commitment to building and retaining employees
who are highly motivated and knowledgeable team players. Discount provides
extensive formal and on-the-job team-building and training programs that focus
on providing superior customer service, automotive parts knowledge, selling
skills, store operational procedures and personal
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development. Financial incentives and stock ownership are also an important
element of Discount's team building focus. As a result of this employee-focused
strategy, Discount believes it has one of the highest rates of sales per
employee in its industry. In addition, management believes that Discount has
one of the lowest employee turnover rates in the industry. The low employee
turnover rate tends to lead to superior customer service and product knowledge,
which are considered to be key factors in attracting customers in the DIY and
DIFM automotive industry.
The CEO, Peter Fontaine, has built a dedicated and knowledgeable management
team. The management team has significant experience in all aspects of
Discount's operations. There are 59 members in the senior management team,
including 39 Division Managers. These team members have an average of 13 years
of experience with Discount. The team is profit-oriented and growth-minded and
has a solid understanding of the automotive aftermarket industry based on their
many years of experience.
Developing Customers for a Lifetime
Discount believes that the attributes most valued by DIY consumers are
superior customer service, convenient and accessible neighborhood locations,
broad product selection and competitive everyday low prices. In an effort to
develop DIY customers for a lifetime, Discount is committed to developing,
maintaining and improving these key value drivers.
Superior Customer Service
Customer service has enabled Discount to develop a loyal customer base and
become a market leader. Customer service is enhanced by in-store computerized
catalogs to assist in the selection of parts, liberal return policies, and
lifetime warranties on certain parts. Most stores also offer free testing of
starters, alternators, and batteries, battery charging, installation assistance
for batteries and windshield wipers, and the use of specialty tools for do-it-
yourself installation.
Discount's special order program is designed with the goal of assuring the
broadest availability of its merchandise at each of Discount's stores. The
special order program provides Discount on-line accesses to numerous third
party warehouse distributors with which Discount has relationships. If
merchandise is unavailable at a particular store or one of Discount's express
warehouses, Company team members can order an item on-line and generally have
it available for the customer within 24 hours.
Discount's stores are open seven days a week, 363 days per year, typically
from 8 a.m. to 9 p.m. with some higher volume stores having extended hours in
order to better serve the DIY customer.
Convenient and Accessible Neighborhood Locations
Locating stores at sites that are convenient and accessible to its customers
is an essential part of Discount's customer service philosophy. Discount
believes that over 50% of its customers view convenience and accessibility as
the number one driver in choosing an automotive parts store. Given this
customer priority, one of Discount's strategies has been to cluster stores in
neighborhood locations in order to offer its customers increased convenience
and accessibility. Discount's strategy is generally to draw customers from a
1.5 to 2 mile radius while many of its competitors attempt to draw customers
from a larger radius. Management believes Discount's relatively low cost
structure gives it the ability to profitably operate stores in close proximity,
thereby offering customers more convenience than most of its competitors. In
addition, Discount attempts to build new stores in locations that are easily
accessible from a number of major roadways.
Broad Product Selection
Discount offers a wide selection of automotive replacement parts,
maintenance items and accessories designed to cover a broad range of specific
vehicle applications. Depending on the store format and including
102
the inventory at the Parts Express warehouses, a typical Discount Auto Parts
store generally carries between approximately 14,000 and 42,000 SKU's.
Discount's operating strategy emphasizes automotive replacement hard parts.
Over the past several years, in order to support this strategy, Discount has
generally continued to substantially increase the number of replacement hard
parts carried in its stores.
Replacement hard parts sold at Discount's stores include brake shoes, brake
pads, belts, hoses, starters, alternators, batteries, shock absorbers, struts,
CV half shafts, carburetors, transmission parts, clutches, electronic
components, suspension, chassis and engine parts. Discount also offers complete
engines that are stocked at Parts Express warehouses and its Lakeland, Florida
distribution center. Other products include maintenance items, such as oil,
antifreeze, brake and power steering fluids, engine additives, car paints,
protectants and waxes; and accessories, such as floor mats, seat covers and car
stereos and speakers.
One of Discount's strategies is to carry a wide selection of different
automotive replacement parts as opposed to having multiple brand names and SKUs
for any one part. As a result, Discount believes that its product selection
satisfies a broader range of DIY demands with fewer SKUs than the product
selection of its competitors. Discount emphasizes brand names and other high
quality products among broad product lines.
Price Leadership
Discount utilizes an everyday low price strategy with prices that are
generally at or below those of its competitors in the market area served by
each store. Discount's depot stores generally offer even lower pricing than its
mini-depot stores. Along with everyday low prices, Discount often runs special
promotional pricing on selected products. Discount's name "Discount Auto Parts"
reinforces Discount's pricing strategy. Discount promotes both its name and its
pricing strategy through newspaper, direct mail, radio and television
advertisements, and through in-store promotional signage and displays. Most of
Discount's stores have a freestanding highly visible pole or marquee sign
promoting special prices and customer service programs.
In an effort to offer the lowest price to its customers, Discount
continually seeks to reduce the purchasing and distribution costs of its
merchandise. Discount achieves such cost reductions by working with its vendors
to secure product cost savings and other benefits, making volume purchases,
achieving efficiencies in its distribution system, and achieving higher
productivity at the store level. Discount believes its ability to control
costs, and thereby maintain price leadership, is a key advantage over its
competitors.
In March 2000, Discount engaged the firm of Cap Gemini Ernst & Young to
assist it in a comprehensive supply chain review. The review, which included
evaluation of ways to lower distribution costs, reduce total inventory, improve
inventory turns and improve overall gross margins, was completed in the fourth
quarter of fiscal 2001. Discount has begun to implement and continues its
implementation of certain recommendations that developed from this review.
Leading the DIY Market
Discount's goal is to be the leading DIY specialty retailer of automotive
parts and accessories in each of its existing markets and prospective markets.
Discount believes its ability to achieve market leadership is dependent upon
successful implementation of its operating strategies and careful selection of
new markets and store sites. Discount believes that market leadership provides
higher consumer name recognition and economies of scale in purchasing,
distribution, advertising, marketing and management.
Discount is the largest DIY specialty retailer of automotive parts and
accessories in Florida. As of August 28, 2001, 436 (65%) of Discount's 668
stores were located in Florida. The demographics within Florida are favorable
for continued growth. In particular, Florida ranks third in the nation in the
total number of registered cars and light trucks, is the fourth most populous
state and continues to be one of the fastest growing states in the U.S.
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Discount believes the strength of its market position in Florida has
provided a competitive advantage and a solid foundation for further expansion
into nearby southeastern states including Georgia, Alabama, South Carolina,
Mississippi and Louisiana. These states provide many of the same favorable
conditions and opportunities that exist in Florida.
Utilizing Advanced Information Systems
In order to maintain its competitive position, Discount emphasizes and
continually invests in advanced distribution and information systems. As a
result of continually updating these systems with state-of-the-art equipment,
management believes Discount has some of the most advanced integrated
distribution and point-of-sale capabilities in its industry. These systems
provide many benefits, including lower distribution and operating costs,
improved in-stock positions at its stores and enhanced customer service. In
addition, over the past two fiscal years, Discount made several enhancements to
its existing systems and introduced new technology.
In fiscal 2001, the primary system changes and enhancements included the
introduction of state-of-the-art warehouse systems technology at the new
Mississippi distribution center, implementation of new distribution center
inventory replenishment software and improvements to Discount's inventory
management systems. In fiscal 2000, the software utilized for the commercial
delivery program was enhanced to better serve the commercial component of the
business and Discount implemented a Data Warehouse. The Data Warehouse provides
information on customer transactions and inventory levels and facilitates
better management of customer service and inventory levels. Also, during fiscal
2000, Discount invested in radio frequency ("RF") technology in its stores. The
RF technology enables the stores to have real time knowledge of their inventory
levels through the re-order and cycle count processes. Discount plans to
continue to upgrade its systems through the integration of additional related
specialized software over the next several years. All of these changes are
designed to provide enhanced customer service and improve supply chain
efficiencies.
Distribution
Discount's Lakeland, Florida distribution system has one of the most
advanced inventory management information systems in the industry. The system
utilizes computer-aided, laser scanning and wireless technology, which
interfaces with Discount's management information and point-of-sale systems.
The system features computer aided ordering and inventory management, having
the capability to monitor inventory levels and determine store by store product
needs. Discount has a warehouse management system in Lakeland referred to as
the Wizard system ("Wizard"). Wizard provides support for the improvement of
Discount's efficiency regarding shipment of merchandise. The system utilizes
wireless hand held bar code scanning terminals which operate in a real time
environment and which are integrated with a racking and flow system featuring
conveyers and computerized sorting devices. These integrated systems enable
Discount's team members to efficiently pick, assemble and palletize merchandise
for shipment to individual stores. All product movement, including receiving,
put-away, restock, cycle counting, picking and shipping, is monitored and
tracked by Wizard.
Discount's new distribution center located in Gallman, Mississippi utilizes
an array of new technologies designed to increase efficiency by the increased
use of automation. New technologies such as the gantry robotic palletizer,
carousel picking system, and pick-to-light technology are being used at the
Gallman facility. As with the Lakeland facility, radio frequency hand held
units are also used at the Gallman facility. The new equipment technology is
driven by a new warehouse management system (Exceed 2000 and Succeed Warehouse
Optimizer) purchased from EXE Technologies. The software technology in turn
interfaces with Discount's host systems at its corporate headquarters.
Stores typically place orders electronically each week with Discount's two
distribution centers. These orders are generally delivered within 48 hours of
receipt by Discount's fleet of trucks and trailers.
Discount's main distribution center, which also houses its headquarters and
administrative offices, is located in Lakeland, Florida, on property owned by
Discount. The total facilities (including parking areas)
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currently occupy the majority of a 31.5 acre tract. The facilities front
Interstate 4, the east-west interstate highway that cuts across central
Florida. Discount's distribution center is comprised of approximately
600,000 square feet and is capable of serving approximately 700 stores.
Discount opened its second distribution center in May 2001. The second
distribution center, which is located in Gallman, Mississippi, comprises
approximately 400,000 square feet and is capable of supporting approximately
450 stores. The Gallman, Mississippi distribution facility, which cost
approximately $43 million to construct and equip, was financed in large part
through a $34 million lease arrangement established in May 2000. Discount
commenced operations in the new distribution facilities in May 2001 and began
making the lease payments under the lease arrangement in June 2001.
Store Operations
Discount has point-of-sale computer terminals at all of its stores, which
communicate interactively with Discount's distribution and management systems.
These terminals decrease transaction times, reduce register lines and eliminate
labor time previously spent in price labeling of merchandise. In addition,
point-of-sale terminals perform valuable functions for management. Since these
terminals capture sales information at the time of the transaction, management
can generate real time sales reports that assist in-store and Company-wide
planning. The point-of-sale system also has an automated suggested reordering
function that is designed to help increase store level in-stock positions. The
automation of the re-order process is believed to have decreased the time and
labor required for store inventory management.
During fiscal 1999, Discount completed the implementation of a new perpetual
inventory system for its stores. This system allows Discount to better manage
specific store level inventories based on the customers buying patterns for a
particular store location.
Growth Strategies
Continuing New Store Openings
Discount's new store opening plans have been impacted by Discount's pending
transaction with Advance Auto Parts. The merger agreement with Advance Auto
Parts imposes limits on new store openings while that agreement is in effect.
Although Discount had plans to add approximately 20 to 40 stores during fiscal
2002, Discount will open no more than seven new stores prior to the anticipated
closing of the merger in November or December 2001. If the merger were not to
close, Discount anticipates that it would add between 12 and 20 new stores in
fiscal 2002. Discount's new stores are planned to utilize Discount's
standardized store formats, with efforts to constantly make adjustments to
these standardized store formats in an effort to improve merchandising
concepts. In the last five fiscal years, Discount has opened an average of 70
stores per year, with slower new store growth in fiscal 2001, during which
Discount opened 31 new stores. Discount also closed eight stores during fiscal
2001.
In certain Florida markets, Discount has opened stores in close geographic
proximity to other Discount Auto Parts stores. This operating strategy is
designed to help Discount establish a competitive position in each of
Discount's markets as well as to support its strategy of providing the customer
with shopping convenience. Although the new stores tend to attract sales that
would otherwise have been made in other Discount Auto Parts stores, management
believes that the negative impact on comparable store sales is often
substantially offset by Discount's ability to leverage costs such as
advertising and store management expenses. Discount believes that in the long
term, the increased growth in the Florida population, as well as Discount's
continued implementation of its commercial delivery program, will provide even
greater justification for most of the stores that are in close proximity.
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The following table sets forth information concerning increases in the
number of Discount Auto Parts stores during the past five fiscal years and the
anticipated increase for fiscal 2001:
Planned
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- -------
Beginning Stores.......................... 314 400 452 558 643 666
New Stores(1)............................. 86 53 106(2) 85 31 12-20
Stores Closed............................. -- 1 -- -- 8 --
--- --- --- --- --- -------
Ending Stores............................. 400 452 558 643 666 678-686
=== === === === === =======
--------
(1) Does not include stores that opened as relocations of previously existing
stores within the same general market area or substantial renovations of
stores.
(2) Includes the 26 stores acquired as part of the September 1998 acquisition
of Rose Auto Parts.
When opening a new store, Discount generally seeks high visibility sites in
high traffic locations (often on corners). Prior to entering new markets,
Discount performs extensive research with emphasis on population, demographics,
vehicle profile and number and strength of competitive stores. Discount
generally seeks to open new stores within or contiguous to existing market
areas and attempts to cluster development in new urban and suburban markets in
a relatively short period of time in order to achieve economies of scale in
management, advertising and distribution costs. Discount also evaluates the
potential first year sales return on investment when determining specific store
site locations.
Store Formats and Express Warehouses
Discount has developed three types of retail store formats: the mini-depot
store, the full service store and the depot store format. These standardized
formats have tended to lower new store operating costs through increased
efficiency and consistency in the selection, acquisition, design and opening of
new stores. As a result, Discount is modeling new stores according to the
standardized formats and also using appropriate elements of one of these three
store formats to remodel existing stores. Since the initiation of the
standardized formats, Discount has converted the product selection at all of
the existing stores to either the mini-depot, full service or depot formats.
Under the standardized store formats, a mini-depot store has approximately
6,800 selling square feet and carries an average of approximately 14,000 SKUs.
A typical full service store has generally the same footprint as a mini-depot
format store, but offers a wider selection of parts because it also provides
commercial delivery service. On average, the full service store carries 17,500
SKUs. The typical depot store has approximately 11,000 square feet, offers
greater product selection and carries an average of approximately 21,000 SKUs.
The following table indicates certain information about the 668 Discount
Auto Parts stores in operation as of August 28, 2001:
Total
Average Stock Number Square Average Total
Store Format Keeping Units of Stores Footage Square Footage
------------ ------------- --------- --------- --------------
Mini-depot.................. 14,000 475 3,220,000 6,779
Full Service................ 17,500 150(1) 1,075,000 7,167
Depot....................... 21,000 43 471,000 10,953
--- ---------
Total..................... 668 4,766,000
=== =========
--------
(1) Currently, Discount provides its commercial delivery program from 168
stores. Of that number, 150 are operated from full service format stores
and 18 are operated from depot format stores.
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In 1998, in an effort to provide support for product availability at its
stores and to help facilitate the roll-out of its commercial delivery program,
Discount developed an "express" warehouse concept and opened its first Parts
Express warehouse in Orlando, Florida in excess space of an existing depot. As
of August 28, 2001, Discount had 10 Parts Express locations in operation. The
Parts Express warehouses are located in Orlando, Tampa, Miami, Fort Myers,
Jacksonville, West Palm Beach, Tallahassee, Atlanta, Mobile and Kenner,
Louisiana.
Each Parts Express warehouse currently stocks approximately 42,000 SKU's and
occupies approximately 10,000 square feet. The objective of establishing Parts
Express warehouses is to provide inventory support to mini-depot and depot
stores within the same geographic market of the respective Parts Express
warehouse, as well as to support Discount's commercial delivery program. Parts
Express warehouses have been utilizing excess space in identified depot stores
in most locations, while some have been designed as stand-alone facilities.
Depot stores are targeted for major metropolitan markets where such stores
can serve densely populated market areas. Depot stores are also utilized as
support locations for nearby mini-depot stores in a hub-and-spoke fashion and,
along with the Parts Express warehouse, offer van delivery for inventory
transfers to other Discount Auto Parts stores. Discount's merchandising staff
also utilizes depot stores to test new products in an effort to help maximize
the success of new SKU additions at mini-depot stores.
Continuing to Improve Merchandising
One of Discount's growth strategies is to improve its merchandising
concepts, primarily by broadening product selection and emphasizing the sale of
replacement hard parts which generally provide higher gross profit margins.
Discount is also using its plan-o-grams program (which is focused on improving
merchandise presentation and in-stock positions) and the in-store point-of-sale
system to improve merchandising. The point-of-sale system helps Discount
maintain proper inventory levels and provide real-time sales information. The
interface of the new plan-o-grams with Discount's point-of-sale systems provide
a more sophisticated means of inventory control and management. These systems
are designed to enhance overall sales and gross margins in each individual
store. During fiscal 1999, Discount implemented a new perpetual inventory
system at its stores. Discount has been able to collect enhanced information
from the perpetual inventory system, enabling Discount to better determine
proper individual store merchandise and inventory levels. These enhancements,
coupled with the implementation of the Parts Express store format in selected
metropolitan markets, are in the process of being fine-tuned in an effort to
improve Discount's overall inventory turnover.
Although each Discount Auto Parts store carries the same basic product
lines, each Division Manager, with input from individual store managers, has
certain limited abilities to adapt product mix based on the specific needs of
the market area served by the stores.
Commercial Market Business
Discount began the roll-out of a commercial delivery service in the third
quarter of fiscal 1998. Under Discount's commercial delivery service program,
which operates under the name "Pro2Call", commercial customers (such as auto
service centers, commercial mechanics, garages and the like) are able to
establish commercial accounts and purchase and receive automotive parts. The
automotive parts are either delivered or are available for pick up at nearby
Discount Auto Parts stores. As of August 28, 2001, 168 of Discount's store
locations provided commercial delivery service.
Discount's entry into the commercial delivery market has required total
capital expenditures of approximately $17 million, which includes the funding
of losses incurred by the program to date. In addition, the commercial delivery
program requires Discount to extend trade credit to certain of the commercial
account customers in the ordinary course of business. The extension of such
trade credit increases the capital requirements associated with the program and
exposes Discount to credit risk from uncollectible accounts.
107
Discount has established systems designed to manage and control such credit
risk. The amount of capital that is needed for extension of trade credit will
be dependent in large part upon the success of the commercial delivery service
roll-out and how quickly the commercial business develops.
In addition, Discount is also utilizing small trucks to achieve its delivery
of parts to commercial customers. These vehicles are currently being leased as
part of a master fleet leasing arrangement. Additional vehicles will be needed
in the future as commercial-designated stores are opened and as sales volume
increases warrant.
Discount believes the commercial delivery business is important to its long-
term success, as it will further allow for the leveraging of fixed and certain
variable store expenses. Although the commercial delivery program incurred
operating losses through the third quarter of fiscal 2001, the program began to
provide small positive operating contributions during the fourth quarter of
fiscal 2001. Because this is a relatively new aspect of the auto parts supply
business for Discount, there are risks associated with Discount's entry into
this new aspect of the business and there can be no assurance that the
commercial delivery service business will be able to continue to provide and
expand upon its recent positive operating contributions or whether Discount
will experience any financial or other challenges in managing and controlling
the credit risk.
Store Operations
Store Design and Visual Merchandising
Discount seeks to design and build stores with a strong visual impact.
Discount's stores are generally freestanding buildings situated in highly
visible locations and are designed to provide easy access and ample parking.
Discount utilizes colorful exterior signage which displays the "Discount Auto
Parts" name and advertises current product specials. Stores are attractive and
brightly-lit. They have signage and special displays to aid customers in
locating merchandise and promoting products. The majority of the selling space
contains shelves for automotive replacement parts, maintenance items, and
accessories, with selected merchandise featured at the ends of the aisles, at
the cash register areas, and in other high traffic areas. All stores have a
hard parts counter staffed by knowledgeable, customer-service oriented team
members. All of the stores have computerized parts catalogs located at the hard
parts counter that provide parts information based on the make, model, and year
of an automobile.
Discount believes that continually improving and upgrading the appearance of
its stores increases sales per store. As market conditions warrant, Discount
relocates or substantially renovates existing stores. Stores are relocated
primarily to secure improved site locations and to expand store size. In
addition, some stores are increased in size in connection with renovations.
Discount considers a store to have been substantially renovated when it has
spent more than $70,000 on store improvements other than for ordinary course of
business maintenance and upkeep expenses.
Store Team Members
A typical mini-depot format store employs 8 to 10 team members, a typical
full service format store employs 10 to 13 team members and a typical depot
format store employs 15 to 20 team members. Each store employs a manager, one
or two assistant managers, a team leader and additional full and part-time team
members. Stores offering commercial delivery also employ 2 to 3 drivers. A
store manager's incentive compensation is based upon the performance of his or
her store vis-a-vis the average Company store. Store managers are reviewed
quarterly and evaluated based on sales levels, gross margins and operating
margin. This review and compensation program attempts to align the goals of
Discount's store managers with those of senior management (i.e., primarily
based on achieving established sales goals for their store, controlling store
general and administrative expenses, controlling inventory shrinkage expense
and team member retention). Discount supervises store operations primarily
through three Vice Presidents of Store Operations and 39 Division Managers,
each of whom supervises between 14 and 21 stores. The three Vice Presidents of
Store Operations currently report to the Chief Executive Officer.
108
Purchasing, merchandising, advertising, accounting, cash management and
other store support functions are provided by Discount's corporate
headquarters. Discount believes that relieving store managers of primary
responsibility for these functions allows them more time to focus on customer
service and the execution of Discount's in-store merchandising and marketing
strategies.
Dimensions of Excellence Reviews
Discount prides itself on continuous store improvement and an overall high
level of customer service. In an effort to achieve these standards, Discount
conducts "dimensions of excellence" reviews of each of its stores twice each
year in order to evaluate the stores' operations. Each dimensions of excellence
review encompasses a comprehensive set of store characteristics and performance
criteria. The dimensions of excellence teams are made up of store managers from
other districts selected based on their success as managers and their depth of
experience, and members of senior management from Discount's headquarters.
In addition, every store is generally visited every other week by a division
manager. All of these review programs help insure Discount's stores are being
maintained in accordance with Discount's standards of excellence.
Purchasing and Distribution
Merchandise is generally selected and purchased for all stores at Discount's
headquarters. Approximately 98% of Discount's merchandise is shipped by vendors
to Discount's distribution centers located in Lakeland, Florida and Gallman,
Mississippi. Deliveries are usually made to individual stores on a weekly basis
by Discount's fleet of trucks and trailers. In fiscal 2001, Discount purchased
products from over 250 suppliers. During fiscal 2001, Discount's ten largest
suppliers accounted for approximately 39% of Discount's purchases but no single
supplier accounted for more than 8% of total purchases. During fiscal 2000 and
1999, Discount's ten largest suppliers accounted for approximately 40% and 41%,
respectively, of Discount's total inventory purchases. Discount believes its
relationships with its suppliers are good. Discount also believes alternative
sources of supply exist (and in some cases such relationships are maintained on
a smaller scale), at similar cost and on similar terms, for substantially all
types of products sold.
In order to offer the lowest prices to its customers, Discount continually
seeks to reduce purchase and distribution costs of its merchandise. Discount
achieves cost reductions by working with vendors to secure product savings and
other benefits, making volume purchases, and achieving efficiencies in its
distribution system and higher productivity at the store level.
Advertising and Promotion
Discount uses various methods to promote its products, including newspaper,
direct mail, radio, television, in-store banners, displays and promotions.
Discount also uses sales incentives and price-based promotions to advertise its
products. In addition, Discount believes that DIY customers are also strongly
influenced by "word-of-mouth" recommendations from satisfied customers.
Discount also works closely with its suppliers in order to promote its
products. Discount views its suppliers as an important element of the
advertising and operating process. The suppliers provide certain benefits to
Discount, such as volume discounts, rebates, credits, return allowances,
cooperative advertising and signage assistance programs. The suppliers also
provide product knowledge and training and education that assist Discount's
team members in providing excellent customer service.
Competition
Both the retail and commercial delivery automotive parts aftermarket are
highly competitive. Automotive products similar or identical to those available
at Discount's stores are generally available from a variety of different
competitors in the communities served by Discount Auto Parts stores. The number
of competitors and the level of competition faced by Discount Auto Parts stores
vary by market area. The principal competitive
109
factors which affect Discount's business are store location, customer service,
product selection, product quality, timeliness of commercial deliveries and
price. In the state of Florida, Discount operates the largest specialty retail
chain offering automotive replacement parts, maintenance items and accessories
to the DIY consumer. Discount competes in its various markets with a number of
local, regional and national automotive retail chains including Auto Zone, Pep
Boys, and Advance Auto Parts. To a lesser extent, Discount's stores also
compete with automotive wholesalers or jobbers such as NAPA, Big A and Steego
and, mass merchandisers such as Wal-Mart, Target and Kmart. In the commercial
delivery program, Discount competes with many of those same companies.
Although Discount believes that it competes effectively in its various
markets, certain of its competitors, or their parent organizations, are larger
in terms of sales volume, have access to greater capital and management
resources, or have been operating longer in particular market areas.
Team Members
As of August 28, 2001, Discount employed approximately 6,200 team members,
of which approximately 5,000 were full-time team members. Approximately 87% of
Discount's team members are employed in stores or in direct field supervision,
while 13% work in the distribution center, and/or corporate and support
functions. Discount has no collective bargaining agreements covering any of its
team members and has never experienced any material labor disruption.
Trademarks
Discount believes that its name, distinctive lettering and eye-catching
stores are important to its operating strategy. In addition, as Discount
continues to expand its commercial delivery business, Discount is establishing
value in its Pro2Call service mark, which is the name under which the
commercial delivery business operates. Although Discount develops and owns
other trademarks, service marks and copyrights, Discount does not believe that
its business is otherwise substantially dependent on any particular trademark,
service mark, copyright or patent. Furthermore, Discount is not aware of any
infringing uses or any assertion of infringing uses in any of its current
market areas with respect to these intellectual property rights, that, in the
opinion of Discount, could materially affect Discount's uses of its material
marks and trade dress described above.
Discount's Properties
Distribution Center and Headquarters
Discount's main distribution center, which also houses its headquarters and
administrative offices, is located in Lakeland, Florida on property owned by
Discount. The total facilities (including parking areas) currently occupy the
majority of a 31.5 acre tract. The facilities front Interstate 4, the east-west
interstate highway that cuts across central Florida.
Discount's main distribution center was expanded in 1996, which doubled its
size. As a result of this expansion, there is essentially no additional useable
area on its headquarters site for further expansion of the facility. However,
the expanded distribution center comprises approximately 600,000 square feet
and is capable of serving approximately 700 stores. The expanded distribution
center also provides service to Discount's Parts Express warehouses, and is
utilized to support the commercial delivery program.
In the fourth quarter of fiscal 2001, Discount completed the construction of
a second distribution center in Gallman, Mississippi. The second distribution
center is approximately 400,000 square feet and has the capacity to support up
to approximately 450 stores. The new distribution center began shipping to a
limited number of stores and has continued to transition selected stores from
the Lakeland distribution center to the new distribution center. As of August
28, 2001, 160 stores were being serviced from the Mississippi distribution
center. The second distribution center is being leased under a $34 million
lease agreement, which was established in May 2000. The lease covers the land,
buildings and certain integrated operating equipment, such
110
as conveyor systems. Additional rolling stock, computer equipment and other
personal property utilized in the new distribution center has been leased under
other leasing arrangements or has been acquired and financed through Discount's
existing revolving line of credit.
Discount Auto Parts Stores
Discount has historically owned the majority of its store locations in order
to maximize real estate flexibility and control operating costs. Recently,
however, Discount effectuated a sale/leaseback of 101 stores. As a consequence,
as of August 28, 2001, Discount owned 482 or 72% of its locations and leased
186 or 28% of its locations. The average cost of a new mini-depot format store
is approximately $800,000, including $660,000 for the land, building, and soft
costs and $140,000 for furniture, fixtures and equipment.
Certain of the stores in which Discount has an ownership interest are
affected by senior secured note credit facilities and mortgages on which the
total unpaid principal balance as of August 28, 2001 was approximately $2.4
million. During fiscal 2001, Discount retired one of the two senior secured
note facilities. The remaining secured note facility provides for interest at a
fixed rate of 9.8%, payable quarterly, with a principal payment of $1.2 million
due on May 31 each year.
Excluding stores under the sale/leaseback arrangement, the majority of
Discount's other store leases provide for the payment of a fixed rent, plus
increases to cover ad valorem taxes, insurance and maintenance costs. The
leases are generally for a term of five years, with Discount having the right
to renew for one or more additional five-year terms.
The sale/leaseback transaction was completed on February 27, 2001. Under the
terms of the sale/ leaseback, Discount sold 101 properties, including land,
buildings, and improvements, for approximately $62.2 million. The stores were
leased back from the purchaser under non-cancelable operating leases with lease
terms of 22.5 years each. The sale of the properties generated a gain for
financial reporting purposes, net of expenses incurred, of $6.0 million, which
gain has been deferred and is being amortized over the lease term. Net rent
expense during the first five years of the lease term will be approximately
$6.4 million annually, with increases periodically thereafter.
Legal Proceedings
Coalition for a Level Playing Field, et. al. v. AutoZone, Inc. et. al, Case
No. 00-0953 in and for the United District Court, Eastern District of New York.
In February 2000, the Coalition for a Level Playing Field and over one hundred
independent automotive parts and accessories aftermarket warehouse distributors
and jobbers filed a lawsuit in the United States District for the Eastern
District of New York against Discount and other retailers. The plaintiffs claim
that the defendants have knowingly induced volume discounts, rebates, slotting
and other allowances, fees, free inventory, sham advertising and promotional
payments, a share in the manufacturers' profits, and excessive payments for
services purportedly performed for the manufacturers in violation of the
Robinson-Patman Act. The complaint seeks injunctive and declaratory relief,
unspecified treble damages on behalf of each of the plaintiffs, as well as
attorneys' fees and costs. The defendants, including Discount, filed a motion
to dismiss in late October 2000. On October 18, 2001, the court denied the
motion to dismiss on all but one count. It is expected that the discovery phase
of the litigation will now commence (including with respect to Discount);
however, determinations as to the discovery schedule and scope remain to be
determined. Discount believes the claims to be without merit and intends to
vigorously defend the action.
As previously reported, Discount had been engaged in litigation with its
insurance carrier pursuant to which Discount was seeking recovery under its
insurance policy of certain amounts incurred by Discount in connection with the
previously reported and settled Airgas, Inc. litigation. Discount settled this
litigation in May 2001.
Discount is not a party to any other legal proceedings, other than various
claims and lawsuits arising in the normal course of Discount's business.
Discount does not believe that such claims and lawsuits, individually or in the
aggregate, will have a material adverse effect on its financial condition or
results of operations.
111
Selected Historical Consolidated Financial and Other Data of Discount
The following table sets forth selected consolidated statement of
operations, balance sheet and other operating data of Discount. The selected
historical consolidated financial and other data as of and for fiscal 1999,
fiscal 2000 and fiscal 2001 have been derived from, and should be read together
with, Discount's audited consolidated financial statements and the related
notes included elsewhere in this proxy statement and prospectus. The selected
historical consolidated financial and other data as of and for fiscal 1997 and
fiscal 1998 have been derived from Discount's audited consolidated financial
statements and the related notes, which have not been included in this proxy
statement and prospectus. The selected historical consolidated financial and
other data as of and for the thirteen weeks ended August 29, 2000 and August
28, 2001 have been derived from, and should be read together with, Discount's
unaudited consolidated financial statements and the related notes included
elsewhere herein. In the opinion of Discount's management, all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of Discount's financial position and the results of Discount's
operations and cash flows have been made. The results of operations for the
thirteen weeks ended August 28, 2001 are not necessarily indicative of the
operating results to be expected for the full fiscal year. The data presented
below should be read in conjunction with the consolidated financial statements
of Discount and the notes thereto included herein, the other financial
information included herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Discount."
Thirteen Weeks Ended
Fiscal Year Ended (Unaudited)
------------------------------------------------ ---------------------
June 3, June 2, June 1, May 30, May 29, August 29, August 28,
1997(1) 1998 1999 2000 2001 2000 2001
-------- -------- -------- -------- -------- ---------- ----------
(In thousands, except per share data and
Selected Operating Data)
Income Statement Data
Net sales.............. $405,186 $447,491 $511,483 $598,258 $661,717 $167,074 $173,381
Cost of sales,
including distribution
costs................. 256,646 271,404 302,843 356,783 404,199 103,150 104,189
-------- -------- -------- -------- -------- -------- --------
Gross profit........... 148,540 176,087 208,640 241,475 257,518 63,924 69,192
Selling, general and
administrative
expenses.............. 101,336 124,125 152,777 184,371 215,353 52,850 56,830
Merger related
expenses.............. -- -- -- -- -- -- 943
-------- -------- -------- -------- -------- -------- --------
Income from
operations............ 47,204 51,962 55,863 57,104 42,165 11,074 11,419
Litigation
settlement(2)......... (20,545) -- -- -- -- -- --
Other income, net...... 187 2,434 817 2,770 6,957 85 100
Interest expense....... (6,125) (10,203) (12,856) (18,079) (21,634) (5,583) (3,318)
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes and cumulative
effect of change in
accounting principle
...................... 20,721 44,193 43,824 41,795 27,488 5,576 8,201
Income taxes........... 7,980 17,013 16,766 15,506 9,880 2,007 2,950
-------- -------- -------- -------- -------- -------- --------
Income before
cumulative effect of
change in accounting
principle ............ 12,741 27,180 27,058 26,289 17,608 3,569 5,251
Cumulative effect of
change in accounting
principle, net of
income tax benefit.... -- -- (8,245) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income............. $ 12,741 $ 27,180 $ 18,813 $ 26,289 $ 17,608 $ 3,569 $ 5,251
-------- -------- -------- -------- -------- -------- --------
Net income (loss) per
basic share from:
Income before
cumulative effect of
change in accounting
principle ........... $ 0.77 $ 1.64 $ 1.63 $ 1.57 $ 1.05 $ 0.21 $ 0.31
Cumulative effect of
change in accounting
principle............ -- -- (0.50) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income(3).......... $ 0.77 $ 1.64 $ 1.13 $ 1.57 $ 1.05 $ 0.21 $ 0.31
======== ======== ======== ======== ======== ======== ========
Net income (loss) per
diluted share from:
Income before
cumulative effect of
change in accounting
principle ........... $ 0.77 $ 1.63 $ 1.61 $ 1.57 $ 1.05 $ 0.21 $ 0.31
Cumulative effect of
change in accounting
principle............ -- -- (0.49) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income............. $ 0.77 $ 1.63 $ 1.12 $ 1.57 $ 1.05 $ 0.21 $ 0.31
======== ======== ======== ======== ======== ======== ========
Average common shares
outstanding........... 16,581 16,604 16,650 16,695 16,703 16,695 16,708
Dilutive effect of
stock options......... 73 111 153 30 4 -- 156
-------- -------- -------- -------- -------- -------- --------
Average common shares
outstanding--assuming
dilution.............. 16,654 16,715 16,803 16,725 16,707 16,695 16,864
======== ======== ======== ======== ======== ======== ========
112
Thirteen Weeks Ended
Fiscal Year Ended (Unaudited)
------------------------------------------------- ---------------------
June 3, June 2, June 1, May 30, May 29, August 29, August 28,
1997(1) 1998 1999 2000 2001 2000 2001
-------- -------- -------- -------- -------- ---------- ----------
(In thousands, except per share data and
Selected Operating Data)
Selected Operating Data
Number of stores at
period end............. 400 452 558 643 666 653 668
Stores with commercial
delivery program (end
of period)............. -- 14 122 172 168 171 168
Commercial delivery
sales(4)............... $ -- $ 78 $ 6,884 $ 25,503 $ 44,089 $ 10,128 $ 11,856
Total store square
footage at period end
(in thousands)......... 2,934 3,295 4,006 4,584 4,750 4,652 4,766
Average net sales per
store (in
thousands)(5)(6)....... $ 1,024 $ 1,050 $ 1,013 $ 996 $ 1,011 -- --
Average net sales per
square foot(5)(6)...... $ 151 $ 144 $ 140 $ 139 $ 142 -- --
Percentage increase
(decrease) in
comparable store net
sales(6)(7)............ (0.8)% 7.8% 0.6% 3.3% 4.0% 6.5% 2.1%
Team members............ 3,677 4,350 5,586 6,390 6,460 6,576 6,225
Balance Sheet Data
Inventories............. $151,644 $172,027 $209,028 $253,113 $242,718 $248,789 $243,053
Working capital(8)...... 80,573 105,662 128,939 153,769 143,850 183,820 166,245
Property and equipment,
net.................... 265,589 314,519 374,577 419,282 384,513 423,721 384,463
Total assets............ 443,066 511,735 620,314 704,709 655,929 699,315 657,053
Long-term debt,
excluding current
maturities............. 114,117 160,695 224,800 264,600 192,900 295,713 209,608
Stockholders' equity.... 229,061 256,885 276,766 303,204 320,862 306,773 326,324
--------
(1) Fiscal year 1997 consisted of 53 weeks; all other years reported consisted
of 52 weeks.
(2) Represents total costs, including related legal expenses, associated with
the settlement of a complaint filed by Airgas, Inc. and certain of its
affiliates in February 1997 against several defendants, including Discount
and one of its employees. The complaint alleged improper commercial sales
of refrigerant R-12 (freon) by the defendants.
(3) Net income for 1999 includes an after-tax charge of $8.2 million related to
a change in the method of accounting for store inventories from the first-
in, first-out retail inventory method to the weighted average cost method.
This change was reflected as of the beginning of 1999. Net income for the
thirteen weeks ended August 28, 2001 includes an after-tax extraordinary
loss of $603 resulting from expenses incurred in connection with the
merger.
(4) Commercial delivery sales represents net sales from Discount's Pro2Call
commercial delivery program.
(5) Average net sales per store and average net sales per square foot are based
on the average of beginning and ending number of stores and store square
footage for the respective period. For fiscal 1997, average net sales per
store and average net sales per square foot have been adjusted to exclude
the effect of the fifty-third week.
(6) The amounts shown for fiscal 1997 exclude bulk commercial sales of air
conditioning products, such as freon. If these commercial sales of freon
were to have been included, the average net sales per store, average net
sales per square foot and the increase in comparable store sales for fiscal
1997 would have been $1,115,000, $231 and 9.7%, respectively.
(7) Comparable store sales growth is calculated based on the change in net
sales of all stores opened as of the beginning of the preceding fiscal
year. Net stores become part of the comparable store base on the first day
of their second full fiscal year in operation.
(8) Working capital represents total current assets less total current
liabilities.
113
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Discount
The following discussion and analysis of Discount's financial condition and
results of operations should be read in conjunction with the consolidated
historical financial statements of Discount, the notes thereto and other data
and information appearing elsewhere in this proxy statement and prospectus.
Discount's fiscal year consists of 52 or 53 weeks ending on the Tuesday closest
to May 31st of each year. The years ended May 29, 2001, May 30, 2000 and June
1, 1999 consisted of 52 weeks. Discount's fiscal quarters ended August 29, 2000
and August 28, 2001 consisted of thirteen weeks each.
Results of Operations
The following table sets forth, for the periods presented, the income
statement data and the percentage of Discount's net sales represented by each
line presented:
Thirteen Weeks Ended
Fiscal Year Ended (Unaudited)
------------------------------------------------- -------------------------------------
June 1, 1999 May 30, 2000 May 29, 2001 August 29, 2000 August 28, 2001
--------------- --------------- --------------- ------------------ ------------------
(Dollars in thousands)
Net sales............... $511,483 100.0% $598,258 100.0% $661,717 100.0% $ 167,074 100.0% $ 173,381 100.0%
Cost of sales, including
distribution costs..... 302,843 59.2 356,783 59.6 404,199 61.1 103,150 61.7 104,189 60.1
-------- ----- -------- ----- -------- ----- --------- ------ --------- ------
Gross profit........... 208,640 40.8 241,475 40.4 257,518 38.9 63,924 38.3 69,192 39.9
Selling, general and
administrative
expenses............... 152,777 29.9 184,371 30.8 215,353 32.5 52,850 31.6 56,830 32.8
Merger related
expenses............... -- -- -- -- -- -- -- -- 943 0.6
-------- ----- -------- ----- -------- ----- --------- ------ --------- ------
Income from
operations............ 55,863 10.9 57,104 9.6 42,165 6.4 11,074 6.7 11,419 6.5
Other income, net....... 817 0.2 2,770 0.5 6,957 1.1 85 0.1 100 0.1
Interest expense........ (12,856) (2.5) (18,079) (3.1) (21,634) (3.3) (5,583) (3.3) (3,318) (1.9)
-------- ----- -------- ----- -------- ----- --------- ------ --------- ------
Income before income
taxes and cumulative
effect of change in
accounting principle .. 43,824 8.6 41,795 7.0 27,488 4.2 5,576 3.3 8,201 4.7
Income taxes............ 16,766 3.3 15,506 2.6 9,880 1.5 2,007 1.2 2,950 1.7
-------- ----- -------- ----- -------- ----- --------- ------ --------- ------
Income before cumulative
effect of change in
accounting principle .. 27,058 5.3 26,289 4.4 17,608 2.7 3,569 2.1 5,251 3.0
Cumulative effect of
change in accounting
principle, net of
income tax benefit..... (8,245) (1.6) -- -- -- -- -- -- -- --
-------- ----- -------- ----- -------- ----- --------- ------ --------- ------
Net income............. $ 18,813 3.7% $ 26,289 4.4% $ 17,608 2.7% $ 3,569 2.1% $ 5,251 3.0%
======== ===== ======== ===== ======== ===== ========= ====== ========= ======
Thirteen Weeks Ended August 28, 2001 Compared to Thirteen Weeks Ended August
29, 2000
Net sales for the first quarter of fiscal 2002 increased 3.8% to $173.4
million, as compared to $167.1 million for the first quarter a year earlier.
Comparable store sales increased 2.1% for the first quarter of fiscal 2002 as
compared to the first quarter of fiscal 2001. Such comparable store sales
growth was generated on a relatively equal basis from DIY and commercial sales.
The balance of the increase in total sales for the first quarter was
attributable to sales from new stores opened since the beginning of fiscal
2001.
At August 28, 2001, Discount had 668 stores in operation, compared with 666
stores at May 29, 2001 and 653 stores at August 29, 2000.
114
Gross profit for the first quarter of fiscal 2002 increased 8.2% to $69.2
million as compared to $63.9 million for the first quarter of fiscal 2001. As a
percentage of sales, gross profit was 39.9% for the first quarter of fiscal
2002 as compared to 38.3% for the first quarter of fiscal 2001. Gross profit
for the first quarter of fiscal 2002 was positively impacted by Discount's
supply chain initiatives implemented in the latter half of fiscal 2001 and
lower inventory shrinkage expense. These positive impacts were offset in part
by lower overall vendor incentives primarily stemming from the reduced number
of store openings and additional operating expenses associated with Discount's
second distribution center which became operational in the fourth quarter of
fiscal 2001.
Selling, general and administrative expenses increased as a percentage of
sales from 31.6% in the first quarter of fiscal 2001 to 32.8% in the first
quarter of fiscal 2002. The increase in these expenses as a percentage of sales
for the first quarter was primarily the result of (1) rent under the February
2001 sale/leaseback of 101 of Discount's store locations exceeding the
historical cost depreciation expense associated with such store locations prior
to the sale/leaseback and (2) increased health and workers' compensation
insurance costs.
As a result of the merger, Discount incurred expenses of $943,000 in the
first quarter of fiscal 2002. Additional expenses are expected to be incurred
during the second quarter of fiscal 2002. Such additional expenses, inclusive
of the fees and expenses payable to Discount's financial advisor, lawyers and
accountants, are estimated to be $3.2 million in the aggregate.
Income from operations for the first quarter of fiscal 2002 increased 3.1%
to $11.4 million as compared to $11.1 million for the first quarter of fiscal
2001. Excluding the effects of the excess of rent expense over the related
depreciation expense related to the stores sold under the sale/leaseback
transaction and the rent expense related to Discount's second distribution
center, both of which did not exist in the first quarter of fiscal 2001 and
merger related expenses, operating income for the first quarter of fiscal 2002
would have increased 28%.
Interest expense for the first quarter of fiscal 2002 decreased 40.6% to
$3.3 million as compared to $5.6 million for the first quarter of fiscal 2001.
The decrease was due to overall lower borrowings for the first quarter of
fiscal 2002, which resulted primarily from the paydown in debt with the
proceeds of the February 2001 sale/leaseback closing, and overall lower
interest rates on Discount's variable rate debt.
Discount's effective tax rate for both the first quarter of fiscal 2002 and
the first quarter of fiscal 2001 was 36.0%.
Taking into account all of the above described factors, Discount's net
income for the first quarter of fiscal 2002 increased 47.1% to $5.3 million
from $3.6 million for the first quarter of fiscal 2001.
Fiscal 2001 Compared to Fiscal 2000
Net sales for the fifty-two week period ended May 29, 2001 increased 10.6%
to $661.7 million, from $598.3 million a year earlier. Comparable store sales
increased 4.0% for fiscal 2001 as compared to fiscal 2000. Comparable store
sales results include sales from Discount's commercial delivery program. The
balance of the increase in total sales for fiscal 2001 was attributable to
sales from new stores opened since the beginning of fiscal 2000. At May 29,
2001, Discount had 666 stores in operation compared to 643 at the end of fiscal
2000.
Gross profit for the fifty-two week period ended May 29, 2001 was $257.5
million, or 38.9% of net sales, compared with $241.5 million, or 40.4% for
fiscal 2000. The reduction in the gross margin percentage for fiscal 2001 was
primarily due to overall lower vendor incentives, higher inventory shrinkage
expense, expenses
115
associated with the opening of the second distribution center and margin
pressure in commodity categories such as oil. Overall vendor incentives were
down due to a lesser number of net new stores opened in fiscal 2001 (23) versus
in fiscal 2000 (85).
During fiscal 2001, Discount began several supply chain initiatives that
were directed, for the most part, at improving overall gross margins and
inventory performance. During the fourth quarter of fiscal 2001, Discount began
to see improvement in overall gross margins as compared to preceding quarters
in fiscal 2001. Management expects to see continuing gross margin improvements
in fiscal year 2002.
Selling, general and administrative expenses for fiscal 2001 increased 16.8%
over such expenses for fiscal 2000, and increased as a percentage of net sales
from 30.8% in fiscal 2000 to 32.5% in fiscal 2001. The increase was primarily
due to lower than anticipated retail sales, which resulted in a reduced ability
to leverage certain store related expenses, the slower ramp up of stores opened
in newer markets and the net additional rent resulting from the February 2001
sale/leaseback of 101 properties.
As a result of the above factors, income from operations for fiscal 2001 was
$42.2 million as compared to $57.1 million for fiscal 2000. Operating margins
for fiscal 2001 were 6.4% as compared to 9.6% for fiscal 2000.
During May 2001, Discount settled a claim related to recovery of amounts
previously paid out by Discount in connection with a separate litigation matter
that was concluded in August 1997. The 1997 litigation stemmed from the sale
and distribution of freon. The net gain of $6.5 million resulting from the
recovery achieved in the May 2001 settlement has been included in other income.
Interest expense for fiscal 2001 increased 19.7% to $21.6 million as
compared to $18.1 million for fiscal 2000. The increase was the result of
increased borrowings in the first half of the fiscal year primarily associated
with new store growth and overall higher interest rates on Discount's variable
rate debt.
Discount's effective tax rate for fiscal 2001 was 35.9% as compared to 37.1%
in fiscal 2000. The reduction in the effective tax rate for fiscal 2001 is
primarily the result of state tax planning and restructuring initiatives, which
were implemented as of the end of the second quarter of fiscal 2000.
As a result of the above factors, net income for fiscal 2001 was $17.6
million, or $1.05 per diluted share as compared to $26.3 million, or $1.57 per
diluted share for fiscal 2000.
Fiscal 2000 Compared to Fiscal 1999
Net sales for the fifty-two week period ended May 30, 2000 increased 17.0%
to $598.3 million, from $511.5 million a year earlier. Comparable store sales
increased 3.3% for fiscal 2000 as compared to fiscal 1999. Comparable store
sales results include sales from Discount's commercial delivery program. The
balance of the increase in total sales for fiscal 2000 was attributable to
sales from new stores opened since the beginning of fiscal 1999. At May 30,
2000, Discount had 643 stores in operation compared to 558 at the end of fiscal
1999.
Gross profit for the fifty-two week period ended May 30, 2000 was $241.5
million, or 40.4% of net sales, compared with $208.6 million, or 40.8% for
fiscal 1999. The reduction in the gross margin percentage for fiscal 2000 was
primarily due to higher product distribution costs. The comparison to fiscal
1999 was also impacted by the inclusion of additional vendor incentives in 1999
resulting from the September 1998 purchase of the Rose Automotive stores.
Selling, general and administrative expenses for fiscal 2000 increased 20.7%
over such expenses for fiscal 1999, and increased as a percentage of net sales
from 29.9% in fiscal 1999 to 30.8% in fiscal 2000. The increase was primarily
due to the expenses incurred related to the continued implementation and
expansion of Discount's commercial delivery program for fiscal 2000 as compared
to fiscal 1999, as well as a loss, during
116
December and January, of Discount's ability to leverage certain expenses during
those periods as a result of lower than anticipated sales.
Income from operations for fiscal 2000 was $57.1 million as compared to
$55.9 million for fiscal 1999. Operating margins for fiscal 2000 were 9.6% as
compared to 10.9% for fiscal 1999. Operating income and the resulting operating
margin for fiscal 2000 were negatively impacted by the implementation and
expansion of Discount's commercial delivery program. For both fiscal 2000 and
fiscal 1999 Discount incurred an estimated operating loss from the commercial
delivery program of approximately $4.7 million each year. Excluding the
estimated operating loss impact of the commercial delivery program, the
operating margin for fiscal 2000 and fiscal 1999 would have been approximately
10.3% and 11.9%, respectively.
Other income primarily includes gains and losses on real estate disposals.
The variance between years primarily reflects the overall change in level of
activity between years.
Interest expense for fiscal 2000 increased 40.6% to $18.1 million as
compared to $12.9 million for fiscal 1999. The increase was the result of
increased borrowings primarily associated with new store growth and overall
higher interest rates.
Discount's effective tax rate for fiscal 2000 was 37.1% as compared to 38.3%
in fiscal 1999. The reduction in the effective tax rate for fiscal 2000 is
primarily the result of state tax planning and restructuring initiatives, which
were implemented as of the end of the second quarter of fiscal 2000.
Income before the cumulative effect of an accounting change for fiscal 2000
was $26.3 million or $1.57 per diluted share as compared to $27.1 million or
$1.61 per diluted share for fiscal 1999.
During the fourth quarter of fiscal 1999, Discount implemented a change in
its method of accounting for store inventories from the first-in, first-out
method calculated using a form of the retail inventory method to the weighted
average cost method. Discount made this change in connection with new
computerized store-level perpetual inventory systems installed throughout
fiscal 1999. As a result of the change in accounting method, Discount reported
a non-cash, fiscal 1999 after tax charge of $8.2 million, or $0.49 per diluted
share which was reflected as of the beginning of the year and which represented
the beginning 1999 fiscal year impact of the change in accounting method.
As a result of the above factors, net income for fiscal 2000 was $26.3
million, or $1.57 per diluted share as compared to $18.8 million, or $1.12 per
diluted share for fiscal 1999.
Liquidity and Capital Resources
For the thirteen weeks ended August 28, 2001, net cash of $14.2 million was
used in Discount's operations versus $27.5 million used by Discount's
operations for the comparable thirteen week period of fiscal 2001. During both
of the thirteen week periods, this net use of cash was due primarily to a
reduction in trade accounts payable resulting from the repayment of normal year
end extensions of credit terms. The reduction of cash used in the fiscal 2002
first quarter versus the fiscal 2001 first quarter primarily related to the
timing of vendor payments.
Net cash provided by operating activities was $51.9 million in fiscal 2001,
$28.0 million in fiscal 2000, and $23.8 million in fiscal 1999. The increase in
fiscal 2001 over fiscal 2000 was primarily due to a decrease in inventories
which was offset in part by a decrease in net income and accounts payable. The
reduction in inventories for the fiscal 2001 period primarily reflects results
of Discount's supply chain initiatives geared toward better overall inventory
management. Such efforts have included Discount's redistribution of excess
quantities of inventory among its stores rather than making additional
purchases from vendors. During fiscal 2001, Discount reduced overall inventory
levels by $10.4 million compared to adding $44.1 million in fiscal 2000. This
process also resulted in lower accounts payable at the end of fiscal 2001
versus the end of fiscal
117
2000. The increase in fiscal 2000 over fiscal 1999 was primarily due to a
decrease in prepaid expenses and other current assets resulting from the
improved timing of collecting vendor program receivables, higher net income and
increased depreciation and amortization offset in part by a decrease in the
amount of inventory growth funded by vendor payables.
Capital expenditures for the thirteen weeks ended August 28, 2001 were $6.3
million. The majority of the capital expenditures related to the 4 new stores
opened during that period plus stores opened near the end of fiscal 2001.
Capital expenditures for fiscal 2001 were $43.1 million as compared to $69.3
million in fiscal 2000 and $81.0 million in fiscal 1999. Capital expenditures
have fluctuated over the periods primarily based on new store openings in the
respective periods. Capital expenditures for fiscal 2001 primarily related to
the 31 new stores opened. Capital expenditures for fiscal 2000 primarily
related to the 85 new stores opened. Capital expenditures for fiscal 1999 also
included costs associated with the completion of the expansion of Discount's
Lakeland, Florida distribution center and additional office space.
On February 27, 2001, Discount completed a sale/leaseback transaction. Under
the terms of the transaction, Discount sold 101 properties, including land,
buildings, and improvements, for a net price of approximately $62.2 million.
The stores were leased back from the purchaser under non-cancelable operating
leases with lease terms of 22.5 years each. The sale of the properties
generated a gain for financial reporting purposes, net of expenses incurred, of
$6.0 million, which gain has been deferred and is being amortized over the
lease term. Net rent expense during the first five years of the lease term will
be approximately $6.4 million annually, with increases periodically thereafter.
Proceeds from the transaction were used to reduce outstanding borrowings under
Discount's Revolving Credit Facility.
During May 2001, Discount settled a claim related to recovery of amounts
previously paid out by Discount in connection with a separate litigation matter
that was concluded in August 1997. The 1997 litigation stemmed from the sale
and distribution of freon. The proceeds from the settlement were collected in
May and the resulting net gain of $6.5 million from the settlement has been
included in other income in Discount's fiscal 2001 income statement.
In May 2000, Discount broke ground on a second distribution center in
Gallman, Mississippi. The second distribution center is approximately 400,000
square feet and will be able to support approximately 450 stores. As of May 29,
2001, 157 stores are being serviced by that facility. The second distribution
center is being leased under a $34 million operating lease agreement, which was
put into effect in May 2000. The lease covers the land, buildings and certain
integrated operating equipment, such as conveyor systems. Additional rolling
stock, computer equipment, software, and other personal property with a total
cost of approximately $9.0 million was funded through other lease arrangements
or through Discount's existing revolving line of credit.
Discount also continued the roll-out of its commercial delivery service,
which began in the third quarter of fiscal 1998. Discount's commercial delivery
service consists of a program whereby commercial customers (such as auto
service centers, commercial mechanics, garages and the like) establish
commercial accounts with Discount and order automotive parts from Discount,
with such parts being delivered by Discount or picked up by the customer from
nearby Discount Auto Parts stores. The commercial delivery program requires
Discount to extend trade credit to certain of the commercial account customers
as part of the ordinary course of business. The extension of such trade credit
increases the capital requirements associated with the roll-out of the program
and exposes Discount to credit risk from uncollectible accounts. Discount has
established systems to manage and control such credit risk. The amount of
capital that is needed to cover extension of trade credit will be dependent in
large part upon the success of the commercial delivery service roll-out and how
quickly the commercial business develops. To date, the commercial delivery
program has incurred operating losses of approximately $10.8 million, which
have been funded by Discount's retail operations and its revolving line of
118
credit. However, during the fourth quarter of fiscal 2001 the commercial
delivery program achieved profitability.
On August 7, 2001, Discount entered into a definitive agreement with Advance
Holding Corporation, Advance Auto Parts, Inc., Advance Stores Company,
Incorporated and AAP Acquisition Corporation (collectively, "Advance") under
which Discount would be acquired by Advance in a merger transaction.
Under the terms of the pending merger transaction with Advance, Discount is
subject to limits on the amount of its capital expenditures through the date of
closing. Accordingly, Discount only expects to open approximately seven new
stores prior to the anticipated closing of the merger in November or December
2001. If the merger does not close, Discount would need to modify its capital
expenditure plans for the remainder of fiscal 2002.
Consistent with its historical practice, Discount expects to finance most of
its new store growth through unsecured lines of credit and medium and longer-
term mortgage financing provided by banks and other institutional lenders, and
through cash flow from operations. As of August 28, 2001, Discount had
$106.6 million of additional availability under its existing financing
agreements.
Discount is exposed to changes in interest rates, primarily from its
revolving credit agreement. Discount also has long-term debt that bears a fixed
rate. As to the fixed rate debt, there is a risk that market rates will decline
and the required payments will exceed those based on current market rates on
the long-term debt.
Discount believes that the expected cash flows from operations, available
bank borrowings and trade credit, will be sufficient to fund the capital and
liquidity needs of Discount for the next two to three years. However, if and
when the pending merger transaction closes, the outstanding balance of
Discount's revolving credit facility and certain senior indebtedness of
Discount would be refinanced through borrowings by Advance, and, thereafter,
Discount would need to look to Advance's sources of capital to fund Discount's
capital and liquidity needs. See "The Merger--Financing Commitments" at Page
49.
Inflation and Seasonality
Discount does not believe its operations have been materially affected by
inflation. Discount has been successful, in many cases, in reducing the effects
of merchandise cost increases principally by taking advantage of vendor
incentive programs, economies of scale resulting from increased volumes or
purchases, and selective forward buying.
Although sales have historically been somewhat higher in Discount's fourth
quarter (March through May), Discount does not consider its business to be
seasonal.
Quantitative and Qualitative Disclosures about Market Risk
Discount's market risk is limited to fluctuations in interest rates as it
pertains to Discount's borrowings under its credit facilities. Discount pays
interest on borrowings at the LIBOR rate plus an applicable margin ranging from
0.625% to 1.90% based on Discount's debt-to-capitalization ratio. If the
interest rates on Discount's borrowings averaged 100 basis points more in
fiscal 2002 than they did in fiscal 2001, Discount's interest expense would
increase and income before income taxes would decrease by approximately
$1.65 million. This amount is determined solely by considering the impact of
the hypothetical change in the interest rate on Discount's borrowing cost
without consideration for other factors such as actions management might take
to mitigate its exposure to interest rate changes.
119
Principal Shareholders of Discount
The following table sets forth, as of October 25, 2001, the number of shares
of Discount's Common Stock beneficially owned by:
. each person known to Discount as having beneficial ownership of more
than 5% of Discount's Common Stock together with such person's address,
. each of Discount's directors and nominees to become a director,
. each named executive officer as defined under applicable Securities and
Exchange Commission rules, and
. all directors and executive officers as a group.
Amount and
Name of Beneficial Owner Nature of Beneficial Percent of
or Number in Group Ownership(1) Class
------------------------ -------------------- ----------
Fontaine Industries Limited Partnership...... 4,021,509(2) 24.1%
3305 W. Spring Mountain Road #60
Las Vegas, Nevada 89012
Glenden Enterprises Limited Partnership...... 2,975,914(3) 17.8%
3305 W. Spring Mountain Road #60
Las Vegas, Nevada 89012
Peter J. Fontaine............................ 4,023,509(4) 24.1%
c/o Discount Auto Parts, Inc.
4900 Frontage Road South
Lakeland, Florida 33815
Glenda A. Fontaine Marital Trust under
Agreement dated July 8, 1993................ 2,975,914(5) 17.8%
c/o Discount Auto Parts, Inc.
4900 Frontage Road South
Lakeland, Florida 33815
Advance Holding Corporation.................. 4,021,509(6) 24.1%
Advance Stores Company, Incorporated
5673 Airport Road
Roanoke, Virginia 24012
William C. Perkins........................... 102,872(7) *
C. Michael Moore............................. 8,725(8) *
Michael D. Harrah............................ 14,925(9) *
Clement A. Bottino........................... 49,663(10) *
David C. Viele............................... 49,991(11) *
David P. Walling............................. 8,790(12) *
Charles W. Webster, Jr. ..................... 1,467(13) *
Donald W. Olson.............................. -0- -0-
NewSouth Capital Management, Inc. ........... 1,318,824(14) 7.9%
1000 Ridgeway Loop Rd. Suite 233
Memphis, TN 38120
Dimensional Fund Advisors, Inc. ............. 1,333,800(15) 8.0%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
All Directors and Executive Officers as a
Group (10 persons).......................... 4,167,675 24.7%
120
* Less than one percent
(1) Beneficial ownership of shares, as determined in accordance with
applicable Securities and Exchange Commission rules, includes shares as to
which a person has or shares voting power and/or investment power. Except
as otherwise indicated, all shares are held of record with sole voting and
investment power.
(2) Fontaine Industries Limited Partnership ("Industries L.P.") is a Nevada
Limited Partnership. A revocable trust established by Peter J. Fontaine
and under which Mr. Fontaine is the trustee, is the sole general partner
and is one of two limited partners of Industries L.P., owning an aggregate
of 99% of the partnership interests. Peter J. Fontaine is a limited
partner and owns the remaining 1% of the partnership interests. In
connection with the agreement and plan of merger dated as of August 7,
2001 by and among Discount, Advance Holding, Advance, Advance Stores, and
Advance Merger Sub, Industries L.P. entered into (i) an irrevocable proxy
and voting agreement with Advance Holding and Advance Stores, dated as of
August 7, 2001 (pursuant to the irrevocable proxy and voting agreement,
Industries L.P. has agreed to vote all of the shares that it beneficially
owns in favor of the merger, the merger agreement and the transactions
contemplated thereby and appointed Advance Stores as its proxy to vote the
shares) and (ii) a stock option agreement with Advance Holding and Advance
Stores, dated as of August 7, 2001 (pursuant to which Industries L.P.
granted Advance Stores an option to purchase all of the shares,
exercisable under certain specified conditions, as set forth in the stock
option agreement).
(3) Glenden Enterprises Limited Partnership ("Enterprises L.P.") is a Nevada
Limited Partnership. The Glenda A. Fontaine Marital Trust (the "Glenda
Fontaine Trust"), of which Merritt A. Gardner is the trustee, is the sole
general partner and a limited partner of Enterprises L.P., owning an
aggregate of 81.5% of the partnership interests. Certain trusts
established for the benefit of the children of Denis L. Fontaine (the
"Children's Trusts"), of which Merritt A. Gardner is also the trustee, are
limited partners of Enterprises L.P. and in such capacity own the
remaining 18.5% of the partnership interests.
(4) Peter J. Fontaine does not directly own any shares. Beneficial ownership
by Mr. Fontaine reflects (i) 4,021,509 shares owned by Industries L.P.,
(ii) 1,000 shares owned by Mr. Fontaine's wife and (iii) 1,000 shares
owned by Mr. Fontaine's daughter. See Note (2) above.
(5) The Glenda Fontaine Trust does not directly own any shares. Beneficial
ownership by the Glenda Fontaine Trust reflects shares owned by
Enterprises L.P. See Note (3) above.
(6) This information is derived from a Schedule 13D dated August 16, 2001,
filed by Advance Holding and Advance Stores. In connection with the
agreement and plan of merger dated as of August 7, 2001 by and among
Discount, Advance Holding, Advance, Advance Stores and Advance Merger Sub,
Industries L.P. entered into (i) an irrevocable proxy and voting agreement
with Advance Holding and Advance Stores, dated as of August 7, 2001
(pursuant to the irrevocable proxy and voting agreement, Industries L.P.
has agreed to vote all of the shares that it beneficially owns in favor of
the merger, the merger agreement and the transactions contemplated thereby
and appointed Advance as its proxy to vote the shares) and (ii) a stock
option agreement with Advance Holding and Advance Stores, dated as of
August 7, 2001 (pursuant to which Industries L.P. granted Advance Stores
an option to purchase all of the shares, exercisable under certain
specified conditions, as set forth in the stock option agreement). As a
result of the irrevocable proxy and voting agreement and the stock option
agreement, each of Advance Holding and Advance Stores is shown in the
Schedule 13D to have beneficial ownership of, and shared voting and
dispositive power with respect to, the shares owned by Industries L.P. See
Note (2) above. Neither Advance Holding nor Advance Stores directly owns
any shares. Beneficial ownership by Advance Stores reflects shares owned
by Industries L.P. See Note (2) above.
(7) The number of shares shown includes 100,000 shares deemed to be
beneficially owned by Mr. Perkins by virtue of certain stock options that
are currently exercisable.
(8) The number of shares shown includes 7,125 shares deemed to be beneficially
owned by Mr. Moore by virtue of certain stock options that are currently
exercisable or become exercisable within 60 days.
(footnotes continued on the following page)
121
(9) The number of shares shown includes 14,875 shares deemed to be
beneficially owned by Mr. Harrah by virtue of certain stock options that
are currently exercisable or become exercisable within 60 days.
(10) The number of shares shown includes 48,681 shares deemed to be
beneficially owned by Mr. Bottino by virtue of certain stock options that
are currently exercisable or become exercisable within 60 days. Also
includes 91 shares held by Mr. Bottino's wife.
(11) The number of shares shown includes 49,981 shares deemed to be
beneficially owned by Mr. Viele by virtue of certain stock options that
are currently exercisable or become exercisable within 60 days.
(12) The number of shares shown includes 3,500 shares deemed to be beneficially
owned by Mr. Walling by virtue of certain stock options that are currently
exercisable or become exercisable within 60 days. Also includes 245 shares
owned by Mr. Walling's wife.
(13) The number of shares shown includes 750 shares deemed to be beneficially
owned by Mr. Webster by virtue of certain stock options that are currently
exercisable or become exercisable within 60 days. Also includes 5 shares
held by Mr. Webster as custodian for one of his two sons, and 12 shares
held by Mr. Webster as custodian for his other son.
(14) This information is derived from a Schedule 13G dated September 7, 2001,
filed by NewSouth Capital Management, Inc. ("NewSouth"). NewSouth is shown
to have sole voting and dispositive power with respect to all 1,318,824
shares.
(15) This information is derived from a Schedule 13G dated February 2, 2001,
filed by Dimensional Fund Advisors, Inc. ("Dimensional"). All 1,333,800
shares are shown to be owned by certain entities for which Dimensional
serves as investment adviser with sole power to direct investments and/or
sole power to vote the securities. None of the entities alone holds shares
representing more than 5% of the outstanding common stock of Discount. For
purposes of the reporting requirements of the Securities Exchange Act of
1934, Dimensional is deemed to be a beneficial owner of such securities;
however, Dimensional expressly disclaims that it is, in fact, the
beneficial owner of such securities.
Agreement and Plan of Merger--Potential Changes in Control
If the merger contemplated by the agreement and plan of merger is
consummated, Advance and its affiliates will control Discount. Upon
consummation of the Discount merger and pursuant to the terms of the agreement
and plan of merger, each share of Discount's common stock will be exchanged for
$7.50 in cash and 0.2577 shares of common stock of Advance. In connection with
entering into the agreement and plan of merger, Industries L.P. entered into
(1) a voting agreement pursuant to which it agreed to vote any shares of
Discount's common stock that it owns in favor of the merger and the agreement
and plan of merger, agreed to refrain from voting in favor of any other
proposals to sell Discount and granted to Advance Stores a proxy to vote such
shares, and (2) a stock option agreement pursuant to which it granted to
Advance Stores an option to purchase the shares of Discount common stock held
by Fontaine Industries under certain circumstances.
Related Party Transactions of Discount
As of October 10, 1992, Discount and Herman and Marie Fontaine ("Mr. and
Mrs. Fontaine"), entered into a Wage Agreement (the "Agreement") that provides
that from October 10, 1992 and continuing as long as Mr. and Mrs. Fontaine are
both living and are continuing to provide the services required under the
Agreement, Discount will pay to Mr. and Mrs. Fontaine, collectively,
$140,000.00 per year. Upon the death of either Herman or Marie Fontaine,
Discount was required to continue to pay the survivor $140,000.00 per year
provided the survivor continues to provide the services required under the
Agreement. Herman Fontaine is one of the founders of Discount and is currently
Chairman Emeritus of Discount. Mr. and Mrs. Fontaine are the parents of Denis
L. Fontaine and Peter J. Fontaine. In fiscal 2001, Discount paid Mr. Fontaine a
total of $140,000, in accordance with the Agreement. Mrs. Fontaine died in
January 2000 and Mr. Fontaine has continued to receive payments under the
Agreement.
122
Discount leases two of its store locations under separate one year leases
from a Florida partnership which was established by Denis L. Fontaine and Peter
J. Fontaine and the current partners of which are Peter J. Fontaine and the
Glenda A. Fontaine Marital Trust, which was formed after Denis L. Fontaine's
death in June 1994 (the "Marital Trust"). The leases provide for fixed monthly
rental, pass through of all expenses to Discount, including taxes, repairs and
insurance and one year renewal terms. During fiscal 2001, one of the leases was
not renewed, but lease payments in the amount of $34,980 were dispersed prior
to the end of the lease. As in the past, the remaining lease has been renewed
from year to year and it is anticipated that such renewals will continue. Lease
payments under the second and ongoing lease was $57,240 in fiscal 2001. The
lease is believed to be at or below fair market value.
During fiscal 2001, Discount chartered on a regular basis an airplane from
PF Flyers, Inc., a Florida corporation that owns and operates an airplane
charter service and all of the common stock of which is beneficially owned by
Peter J. Fontaine. The payments made during fiscal 2001 by Discount to PF
Flyers, Inc., aggregated approximately $105,833. The rates charged to Discount
by PF Flyers, Inc., for the chartering services are believed to be at or below
fair market value.
123
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following pro forma consolidated financial data (the "Pro Forma
Financial Data") has been prepared by Advance's management by applying pro
forma adjustments to the historical consolidated financial statements of
Advance Holding and Discount and the notes thereto included elsewhere in this
proxy statement and prospectus. The pro forma adjustments, which are based upon
available information and upon certain assumptions that Advance's management
believes are reasonable, are described in the accompanying notes. The unaudited
pro forma balance sheet as of July 14, 2001 was prepared as if the merger and
related financing had occurred on such date. The unaudited pro forma
consolidated statements of operations combine the Advance Holding consolidated
statements of operations for the fiscal year ended December 30, 2000
(comprising fifty-two weeks), for the twelve months ended July 14, 2001
(comprising fifty-two weeks) and for the six month period ended July 14, 2001
(comprising twenty-eight weeks) with the Discount unaudited consolidated income
statements for the twelve-month period ended November 28, 2000 (comprising
fifty-two weeks), for the twelve-month period ended August 28, 2001 (comprising
fifty-two weeks) and for the six month period ended August 28, 2001 (comprising
twenty-six weeks), respectively, to reflect the proposed merger of Discount and
Advance and the related financing as if such transactions had been consummated
and was effective as of January 2, 2000. As a result of combining the financial
results for the above-mentioned periods, Discount's financial results for the
13-week quarter ended February 27, 2001 have been omitted from the Pro Forma
Financial Data. Discount's sales and net income for the quarter ended February
27, 2001 were $159.5 million and $2.3 million, respectively. Advance's fiscal
year ends on the Saturday closest to December 31 of each year, while Discount's
fiscal year ends on the Tuesday closest to May 31 of each year. Accordingly,
for purposes of the pro forma consolidated statements of operations, comparable
annual and six month period results for the respective companies have been
combined in order to provide comparable results for the periods presented.
The merger will be accounted for under the purchase method of accounting.
The unaudited pro forma consolidated balance sheet as of July 14, 2001 reflects
a pro forma allocation of purchase price for the merger to the tangible and
intangible assets and liabilities acquired. The final allocation of such
purchase price, and the resulting depreciation and amortization expense, will
differ from the estimates contained herein due to the final allocation being
based on (a) the actual amounts of assets and liabilities on the closing date,
(b) final purchase price adjustments, including reserves that may be recognized
for possible exit costs, and (c) the final determination of values of property
and equipment and intangible and other assets. The actual allocation of the
purchase price, and the resulting effect on income from operations may differ
significantly from the pro forma amounts included herein.
The financial effects to Advance of the merger as presented in the pro forma
consolidated financial data are not necessarily indicative of Advance's
consolidated financial position or results of operations which would have been
obtained had the merger actually occurred on the dates described above, nor are
they necessarily indicative of the results of future operations. The pro forma
consolidated financial data should be read in conjunction with the notes
thereto, which are an integral part thereof, the consolidated historical
financial statements of Advance Holding and Discount and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for Advance Holding and Discount which are included elsewhere in
this proxy statement and prospectus.
Advance expects to achieve ongoing purchasing, distribution and
administrative savings as a result of the merger. During 2002, Advance expects
these savings to result in approximately $30 million of incremental EBITDA,
excluding certain one-time merger expenses. Advance expects these one-time
expenses to total approximately $53 million from the closing of the merger
through the end of 2003, $41 million of which Advance expects to incur in 2002.
Neither the incremental EBITDA nor the one-time merger expenses have been
reflected in the Pro Forma Financial Data. See "Certain Financial Projections
and Forecasts" at page 41. The Forecast is subject to the qualifications
described in that section and the special note regarding forward-looking
statements at page 23.
124
Unaudited Pro Forma Consolidated Statements of Operations
(amounts in thousands, except per share data)
Twelve Months Ended July 14, 2001
-----------------------------------------------
Advance
Holding Discount Total
Historical Historical Adjustments Pro Forma
---------- ---------- ----------- ----------
Net Sales.................... $2,389,627 $668,024 $ -- $3,057,651
Cost of Sales................ 1,428,960 405,238 -- 1,834,198
---------- -------- ------- ----------
Gross Profit................. 960,667 262,786 -- 1,223,453
Selling, general and
administrative expenses..... 851,392 220,276 (4,431)(1) 1,067,237
---------- -------- ------- ----------
Income from operations....... 109,275 42,510 4,431 156,216
Total interest expense....... (63,113) (19,369) (12,399)(2) (94,881)
Other income, net............ 1,049 6,972 -- 8,021
---------- -------- ------- ----------
Income before provision for
income taxes................ 47,211 30,113 (7,968) 69,355
Provision for income taxes... (18,606) (10,823) 3,188 (3) (26,241)
---------- -------- ------- ----------
Net income from continuing
operations.................. $ 28,605 $ 19,290 $(4,780) $ 43,114
========== ======== ======= ==========
Earnings per share from
continuing operations
Basic...................... $ 1.01 $ 1.15 $ 1.32
Diluted.................... 1.00 1.15 1.30
========== ======== ==========
Weighted average common
shares outstanding
Basic...................... 28,290 16,704 32,590
Diluted.................... 28,746 16,746 33,045
========== ======== ==========
Fiscal Year Ended December 30, 2000
-----------------------------------------------
Advance
Holding Discount Total
Historical Historical Adjustments Pro Forma
---------- ---------- ----------- ----------
Net Sales.................... $2,288,022 $640,014 $ -- $2,928,036
Cost of Sales................ 1,392,127 388,225 -- 1,780,352
---------- -------- ------- ----------
Gross Profit................. 895,895 251,789 -- 1,147,684
Selling, general and
administrative expenses..... 803,106 202,401 (4,510)(1) 1,000,997
---------- -------- ------- ----------
Income from operations....... 92,789 49,388 4,510 146,687
Total interest expense....... (66,640) (21,812) (7,081)(2) (95,533)
Other income, net............ 1,012 2,079 -- 3,091
---------- -------- ------- ----------
Income before provision for
income taxes................ 27,161 29,655 (2,571) 54,245
Provision for income taxes... (10,535) (10,882) 1,029 (3) (20,388)
---------- -------- ------- ----------
Net income from continuing
operations.................. $ 16,626 $ 18,773 $(1,542) $ 33,857
========== ======== ======= ==========
Earnings per share from
continuing operations
Basic...................... $ 0.59 $ 1.12 $ 1.04
Diluted.................... 0.58 1.12 1.03
========== ======== ==========
Weighted average common
shares outstanding
Basic...................... 28,296 16,698 32,596
Diluted.................... 28,611 16,698 32,911
========== ======== ==========
See Notes to Unaudited Pro Forma Consolidated Statements of Operations
125
Unaudited Pro Forma Consolidated Statements of Operations
(amount in thousands, except per share data)
Six Months Ended July 14, 2001
-----------------------------------------------
Advance
Holding Discount Total
Historical Historical Adjustments Pro Forma
---------- ---------- ----------- ----------
Net Sales.................... $1,336,837 $347,597 $ -- $1,684,434
Cost of Sales................ 796,557 209,769 -- 1,006,326
---------- -------- ------- ----------
Gross Profit................. 540,280 137,828 -- 678,108
Selling, general and
administrative expenses..... 472,361 114,153 (2,323)(1) 584,191
---------- -------- ------- ----------
Income from operations....... 67,919 23,675 2,323 93,917
Total interest expense....... (33,074) (7,474) (10,458)(2) (51,006)
Other income, net............ 569 6,741 -- 7,310
---------- -------- ------- ----------
Income before provision for
income taxes................ 35,414 22,942 (8,135) 50,221
Provision for income taxes... (14,010) (8,242) 3,254 (3) (18,998)
---------- -------- ------- ----------
Net income from continuing
operations.................. $ 21,404 $ 14,700 $(4,881) $ 31,223
========== ======== ======= ==========
Earnings per share from
continuing operations
Basic...................... $ 0.76 $ 0.88 $ 0.96
Diluted.................... 0.74 0.88 0.94
========== ======== ==========
Weighted average common
shares outstanding
Basic...................... 28,285 16,707 32,585
Diluted.................... 28,760 16,792 33,060
========== ======== ==========
See Notes to Unaudited Pro Forma Consolidated Statements of Operations
126
Notes to Unaudited Consolidated Pro Forma Statements of Operations
(dollars in thousands)
Twelve Months Fiscal Year Six Months
Ended Ended Ended
July 14, December 30, July 14,
2001 2000 2001
------------- ------------ ----------
(1)Reflects the following:
Reduction in depreciation as a result
of pro forma purchase price allocation
based on an average useful lives of
14 years(a)........................... $ (3,974) $ (3,974) $ (2,140)
Less: Amortization of debt issuance
costs and goodwill included in
selling, general and administrative
expenses in historical statement of
operations of Discount................ (618) (536) (344)
Elimination of amortization of deferred
gain on sale leaseback................ 161 -- 161
-------- -------- --------
Net decrease in selling, general and
administrative expenses............. $ (4,431) $ (4,510) $ (2,323)
======== ======== ========
(2) Gives effect to the increase in
estimated interest expense from the
use of borrowings to finance the
merger:
Commitment fees on unused borrowings
related to the revolving credit
facility............................. $ (1,274) $ (1,274) $ (686)
Interest related to the tranche A term
loan facility........................ (11,700) (11,700) (6,300)
Interest related to the tranche B term
loan facility........................ (21,350) (21,350) (11,496)
Interest related to the new senior
subordinated notes................... (20,500) (20,500) (11,038)
Amortization of original issuance
discount related to the New Senior
Subordinated Notes amortized over 6
years................................ (1,540) (1,540) (830)
Amortization of debt issuance costs
related to the New Credit Facility
and the New Senior Subordinated Notes
amortized over 6 years............... (3,725) (3,725) (2,006)
Less: Interest expense and
amortization of debt issuance
costs in historical statement of
operations related to
debt extinguished in connection with
the merger........................... 47,690 53,008 21,898
-------- -------- --------
Net increase in interest expense..... $(12,399) $ (7,081) $(10,458)
======== ======== ========
--------
(a) Advance has not yet completed valuations of the fair values of
Discount's tangible and intangible assets. Advance believes that
Discount has intangible assets related to trade names, trade dress,
customer contracts and related customer relationships that may
ultimately be assigned fair market value in the final purchase price
allocation, however, the amounts to be assigned to these intangible
assets cannot be estimated currently. Accordingly, the net decrease to
book value of property and equipment and intangible assets that
results from the purchase price allocation has been allocated in its
entirety to property and equipment for purposes of this pro forma
presentation and depreciated based on an assumed average useful life
of 14 years. The allocation of the net decrease to book value of
property and equipment and intangible assets may differ significantly
from the pro forma allocation and, as a result, the final related
reduction in depreciation expense and increase to amortization expense
for intangible assets may differ significantly from the pro forma
presentation.
(b) Reflects pro forma interest expenses calculated assuming (i) a LIBOR
rate of 3.0% plus a spread of 3.5% and 4.0% for the tranche A and
tranche B portions of the New Credit Facility, respectively, (ii) a
yield to maturity of 11.875% on the New Senior Subordinated Notes,
which includes a cash interest component based on a coupon rate of 10
1/4%, and (iii) commitment fees on unused borrowings on the New Credit
Facility using a rate of 0.5% per annum. The interest rates on the New
Credit Facility are variable. A change in the rates of 1/8 of 1% on
these borrowings would change the pro forma interest expense for the
fiscal year ended December 30, 2000 and the Twelve Months Ended July
14, 2001 by $618 and for the Six Months Ended July 14, 2001 by $333.
(3) Estimated tax effects of the pro forma adjustments at a statutory rate of
approximately 40%.
127
Unaudited Pro Forma Consolidated Balance Sheet
Advance
Holding Discount
Historical Historical
July 14, August 28, Total
2001 2001 Adjustments Pro Forma
---------- ---------- ----------- ----------
(dollars in thousands)
Assets
Current Assets:
Cash and cash
equivalents(11)............. $ 19,620 $ 6,372 $ (19,807)(1) $ 6,185
Receivables, net............. 90,401 -- -- 90,401
Inventories.................. 788,773 243,053 (20,049)(2) 1,011,777
Other current assets......... 18,878 18,734 17,903(10) 55,515
---------- -------- --------- ----------
Total Current Assets....... 917,672 268,159 (21,953) 1,163,878
Property and equipment, net.... 400,973 384,463 (22,404)(3) 763,032
Assets held for sale........... 23,640 -- -- 23,640
Other assets, net.............. 22,029 4,431 11,187(4) 37,647
---------- -------- --------- ----------
Total Assets............... $1,364,314 $657,053 $ (33,170) $1,988,197
========== ======== ========= ==========
Liabilities and Stockholders'
Equity
Current Liabilities:
Current portion of long-term
debt........................ $ -- $ 1,200 $ (1,200)(5) $ --
Accounts payable............. 401,039 75,609 -- 476,648
Accrued expenses............. 138,839 23,092 9,900(6) 171,831
Other current liabilities.... 50,770 2,013 (1,342)(9) 51,441
---------- -------- --------- ----------
Total Current Liabilities.. 590,648 101,914 7,358 699,920
Long-term debt................. 554,819 209,608 185,093(5) 949,520
Other long-term liabilities.... 39,488 19,207 6,937(7) 65,632
Stockholders' equity........... 179,359 326,324 (232,558)(8) 273,125
---------- -------- --------- ----------
Total Liabilities and
Stockholders' Equity...... $1,364,314 $657,053 $ (33,170) $1,988,197
========== ======== ========= ==========
See Notes to Unaudited Pro Forma Consolidated Balance Sheet
128
Notes to Unaudited Pro Forma Consolidated Balance Sheet
(dollars in thousands, except per share data)
The Unaudited Pro Forma Consolidated Balance Sheet reflects the merger as if
it occurred as of July 14, 2001 (actual amounts may differ significantly from
the pro forma amounts estimated below).
(1) Reflects increases and decreases in cash resulting from the pro forma
adjustments:
Cash increases:
Proceeds from the issuance of the following: (See note (5) below)
Revolving credit facility......................................... $ 9,400
Tranche A term loan facility...................................... 180,000
Tranche B term loan facility...................................... 305,000
New senior subordinated notes..................................... 185,600
---------
Total cash inflows.............................................. 680,000
---------
Cash decreases:
Cash portion of purchase price for acquisition (a)................ (128,400)
Repayment of Discount's existing long-term debt (b)............... (217,108)
Repayment of Advance senior debt under existing deferred term
loan, delayed draw, revolving credit and Tranche B facilities
(See note (5) below)............................................. (285,299)
Purchase of Discount's Gallman distribution facility from the
lessor........................................................... (34,000)
Estimated debt issuance costs (See note (4) below)................ (22,350)
Estimated stock issuance costs (See note (8) below)............... (6,325)
Estimated acquisition related costs (See note (2) below).......... (6,325)
---------
Total cash outflows............................................. (699,807)
---------
Net impact on cash (See note (11) below).......................... $ (19,807)
=========
--------
(a) Amount includes $125,300 to purchase approximately 16,700,000 shares of
Discount's common stock at $7.50 per share and $3,100 to purchase
outstanding "in the money" options to acquire Discount common stock.
(b) Amount includes $210,808 to retire long-term debt outstanding and
$6,300 in debt prepayment penalties.
129
(2) The merger will be accounted for as a purchase in accordance with Statement
of Financial Accounting Standards No. 141, "Business Combinations." The
purchase price is being allocated first to the tangible assets and
liabilities of Discount based upon preliminary estimates of their fair
market values, assuming the merger had occurred on July 14, 2001, with the
excess of the estimated fair market value of the net assets acquired over
the purchase price allocated on a pro rata basis to reduce property and
equipment and intangible assets for pro forma purposes, as follows:
Components of purchase price:
Cash to Discount shareholders (see note (1) above)................. $ 128,400
Advance common stock to Discount shareholders (4,305,000 shares
valued at $24.60 per share)(a).................................... 105,913
Prepayment penalties associated with the extinguishment of
Discount's existing long-term debt (see note (1) above)........... 6,300
Accrual for Advance's obligation to purchase continuing insurance
coverage for Discount's directors and officers for pre-merger time
periods as required by the Merger Agreement (see note (6) below).. 700
Fair value of outstanding options to purchase 1,152,684 shares of
Discount common stock that will be converted to options to
purchase 594,045 shares of Advance common stock, valued at $1.92
per option (b).................................................... 1,141
Estimated acquisition related costs................................ 6,325
---------
Total purchase price............................................. 248,779
--------
(a) Assumes a $13.84 per share value for Discount common stock (inclusive
of $7.50 in cash) based on the historical trading value of Discount's
common stock on and around the announcement date of the merger.
(b) The fair value of the options to purchase shares of Advance common
stock was determined using the Black-Scholes option-pricing model with
the following assumptions: (i) risk-free interest rate of 3.92%; (ii)
an expected life of two years; (iii) a volatility factor of .40; (iv) a
fair value of Advance's common stock of $24.60 and (v) expected
dividend yield of zero.
Derivation of book value:
Historical book value of Discount's net assets................... (326,324)
Adjustments to recognize (assets) liabilities in purchase
accounting:
Reserve for severance payments related to change in control
agreements.................................................... 13,500
Purchase accounting adjustment to conform Discount's accrual
for self-insured liabilities, based on an estimated case-by-
case basis and amounts incurred but not reported to Advance's
policy of utilizing actuarially developed accruals for such
liabilities (See note (6) below).............................. 1,000
Purchase accounting adjustment to increase Discount's warranty
accrual on pre-acquisition sales of certain Discount
merchandise to conform with Advance's merchandise return
policies (See note (6) below)................................. 3,000
Purchase accounting adjustment to accrue for the settlement of
certain consulting agreements as required by the merger
agreement (See note (6) below)................................ 1,500
Deferred tax impact of pro forma adjustments (See note (9)
below)........................................................ (16,608)
Adjustments to reflect fair market value of net assets acquired:
Elimination of net book value of goodwill and deferred
financing costs acquired (See note (4) below)................. 4,200
Elimination of deferred gain related to a sale-leaseback
transaction previously consummated by Discount (See note (7)
below)........................................................ (5,900)
Decrease in book value of receivables to the amount required
given Advance's historical acquisition receivables collection
experience ($400) and inventory ($20,049) arising primarily
due to Advance management's plans for disposal at sales prices
less than book value.......................................... 20,449
---------
Net decrease to book value of property and equipment and
intangible assets........................................... $ (56,404)
=========
The foregoing pro forma purchase price allocation is based on available
information and certain assumptions that Advance believes are reasonable.
Advance is currently evaluating certain exit costs that may be incurred in
connection with the merger and may establish additional reserves, not reflected
in the
130
accompanying pro forma consolidated financial data, at closing based on the
results of its evaluation. Any reserves established will result in a pro rata
increase in property and equipment, resulting in additional provisions for
depreciation expense. The final purchase price allocation will be based on the
outcome of the matter referred to above, final determination of the fair values
of the tangible and intangible assets acquired at the date of the merger as
determined by appraisal or other methods, and actual amounts of assets and
liabilities on the closing date. The final purchase price allocation may differ
significantly from the pro forma allocation.
(3) Reflects the following:
Purchase of Discount's Gallman distribution facility from the
lessor (See note (1) above)....................................... $ 34,000
Purchase accounting adjustment (See note (2) above) (a)............ (56,404)
--------
$(22,404)
========
--------
(a) Advance has not yet completed valuations of the fair values of
Discount's tangible and intangible assets. Advance believes that
Discount has intangible assets related to trade names, trade dress,
customer contracts and related customer relationships that may
ultimately be assigned fair market values in the final purchase price
allocation, however, the amounts to be assigned to these intangible
assets cannot be estimated currently. Accordingly, the net decrease to
book value of property and equipment and intangible assets determined
in (1) above has been allocated in its entirety to property and
equipment for purposes of this pro forma presentation. The final
allocation of the net decrease to book value of property and equipment
and intangible assets may differ significantly from the pro forma
allocation.
(4) Reflects the following (a):
Purchase accounting adjustment (See note (2) above)................. $(4,200)
Estimated deferred debt issuance costs (See note (1) above)......... 22,350
Elimination of deferred debt issuance costs related to Advance's
debt that was refinanced
(See note (8) below)............................................... (6,963)
-------
$11,187
=======
--------
(a) See note (a) to note (3) above.
(5) Reflects the following:
Proceeds from the issuance of long-term debt under the New Credit
Facility and the New Senior Subordinated Notes (See note (1)
above)............................................................ $680,000
Repayment of Discount's existing debt:
Current portion of long-term debt................................ (1,200)
Long-term debt................................................... (209,608)
Repayment of Advance senior debt under existing deferred term loan,
delayed draw, revolving credit and Tranche B facilities (See note
(i) above)........................................................ (285,299)
--------
Subtotal......................................................... $183,893
Current portion of Discount's long-term debt repaid................ 1,200
--------
$185,093
========
(6) Reflects the following:
Current portion of the purchase accounting adjustment to accrue for
severance payments related to change in control agreements (See note
(2) above)........................................................... $3,700
Purchase accounting adjustment to conform Discount's accrual for self-
insured liabilities, based on an estimated case-by-case basis and
amounts incurred but not reported to Advance's policy of utilizing
actuarially developed accruals for such liabilities (See note (2)
above)............................................................... 1,000
Purchase accounting adjustment to increase Discount's warranty accrual
to reflect Advance's expanded return policy on pre-acquisition sales
of certain Discount merchandise (See
note (2) above)...................................................... 3,000
Purchase accounting adjustment to accrue for the settlement of certain
consulting agreements as required by the merger agreement (See note
(2) above)........................................................... 1,500
Accrual for Advance's obligation to purchase continuing insurance
coverage for Discount's directors and officers (see note (2) above).. 700
------
$9,900
======
131
(7) Reflects the following:
Long-term portion of the purchase accounting adjustment to reserve
for severance payments related to change in control agreements (See
note (2) above).................................................... $ 9,800
Deferred tax impact of pro forma adjustments (See note (9) below)... 3,037
Elimination of deferred gain related to a sale-leaseback transaction
previously consummated by Discount (See note (2) above)............ (5,900)
-------
$ 6,937
=======
(8) Reflects the following:
Issuance of 4,305,000 shares of Advance common stock valued at
$24.60 per share to Discount shareholders (See note (2) above)... $ 105,913
Estimated stock issuance costs (See note (1) above)............... (6,325)
Fair value of outstanding options to purchase 1,152,684 shares of
Discount common stock that will be converted to options to
purchase 594,045 shares of Advance common stock, valued at $1.92
per option (See note (2) above).................................. 1,141
Elimination of historical Discount stockholders' equity (See note
(2) above)....................................................... (326,324)
Elimination of deferred debt issuance costs related to Advance's
debt that was refinanced (See note (4) above).................... (6,963)
---------
$(232,558)
=========
(9) Advance anticipates that the merger will be accounted for as a tax-free
transaction resulting in the tax bases of assets and liabilities being
carried over from Discount. Components of the net pro forma change in
deferred taxes related to changes in amounts allocated to assets and
liabilities for financial reporting purposes and other purchase accounting
adjustments:
Current deferred tax asset......................................... $ 18,303
Reclassification of current deferred tax liability to current
deferred tax asset................................................ 1,342
Noncurrent deferred tax liability.................................. (3,037)
--------
$ 16,608
========
(10) Reflects the following:
Current deferred tax impact of pro forma adjustments (See note (9)
above)............................................................. $18,303
Decrease in book value of receivables to the amount required given
Advance's historical acquisition receivables collection experience
(see note (2) above)............................................... (400)
-------
$17,903
=======
132
MARKET FOR ADVANCE'S AND DISCOUNT'S COMMON STOCK AND DIVIDENDS
There is no established public trading market for Advance common stock.
Advance Holding stockholders will become holders of Advance common stock as a
result of the reincorporation merger on a one share for one share basis. As of
October 25, 2001, there were approximately 60 holders of record of common stock
of Advance Holding. Advance intends to apply for listing of its shares of
common stock on the New York Stock Exchange in connection with the consummation
of the merger.
Advance Holding has not paid cash dividends to its shareholders since the
Recapitalization, and neither Advance nor Advance Holding intends to pay cash
dividends in the foreseeable future. In fiscal 1998, prior to the
Recapitalization, Advance Holding paid a dividend to its shareholders of
approximately $15.0 million.
Discount's common stock is currently traded on the New York Stock Exchange
under the ticker symbol "DAP." The approximate number of record holders of
Discount's common stock at October 25, 2001 was 734.
High and low stock prices for the last two fiscal years were:
Fiscal 2002 Fiscal 2001 Fiscal 2000
------------- ------------ -------------
High Low High Low High Low
------ ------ ------ ----- ------ ------
Qtr 1............................. $15.25 $10.35 $11.00 $7.88 $24.50 $18.94
Qtr 2............................. -- -- 9.25 5.19 19.13 11.00
Qtr 3............................. -- -- 7.75 4.88 20.81 10.13
Qtr 4............................. -- -- 14.20 6.60 12.38 8.50
Since its initial public offering in August 1992, Discount has not paid any
cash dividends. Discount does not intend to pay any cash dividends for the
foreseeable future and intends to retain earnings, if any, for the future
operation and expansion of Discount's business. Discount's existing credit
facilities contain restrictions on the payment of cash dividends on Discount's
common stock. At August 28, 2001, approximately $48.1 million of Discount's
retained earnings were available for dividend distribution.
133
MANAGEMENT OF ADVANCE AFTER THE MERGER
Directors and Executive Officers of Advance After the Merger
The following table provides information about those persons who are
expected to be the directors and executive officers of Advance upon the closing
of the merger. With the exception of Mr. Fontaine, such persons are serving as
the directors and executive officers of Advance Holding as of the date of this
Proxy and Prospectus:
Name Age(1) Position
---- ------ --------
Nicholas F. Taubman..... 66 Chairman of the Board and Director
Garnett E. Smith........ 61 Vice Chairman of the Board and Director
Lawrence P. Castellani.. 56 Chief Executive Officer and Director
Jimmie L. Wade.......... 47 President and Chief Financial Officer
David R. Reid........... 39 Executive Vice President and Chief Operating
Officer
Paul W. Klasing......... 42 Executive Vice President, Merchandising and
Marketing
Eric M. Margolin........ 48 Senior Vice President, General Counsel and
Secretary
Jeffrey T. Gray......... 36 Senior Vice President, Controller, Assistant
Secretary
Robert E. Hedrick....... 54 Senior Vice President, Human Resources and
Benefits
Senior Vice President and Chief Information
S. Lynn Stevens......... 52 Officer
John M. Roth............ 43 Director
Mark J. Doran........... 37 Director
Ronald P. Spogli........ 53 Director
Timothy C. Collins...... 45 Director
William L. Salter....... 58 Director
Jeffrey B. Conner....... 42 Director
Peter J. Fontaine(2).... 47 Director
--------
(1) As of October 10, 2001.
(2) To be elected as a member of the board of directors of Advance and Advance
Stores upon the closing of the merger.
Mr. Taubman, Chairman of the Board of Advance, Advance Holding and Advance
Stores, joined Advance Stores in 1956. Mr. Taubman has served as Chairman of
Advance Stores since January 1985 and as Chief Executive Officer of Advance
Stores from January 1985 to July 1997. From 1969 to 1984, Mr. Taubman served as
President of Advance Stores. In addition, Mr. Taubman has served as Chairman of
Advance Holding since May 1992, the year it was formed, as Chief Executive
Officer of Advance Holding from May 1992 to March 1998, and as Secretary and
Treasurer of Advance Holding from May 1992 to February 1998.
Mr. Smith, Vice Chairman of the Board of Advance, Advance Holding and
Advance Stores, joined Advance Stores in November 1959. Mr. Smith was named
Vice Chairman of the Board of Advance Holding and Advance Stores in January
2000. Prior to that Mr. Smith served as President and Chief Operating Officer
of Advance Stores from January 1985 until July 1997, at which time he became
Chief Executive Officer. Mr. Smith has also served in numerous other positions
including Executive Vice President and General Manager, Vice President of
Purchasing, Buyer and Store Manager. In addition, Mr. Smith has served as
President of Advance Holding from May 1992 to October 1999, as Chief Operating
Officer of Advance Holding from May 1992 to March 1998, and as Chief Executive
Officer of Advance Holding and Advance Stores from March 1998 to January 2000.
134
Mr. Castellani, Chief Executive Officer and Director of Advance, Advance
Holding and Advance Stores, joined Advance Stores in February 2000 and is
responsible for overall management and operations of Advance Stores. Prior to
joining Advance Stores, Mr. Castellani was President and Chief Executive
Officer of Ahold Support Services in Latin America (a division of Royal Ahold)
from 1998 to 2000 and Chief Executive Officer of Tops Friendly Markets from
1991 to 1998.
Mr. Wade, President and Chief Financial Officer of Advance, Advance Holding
and Advance Stores, joined Advance Stores in February 1994. Mr. Wade was named
President in October 1999 and Chief Financial Officer, and Secretary in March
2000. Mr. Wade is responsible for finance, logistics, information technology,
legal and real estate. From 1987 to 1993, Mr. Wade was Vice President, Finance
and Operations, for S.H. Heironimus, and from 1979 to 1987, he was Vice
President of Finance for American Motor Inns. Mr. Wade is a certified public
accountant.
Mr. Reid, Executive Vice President and Chief Operating Officer of Advance,
Advance Holding and Advance Stores, joined Advance Stores in October 1984 and
has held his current position since October 1999. Mr. Reid is responsible for
all retail operations and commercial sales. From March 1999 to October 1999,
Mr. Reid served as the Chief Executive Officer of Western. Immediately prior to
assuming this position, Mr. Reid was Senior Vice President with responsibility
for real estate and store support. Mr. Reid has been a Vice President, Store
Support for Advance Stores and has also served in various training and store
operations positions as Store Manager, Revenue and Division Manager.
Mr. Klasing, Executive Vice President, Merchandising and Marketing of
Advance, Advance Holding and Advance Stores, joined Advance Stores in April
1995 and has held his current position since October 1999. Mr. Klasing is
responsible for merchandising, marketing, and retail pricing. From 1981 to
1992, Mr. Klasing worked for Kragen Auto Parts (now CSK Automotive) and from
1992 to 1995 for Montgomery Ward/Auto Express in various positions.
Mr. Margolin, Senior Vice President, General Counsel & Secretary of Advance,
Advance Holding and Advance Stores, joined Advance Stores in April 2001. Mr.
Margolin is responsible for legal, corporate secretarial affairs and real
estate. From 1993 to 2000, Mr. Margolin was Vice President, General Counsel and
Secretary of Tire Kingdom, Inc. (now TBC Corporation) and from 1985 to 1993 was
general counsel for several companies in the apparel manufacturing and
retailing field. Mr. Margolin is a member of the New York State Bar.
Mr. Gray, Senior Vice President, Controller and Assistant Secretary of
Advance, Advance Holding and Advance Stores, joined Advance Stores in March
1994 and has held his current position since April 2000. Mr. Gray is
responsible for accounting, treasury, budgeting, financial analysis and risk
management. From 1994 to 2000, Mr. Gray held several positions within Advance
Stores, most recently as Vice President of Inventory Management. From 1993 to
1994, Mr. Gray served as controller of Hollins University, and from 1987 to
1993, Mr. Gray was employed by KPMG LLP. Mr. Gray is a certified public
accountant.
Mr. Hedrick, Senior Vice President, Human Resources of Advance, Advance
Holding and Advance Stores, joined Advance Stores in May 2001. Mr. Hedrick is
responsible for employee relations, organizational development, compensation,
benefits and payroll. Mr. Hedrick was previously Vice President, Human
Resources for Foodbrands America from 1997 to 2001, and before that held
various positions in Human Resources over a 20 year period with Sara Lee
Corporation.
Ms. Stevens, Senior Vice President and Chief Information Officer of Advance,
Advance Holding and Advance Stores, joined Advance in July 1979. Ms. Stevens
was named Senior Vice President and CIO in July 1997. Ms. Stevens is
responsible for all technology infrastructure, systems architecture, software,
data security, and communications networks. From 1979 until 1997, Ms. Stevens
held several positions within Advance, most recently as Vice President of
Systems Development.
Mr. Roth, Director of Advance, Advance Holding and Advance Stores, became a
member of the board of directors in April 1998. Mr. Roth joined Freeman Spogli
& Co. in March 1988 and became a principal in March 1993. Mr. Roth is also a
director of AFC Enterprises, Inc. and Galyan's Trading Company, Inc.
135
Mr. Doran, Director of Advance, Advance Holding and Advance Stores, became a
member of the board of directors April 1998. Mr. Doran joined Freeman Spogli &
Co. in 1988 and became a principal in January 1998. Mr. Doran is also a
director of Century Maintenance Supply, Inc.
Mr. Spogli, Director of Advance, Advance Holding and Advance Stores, became
a member of the board of directors in August 2001. He was previously a director
of Advance Holding and Advance Stores from the April 1998 recapitalization
until the closing of the Western Merger in November 1998. Mr. Spogli is a
principal of Freeman Spogli & Co. which he co-founded in 1983. Mr. Spogli also
serves as a member of the board of directors of Hudson Respiratory Care, Inc.,
Century Maintenance Supply, Inc., AFC Enterprises, Inc., and Galyan's Trading
Company, Inc.
Mr. Collins, Director of Advance, Advance Holding and Advance Stores, became
a member of the board of directors in April 1998. Mr. Collins is Senior
Managing Director and Chief Executive Officer of Ripplewood Holdings L.L.C., a
private investment firm formed by him in October 1995, and is co-head of RHJ
Industrial Partners, an affiliate of Ripplewood Holdings L.L.C. From February
1990 to October 1995, Mr. Collins was a Senior Managing Director of the New
York office of Onex Corporation, an Ontario corporation listed on the Toronto
and Montreal Stock Exchanges. Mr. Collins is also a director of WRC Media,
Inc., The Strong Schaefer Value Fund, and Western Multiplex Corporation.
Mr. Salter, Director of Advance, Advance Holding and Advance Stores, became
a member of the board of directors in April 1999. Mr. Salter is the retired
President of the Specialty Retail Division of Sears. From 1995 to 1999, Mr.
Salter served as President of the Home Stores and Hard Lines division of Sears,
and from 1993 to 1995 as the Vice President and General Manager of the Home
Appliances and Electronics Division of Sears.
Mr. Conner, Director of Advance, Advance Holding and Advance Stores, became
a member of the board of directors in December 2000. Mr. Conner has served as
Vice President of Business Development for Sears since May 2000. From 1998 to
2000, Mr. Conner served as Vice President of Stores for Sears Tire Group. Mr.
Conner joined Sears in 1987 and held a number of strategic and operational
positions before becoming Vice President of Operations for Sears Tire Group in
1997.
Mr. Fontaine will become a member of the board of directors of Advance and
Advance Stores upon consummation after the merger with Discount. Mr. Fontaine
currently is Chairman and Chief Executive Officer of Discount. Mr. Fontaine has
been with Discount since 1975, serving since 1978 in various managerial and
executive capacities. Mr. Fontaine was elected Secretary and Treasurer of
Discount in 1979, Executive Vice President--Operations of Discount in 1992,
Chief Operating Officer of Discount in 1993 and President, Chief Executive
Officer and Chairman of the Board of Discount in July 1994. Effective February
1, 1997, Mr. Fontaine stepped down from his position as President of Discount
but continued in his positions of Chief Executive Officer and Chairman of the
Board of Discount.
Directors of Advance are elected annually and hold office until the next
annual meeting of stockholders or until their successors are duly elected and
qualified.
Executive officers are elected by, and serve at the discretion of, the board
of directors of Advance. Advance Stores has entered into employment agreements
with certain of its executive officers.
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Executive Compensation
The following table sets forth information with respect to compensation
earned by the Chief Executive Officer, the four other most highly compensated
executives serving as officers at the end of the last completed fiscal year and
two additional executives, who served as officers during the fiscal year and
would have been included in the top four if serving as such at the end of the
fiscal year.
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
-------------------------------------- ------------
Securities
Name and Principal Fiscal Other Annual Underlying All Other
Position Year Salary Bonus(1) Compensation(3) Options/SARs Compensation(4)
------------------ ------ -------- ---------- --------------- ------------ ---------------
Lawrence P. Castellani.. 2000 $542,308 $ 75,000 $ -- 1,050,000 $ --
Chief Executive Officer 1999 -- 3,272,700(2) -- -- --
1998 -- -- -- -- --
Jimmie L. Wade.......... 2000 $265,865 $ 128,502 $ -- 30,000 $6,336
President and Chief 1999 174,421 158,026 -- 34,500 6,080
Financial Officer 1998 108,537 221,887 -- 25,000 6,665
David R. Reid........... 2000 $250,000 $ 84,923 $ -- 25,000 $6,379
Executive Vice
President 1999 198,808 156,625 -- 34,500 6,080
and Chief Operating 1998 108,131 207,794 -- 25,000 5,320
Officer
Paul W. Klasing......... 2000 $184,128 $ 80,605 $ -- 18,000 $6,298
Executive Vice
President, 1999 151,031 139,359 -- 34,500 6,080
Merchandise and 1998 140,000 231,382 -- 25,000 6,589
Marketing
S. Lynn Stevens......... 2000 $172,782 $ 61,243 $ -- 10,000 $6,302
Senior Vice President
and 1999 164,665 127,850 -- 8,000 6,080
Chief Information
Officer 1998 150,800 234,232 -- 25,000 6,982
Garnett E. Smith(5)..... 2000 $280,758 $ 38,288 $ -- 55,000 $6,000
Vice Chairman and
former 1999 507,965 290,000 -- 417,500 8,000
Chief Executive Officer 1998 457,600 7,871,826 -- 362,500 8,000
J. O'Neil Leftwich(6)... 2000 $203,291 $ 23,000 $ -- -- $6,326
Former Senior Vice 1999 188,092 141,125 -- 86,500 6,080
President and Chief 1998 164,415 827,920 -- 72,500 6,932
Financial Officer,
Secretary and Treasurer
--------
(1) In connection with the Recapitalization, an aggregate of $11.5 million in
extraordinary bonuses were paid to senior employees in April 1998.
(2) Reflects a signing bonus accrued on January 1, 2000 in connection with Mr.
Castellani's retention as CEO. Approximately $1.9 million of the bonus was
used to purchase restricted stock in Advance Holding.
(3) While certain officers received perquisites, such perquisites do not exceed
the lesser of $50,000 or 10% of each officer's respective salary and bonus.
(4) Consists of matching contributions made by Advance Stores under Advance
Stores' 401(k) savings plan.
(5) In January 2000, Mr. Smith became Vice Chairman of the Board of Advance
Holding and Advance Stores.
(6) Mr. Leftwich's employment with Advance Stores terminated as of December 30,
2000.
137
Executive Employment Contracts
Mr. Castellani was appointed Chief Executive Officer and began employment
with Advance Stores on February 1, 2000, at which time he signed an employment
and non-competition agreement. Mr. Castellani signed an irrevocable acceptance
letter with Advance Stores in December 1999 that obligated Advance Stores to
pay Mr. Castellani a signing bonus of $3.3 million. The signing bonus of $3.3
million was accrued at January 1, 2000 and was paid in the first quarter of
fiscal 2000. Approximately $1.9 million of the bonus was used to purchase
shares of Advance Holding common stock pursuant to a restricted stock
agreement, which limits the sale or transfer of rights to the stock during the
term of the contract. This portion of the bonus was deferred and is being
amortized over the two-year term of the contract. Mr. Castellani's employment
contract has an initial term of two years, and renews automatically each year
thereafter unless terminated by Advance Stores or Mr. Castellani. The contract
provides for a base salary of $600,000, subject to annual increases at the
discretion of the board of directors, and an annual cash bonus based on Advance
Stores' achievement of performance targets established by the board of
directors. In the event Mr. Castellani is terminated without cause, or
terminates his employment for "good reason" as defined in the employment
agreement, he will receive salary through the later of the end of the term of
employment or one year from the effective date of termination, less any amounts
earned in other employment. Mr. Castellani has agreed not to compete with
Advance Stores, to preserve its confidential information, not to recruit or
employ employees of Advance Stores to or in other businesses, and not to
solicit customers or suppliers for competitors.
On April 15, 1998, Mr. Smith entered into an employment and non-competition
agreement with Advance Stores and it was amended effective April 2001. In
January 2000, Mr. Smith was named Vice Chairman of Advance Holding and Advance
Stores. The agreement has a term of one year, renewing automatically each year
thereafter unless terminated by Advance Stores or Mr. Smith. The agreement
provides for a base salary of $200,000, effective April 1, 2000, and is subject
to annual increases at the discretion of the board of directors. Additionally,
Mr. Smith may earn annual cash bonuses based on Advance Stores' achievement of
performance targets established by the board of directors. The bonus to be paid
upon achievement of targets will be consistent in amount with the bonuses paid
to Mr. Smith by Advance Stores historically. In the event Mr. Smith is
terminated without cause, or terminates his employment for "good reason" as
defined in the employment agreement, he will receive salary through the later
of the end of the term of employment or one year from the effective date of
termination, less any amounts earned in other employment. Mr. Smith has agreed
not to compete with Advance Stores, to preserve its confidential information,
not to recruit or employ employees of Advance Stores to or in other businesses,
and not to solicit customers or suppliers of Advance Stores for competitors.
On April 15, 1998, Messrs. Reid, Wade, Klasing and Ms. Stevens entered into
employment agreements with Advance Stores. Such agreements contain severance
provisions that provide for one year of base salary upon termination of
employment, unless the termination is due to death, disability or retirement,
by Advance Stores for "cause" (as defined in the agreements) or by the employee
other than for "good reason" (as defined in the agreements), less any amounts
earned in other employment. The agreements extend from year-to-year unless
terminated by either Advance Stores or the employee. Other provisions require
Advance Stores to pay bonuses earned by the employee upon Advance Stores'
achievement of earnings targets established by the board of directors, and an
agreement by the employee not to compete with Advance Stores, to preserve its
confidential information, not to recruit or employ employees of Advance Stores
to or in other businesses, and not to solicit customers or suppliers of Advance
Stores for competitors.
Consulting Agreement
On April 15, 1998, Mr. Taubman entered into a consulting and non-competition
agreement with Advance Holding and Advance Stores, and it was amended effective
April 2001. The agreement requires Advance Holding or Advance Stores to pay
consulting fees in an amount of $300,000 per annum, plus an annual bonus of at
least $300,000 based upon the achievement of targeted performance goals
established by the board of directors. In fiscal 2000, 1999 and 1998, Mr.
Taubman earned $320,000, $400,000 and $708,222 respectively,
138
pursuant to the consulting agreement. The agreement extends from year to year
unless terminated by either Advance Stores or Mr. Taubman. Mr. Taubman has
agreed not to compete with Advance Stores, to preserve its confidential
information, not to recruit or employ employees of Advance Stores to or in
other businesses, and not to solicit customers or suppliers for competitors.
Pursuant to the consulting agreement, Advance Holding and Mr. Taubman have
entered into an indemnity agreement whereby Advance Holding will indemnify Mr.
Taubman for actions taken as an officer or director of or consultant to Advance
Holding or Advance Stores to the fullest extent permitted by law. The amount of
time Mr. Taubman must devote to his consultation duties declines throughout the
term of the agreement. Advance Stores has entered into indemnification
agreements similar to that with Mr. Taubman with five of its other directors.
Compensation of Directors
Directors of Advance Holding receive no compensation as directors. Directors
are reimbursed for their reasonable expenses in attending meetings and
performing duties as directors.
Stock Subscription Plans
Advance Holding has adopted stock subscription plans pursuant to which
certain directors, officers and key employees have purchased 751,050 shares,
net of cancellations, of the outstanding Advance Holding common stock at the
same price as Freeman Spogli & Co.'s purchase of its shares in the
Recapitalization, or fair market value at the time of purchase. Approximately
$3.2 million of the purchase price for such shares has been paid by delivery of
full recourse promissory notes bearing interest at the prime rate and due five
years from their inception, secured by all of the stock each such individual
owns in Advance Holding. As of July 14, 2001, $2.7 million under these notes
remained outstanding. Mr. Smith purchased 250,000 shares for cash and did not
deliver a promissory note. Messrs. Wade, Reid, Klasing, Gray, Margolin and
Hedrick and Ms. Stevens purchased 25,000 shares, 20,000 shares, 20,000 shares,
10,000 shares, 14,300 shares, 14,300 shares and 20,000 shares respectively. For
these individuals, $75,000, $115,000, $110,000, $50,000, $150,000, $150,000 and
$100,000 of their purchase price, respectively, was financed through the
delivery of promissory notes on the terms described above. As of July 14, 2001,
the outstanding principal balance on the promissory notes was $115,000,
$110,000, $40,000, $150,000, $150,000 and $100,000 for each of Messrs. Reid,
Klasing, Gray, Margolin and Hedrick and Ms. Stevens, respectively.
Mr. Castellani entered into a stock subscription agreement under the stock
subscription plan in fiscal 2000, pursuant to which he purchased 75,000 shares
of Advance Holding common stock. $900,000 of Mr. Castellani's purchase price
was financed through the delivery to Advance Stores of a promissory note. As of
July 14, 2001, the outstanding balance of the promissory note was $600,000.
The agreements entered into in connection with the stock subscription plans
provide for restrictions on transferability, and acquired shares are subject to
a right of first refusal and a repurchase right at stated prices in favor of
Advance Holding and co-sale rights in favor of the executive if Freeman Spogli
& Co. sells its shares to a third party. The agreements also include an
obligation to sell the shares at the request of Freeman Spogli & Co. These
rights (but not the restrictions on transferability) will terminate upon an
initial public offering by Advance Holding of Advance Holding common stock, (or
an initial public offering by Advance Auto Parts, Inc. of Advance common stock
following completion of the merger) as further defined in agreements entered
into under the stock subscription plans. The merger is not an initial public
offering for this purpose. Advance Auto Parts, Inc. has adopted identical stock
subscription plans, and the rights and obligations under the agreements and
notes with Advance Holding will be assumed by Advance Auto Parts, Inc.
Stock Option Plans
Advance Holding has adopted stock option plans. As of October 25, 2001,
Advance Holding has granted a total of 2,522,375 shares under the option plans,
net of cancellations. Each option plan participant has entered into an option
agreement with Advance Holding. The option plans and each outstanding option
thereunder are subject to termination in the event of a change in control of
Advance Holding or other extraordinary corporate transactions, as more fully
described in the option plans. In addition, all options granted pursuant to the
option
139
plans will terminate 90 days after termination of employment (unless
termination was for cause, in which event an option will terminate immediately)
or 180 days in the event of termination due to death or disability. Shares
received upon exercise of options are subject to both a right of first refusal
and a repurchase right at stated prices in favor of Advance Holding, and co-
sale rights in favor of the optionee. These rights will terminate upon an
initial public offering by Advance Holding (or by Advance Auto Parts, Inc.
following completion of the merger) of its common stock, as further defined in
the option agreements. The issuance of shares in the merger is not an initial
public offering. Shares received upon exercise of options, as well as all
outstanding options, are also subject to obligations to sell at the request of
Freeman Spogli & Co. All options will terminate on the seventh anniversary of
the option agreement under which they were granted if not exercised prior
thereto.
Three different types of options may be granted pursuant to the option
plans. Fixed price service options generally vest over a three-year period in
three equal annual installments beginning one year from the date of grant.
Performance options are earned in installments based upon satisfaction of
certain performance targets for the four-year period ending in fiscal 2001.
Variable price service options vest in equal annual installments over a two-
year period beginning in 2000, and have an exercise price that increases over
time.
Advance will be adopting option plans nearly identical to those currently in
use by Advance Holding. Advance's 2001 executive stock option plan will provide
the committee administering the plan discretion to grant options which
terminate on the tenth anniversary of the date of the option agreement under
which such options were granted, and to grant options (primarily for purposes
of the substitute options to be granted to holders of Discount's out-of-the-
money options, as discussed below) without the restrictions regarding
transferability, rights of first refusal, mandatory sale restrictions and other
restrictive provisions. As a result of the merger, the existing stock option
agreements of Advance Holding and the rights and obligations thereunder will be
assumed by Advance. Under the terms of the merger agreement, holders of
Discount's out-of-the-money options will receive an option to purchase Advance
common stock, preserving the same economic terms. Further, Advance will be
obligated to memorialize these substitute options in an agreement no more
restrictive, from the perspective of the option holder, than the option
agreement between Discount and the holder. Therefore, such options will not
contain the same provisions regarding termination or restrictions on
transferability, rights of first refusal, mandatory sale restrictions and other
restrictive provisions as the current options issued by Advance Holding. These
substitute options will terminate on the tenth anniversary of the date of the
option agreement between Discount and the holder.
Option Grants
The following table sets forth information concerning options granted in
fiscal 2000 to each of the named executive officers.
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Individual Grants Term Fixed Price Options
------------------------------------------------- --------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted # Fiscal Year ($/Sh)(1) Date 0%(2) 5%($)(3) 10%($)(3)
---- ------------ ------------ ----------- ---------- ------------------- ------------
Lawrence P. Castellani.. 350,000(4) 26.2 $16.82 2/1/07 -- $ 2,396,600 $ 5,585,098
Lawrence P. Castellani.. 350,000(4) 26.2 20.00 2/1/07 -- 1,283,600 4,472,098
Lawrence P. Castellani.. 350,000(4) 26.2 25.00 2/1/07 -- -- 2,722,098
Jimmie L. Wade.......... 30,000(5) 2.2 16.82 4/14/07 -- 205,423 478,723
David R. Reid........... 25,000(6) 1.9 16.82 4/14/07 -- 171,186 398,936
Paul W. Klasing......... 18,000(7) 1.3 16.82 4/14/07 -- 123,254 287,324
Garnett E. Smith........ 18,000(8) 1.3 16.82 4/14/07 -- 123,254 287,324
S. Lynn Stevens......... 10,000(9) 0.7 16.82 4/14/07 -- 68,474 159,574
--------
(1) Represents the fair market value of the underlying shares of common stock
at the time of the grant as determined by Advance's board of directors.
(2) Unless the stock price increases, which will benefit all stockholders
commensurately, an option holder will realize no gain.
140
(3) Represents the value of the shares of common stock issuable upon the
exercise of the option, assuming the stated rates of price appreciation for
seven years, compounded annually, with the aggregate exercise price
deducted from the final appreciated value. The 5% and 10% rates are
established by the SEC as examples only and are not intended to forecast
future appreciation in the common stock price.
(4) Represents 350,000 fixed price service options.
(5) Represents 30,000 fixed price service options.
(6) Represents 25,000 fixed price service options.
(7) Represents 18,000 fixed price service options.
(8) Represents 18,000 fixed price service options.
(9) Represents 10,000 fixed price service options.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values
The following table sets forth information with respect to the executive
officers concerning option exercises for fiscal 2000 and exercisable and
unexercisable options held as of December 30, 2000.
Number of Underlying Value of In-the-Money
Options at Options at December 30,
Shares December 30, 2000 2000 ($)(1)(2)
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
Lawrence P. Castellani.. -- -- -- 1,050,000 $ -- $1,813,000
Jimmie L. Wade.......... -- -- 10,667 53,833 95,737 344,373
David R. Reid........... -- -- 10,677 48,833 95,737 323,473
Paul W. Klasing......... -- -- 10,677 41,833 95,737 294,213
Garnett E. Smith........ -- -- 124,583 310,917 1,245,381 3,047,258
S. Lynn Stevens......... -- -- 10,167 32,833 93,647 256,593
--------
(1) There is no established public trading market for the Advance common stock.
Advance believes that the fair market value of the Advance Holding common
stock was $21.00 per share as of December 30, 2000.
(2) Values for "in-the-money" outstanding options represent the positive spread
between the respective exercise prices of the outstanding options and the
fair market value underlying the Advance common stock of $21.00 as
described in note (1).
Compensation Committee Interlocks and Insider Participation
The compensation committee of the board of directors determines the
compensation of the executive officers. During fiscal 2000, Messrs. Roth,
Salter and Smith served on the compensation committee. Mr. Smith also served as
an officer of Advance during fiscal 2000.
141
DESCRIPTION OF THE CAPITAL STOCK OF ADVANCE
Advance's authorized capital stock consists of 100,000,000 shares of common
stock, par value $.0001 per share, and 10,000,000 shares of preferred stock,
par value $.01 per share.
As of October 25, 2001, on a pro forma basis assuming completion of the one-
for-one exchange contemplated by the reincorporation merger agreement, there
were 28,321,150 shares of Advance common stock outstanding, which were held by
60 shareholders of record. Approximately 4,305,000 additional shares of Advance
common stock will be issued in the Discount merger by Advance to holders of
Discount common stock and as a result approximately 32,626,150 shares of
Advance common stock will be outstanding following the Discount merger.
The following description of Advance's capital stock is not complete and is
subject to and qualified in its entirety by Advance's certificate of
incorporation and bylaws, which are included as exhibits to the registration
statement filed by Advance with the SEC and which is publicly available, and by
the provisions of applicable Delaware law.
Common Stock
Holders of shares of common stock are entitled to one vote for each share
held of record on all matters on which stockholders are entitled or permitted
to vote. The certificate of incorporation and bylaws of Advance provide that,
except as otherwise provided by law, the affirmative vote of a majority of the
shares entitled to vote, present in person or represented by proxy at a meeting
at which a quorum is present, shall be the act of the stockholders. Delaware
law requires the affirmative vote of a majority of the outstanding shares
entitled to vote thereon to authorize certain extraordinary actions, such as
mergers, consolidations, dissolutions of the corporation or an amendment to the
certificate of incorporation of the corporation. Advance's certificate of
incorporation does not provide for cumulative voting and, therefore, under
Delaware law, there is no cumulative voting for the election of directors. Upon
a liquidation, Advance's creditors and any holders of preferred stock with
preferential liquidation rights will be paid before any distribution to holders
of Advance's common stock. The holders of Advance's common stock would be
entitled to receive a pro rata amount per share of any excess distribution.
Holders of common stock have no preemptive or subscription rights. There are no
conversion rights, redemption rights, sinking fund provisions or fixed dividend
rights with respect to the common stock. All outstanding shares of common stock
are fully paid and nonassessable, and the shares of common stock to be issued
upon completion of the merger will be fully paid and nonassessable.
Preferred Stock
Advance's certificate of incorporation empowers Advance's board of directors
to issue up to 10,000,000 shares of preferred stock from time to time in one or
more series. The board also may fix the designation, privileges, preferences
and rights and the qualifications, limitations and restrictions of those
shares, including dividend rights, conversion rights, voting rights, redemption
rights, terms of sinking funds, liquidation preferences and the number of
shares constituting any series or the designation of the series. Terms selected
could decrease the amount of earnings and assets available for distribution to
holders of common stock or adversely affect the rights and powers, including
voting rights, of the holders of the common stock without any further vote or
action by the shareholders. The rights of holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred shares that may be issued by Advance in the future. Additionally, the
issuance of preferred stock may have the effect of decreasing the market price
of the common stock and may adversely affect the voting and other rights of the
holders of common stock. Although Advance has no present intention to issue any
shares of preferred stock, any issuance could have the effect of making it more
difficult for a third party to acquire a majority of Advance's outstanding
voting stock.
Stockholders Agreement
Mr. Taubman and the Arthur Taubman Trust Dated July 13, 1964, Freeman Spogli
& Co., Ripplewood Partners, L.P. and Ripplewood Advance Auto Parts Employee
Fund I L.L.C., WAH and Advance Holding have
142
entered into a stockholders agreement that will continue in force following the
merger as to the stock and options of Advance Auto Parts, Inc. Under the
stockholders agreement, Freeman Spogli & Co., the Ripplewood entities, WAH and
Mr. Taubman and the Taubman Trust have the right to purchase their pro rata
share of certain new issuances of securities, including capital stock, by
Advance Holding (and by Advance Auto Parts, Inc. following the consummation of
the Discount merger). Prior to an initial public offering, any transfers of
common stock of Advance Holding (and as to Advance common stock following
consummation of the Discount merger) by signatories to the stockholders
agreement (other than Peter Fontaine and his affiliates) are subject to rights
of first refusal in favor of (i) Freeman Spogli & Co. and WAH on a pro rata
basis, in the case of a transfer by Ripplewood, (ii) WAH, in the case of a
transfer by Freeman Spogli & Co. and (iii) Freeman Spogli & Co., in the case of
a transfer by WAH. The stockholders agreement further provides tag-along rights
such that (i) upon transfers of common stock of Advance Holding (and as to
Advance common stock following consummation of the Discount merger) by Freeman
Spogli & Co. (excluding transfers to affiliates), Mr. Taubman, the Taubman
Trust, the Ripplewood entities and WAH will have the right to participate in
such sales on a pro rata basis, (ii) upon transfers of common stock of Advance
Holding (and as to Advance common stock following the merger) by WAH (excluding
transfers to affiliates of WAH), Freeman Spogli & Co., Mr. Taubman, the Taubman
Trust, and the Ripplewood entities will have the right to participate in such
sales on a pro rata basis and (iii) upon transfers of common stock of Advance
Holding (and to Advance common stock, following the merger) by the Ripplewood
entities (excluding transfers to their affiliates), Freeman Spogli & Co. will
have the right to participate in such sales on a pro rata basis, and if Freeman
Spogli & Co. exercises such right, Mr. Taubman, the Taubman Trust, and WAH will
have the right to participate in such sales on a pro rata basis. In addition,
if Freeman Spogli & Co. sells all of its holdings of common stock of Advance
Holding (and as to Advance common stock after consummation of the merger),
Ripplewood, Mr. Taubman and the Taubman Trust will be obligated to sell all of
their shares of common stock of Advance Holding (and as to Advance common stock
after consummation of the merger) at the request of Freeman Spogli & Co.
Without the consent of the majority of the other stockholders, Sears will not
sell WAH to a third party so as to dispose of its indirect interest in Advance.
The stockholders agreement further provides that the parties will vote at
each annual meeting of Advance Holding (and of Advance Auto Parts, Inc.
following consummation of the merger) to elect to the board of directors Mr.
Taubman, the chief executive officer of Advance, three nominees of Freeman
Spogli & Co., three nominees of WAH and one nominee of Ripplewood. Certain
transfers of common stock of Advance Holding (and as to Advance common stock
after consummation of the merger) by either Freeman Spogli & Co. or WAH will
reduce the number of directors such parties are entitled to nominate.
Ripplewood has granted Freeman Spogli & Co. an irrevocable proxy to vote
Ripplewood's stock in Advance Holding (and of Advance Auto Parts, Inc.
following consummation of the merger) on all matters, expiring upon an initial
public offering of common stock by Advance (the issuance of common stock in the
merger is not an initial public offering), but Freeman Spogli & Co. will
nominate one director designated by Ripplewood. The Ripplewood director will
agree to vote with the Freeman Spogli & Co. directors on all matters prior to
an initial public offering of common stock by Advance. The merger will not
constitute an initial public offering for this purpose. Pursuant to the
stockholders agreement, without the approval of Mr. Taubman, Advance Holding
(Advance Auto Parts, Inc. following consummation of the merger) may not (i)
issue any capital stock for consideration at less than fair market value,
unless the capital stock is issued in a financing transaction fair to and in
the best interests of Advance Holding (Advance Auto Parts, Inc. following
consummation of the merger), subject to certain specified exceptions, (ii)
enter into any transaction with any affiliate of Freeman Spogli & Co.,
Ripplewood, or Sears, except on terms no less favorable to Advance Holding
(Advance Auto Parts, Inc. following consummation of the merger) than are
available from an unaffiliated party, or (iii) amend the articles of
incorporation or bylaws of Advance Holding (Advance Auto Parts, Inc. following
consummation of the merger) or the stockholders agreement in a manner which
would adversely affect the rights and obligations of Mr. Taubman, subject to
certain specified exceptions.
At the closing of the merger, Peter Fontaine, together with entities
controlled by him, will become a party to the stockholders agreement. In
addition, as a condition to consummation of the merger, at the closing,
Mr. Fontaine will be elected to the board of directors of Advance Auto Parts,
Inc. Thereafter, the parties to the
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stockholders agreement will be obligated to vote for Mr. Fontaine's election to
the Advance Auto Parts, Inc. board until the earlier of 2004, Mr. Fontaine's
resignation from the Advance Auto Parts, Inc. board, his removal from the
Advance Auto Parts, Inc. board for cause, Mr. Fontaine's no longer having
beneficial interest in at least 50% of the Advance Auto Parts, Inc. shares as
to which he acquires beneficial ownership in the merger, or the termination of
the voting rights of the other parties to the stockholders agreement.
Registration Rights of Stockholders
Freeman Spogli & Co., WAH, the Ripplewood entities, Mr. Taubman and the
Taubman Trust, under the stockholders agreement, have registration rights with
respect to approximately 27,436,318 shares of common stock that they hold.
Under the stockholders agreement, beginning 180 days after the consummation of
an initial public offering of Advance's stock, these stockholders may require
Advance to register for resale under the Securities Act their shares of common
stock. The merger is not an initial public offering for this purpose. These
registration rights include the following provisions:
Demand Registration Rights. Advance has granted three demand registrations
to Freeman Spogli & Co. and WAH, two demand registrations to Mr. Taubman and
the Taubman Trust, and one demand registration to Ripplewood.
Piggyback Registration Rights. All holders of shares with demand
registration rights also have unlimited piggyback registration rights.
Other Rights. Advance granted WAH the right, beginning 180 days after the
consummation of an initial public offering, to distribute its shares of common
stock to stockholders of Sears, Roebuck & Co.
Expenses. Advance is responsible for paying all registration expenses,
excluding underwriting discounts and commissions.
Indemnification. Advance has agreed to indemnify Freeman Spogli & Co., WAH,
Ripplewood, Mr. Taubman and the Taubman Trust, and the control person of each
of these against certain liabilities under the Securities Act.
At the closing of the merger, the stockholders agreement will be amended to
grant to Peter Fontaine, and the entities he controls, unlimited piggyback
registration rights.
Potential Anti-takeover Effect of Delaware Law, Advance's Certificate of
Incorporation and Bylaws
Advance is governed by the provisions of Section 203 of the Delaware General
Corporation Law, which is an anti-takeover law.
Section 203 generally prevents any "interested shareholder" (15% or more
stockholder in a public company) from entering into any merger or business
combination for three years following the time at which such stockholder
crossed the 15% threshold, unless:
. the board of directors approved the transaction before the stockholder
reached the 15% ownership threshold;
. the stockholder crossed the 15% threshold in a transaction in which it
acquired at least 85% of Advance's stock (excluding for purposes of
determining the number of shares outstanding those shares owned (i) by
persons who are directors and are also officers and (ii) employee stock
plans in which the participants do not have the right to determine
confidentially whether shares held subject to the plans will be tendered
in the tender or exchange offer); or
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. the business combination or merger is approved by the board of directors
and authorized at an annual or special meeting of stockholders (and not
by written consent) by two-thirds of the holders of the outstanding
common stock not owned by the interested stockholder.
Section 203 prevents unwelcome bidders from completing a merger unless the
board and/or the non-interested stockholders consent.
Provisions of Advance's certificate of incorporation and bylaws providing
that only the board of directors, the Chairman of the board of directors or the
chief executive officer may call special meetings of stockholders, and
prohibiting stockholder action by written consent, may have the effect of
making it more difficult for a third party to acquire control of Advance, or of
discouraging a third party from attempting to acquire control of Advance.
Amendment of these provisions requires the affirmative vote of holders of 66
2/3% of the outstanding Advance capital stock. In addition, Advance's
certificate of incorporation allows Advance's board of directors to issue up to
10,000,000 shares of preferred stock that could have when issued voting rights
or preferences that could impede the success of any hostile takeover, or delay
a change in control or change in Advance's management.
Listing
Advance has filed an application for quotation of its common stock on the
New York Stock Exchange under the trading symbol AAP.
Transfer Agent and Registrar
The transfer agent and registrar for Advance's common stock is Mellon
Investor Services LLC. The transfer agent's address is One Mellon Center, 500
Grant Street, Suite 2122, Pittsburgh, PA 15258-0001 and telephone number is
(412) 236-8173.
Lock-Up Agreements
Effective upon the closing of the merger, Peter J. Fontaine and entities
controlled by him will be bound not to sell their shares of Advance common
stock received in the merger, or enter into a contract or hedge transaction
having the economic consequences of a sale, for a period of 180 days after the
merger. Further, after completion of any underwritten public offering by
Advance, so long as Mr. Fontaine is serving as a director or officer of Advance
he and the Fontaine entities will also be restricted from selling Advance
common stock for up to 180 days thereafter depending on the lock-up period
applicable to Mr. Taubman. Under the stockholders agreement, Advance, as
successor to Advance Holding, has the right to obtain similar lock-up
agreements from its principal stockholders, though the duration for certain
stockholders may be shorter in certain instances. In addition, provisions of
stock subscription agreements and stock option agreements entered into between
Advance Holding and Advance will have the effect of prohibiting certain
executive officers of Advance from selling shares acquired under the agreements
into the public market for various periods of time following the merger.
Rule 144
In general, under Rule 144, a person, including each of Advance's
"affiliates," who has beneficially owned "restricted securities" for at least
one year, will be entitled to sell in any three-month period a number of shares
that does not exceed the greater of:
. 1% of the then outstanding shares of the common stock, approximately
326,261 shares immediately after the completion of the merger, or
. the average weekly trading volume in Advance's common stock during the
four calendar weeks preceding the filing of a notice of the sale with
the SEC.
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Sales pursuant to Rule 144 are subject to requirements relating to manner of
sale, notice and availability of current public information about us. Under
Rule 144(k), a holder of "restricted securities" who is not an affiliate of
Advance and who has beneficially owned his or her shares for at least two years
is entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above.
Rule 701
In general, and subject to lock-up agreements, any of Advance's employees,
consultants or advisors, other than affiliates, who has purchased shares from
Advance under its stock purchase plans or option plans or other written
agreements in accordance with Rule 701 of the Securities Act, will be eligible
to resell their shares under Rule 144 after satisfying the one year holding
period.
Registration of Shares Under Stock Option Plans
Advance intends to file a registration statement on Form S-8 covering all of
the shares of common stock issuable or reserved for issuance under Advance's
stock option plans, including the substitute options granted to certain of
Discount's option holders in accordance with the terms of the merger agreement,
as soon as practicable following the date of the effective time of the merger.
When issued, these shares will be freely tradeable in the public market,
subject to Rule 144 volume limitations applicable to affiliates and lock-up
agreements.
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COMPARISON OF RIGHTS BETWEEN DISCOUNT SHAREHOLDERS
AND ADVANCE STOCKHOLDERS
The following table compares in summary form a number of the provisions of
Discount's articles of incorporation and bylaws with the provisions of
Advance's certificate of incorporation and bylaws, as well as various
provisions of Florida and Delaware corporate law. The summary table is not a
complete description of all of the differences between Discount's articles of
incorporation and bylaws and the Advance's certificate of incorporation and
bylaws, nor is it a complete description of the differences between the
corporate laws of the two states.
Item Discount Advance
---- -------- -------
Authorized shares 50,000,000 common stock, 100,000,000 common stock,
5,000,000 preferred. 10,000,000 preferred.
Directors
. number Currently 4, with the Currently 9, with the exact number to
exact number to be be between 9 and 14.
between 3 and 9.
. term Three years. Classified One year.
board serving staggered
three year terms.
. cumulative voting One vote per share of One vote per share of common stock.
common stock.
. filling of vacancies By majority of the By majority of the directors then in office,
directors. although less than a quorum.
. removal without cause By majority vote of By majority vote of stockholders present in
shareholders, with or person or represented by proxy at a meeting
without cause, at any of stockholders at which a quorum is present,
annual or special with or without cause.
meeting of shareholders.
Preemptive rights No preemptive rights Board of directors has the authority to
unless specifically determine all preferences of preferred
provided in terms of stock including preemptive rights.
preferred stock.
Stockholder proposals Need to satisfy certain Need to satisfy certain timing and
timing and information information requirements.
requirements.
Special meetings of May be called by a May be called by the board of
stockholders majority of the board of directors, the chairman of the board or
directors, the chairman the chief executive officer.
of the board, the
president or
shareholders together
holding at least 25% of
the outstanding shares
if certain notice
requirements are met by
the shareholders.
Stockholder action without Shareholder action may None. Any action by the stockholders
a meeting be taken without a must be taken at a duly called annual or
meeting if the action is special meeting.
taken by the
shareholders
representing the minimum
number required to
approve the transaction
at a meeting and if such
consent is delivered to
a company's secretary
within 60 days of
receipt of the earliest
dated consent. Notice of
the action must be given
to those shareholders
who did not consent to
the action within 10
days of approval of the
action.
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Item Discount Advance
---- -------- -------
Limitations on liability Directors and officers Directors and officers not liable for monetary
not liable except for damages for breaches of fiduciary duties
(1) a violation of except for (1) breach of duty of loyalty,
criminal law, unless the (2) acts or omissions not in good faith or
director had reasonable which involve intentional misconduct or a
cause to believe his knowing violation of the law,
conduct was lawful or (3) unlawful payment of dividends or
had no reasonable cause unlawful stock repurchases, or
to believe his conduct (4) transactions involving improper
was unlawful, (2) a personal benefit.
transaction from which
the director derived an
improper personal
benefit, (3) a
circumstance for which a
director is liable for
an unlawful
distribution, (4) in a
derivative action or an
action by a shareholder,
a circumstance which
constitutes conscious
disregard for the best
interests of the
corporation or willful
misconduct, or (5) in a
proceeding other than a
derivative action or an
action by a shareholder,
a circumstance which
constitutes recklessness
or an act or omission
which was committed in
bad faith or with
malicious purpose or in
a manner exhibiting
wanton and willful
disregard of human
rights, safety or
property.
Indemnification Indemnification of Indemnification of directors, officers,
directors and officers employees and agents to the fullest
to the fullest extent extent permitted by Delaware law.
permitted by Florida
law.
Transactions with Florida law contains an Delaware law restricts transactions
interested stockholders "affiliated with a 15% or more stockholder for a
transactions" statute period of three years after reaching the
which provides that 15% threshold, subject to certain exceptions.
certain transactions
involving a corporation
and a shareholder owning
10% or more of the
corporation's
outstanding voting
shares, an "interested
shareholder," must
generally be approved by
the affirmative vote of
the holders of 66 2/3%
of the disinterested
shareholders.
Limitation of voting Florida has a control Delaware has no similar provision.
rights share acquisition
statute which can have
the effect of limiting
the voting rights of
stockholders who hold
20% or more of the
voting stock.
Significant provisions of Advance's certificate and bylaws and Discount's
articles and bylaws, and certain differences between such charter documents are
discussed below. Although it is impracticable to compare all of the aspects in
which Florida law and Delaware law differ, the following is a summary of
certain significant differences between the provisions of these laws.
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The following discussion is not intended to be a complete statement of the
differences affecting the rights of stockholders, but rather summarizes
material differences and certain important similarities.
Board of Directors. Advance's bylaws provide that the board of directors of
Advance shall consist of between 9 and 14 persons, the exact number of which
shall be determined by resolution of the board of directors. Advance's board is
set at 10 directors and one position is currently vacant. Following the merger,
the then current directors of Advance will continue to serve as directors of
Advance and Peter J. Fontaine, the Chief Executive Officer of Discount, will
become a director of Advance. If the vacancy is filled prior to the closing
then the number of directors which constitutes the board shall be increased to
11 to accommodate Mr. Fontaine's position on the Board.
Cumulative Voting. Under Florida law and Delaware law, cumulative voting is
permitted if provided for in a company's articles of incorporation or
certificate of incorporation. Both the certificate of incorporation of Advance
and the articles of incorporation of Discount do not provide for cumulative
voting. There is therefore no cumulative voting.
Board Vacancies. Delaware law provides that, unless otherwise provided in a
corporation's certificate of incorporation or bylaws, vacancies and newly
created directorships may be filled by the affirmative vote of a majority of
the directors then in office or a sole remaining director, even though less
than a quorum. However, Delaware law also provides that if at the time of
filling any vacancy or newly created directorship the directors then in office
constitute less than a majority of the corporation's whole board of directors,
as constituted prior to any such increase, then, upon application by
shareholders representing at least 10% of outstanding shares entitled to vote
for such directors, the Delaware Court of Chancery may order a shareholder
election of directors to be held. Advance's bylaws follow the provisions of
Delaware law.
Florida law provides that, unless the articles of incorporation provide
otherwise, vacancies arising on the board of directors may be filled by the
affirmative vote of a majority of the remaining directors, even if no quorum
remains, or by the shareholders. Where a vacancy will be known to occur at some
point in the future, it may be filled in advance, although the new director
will not take office until the vacancy actually occurs. The Discount bylaws
follow the provisions of Florida law.
Removal of Directors. Both Discount's and Advance's bylaws provide that a
director or the entire board of directors may be removed with or without cause
by the affirmative vote of a majority of the shares of capital stock then
outstanding and entitled to vote in an election of directors.
Preemptive Rights. Discount's articles provide that shareholders do not have
any preemptive rights for any shares of common stock or other securities of
Discount unless specifically provided in the terms of the preferred stock. As a
result, if Discount was to issue any new shares or new class of stock, or
securities convertible into any such stock, existing stockholders would not be
entitled, as a matter of right, to subscribe for or purchase the new shares or
securities unless Discount elected to provide such opportunity. Advance's
certificate is silent on preemptive rights and therefore the holders of capital
stock of Advance do not have preemptive rights.
Special Meetings of Stockholders. Discount's bylaws provide that a special
meeting of the shareholders may be called by a majority of the board of
directors, the chairman of the board, the president or stockholders together
holding at least 25% of the outstanding shares if the stockholders sign, date
and deliver to the secretary of Discount one or more written demands for the
meeting describing the purpose or purposes for which it is to be held.
Advance's certificate of incorporation and bylaws provide that special meetings
of stockholders may only be called by the board of directors, the chairman of
the board of directors or by the chief executive officer of Advance. Advance's
certificate of incorporation and bylaws do not allow stockholders to call a
special meeting.
Stockholder Action Without a Meeting. Both Florida and Delaware law provide
that any action required or permitted to be taken at an annual or special
meeting of stockholders may be taken by written consent of the
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stockholders without a meeting if taken by the minimum number of votes that
would be necessary to take the action at a meeting at which all shares entitled
to vote thereon were present, unless otherwise provided in its certificate of
incorporation. Discount's certificate further provides that the approved
written consent must be delivered to the secretary of Discount within 60 days
of the action and that notice that such stockholder action was taken must be
delivered to all stockholders within 10 days of approval if the action was not
taken by all stockholders. Advance's certificate prohibits action by the
stockholders without a meeting.
Limitations on Director and Officer Liability; Indemnification. Advance's
certificate of incorporation and Discount's articles of incorporation both
contain a provision that eliminates or limits a director's personal liability
for monetary damages for breaches of fiduciary duties to the fullest extent
permitted by Delaware law and Florida law, respectively. Delaware law allows
the corporation to adopt a provision in its certificate of incorporation which
provides that a director (and any other person who pursuant to the certificate
of incorporation and in accordance with Delaware law exercises or performs
powers or duties conferred or imposed by the board) of Advance shall not be
liable for monetary damages for breach of his or her fiduciary duty as a
director, but that a director would be liable for:
. any breach of the director's duty of loyalty to Advance or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
. under Section 174 of the Delaware General Corporation Law which imposes
liability on directors for unlawful payment of dividends or unlawful
stock repurchases; or
. any transaction from which the director derived an improper personal
benefit.
Advance's certificate contains such a provision limiting the liability of
Advance's directors.
To the extent a present or former director or officer is successful on the
merits or otherwise in the defense of certain actions, suits or proceedings,
the corporation is required by Delaware law to indemnify such individual for
reasonable expenses incurred thereby.
The bylaws of Advance require Advance to pay expenses incurred in defending
the proceedings specified above in advance of their final disposition, provided
that the advancement of expenses to a director or officer shall be made only if
such person undertakes to repay all amounts so advanced if it is ultimately
determined that such person is not entitled to be indemnified.
Delaware law permits a corporation to enter into separate indemnification
agreements with directors and officers to provide additional indemnification to
the fullest extent permitted by law. Advance Holding has made indemnification
agreements available to every director and Advance would enter into
substantially similar agreements with its directors upon completion of the
merger.
Florida law and Discount's bylaws permit a corporation to indemnify
officers, directors, employees and agents against liability for actions taken
in good faith and in a manner they reasonably believed to be in, or not opposed
to, the best interests of the corporation, and with respect to any criminal
action, which they had no reasonable cause to believe was unlawful. Florida law
provides that a corporation may advance reasonable expenses of defense:
. to a director or officer upon receipt of an undertaking to reimburse the
corporation if indemnification is ultimately determined not to be
appropriate; and
. to other employees and agents upon such terms and conditions as the
board deems appropriate.
The corporation must reimburse a successful defendant for expenses, including
attorneys' fees, actually and reasonably incurred.
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Indemnification and advancement of expenses under Discount's bylaws are not
exclusive, and Discount may further indemnify or advance expenses to any such
parties under any agreement, vote of directors or shareholders or otherwise,
unless the person indemnified:
. has acted in violation of criminal law and had reasonable cause to
believe that his conduct was unlawful;
. derived an improper personal benefit; or
. displayed willful misconduct or conscious disregard for the best
interests of Discount.
Florida law provides that a director is not personally liable for monetary
damages to the corporation or any other person for any statement, vote,
decision, or failure to act, regarding corporate management or policy unless
the director breached or failed to perform his duties as a director and such
breach or failure constitutes:
. a violation of criminal law, unless the director had reasonable cause to
believe his conduct was lawful or had no reasonable cause to believe his
conduct was unlawful;
. a transaction from which the director derived an improper personal
benefit;
. a circumstance for which a director is liable for an unlawful
distribution;
. in a derivative action or an action by a shareholder, constitutes
conscious disregard for the best interests of the corporation or willful
misconduct; or
. in a proceeding other than a derivative action or an action by a
shareholder, constitutes recklessness or an act or omission which was
committed in bad faith or with malicious purpose or in a manner
exhibiting wanton and willful disregard of human rights, safety or
property.
Payments of Dividends. Florida law permits a corporation's board to make
distributions to its shareholders unless, after giving effect to such
distribution, the corporation would be unable to pay its debts as they become
due in the usual course of business, or would be left with total assets that
are less than the sum of its total liabilities plus its obligations upon
dissolution to satisfy preferred shareholders whose preferential rights are
superior to those receiving the distribution. Under Florida law, a
corporation's redemption of its own common stock is deemed a distribution.
Under Delaware law, upon resolution of the corporation's board of directors,
dividends may be declared and paid out of capital surplus, or, in case there is
no capital surplus, out of the corporation's net profits for the fiscal year in
which the dividend is declared and/or the net profits from the preceding fiscal
year. The distribution of dividends is not permitted by a Delaware corporation
in the event the capital of such corporation shall have diminished by
depreciation of property or losses to an amount less than the aggregate amount
of the capital represented by issued and outstanding stock having a preference
upon distribution of assets.
The board of directors of Advance has no intention of paying dividends on
the common stock in the foreseeable future. Advance is party to indentures for
the outstanding 12.875% debentures of Advance Holding and 10.25% senior
subordinated notes of Advance Stores, each of which contain certain covenants
that limit the ability of Advance and subsidiaries to pay dividends. Advance
Stores' current senior debt facility likewise prohibits payment of dividends by
Advance Holding. The proposed financing arrangements to be entered into on
connection with the merger would likewise prohibit payment of dividends by
Advance.
Restrictions on Business Combinations with Principal Stockholders; Anti-
takeover Statutes. Delaware law and Florida law regulate transactions with
interested stockholders after they become interested stockholders. Under
Delaware law, a Delaware corporation (or any direct or indirect majority owned
subsidiary of the corporation) is prohibited from engaging in:
. mergers or consolidations;
. sales, leases, exchanges, mortgages, pledges, transfers or other
dispositions of assets having an aggregate market value equal to 10% or
more of either the aggregate market value of all assets of the
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corporation determined on a consolidated basis or the aggregate market
value of all outstanding stock of the corporation; and
. issuances of stock and other transactions ("business combinations"),
in each case with a person or group that owns 15% or more of the voting stock
of the corporation (an "interested stockholder"), for a period of three years
after the interested stockholder crosses the 15% threshold.
These restrictions on transactions involving an interested stockholder do not
apply in certain circumstances, including those transactions in which:
. prior to an interested stockholder owning 15% or more of the voting
stock, the board of directors approved the business combination or the
transaction that resulted in the person or group becoming an interested
stockholder;
. upon consummation of a transaction that resulted in a person or group
becoming an interested stockholder, the person or group owned at least
85% of the voting stock other than stock owned by inside directors and
certain employee stock plans; or
. after the person or group became an interested stockholder, the board of
directors and at least two-thirds of the voting stock other than stock
owned by the interested stockholder approved the business combination.
A Delaware corporation may exempt itself from the requirements of the statute
in its certificate of incorporation, although Advance has not done so. In
addition, the statute does not apply to corporations whose stock is:
. not listed on a national securities exchange;
. not authorized for quotation on the Nasdaq Stock Market; or
. held of record by 2,000 or less stockholders.
Florida law contains an "affiliated transactions" statute which provides
that certain transactions involving a corporation and a shareholder owning 10%
or more of the corporation's outstanding voting shares, an "interested
shareholder," must generally be approved by the affirmative vote of the
holders of 66% of the disinterested shareholders. The transactions covered by
the statute include, with certain exceptions, mergers and consolidations to
which the corporation and the interested shareholder are parties. Under the
Florida law, a 66% vote is not required in any of the following circumstances:
. the transaction was approved by a majority of the corporation's
disinterested directors;
. the corporation did not have more than 300 shareholders of record at any
time during the preceding three years;
. the interested shareholder has been the beneficial owner of at least 80%
of the corporation's outstanding voting shares for the past five years;
. the interested shareholder is the beneficial owner of at least 90% of
the corporation's outstanding voting shares, exclusive of those acquired
in a transaction not approved by a majority of disinterested directors;
and
. the consideration received by each shareholder in connection with the
transaction satisfies the "fair price" provisions of the statute.
This statute applies to any Florida corporation unless the original
articles of incorporation or an amendment to the articles of incorporation or
bylaws contain a provision expressly electing not to be governed by this
statute, or an amendment to the articles of incorporation expressly electing
not to be governed by the "affiliated transactions" statute or bylaws is
approved by the affirmative vote of a majority of disinterested
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shareholders, but is not effective until 18 months after approval. Neither
Discount's articles of incorporation nor its bylaws contain such a provision.
Florida law also contains a "control share acquisition" statute which
provides that a person who acquires shares in an issuing public corporation in
excess of certain specified thresholds, pursuant to Section 607.0902, will
generally not have any voting rights with respect to such shares, unless the
voting rights are approved by a majority of the disinterested shareholders.
This statute does not apply to acquisitions of shares of a corporation if,
prior to the pertinent acquisition of shares, the corporation's articles of
incorporation or bylaws provide that the corporation shall not be governed by
the statute. Under Florida law, a corporation is permitted to adopt a provision
in its articles of incorporation or bylaws providing for the redemption by the
corporation of such acquired shares in certain circumstances. Unless otherwise
provided in the corporation's articles of incorporation or bylaws prior to the
pertinent acquisition of shares, and in the event that such shares are accorded
full voting rights by the shareholders of the corporation and the acquiring
shareholder acquires a majority of the voting power of the corporation, all
shareholders who did not vote in favor of according voting rights to such
acquired shares are entitled to dissenters' rights to receive fair value of
their shares.
Amendment of the Present Bylaws and New Bylaws. Discount's bylaws and
Advance's certificate of incorporation provide for amendment of their
respective bylaws by the board of directors or otherwise as provided by Florida
law and Delaware law, respectively.
Amendment of the Certificate and Articles. Advance's certificate of
incorporation provides that no amendment, addition, alteration, change or
repeal to certain sections of the certificate of incorporation pertaining to
shareholder written consent and indemnification shall be made unless it is
approved by the holders of at least 66 2/3% of the outstanding shares entitled
to vote generally in an election of directors, as well as such additional vote
the preferred stock as may be required by law or by the provisions of any
series thereof. Notwithstanding the preceding sentence, any amendment to the
certificate of incorporation recommended for adoption by the board of directors
shall, to the extent Delaware law requires stockholder approval of such
amendment, require the affirmative vote of a majority of the outstanding shares
entitled to vote generally in an election of directors, as well as such
additional vote of the preferred stock as may be required by law or by the
provisions of any series thereof.
Discount's articles of incorporation provide that no amendment, alteration,
charge or repeal to certain of the articles of incorporation regarding
directors, stockholder meetings and amendments to these articles of
incorporation may be made without the approval of 66% of the outstanding shares
of common stock.
153
LEGAL MATTERS
The validity of the common stock offered under this prospectus will be
passed upon for Advance by Riordan & McKinzie, a Professional Law Corporation,
Los Angeles, California. Principals and employees of Riordan & McKinzie are
partners in partnerships that are limited partners of Freeman Spogli & Co.
investment funds that own an approximately 40% equity interest in Advance.
Certain tax matters raised in connection with this offering will be passed upon
for Discount by Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis, P.A.
Tampa, Florida.
EXPERTS
The consolidated financial statements of Advance Holding Corporation as of
December 30, 2000 and January 1, 2000, and for each of the three years in the
period ended December 30, 2000 included in this proxy statement and prospectus
and elsewhere in the registration statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto and are included herein in reliance upon the authority of said
firm as experts in giving said report.
Ernst & Young LLP, independent certified public accountants, have audited
the consolidated financial statements of Discount Auto Parts, Inc. for the
years ended May 29, 2001 and May 30, 2000, and for each of the three years in
the period ended May 29, 2001, as set forth in their report. The consolidated
financial statements of Discount Auto Parts, Inc. have been included in the
proxy statement and prospectus on Form S-4 in reliance upon Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION ABOUT ADVANCE AND DISCOUNT
Advance Holding and Advance Stores file annual, quarterly and special
reports and other information with the SEC. Discount files annual, quarterly
and special reports, proxy statements and other information with the SEC.
Advance has filed with the SEC a registration statement on Form S-4 under
the Securities Act with respect to the Advance common stock. This prospectus
does not contain all of the information set forth in the registration statement
and the exhibits and schedules to the registration statement. For further
information with respect to Advance and Discount and Advance's common stock,
Advance and Discount refer you to the registration statement and the exhibits
and schedules filed as a part of the registration statement and the other
reports and filings referenced above. Each statement in this proxy statement
and prospectus relating to a contract or document filed as an exhibit is
qualified in all respects by the filed exhibit.
You may read and copy any document Advance, Advance Holding, Advance Stores
or Discount has filed or may in the future file at the SEC's public reference
room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room. The SEC maintains a website that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC at
http://www.sec.gov.
Upon completion of this offering, Advance will become subject to the
information and periodic reporting requirements of the Exchange Act and will
file periodic reports and other information, including proxy statements, with
the SEC. These periodic reports and other information are and will be available
for inspection and copying at the SEC's public reference rooms and the web site
of the SEC referred to above.
In this proxy statement and prospectus, the information regarding Advance
was provided by Advance and the information regarding Discount was provided by
Discount.
154
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
ADVANCE AUTO PARTS, INC.
Under the terms of the proposed merger, Discount Auto Parts, Inc. will merge
with a subsidiary of Advance Auto Parts, Inc. and continue as the surviving
corporation and wholly owned subsidiary of Advance Auto Parts, Inc. Immediately
after the merger, Advance Auto Parts, Inc. will contribute the common stock of
Discount Auto Parts, Inc. received in the merger to Advance Stores Company,
Incorporated, a company that will have become a wholly owned subsidiary of
Advance Auto Parts, Inc. as a result of a simultaneous merger of Advance
Holding Corporation, the current parent company of Advance Stores Company,
Incorporated, into Advance Auto Parts, Inc. Advance Auto Parts, Inc. was formed
in August 2001 and has no separate operations. Accordingly, financial
statements for Advance Auto Parts, Inc. have not been included in this filing.
Page
----
Report of Independent Public Accountants................................. F-2
Audited Consolidated Financial Statements of Advance Holding Corporation
and Subsidiaries for the three years ended December 30, 2000, January 1,
2000, and January 2, 1999:
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations................................... F-4
Consolidated Statements of Changes in Stockholders' Equity.............. F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements.............................. F-8
Schedule I--Condensed Financial Information of the Registrant............ F-34
Schedule II--Valuation and Qualifying Accounts........................... F-40
Unaudited Condensed Consolidated Financial Statements for the Twenty-
Eight Week Periods Ended July 14, 2001 and July 15, 2000:
Condensed Consolidated Balance Sheets................................... F-41
Condensed Consolidated Statements of Operations......................... F-42
Condensed Consolidated Statements of Cash Flows......................... F-43
Notes to the Condensed Consolidated Financial Statements................ F-44
DISCOUNT AUTO PARTS, INC
Audited Consolidated Financial Statements of Discount Auto Parts, Inc.
and Subsidiaries for three years ended June 1, 1999, May 30, 2000 and
May 29, 2001
Report of Independent Certified Public Accountants...................... F-50
Consolidated Balance Sheets............................................. F-51
Consolidated Statements of Income....................................... F-52
Consolidated Statements of Stockholders' Equity......................... F-53
Consolidated Statements of Cash Flows................................... F-54
Notes to Consolidated Financial Statements.............................. F-55
Unaudited Condensed Consolidated Financial Statements of Discount Auto
Parts, Inc. and Subsidiaries for the Thirteen Week Periods Ended August
28, 2001 and August 29, 2000
Condensed Consolidated Balance Sheets................................... F-64
Condensed Consolidated Statements of Income............................. F-65
Condensed Consolidated Statements of Cash Flows......................... F-66
Notes to Condensed Consolidated Financial Statements.................... F-67
F-1
Report of Independent Public Accountants
To the Board of Directors and Stockholders of
Advance Holding Corporation:
We have audited the accompanying consolidated balance sheets of Advance
Holding Corporation (a Virginia company) and subsidiaries (the Company), as of
December 30, 2000, and January 1, 2000, and the related consolidated statements
of operations, changes in stockholders' equity and cash flows for each of the
three years in the period ended December 30, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Advance Holding Corporation
and subsidiaries as of December 30, 2000, and January 1, 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 30, 2000, in conformity with accounting principles
generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to
financial statements and schedules are presented for purposes of complying with
the Securities and Exchange Commission's rules and are not part of the basic
financial statements. The schedules have been subjected to the auditing
procedures applied in the audits of basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Greensboro, North Carolina,
March 2, 2001 (except with respect to the
matters discussed in Note 19, as to which
the date is August 7, 2001).
F-2
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 30, 2000 and January 1, 2000
(Dollars in thousands, except per share data)
December January 1,
30, 2000 2000
ASSETS ---------- ----------
Current assets:
Cash and cash equivalents.............................. $ 18,009 $ 22,577
Receivables, net....................................... 80,578 100,323
Inventories............................................ 788,914 749,447
Other current assets................................... 10,274 12,025
---------- ----------
Total current assets............................... 897,775 884,372
Property and equipment, net............................ 410,960 402,476
Assets held for sale................................... 25,077 29,694
Other assets, net...................................... 22,548 32,087
---------- ----------
$1,356,360 $1,348,629
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdrafts........................................ $ 13,599 $ 11,715
Current portion of long-term debt...................... 7,028 3,665
Accounts payable....................................... 387,852 341,188
Accrued expenses....................................... 124,962 146,024
Other current liabilities.............................. 42,794 26,172
---------- ----------
Total current liabilities.......................... 576,235 528,764
---------- ----------
Long-term debt......................................... 579,921 634,664
---------- ----------
Other long-term liabilities............................ 43,933 51,247
---------- ----------
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; 28,288,550 and
28,144,050 issued and outstanding..................... 283 281
Common stock, Class B, nonvoting, $.01 par value,
21,875,000 shares authorized; no shares issued or
outstanding........................................... -- --
Additional paid-in capital............................. 372,169 369,399
Other.................................................. 396 69
Accumulated deficit.................................... (216,577) (235,795)
---------- ----------
Total stockholders' equity......................... 156,271 133,954
---------- ----------
$1,356,360 $1,348,629
========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
2000 1999 1998
---------- ---------- ----------
Net sales................................. $2,288,022 $2,206,945 $1,220,759
Cost of sales, including purchasing and
warehousing costs........................ 1,392,127 1,404,113 766,198
---------- ---------- ----------
Gross profit.......................... 895,895 802,832 454,561
Selling, general and administrative
expenses................................. 803,106 782,597 401,681
Expenses associated with
Recapitalization......................... -- -- 14,277
Expenses associated with restructuring in
conjunction with the Western Merger...... -- -- 6,774
---------- ---------- ----------
Operating income...................... 92,789 20,235 31,829
Other (expense) income
Interest expense........................ (66,640) (62,792) (35,038)
Other, net.............................. 1,012 4,647 943
---------- ---------- ----------
Total other expense, net.............. (65,628) (58,145) (34,095)
---------- ---------- ----------
Income (loss) before provision (benefit)
for income taxes and extraordinary item.. 27,161 (37,910) (2,266)
Provision (benefit) for income taxes...... 10,535 (12,584) (84)
---------- ---------- ----------
Income (loss) before extraordinary item... 16,626 (25,326) (2,182)
Extraordinary item, gain on debt
extinguishment, net of $1,759 income
taxes.................................... 2,933 -- --
---------- ---------- ----------
Net income (loss)......................... $ 19,559 $ (25,326) $ (2,182)
========== ========== ==========
Net income (loss) per basic share from:
Income (loss) before extraordinary
item................................... $ 0.59 $ (0.90) $ (0.12)
Extraordinary item, gain on debt
extinguishment......................... 0.10 -- --
---------- ---------- ----------
$ 0.69 $ (0.90) $ (0.12)
---------- ---------- ----------
Net income (loss) per diluted share from:
Income (loss) before extraordinary
item................................... $ 0.58 $ (0.90) $ (0.12)
Extraordinary item, gain on debt
extinguishment......................... 0.10 -- --
---------- ---------- ----------
$ 0.68 $ (0.90) $ (0.12)
========== ========== ==========
Average common shares outstanding......... 28,295,873 28,269,431 18,606,048
Dilutive effect of stock options.......... 314,995 -- --
---------- ---------- ----------
Average common shares outstanding--
assuming dilution........................ 28,610,868 28,269,431 18,606,048
========== ========== ==========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Years Ended December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
Preferred Class A Class B Retained
Stock Common Stock Common Stock Additional Earnings Total
--------------- ------------------ ------------------- Paid-in (Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Capital Other Deficit) Equity
------- ------ ---------- ------ ----------- ------ ---------- ------ ------------ -------------
Balance, January
3, 1998.......... 77,300 $773 2,412,500 $ 19 21,875,000 $175 $ -- $ -- $ 142,581 $143,548
Change in par
value of stock... -- -- -- 5 -- 44 -- -- (49) --
Redemption of
stock............ (77,300) (773) (662,500) (7) (21,875,000) (219) -- 300 (350,301) (351,000)
Issuance of Class
A common stock
associated with
the
Recapitalization,
net of issuance
costs of $775.... -- -- 10,853,800 109 -- -- 107,654 -- -- 107,763
Issuance of Class
A common stock
associated with
Western Merger,
net of issuance
costs of $575.... -- -- 15,636,318 156 -- -- 262,272 -- -- 262,428
Other............. -- -- 21,782 1 380 (1,832) -- (1,451)
Net loss.......... -- -- -- -- -- -- -- -- (2,182) (2,182)
Preferred
dividend, 0.80
per share........ -- -- -- -- -- -- -- -- (15) (15)
------- ---- ---------- ---- ----------- ---- -------- ------ --------- --------
Balance, January
2, 1999.......... -- -- 28,261,900 283 -- -- 370,306 (1,532) (209,966) 159,091
Other............. (117,850) (2) (907) 1,601 (503) 189
Net loss.......... -- -- -- -- -- -- -- -- (25,326) (25,326)
------- ---- ---------- ---- ----------- ---- -------- ------ --------- --------
Balance, January
1, 2000.......... -- -- 28,144,050 281 -- -- 369,399 69 (235,795) 133,954
Other............. -- -- 144,500 2 -- -- 2,770 327 (341) 2,758
Net income........ -- -- -- -- -- -- -- -- 19,559 19,559
------- ---- ---------- ---- ----------- ---- -------- ------ --------- --------
Balance, December
30, 2000......... -- $-- 28,288,550 $283 -- $-- $372,169 $ 396 $(216,577) $156,271
========== ==== =========== ==== ======== ====== ========= ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 30, 2000, January 1, 2000, and January 2, 1999
(dollars in thousands)
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net income (loss)............................. $ 19,559 $ (25,326) $ (2,182)
Adjustments to reconcile net income (loss) to
net cash provided by (used in)
operating activities:
Depreciation and amortization............... 66,826 58,147 29,964
Amortization of stock option compensation... 729 1,082 695
Amortization of deferred debt issuance
costs...................................... 3,276 3,478 2,070
Amortization of bond discount............... 9,853 8,700 5,645
Amortization of interest on capital lease
obligation................................. 42 201 --
Extraordinary gain on extinguishment of
debt, net of tax........................... (2,933) -- --
Net losses on sales of property and
equipment.................................. 885 119 150
Impairment of asset held for sale........... 856 -- --
Sales of marketable securities.............. -- -- 2,025
Provision (benefit) for deferred income
taxes...................................... 683 (12,650) (5,348)
Restructuring charge........................ -- -- 6,774
Net decrease (increase) in:
Receivables, net........................... 19,676 (8,128) 4,295
Inventories................................ (39,467) (23,090) (99,653)
Other assets............................... 14,921 (4,817) (297)
Net increase (decrease) in:
Accounts payable........................... 46,664 (5,721) 55,329
Accrued expenses........................... (29,540) (21,958) 35,718
Other liabilities.......................... (8,079) 8,987 8,837
--------- --------- ---------
Net cash provided by (used in) operating
activities.............................. 103,951 (20,976) 44,022
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment........... (70,566) (105,017) (65,790)
Proceeds from sales of property and equipment
and assets held for sale..................... 5,626 3,130 6,073
Western Merger, net of cash acquired.......... -- (13,028) (170,955)
Other......................................... -- 1,091 --
--------- --------- ---------
Net cash used in investing activities.... (64,940) (113,824) (230,672)
--------- --------- ---------
Cash flows from financing activities:
Increase (decrease) in bank overdrafts........ 1,884 (8,688) 13,434
Net borrowings (repayments) under notes
payable...................................... 784 -- (2,959)
Proceeds from issuance of long-term debt...... -- -- 11,500
Principal payments of long-term debt.......... -- -- (102,667)
Early extinguishment of debt.................. (24,990) -- --
Borrowings under credit facilities............ 278,100 465,000 485,017
Payments on credit facilities................. (306,100) (339,500) --
Payment of debt issuance costs................ -- (972) (23,374)
Proceeds from issuance of Class A common
stock, net of repurchases.................... 1,602 423 --
Proceeds from issuance of Class A common
stock--Recapitalization...................... -- -- 105,148
Payment for redemption of preferred and common
stock--Recapitalization...................... -- -- (351,000)
Proceeds from issuance of Class A common
stock--Western Merger........................ -- -- 69,806
Other......................................... 5,141 4,999 2,397
--------- --------- ---------
Net cash (used in) provided by financing
activities.............................. (43,579) 121,262 207,302
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents.................................. (4,568) (13,538) 20,652
Cash and cash equivalents, beginning of year.. 22,577 36,115 15,463
--------- --------- ---------
Cash and cash equivalents, end of year........ $ 18,009 $ 22,577 $ 36,115
========= ========= =========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands)
2000 1999 1998
------- ------- -------
Supplemental cash flow information:
Interest paid....................................... $51,831 $46,264 $23,639
Income tax refunds (payments), net.................. 6,175 (3,792) (3,129)
Noncash transactions:
Conversion of capital lease obligation.............. 3,509 -- --
Accrued purchases of property and equipment......... 9,299 543 --
Net issuances of common stock under stockholder
subscription receivable plan....................... 538 1,316 --
Loans receivable related to issuance of common
stock.............................................. 402 344 2,527
Appreciation of cancelled shares under stockholder
subscription receivable plan....................... 341 -- --
Debt issuance and acquisition costs accrued at
January 2, 1999.................................... -- -- 3,734
Stock options issued for redemption of stock........ -- -- 300
Issuance of common stock--Western Merger............ -- -- 193,003
Accrued Credit Card Liability--Western Merger....... -- -- 10,000
Obligations under capital lease..................... -- 3,266 --
======= ======= =======
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-7
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
1. Description of Business:
Advance Holding Corporation and its Subsidiaries (the "Company") maintain
two operating segments within the United States, Puerto Rico and the Virgin
Islands. The Retail segment operates 1,728 retail stores under the "Advance
Auto Parts" and "Western Auto" trade names. The Advance Auto Parts stores offer
automotive replacement parts, accessories and maintenance items throughout the
Eastern and Midwest portions of the United States. The Western Auto stores,
located in Puerto Rico and the Virgin Islands, included in the Retail segment
offer home and garden merchandise in addition to automotive parts, accessories
and service. The Wholesale segment consists of the wholesale operations,
including distribution services to approximately 590 independent dealers
located throughout the United States, and one Company-owned store in California
all operating under the "Western Auto" trade name.
2. Summary of Significant Accounting Policies:
Accounting Period
The Company's fiscal year ends on the Saturday nearest the end of December.
Principles of Consolidation
The consolidated financial statements include the accounts of Advance
Holding Corporation and its wholly owned subsidiaries. The Company also
participates in a joint venture in which it has less than a 50% ownership. The
investment in the joint venture is accounted for by the equity method. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash, Cash Equivalents and Bank Overdrafts
Cash and cash equivalents consist of cash in banks and money market funds.
Bank overdrafts include net outstanding checks not yet presented to a bank for
settlement.
Allowances
The Company receives cooperative advertising allowances, rebates and various
other incentives from vendors that are recorded as a reduction of cost of sales
or selling, general and administrative expenses when earned. Cooperative
advertising revenue is earned as advertising expenditures are incurred. Rebates
and other incentives are earned based on purchases. Amounts received or
receivable from vendors that are not yet earned are reflected as deferred
revenue in the accompanying consolidated balance sheets. Management's estimate
of the portion of deferred revenue that will be realized within one year of the
balance sheet date has been included in other current liabilities in the
accompanying consolidated balance sheets. Total deferred revenue is $26,994 and
$25,015 at December 30, 2000 and January 1, 2000, respectively.
F-8
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
Preopening Expenses
Preopening expenses, which consist primarily of payroll and occupancy
costs, are expensed as incurred.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
incurred was approximately $53,658, $65,524, and $35,972 in fiscal 2000, 1999
and 1998, respectively.
Warranty Costs
The Company's vendors are primarily responsible for warranty claims.
Warranty costs relating to merchandise and services sold under warranty, which
are not covered by vendors' warranties are estimated based on the Company's
historical experience and are recorded in the period the product is sold.
Revenue Recognition
The Company recognizes merchandise revenue at the point of sale to a retail
customer and point of shipment to a wholesale customer, while service revenue
is recognized upon performance of service. The majority of sales are made for
cash; however, the Company extends credit to certain commercial customers
through a third-party provider of private label credit cards. Receivables
under the private label credit card program are transferred to the third-party
provider on a limited recourse basis. The Company provides an allowance for
doubtful accounts on receivables sold with recourse based upon factors related
to credit risk of specific customers, historical trends and other information.
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," provides that this arrangement be accounted for as a secured
borrowing. Receivables under the private label credit card and the related
payable to the third-party provider were $15,666 and $10,525 at December 30,
2000 and January 1, 2000, respectively.
Per Share Information
Basic income per share information has been determined by dividing the
respective net income amounts by the weighted average number of shares of
common stock outstanding during the periods. Diluted income per share
information also considers the additional dilutive effect for stock options.
The number of outstanding stock options considered antidilutive for either
part or all of the fiscal year and not included in the calculation of diluted
net income (loss) per share for the fiscal years ended December 30, 2000,
January 1, 2000, and January 2, 1999, were 1,565,500, 230,000 and 1,001,665,
respectively. These antidilutive stock options were outstanding at the end of
each fiscal year.
Change in Accounting Estimate
In July of fiscal 2000, the Company adopted a change in an accounting
estimate to reduce the depreciable lives of certain property and equipment on
a prospective basis. The effect on operations for fiscal 2000 was to increase
depreciation expense by $2,458. The Company expects to discontinue the
operations of the affected assets by the third quarter of fiscal 2001, at
which time they will be fully depreciated under the reduced useful lives.
F-9
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued 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 Activities--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 the first quarter of fiscal 2001. The implementation had no impact on
the Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses accounting
and reporting for all business combinations and requires the use of the
purchase method for business combinations. SFAS No. 141 also requires
recognition of intangible assets apart from goodwill if they meet certain
criteria. SFAS No. 142 establishes accounting and reporting standards for
acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and
intangibles with indefinite useful lives are no longer amortized but are
instead subject to at least an annual assessment for impairment by applying a
fair-value based test. SFAS No. 141 applies to all business combinations
initiated after June 30, 2001. SFAS No. 142 is effective for existing goodwill
and intangible assets beginning on December 31, 2001. SFAS No. 142 is effective
immediately for goodwill and intangibles acquired after June 30, 2001. Although
the Company is currently evaluating the impact of SFAS Nos. 141 and 142,
management does not expect that the adoption of these statements will have a
material impact on existing goodwill or intangibles.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 establishes accounting standards for
recognition and measurement of an asset retirement obligation and an associated
asset retirement cost and is effective for fiscal years beginning after June
15, 2002. The Company does not expect SFAS No. 143 to have a material impact on
its financial statements.
Reclassifications
Certain items in the fiscal 1999 and fiscal 1998 financial statements have
been reclassified to conform with the fiscal 2000 presentation.
F-10
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
3. Restructuring Charges:
The Company's restructuring activities relate to the ongoing analysis of the
profitability of store locations and the settlement of restructuring activities
undertaken and assumed as a result of the Western Merger (see Note 16). The
Company recognizes a provision for future obligations at the time a decision is
made to close a facility, primarily store locations. The provision for closed
facilities includes the present value of the remaining lease obligations,
reduced by the present value of estimated revenues from subleases, and
management's estimate of future costs of insurance, property tax and common
area maintenance. The Company uses discount rates ranging from 6.5% to 7.7%.
From time to time these estimates require revision that affect the amount of
the recorded liability. The effect of these changes in estimates is netted with
new provisions and included in selling, general and administrative expenses on
the accompanying consolidated statements of operations.
During fiscal 2000, the Company closed five stores included in the fiscal
1999 restructuring activities and made the decision to close or relocate 25
additional stores not meeting profitability objectives, of which 20 have been
closed as of December 30, 2000.
A reconciliation of activity with respect to these restructuring accruals is
as follows:
Other
Severance Exit Costs
--------- ----------
Restructuring reserves assumed in Western Merger...... $1,092 $ 8,569
Restructuring provision for Advance store exit costs
in conjunction with the Western Merger............... -- 6,774
Reserves utilized..................................... (410) (570)
------ -------
Balance, January 2, 1999.............................. $ 682 $14,773
New provisions........................................ -- 1,307
Change in estimates................................... -- (1,249)
Reserves utilized..................................... (664) (4,868)
------ -------
Balance, January 1, 2000.............................. $ 18 $ 9,963
New provisions........................................ -- 1,768
Change in estimates................................... -- (95)
Reserves utilized..................................... (18) (4,848)
------ -------
Balance, December 30, 2000............................ $ -- $ 6,788
====== =======
Other exit cost liabilities will be settled over the remaining terms of the
underlying lease agreements.
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 December 30, 2000,
all employees have been terminated and all leased stores have been closed.
F-11
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
A reconciliation of activity with respect to these restructuring accruals is
as follows:
Other Exit
Severance Relocation Costs
--------- ---------- ----------
Recognized as liabilities assumed in
purchase accounting and included in
purchase price allocation.................. $ 8,000 $ 970 $14,384
Reserves utilized........................... (262) (132) (652)
------- ----- -------
Balance at January 2, 1999.................. $ 7,738 $ 838 $13,732
Purchase accounting adjustments............. 3,630 (137) (1,833)
Reserves utilized........................... (7,858) (701) (4,074)
------- ----- -------
Balance at January 1, 2000.................. $ 3,510 $ -- $ 7,825
Purchase accounting adjustments............. -- -- (1,261)
Reserves utilized........................... (3,510) -- (2,767)
------- ----- -------
Balance at December 30, 2000................ $ -- $ -- $ 3,797
======= ===== =======
Other exit cost liabilities will be settled over the remaining terms of the
underlying lease agreements.
4. Receivables:
Receivables consist of the following:
December 30, January 1,
2000 2000
------------ ----------
Trade:
Wholesale........................................ $12,202 $ 22,221
Retail........................................... 15,666 10,525
Vendor........................................... 36,260 50,208
Installment (Note 18)............................ 14,197 13,616
Related parties.................................. 3,540 6,647
Employees........................................ 607 552
Other............................................ 3,127 3,481
------- --------
Total receivables.................................. 85,599 107,250
Less: Allowance for doubtful accounts.............. (5,021) (6,927)
------- --------
Receivables, net................................... $80,578 $100,323
======= ========
F-12
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
5. Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out ("LIFO") method for approximately 90% and 89% of
inventories at December 30, 2000 and January 1, 2000, respectively, and the
first-in, first-out ("FIFO") method for remaining inventories. The Company
capitalizes certain purchasing and warehousing costs into inventory. Purchasing
and warehousing costs included in inventory, at FIFO, at December 30, 2000 and
January 1, 2000, were $56,305 and $49,252, respectively. Inventories consist of
the following:
December 30, January 1,
2000 2000
------------ ----------
Inventories at FIFO................................ $779,376 $735,762
Adjustments to state inventories at LIFO........... 9,538 13,685
-------- --------
Inventories at LIFO................................ $788,914 $749,447
======== ========
Replacement cost approximated FIFO cost at December 30, 2000 and January 1,
2000.
6. Property and Equipment:
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Expenditures for maintenance and repairs are charged directly to
expense when incurred; major improvements are capitalized. When items are sold
or retired, the related cost and accumulated depreciation are removed from the
accounts, with any gain or loss reflected in the consolidated statements of
operations.
Depreciation of land improvements, buildings, furniture, fixtures and
equipment, and vehicles is provided over the estimated useful lives, which
range from 2 to 40 years, of the respective assets using the straight-line
method. Amortization of building and leasehold improvements is provided over
the shorter of the estimated useful lives of the respective assets or the term
of the lease using the straight-line method.
Property and equipment consists of the following:
Estimated December 30, January 1,
Useful Lives 2000 2000
------------ ------------ ----------
Land and land improvements............ 0-10 years $ 40,371 $ 40,927
Buildings............................. 40 years 79,109 70,788
Building and leasehold improvements... 10-40 years 84,658 76,605
Furniture, fixtures and equipment..... 3-12 years 357,642 331,238
Vehicles.............................. 2-10 years 30,506 27,555
Other................................. 10,571 2,010
--------- ---------
602,857 549,123
Less--Accumulated depreciation and
amortization......................... (191,897) (146,647)
--------- ---------
Property and equipment, net........... $ 410,960 $ 402,476
========= =========
Effective January 3, 1999, the Company adopted the American Institute of
Certified Public Accountant's Statement of Position ("SOP") 98-1, "Accounting
for the Cost of Computer Software Developed or Obtained for Internal Use". The
SOP requires companies to capitalize certain expenditures related to
development of or obtaining computer software for internal use. The adoption of
the SOP resulted in the Company capitalizing approximately $9,400 and $561 in
costs incurred during fiscal 2000 and fiscal 1999, respectively.
F-13
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
7. Assets Held for Sale
The Company applies SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," which requires that
long-lived assets and certain identifiable intangible assets to be disposed of
be reported at the lower of the carrying amount or the fair market value less
selling costs. As of December 30, 2000 and January 1, 2000, the Company's
assets held for sale primarily consist of real property acquired in the Western
Merger and held in the Wholesale Segment of $25,077 and $29,694, respectively.
The Company expects to dispose of this property during fiscal 2001.
During fiscal 2000, the Company recorded an impairment of the value assigned
to a property held in the Wholesale segment. This facility consisted of excess
space not required by the Company's current needs, therefore, leading to the
Company's decision to dispose. The impairment charge of $856, included in
selling, general and administrative expenses, reduced the carrying value of the
property to approximately $8,000.
8. Other Assets:
As of December 30, 2000 and January 1, 2000, other assets include deferred
debt issuance costs of $14,843 and $18,886, respectively (net of accumulated
amortization of $8,232 and $5,261, respectively), relating to the
Recapitalization (Note 15) and the Western Merger (Note 16). Such costs are
being amortized over the term of the related debt (6 years to 11 years). Other
assets also include the non-current portion of deferred income tax assets (Note
13).
9. Accrued Expenses:
Accrued expenses consist of the following:
December 30, January 1,
2000 2000
------------ ----------
Payroll and related benefits....................... $ 25,507 $ 32,682
Restructuring...................................... 3,772 8,238
Warranty........................................... 18,962 19,780
Other.............................................. 76,721 85,324
-------- --------
Total accrued expenses............................. $124,962 $146,024
======== ========
10. Other Long-Term Liabilities:
Other long-term liabilities consist of the following:
December 30, January 1,
2000 2000
------------ ----------
Other employee benefits............................ $ 24,625 $ 26,587
Restructuring...................................... 6,813 13,078
Other.............................................. 12,495 11,582
-------- --------
Total other long-term liabilities.................. $ 43,933 $ 51,247
======== ========
F-14
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
11. Long-term Debt:
Long-term debt consists of the following:
December 30, January
2000 1, 2000
------------ --------
Senior Debt:
Deferred term loan at variable interest rates (9.25% at
December 30, 2000), due April 2004.................... $ 90,000 $ 90,000
Delayed draw facilities at variable interest rates,
(8.47% at December 30, 2000), due April 2004.......... 94,000 70,000
Revolving facility at variable interest rates (8.50% at
December 30, 2000), due April 2004.................... 15,000 66,000
Tranche B facility at variable interest rates (9.19% at
December 30, 2000), due April 2006.................... 123,500 124,500
McDuffie County Authority taxable industrial
development revenue bonds, issued December 31,1997,
interest due monthly at an adjustable rate established
by the Remarketing Agent (6.90% at December 30, 2000),
principal due on November 1, 2002..................... 10,000 10,000
Capital lease obligation............................... -- 3,467
Other.................................................. 784 --
Subordinated debt:
Subordinated notes payable, interest due semi-annually
at 10.25%, due April 2008............................. 169,450 200,000
Discount debentures, interest at 12.875%, due April
2009, face amount of $112,000 less unamortized
discount of $27,785 and $37,638 at December 30, 2000
and January 1, 2000, respectively (subordinate to
substantialy all other liabilities)................... 84,215 74,362
-------- --------
Total long-term debt................................... 586,949 638,329
Less: Current portion of long-term debt................ (7,028) (3,665)
-------- --------
Long-term debt, excluding current portion.............. $579,921 $634,664
======== ========
Senior Debt:
The deferred term loan, delayed draw facilities, revolving facility and
Tranche B facility ("Credit Facility") are with a syndicate of banks. The
Credit Facility provides for the Company to borrow up to $462,500 in the form
of senior secured credit facilities, consisting of (i) $90,000 senior secured
deferred term loan, (ii) $49,000 senior secured delayed draw term loan facility
(the "Delayed Draw Facility I"), (iii) $75,000 senior secured delayed draw term
loan facility (the "Delayed Draw Facility II") and, together with the Delayed
Draw Facility I, (the "Delayed Draw Facilities"), (iv) a $123,500 Tranche B
senior secured term loan facility (the "Tranche B Facility"), and (v) a
$125,000 senior secured revolving credit facility (the "Revolving Facility").
The Revolving Facility has a letter of credit sub-limit of $25,000, of which
$11,910 was outstanding for stand-by letters of credit as of December 30, 2000.
Amounts available 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 December 30,
2000, $118,300 was available under these facilities.
Borrowings under the Credit Facility are required to be prepaid, subject to
certain exceptions, with (a) 50% of the Excess Cash Flow (as defined), (b) the
net cash proceeds of all asset sales or other dispositions
F-15
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
of property (as defined), (c) the net proceeds of issuances of debt obligations
and (d) the net proceeds of issuance of equity securities. Excess Cash Flow is
defined as the excess of (A) the sum of Advance Stores Company, Incorporated's
("Stores"), a wholly owned subsidiary, (i) consolidated net income (excluding
certain gains and losses and restricted payments made to its parent), (ii)
depreciation, amortization and other noncash charges, (iii) any decrease in Net
Working Capital (as defined), (iv) increases in the deferred revenues, and
(v) proceeds of certain indebtedness incurred, less (B) the sum of (a) any
noncash gains, (b) any increases in Net Working Capital, (c) decreases in
consolidated deferred revenues, (d) capital expenditures and (e) repayments of
indebtedness (subject to certain exceptions). The Company was not required to
make an Excess Cash Flow prepayment for fiscal 1999 but will make a $6,244
mandatory prepayment for fiscal 2000 in fiscal 2001.
The interest rates under the delayed draw facilities and the revolver are
determined by reference to a pricing grid that provides 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 December 30, 2000, the margins were 1.75% and 0.75% for
Eurodollar and base rate borrowings, respectively. Additionally, at December
30, 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.
A commitment fee of 0.50% per annum is charged on the unused portion of the
Credit Facility.
The Credit Facility is secured by all assets of the Company and contains
covenants restricting the ability of the Company and its subsidiaries to, among
others, (i) declare dividends or redeem or repurchase capital stock, (ii) make
loans and investments and (iii) engage in transactions with affiliates or the
Company to change its passive holding company status. The Company is required
to comply with financial covenants with respect to (a) a maximum leverage
ratio, (b) a minimum interest coverage ratio, (c) a minimum retained cash
earnings test and (d) maximum limits on capital expenditures.
On December 31, 1997, the Company entered into an agreement with McDuffie
County Authority under which bond proceeds of $10,000 were issued to construct
a distribution center. Proceeds of the bond offering were fully expended during
fiscal 1999. These industrial development revenue bonds currently bear interest
at a variable rate, with a one-time option to convert to a fixed rate, and are
secured by a letter of credit.
Subordinated Debt:
The $169,450 Senior Subordinated Notes (the "Notes") are unsecured and are
subordinate in right of payment to all existing and future Senior Debt. The
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after April 15, 2003. In addition, at any time prior to April 15,
2001, the Company may redeem up to 35% of the initially outstanding aggregate
principal amount of the Notes at a redemption price equal to 110.25% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, thereon to the date of redemption, with the net proceeds of
one or more equity offerings; provided that, in each case, at least 65% of the
initially outstanding aggregate principal amount of the Notes remains
outstanding immediately after the occurrence of any such redemption; and
provided further, that such redemption shall occur within 90 days of the date
of the closing of such equity offering.
Upon the occurrence of a change of control, each holder of the Notes will
have the right to require the Company to repurchase all or any part of such
holder's Notes at an offering price in cash equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest and liquidated
damages, if any, thereon to the date of purchase.
F-16
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
The Notes contain various non-financial restrictive covenants that limit,
among other things, the ability of the Company and its subsidiaries to issue
preferred stock, repurchase stock and incur certain indebtedness, engage in
transactions with affiliates, pay dividends or certain other distributions,
make certain investments and sell stock of subsidiaries.
During fiscal 2000, the Company repurchased on the open market $30,550 face
value of Notes at a price ranging from 81.5 to 82.5 percent of their face
value. Accordingly, the Company recorded a gain related to the extinguishment
of this debt of $2,933, net of $1,759 provided for income taxes and $868 for
the write off of the associated deferred debt issuance costs.
The Senior Discount Debentures (the "Debentures") accrue at a rate of
12.875%, compounded semi-annually, to an aggregate principal amount of $112,000
by April 15, 2003. Cash interest will not accrue on the Debentures prior to
April 15, 2003. Commencing April 15, 2003, cash interest on the Debentures will
accrue and be payable, at a rate of 12.875% per annum, semi-annually in arrears
on each April 15 and October 15. As of December 30, 2000, the Debentures have
been accreted by $24,198 with corresponding interest expense of $9,853, $8,700
and $5,645 recognized for the years ended December 30, 2000, January 1, 2000
and January 2, 1999, respectively.
The Debentures are redeemable at the option of the Company, in whole or in
part, at any time on or after April 15, 2003. In addition, at any time prior to
April 15, 2001 the Company may, at its option, redeem up to 35% of the
aggregate principal amount at maturity of the Debentures originally issued at a
redemption price equal to 112.875% of the accreted value thereof, plus
liquidated damages, if any, with the net cash proceeds of one or more equity
offerings; provided that at least 65% of the original aggregate principal
amount at maturity of the Debentures will remain outstanding immediately
following each such redemption.
Upon the occurrence of a change of control, each holder of the Debentures
will have the right to require the Company to purchase the Debentures at a
price in cash equal to 101% of the accreted value thereof plus liquidated
damages, if any, thereon in the case of any such purchase prior to April 15,
2003, or 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest and liquidated damages, if any, thereon to the date of purchase
in the case of any such purchase on or after April 15, 2003. As the Company may
not have any significant assets other than capital stock of Stores (which is
pledged to secure the Company's obligations under the Credit Facility), the
Company's ability to purchase all or any part of the Debentures upon the
occurrence of a change in control will be dependent upon the receipt of
dividends or other distributions from Stores or its subsidiaries. The Credit
Facility and the Senior Subordinated Notes have certain restrictions for Stores
with respect to paying dividends and making any other distributions.
The Debentures are subordinated to substantially all of the Company's other
liabilities. The Debentures contain certain non-financial restrictive covenants
that are similar to the covenants contained in the Notes.
As of December 30, 2000, the Company was in compliance with the covenants of
the Credit Facility, the Notes and Debentures. Substantially all of the net
assets of the Company's subsidiaries are restricted at December 30, 2000.
F-17
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
The aggregate future annual maturities of long-term debt, net of the
unamortized discount related to the Debentures, are as follows:
2001............................................................ $ 7,028
2002............................................................ 14,000
2003............................................................ 4,000
2004............................................................ 219,668
2005............................................................ 60,000
Thereafter...................................................... 282,253
--------
$586,949
========
12. Stockholder Subscription Receivables:
As a result of the Recapitalization (See Note 15) the Company established a
stock subscription plan which allows certain directors, officers and key
employees of the Company to purchase shares of Class A common stock. The plan
requires that the purchase price of the stock equal the fair market value at
the time of the purchase and allows fifty percent of the purchase price be
executed through the delivery of a full recourse promissory note. The notes
provide for annual interest payments, at the prime rate, with the entire
principal amount due in five years. As of December 30, 2000 and January 1,
2000, outstanding stockholder subscription receivables were $2,364 and $2,008,
respectively, and are included as a reduction to Stockholders' equity in the
accompanying consolidated balance sheets.
13. Income Taxes:
Provision (benefit) for income taxes for fiscal 2000, fiscal 1999 and
fiscal 1998 consists of the following:
Current Deferred Total
------- -------- --------
2000--
Federal....................................... $ 8,005 $ 976 $ 8,981
State......................................... 1,847 (293) 1,554
------- -------- --------
$ 9,852 $ 683 $ 10,535
======= ======== ========
1999--
Federal....................................... $(1,913) $ (6,535) $ (8,448)
State......................................... 1,979 (6,115) (4,136)
------- -------- --------
$ 66 $(12,650) $(12,584)
======= ======== ========
1998--
Federal....................................... $ 3,845 $ (4,528) $ (683)
State......................................... 1,419 (820) 599
------- -------- --------
$ 5,264 $ (5,348) $ (84)
======= ======== ========
F-18
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
The provision (benefit) for income taxes differed from the amount computed
by applying the federal statutory income tax rate due to:
2000 1999 1998
------- -------- -----
Pre-tax income (loss) at statutory U.S. federal
income tax rate................................ $ 9,507 $(13,269) $(793)
State income taxes, net of federal income tax
benefit........................................ 896 (2,688) 389
Non-deductible interest & other expenses........ 1,010 1,125 609
Changes in certain tax accounting methods....... -- -- (366)
Valuation allowance............................. 914 596 --
Puerto Rico dividend withholding tax............ -- 150 120
Other, net...................................... (1,792) 1,502 (43)
------- -------- -----
$10,535 $(12,584) $ (84)
======= ======== =====
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period-end, based on enacted tax laws and
statutory income tax rates applicable to the periods in which the differences
are expected to affect taxable income. Deferred income taxes reflect the net
income tax effect of temporary differences between the bases of assets and
liabilities for financial reporting purposes and for income tax reporting
purposes. Net deferred income tax balances are comprised of the following:
December 30, January 1,
2000 2000
------------ ----------
Deferred income tax assets........................... $57,378 $65,572
Deferred income tax liabilities...................... (62,121) (54,731)
------- -------
Net deferred income tax (liabilities) assets......... $(4,743) $10,841
======= =======
Net deferred income tax assets of $8,792 were recorded in the purchase price
allocation of Western.
The Company incurred financial reporting and tax losses in 1999 primarily
due to integration and interest costs incurred as a result of the Western
Merger and the Recapitalization (See Notes 15 and 16). As of December 30, 2000,
the Company has cumulative net deferred income tax liabilities of $4,743. The
gross deferred income tax assets include federal and state net operating loss
carryforwards ("NOLs") of approximately $16,931. These NOLs may be used to
reduce future taxable income and expire periodically through fiscal year 2020.
The Company believes it will realize these tax benefits through a combination
of the reversal of temporary differences, projected future taxable income
during the NOL carryforward periods and available tax planning strategies. Due
to uncertainties related to the realization of certain deferred tax assets for
NOLs in various jurisdictions, the Company recorded a valuation allowance of
$1,510 as of December 30, 2000 and $596 as of January 1, 2000. The amount of
deferred income tax assets realizable, however, could change in the near future
if estimates of future taxable income are changed.
F-19
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
Temporary differences which give rise to significant deferred income tax
assets (liabilities) are as follows:
December 30, January 1,
2000 2000
------------ ----------
Current deferred income taxes--
Inventory valuation differences.................. $(36,051) $(30,708)
Accrued medical and workers compensation......... 2,319 2,462
Accrued expenses not currently deductible for
tax............................................. 16,391 26,778
Net operating loss carryforwards................. 7,124 4,000
-------- --------
Total current deferred income taxes............ $(10,217) $ 2,532
======== ========
Long-term deferred income taxes--
Property and equipment........................... $(24,571) $(24,023)
Postretirement benefit obligation................ 8,254 8,580
Amortization of bond discount.................... 8,184 4,861
Net operating loss carryforwards................. 9,807 18,140
Minimum tax credit carryforward (no expiration).. 6,809 --
Valuation allowance.............................. (1,510) (596)
Other, net....................................... (1,499) 1,347
-------- --------
Total long-term deferred income taxes.......... $ 5,474 $ 8,309
======== ========
The Company currently has four years that are open to audit by the Internal
Revenue Service. In addition, various state and foreign income tax returns for
several years are open to audit. In management's opinion, adequate reserves
have been established and any amounts assessed will not have a material effect
on the Company's financial position or results of operations.
F-20
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
14. Lease Commitments:
The Company leases store locations, distribution centers, office space,
equipment and vehicles under lease arrangements, some of which are with related
parties.
At December 30, 2000, future minimum lease payments due under non-cancelable
operating leases are as follows:
Related
-----------------------------
Other(a) Parties(a) Total
--------- ---------- --------
2001......................................... $ 115,631 $ 3,688 $119,319
2002......................................... 107,908 3,688 111,596
2003......................................... 97,119 3,496 100,615
2004......................................... 84,711 2,536 87,247
2005......................................... 76,686 2,239 78,925
Thereafter................................... 228,300 2,211 230,511
--------- ------- --------
$ 710,355 $17,858 $728,213
========= ======= ========
--------
(a) The Other and Related Parties columns include stores closed as a result of
the Company's restructuring plans (See Note 3).
At December 30, 2000, future minimum sub-lease income to be received under
non-cancelable operating leases is $10,152.
Net rent expense for fiscal 2000, fiscal 1999 and fiscal 1998 was as
follows:
2000 1999 1998
--------- -------- -------
Minimum facility rentals..................... $ 112,768 $103,807 $63,787
Contingent facility rentals.................. 1,391 2,086 718
Equipment rentals............................ 1,875 3,831 1,804
Vehicle rentals.............................. 6,709 4,281 2,391
--------- -------- -------
122,743 114,005 68,700
Less: Sub-lease income....................... (1,747) (1,085) (426)
--------- -------- -------
$ 120,996 $112,920 $68,274
========= ======== =======
Contingent facility rentals are determined on the basis of a percentage of
sales in excess of stipulated minimums for certain store facilities. Most of
the leases provide that the Company pay taxes, maintenance, insurance and
certain other expenses applicable to the leased premises and include options to
renew. Certain leases contain rent escalation clauses, which are recorded on a
straight-line basis. Management expects that, in the normal course of business,
leases that expire will be renewed or replaced by other leases.
Rental payments to related parties of approximately $3,921 in fiscal 2000,
$3,998 in fiscal 1999 and $2,984 in fiscal 1998 are included in net rent
expense.
F-21
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
15. Recapitalization:
On April 15, 1998, the Company consummated its recapitalization pursuant to
an Agreement and Plan of Merger dated March 4, 1998 (the "Merger Agreement").
In connection with the Merger Agreement, the Company's Board of Directors
authorized a 12,500 to 1 split of the common stock and a change in the par
value of the common stock from $100 to $.01 per share.
Pursuant to the Merger Agreement, AHC Corporation ("AHC"), a corporation
controlled by an investment fund organized by Freeman Spogli & Co. Incorporated
("FS&Co."), merged into the Company (the "Merger"), with the Company as the
surviving corporation. In the Merger, a portion of the common stock and all of
the preferred stock of the Company were converted into the right to receive in
the aggregate approximately $351,000 in cash and certain stock options (See
Note 23). Certain shares representing approximately 14% of the outstanding
Class A common stock remained outstanding upon consummation of the Merger.
Immediately prior to the Merger, FS&Co. purchased approximately $80,500 of the
common stock of AHC which was converted in the Merger into approximately 64% of
the Company's outstanding common stock and Ripplewood Partners, L.P. and its
affiliates ("Ripplewood") purchased approximately $20,000 of the common stock
of AHC which was converted in the Merger into approximately 16% of the
Company's outstanding common stock. In connection with the Merger, management
purchased approximately $8,000, or approximately 6%, of the Company's
outstanding common stock, a portion of which resulted in stockholder
subscription receivables.
The Merger, the retirement of certain notes payable and long-term debt,
borrowings under the Credit Facility, the issuance of the Debentures and the
issuance of the Notes collectively represent the "Recapitalization". The
Company has accounted for the Recapitalization for financial reporting purposes
as the sale of common stock, the issuance of debt, the redemption of common and
preferred stock and the repayment of notes payable and long-term debt.
16. Western Merger:
On November 2, 1998, the Company consummated a Plan of Merger (the "Western
Merger") with Sears, Roebuck and Co. ("Sears"), to acquire Western (Western
Auto Supply Company), for $175,000 in cash and 11,474,606 shares of the
Company's common stock. Additionally, the Company agreed to share losses
incurred by Sears as a result of the sale, or as a result of continuing the
private label credit card programs up to a maximum of $10,000 ("Credit Card
Liability"). The Company recorded the $10,000, which was paid in fiscal 1999,
as additional purchase price. In connection with the transaction, the Company
sold 4,161,712 shares of common stock to certain stockholders for $70,000 and
the Company borrowed $90,000 under a new deferred term loan facility. The
remainder of the $175,000 was funded through cash on hand. As of the
transaction date, Sears owned approximately 40.6% of the Company's issued and
outstanding common stock.
The Western Merger has been accounted for under the purchase method of
accounting. Accordingly, the results of operations of Western for the periods
from November 2, 1998 are included in the accompanying consolidated financial
statements. The purchase price has been allocated to assets acquired and
liabilities assumed based on their respective fair values. The final purchase
price allocation resulted in total excess fair value over the purchase price of
$4,667 and was allocated to non-current assets, primarily property and
equipment.
F-22
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
17. Stockholders' Agreement:
A former owner of the Company and a trust established for the founder of the
Company (the "Continuing Stockholders"), FS&Co., Ripplewood, WA Holding Co.
("WAH"), a subsidiary of Sears, and the Company have entered into a
Stockholders' Agreement (the "Stockholders' Agreement"). Under the
Stockholders' Agreement, FS&Co., Ripplewood, the Continuing Stockholders and
WAH have the right to purchase their pro rata share of certain new issuances of
common stock as well as the right to participate pro rata in any sale of common
stock by a stockholder. Sales of common stock by the Continuing Stockholders
and Ripplewood are subject to a right of first offer in favor of FS&Co. and
WAH, in the case of the Continuing Stockholders through April 2001. The
Stockholders' Agreement provides Ripplewood and the Continuing Stockholders
with tag-along rights in the event of sales by FS&Co. or WAH. If FS&Co. sells
all of its common stock, Ripplewood and the Continuing Stockholders will be
obligated to sell all of their shares of common stock at the request of FS&Co.
The Stockholders' Agreement further provides that FS&Co., WAH, Ripplewood
and the Continuing Stockholders will have defined levels of representation on
the Board of Directors. Ripplewood has granted FS&Co. an irrevocable proxy to
vote Ripplewood's common stock on all matters, expiring upon an initial public
offering. Pursuant to the Stockholders' Agreement, the current Chairman of the
Board has certain approval rights with respect to major corporate transactions.
18. Installment Sales Program:
A subsidiary of the Company maintains an in-house finance program, which
offers financing to retail customers. Finance charges of $3,063, $2,662 and
$376 on the installment sales program are included in net sales in the
accompanying consolidated statements of operations for the years ended December
30, 2000, January 1, 2000 and January 2, 1999, respectively. The cost of
administering the installment sales program is included in selling, general and
administrative expenses as a cost of operations.
19. Subsequent Events:
On August 7, 2001, the Company signed a definitive agreement to acquire
Discount Auto Parts, Inc. (Discount) in a merger transaction. Discount
shareholders will receive $7.50 per share in cash plus 0.2577 shares of common
stock in the combined company for each share of Discount common stock.
Accordingly, upon consummation of the merger, Discount shareholders will own
approximately 13% of the total shares outstanding of the combined company. The
Company will file a registration statement covering the shares issued to
Discount shareholders, and, through this offering, become a public company
renamed Advance Auto Parts, Inc. Discount operates approximately 667 retail
auto parts stores in Florida, Georgia, South Carolina, Alabama, Louisiana and
Mississippi. The merger, subject to certain regulatory filings and approvals,
will be accounted for under the purchase method of accounting in accordance
with SFAS No. 141, "Business Combinations."
On July 27, 2001, the Company made the decision to close a duplicative
distribution facility located in Jeffersonville, Ohio. This 382,000 square foot
owned facility opened in 1996 and served stores operating in the retail segment
throughout the Mid-west portion of the United States. The Company has operated
two distribution facilities in overlapping markets since the Western Merger, in
which the Company assumed the operation of a Western distribution facility in
Ohio. The decision to close this facility allows the Company to utilize the
operating resource requirements more productively in other areas of the
business. The Company does not anticipate closure of this facility and the
severing of certain of its employees to materially impact its financial
position or future results of operations.
F-23
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
On April 23, 2001, the Company completed its acquisition of Carport Auto
Parts, Inc. ("Carport"). The acquisition included a net 30 retail stores
located in Alabama and Mississippi, and substantially all of the assets used in
Carport's operations. The acquisition has been accounted for under the purchase
method of accounting during the second quarter of fiscal 2001.
The purchase price of $21,533 was allocated during the second quarter of
fiscal 2001to the asset and the liabilities assumed based on their fair values
at the date of acquisition. This allocation resulted in the recognition of
$3,239 in goodwill.
The Company received notification from Sears during the first quarter of
fiscal 2001 that certain environmental matters of Western existing as of the
merger date and fully indemnified by Sears, have been settled. Accordingly, the
Company reversed $2,500 of the previously recorded $3,750 receivable due from
Sears and reduced the corresponding environmental liability (see Note 20).
20. Contingencies:
In the case of all known contingencies, the Company accrues for an
obligation when it is probable and the amount is reasonably estimable. As facts
concerning contingencies become known to the Company, the Company reassesses
its position both with respect to gain contingencies and accrued liabilities
and other potential exposures. Estimates that are particularly sensitive to
future change include tax and legal matters, which are subject to change as
events evolve and as additional information becomes available during the
administrative and litigation process.
In October 2000, a vendor repudiated a long-term purchase agreement entered
into with the Company in January 2000. The Company filed suit against the
vendor in November of fiscal 2000. While legal remedies were being pursued, an
interim agreement was entered into to ensure the continuous supply of products.
In its suit, the Company attempted to recover monetary damages for the
increased costs charged by the vendor under the interim agreement, the
increased costs to acquire product from other sources, plus any consequential
damages. Based on consultation with the Company's legal counsel, management
believed the purchase agreement was entered into in good faith and it was
highly probable that the Company would prevail in its suit. Therefore, the
Company recorded a gain of $3,300, which represented actual damages incurred
through December 30, 2000, as a reduction of cost of sales in the accompanying
statements of operations. Related income taxes and legal fees of $1,300 were
also recorded in the accompanying consolidated statement of operations for the
year ended December 30, 2000. On March 23, 2001, the Company agreed to a cash
settlement of $16,600 from the vendor. The remainder of the cash settlement
over the originally recorded gain, less higher product costs incurred under the
interim supply agreement, related legal expenses and taxes, was recognized as a
net gain of $8,300 during first quarter of fiscal 2001.
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.
In January 1999, the Company was notified by the United States Environmental
Protection Agency ("EPA") that Western Auto may have potential liability under
the Comprehensive Environmental Response Compensation and Liability Act
relating to two battery salvage and recycling sites that were in operation in
the 1970's and 1980's. The EPA has indicated the total cleanup for this site
will be approximately $1,600.
F-24
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
Management is continuing their investigation of the EPA notification. An
estimate of the range of liability is not reasonably possible until technical
studies are sufficiently completed and the amount of potential indemnification
from Sears, if any, is further investigated. The ultimate exposure will also
depend upon the participation of other parties named in the notification who
are believed to share in responsibility. The Company believes the claim could
be settled for an amount not material to the Company's financial position or
results of operations.
Sears has agreed to indemnify the Company for certain litigation and
environmental matters of Western that existed as of the Western Merger date.
The Company has recorded a receivable from Sears of approximately $2,685, which
is included in the fair value of Western's assets (Note 16), relating to
certain environmental matters that had been accrued by Western as of the
Western Merger date. As of the Western Merger date, Sears has agreed to
partially indemnify the Company for up to 5 years for certain additional
environmental matters that may arise relating to the period prior to the
Western Merger. The Company's maximum exposure during the indemnification
period for certain matters covered in the Western Merger agreement is $3,750.
In November 1997 a plaintiff, on behalf of himself and others similarly
situated, filed a class action complaint and motion of class certification
against the Company in the circuit court for Jefferson County, Tennessee,
alleging misconduct in the sale of automobile batteries. The complaint seeks
compensatory and punitive damages. The Company believes it has no liability for
such claims and intends to defend them vigorously.
In addition, three lawsuits were filed against the Company on July 28, 1998,
for wrongful death relating to an automobile accident involving an employee of
the Company. The Company believes the financial exposure is covered by
insurance.
The Company is also involved in various other claims and lawsuits 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
results of operations.
The Company has certain periods open to examination by taxing authorities in
various states for sales and use tax. In management's opinion, adequate
reserves have been established and any amounts assessed will not have a
material effect on the Company's financial position or results of operations.
The Company is self-insured with respect to workers' compensation and health
care claims for eligible active employees. The Company maintains certain levels
of stop-loss insurance coverage for these claims through an independent
insurance provider. The cost of workers' compensation and general health care
claims is accrued based on actual claims reported plus an estimate for claims
incurred but not reported. These estimates are based on historical information
along with certain assumptions about future events, and are subject to change
as additional information comes available.
The Company has entered into employment agreements with certain employees
that provide severance pay benefits under certain circumstances after a change
in control of the Company or upon termination by the Company. The maximum
contingent liability under these employment agreements is approximately $4,740
and $4,400 at December 30, 2000 and January 1, 2000, respectively.
F-25
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
21. Related-party Transactions:
Rents for related-party leases may be slightly higher than rents for non-
affiliated leases, and certain terms of the related-party leases are more
favorable to the landlord than those contained in leases with non-affiliates
(See Note 14).
Under the terms of a shared services agreement, Sears provided certain
services to the Company, including payroll and payable processing for Western,
among other services through the third quarter of fiscal year 1999. The Company
and Sears have entered into agreements that provide for the Western stores to
continue to purchase and carry certain Sears branded products during periods
defined in the agreements. The Company is also a first-call supplier of certain
automotive products to certain Sears Automotive Group stores.
In connection with the Western Merger, Sears arranged to buy from the
Company certain products in bulk for its automotive centers through January
1999. These amounts are included in net sales to Sears in the following table.
The following table presents the related party transactions with Sears for
fiscal 2000, 1999 and 1998 and as of December 30, 2000 and January 1, 2000:
Years Ended
----------------------------------
December 30, January 1, January 2,
2000 2000 1999
------------ ---------- ----------
Net sales to Sears...................... $7,487 $5,326 $2,124
Shared services revenue................. -- 2,286 697
Shared services expenses................ -- 887 844
Credit card fees expense................ 405 348 657
====== ====== ======
December 30, January 1,
2000 2000
------------ ----------
Receivables from Sears.................. $3,160 $6,625
Payable to Sears........................ 1,321 4,304
====== ======
22. Benefit Plans:
401(k) Plan
The Company maintains a defined contribution employee benefit plan, which
covers substantially all employees after one year of service. The plan allows
for employee salary deferrals, which are matched at the Company's discretion.
Company contributions were $5,245 in fiscal 2000, $4,756 in fiscal 1999, and
$2,634 in fiscal 1998.
The Company also maintains a profit sharing plan covering Western employees
that was frozen prior to the Western Merger on November 2, 1998 (Note 16). This
plan covered all full-time employees who had completed one year of service and
had attained the age of 21 on the first day of each month. All employees
covered under this plan were included in the Company's plan on January 1, 1999.
F-26
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
Deferred Compensation
The Company maintains an unfunded deferred compensation plan established for
certain key employees of Western prior to the Western Merger (Note 16). The
Company assumed the plan liability of $15,253 through the Western Merger. The
plan was frozen at the date of the Western Merger. As of December 30, 2000 and
January 1, 2000, $5,359 and $8,504, respectively was accrued related to the
plan.
Postretirement Plan
The Company provides certain health care and life insurance benefits for
eligible retired employees. Employees retiring from the Company with 20
consecutive years of service after age 40 are eligible for these benefits,
subject to deductibles, co-payment provisions and other limitations.
The estimated cost of retiree health and life insurance benefits is
recognized over the years that the employees render service as required by SFAS
No. 106, "Employers Accounting for Postretirement Benefits Other Than
Pensions." The initial accumulated liability, measured as of January 1, 1995,
the date the Company adopted SFAS No. 106, is being recognized over a 20-year
amortization period.
In connection with the Western Merger, the Company assumed Western's benefit
obligation under its postretirement health care plan. This plan was merged into
the Company's plan effective July 1, 1999.
The Company maintains the existing plan and the assumed plan covering
Western employees. Financial information related to the plans was determined by
the Company's independent actuaries as of December 30, 2000 and January 1,
2000. The following provides a reconciliation of the benefit obligation and the
funded status of the plan:
2000 1999
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of the year........... $ 22,095 $ 23,559
Service cost.......................................... 451 336
Interest cost......................................... 1,532 1,401
Benefits paid......................................... (2,826) (1,843)
Actuarial loss (gain)................................. 830 (1,358)
-------- --------
Benefit obligation at end of the year................. 22,082 22,095
Change in plan assets:
Fair value of plan assets at beginning of the year.... -- --
Employer contributions................................ 2,826 1,843
Benefits paid......................................... (2,826) (1,843)
-------- --------
Fair value of plan assets at end of year.............. -- --
Reconciliation of funded status:
Funded status......................................... (22,082) (22,095)
Unrecognized transition obligation.................... 810 868
Unrecognized actuarial loss (gain).................... 530 (300)
-------- --------
Accrued postretirement benefit cost..................... $(20,742) $(21,527)
======== ========
F-27
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
Net periodic postretirement benefit cost is as follows:
2000 1999 1998
------ ------ ----
Service cost............................................. $ 451 $ 336 $240
Interest cost............................................ 1,532 1,401 440
Amortization of the transition obligation................ 58 58 58
Amortization of recognized net losses.................... -- 43 60
------ ------ ----
$2,041 $1,838 $798
====== ====== ====
The postretirement benefit obligation was computed using an assumed discount
rate of 7.5% and 6.5% in 2000 and 1999, respectively. The health care cost
trend rate was assumed to be 9.0% for 2000, 8.5% for 2001, 8.0% for 2002, 7.5%
for 2003, 7.0% for 2004, 6.5% for 2005, and 5.0% to 6.0% for 2006 and
thereafter.
If the health care cost were increased 1% for all future years the
accumulated postretirement benefit obligation would have increased by $1,496 as
of December 30, 2000. The effect of this change on the combined service and
interest cost would have been an increase of $130 for 2000.
If the health care cost were decreased 1% for all future years the
accumulated postretirement benefit obligation would have decreased by $1,308 as
of December 30, 2000. The effect of this change on the combined service and
interest cost would have been a decrease of $113 for 2000.
The Company reserves the right to change or terminate the benefits at any
time. The Company also continues to evaluate ways in which it can better manage
these benefits and control costs. Any changes in the plan or revisions to
assumptions that affect the amount of expected future benefits may have a
significant impact on the amount of the reported obligation and annual expense.
23. Stock Options:
The Company maintains a senior executive stock option plan and an executive
stock option plan (the "Option Plans") for key employees of the Company. The
Option Plans provide for the granting of non-qualified stock options. All
options will terminate on the seventh anniversary of the grant date. Shares
authorized for grant under the senior executive and the executive stock option
plans are 1,650,000 and 1,240,000, respectively, at December 30, 2000.
Three different types of options are granted pursuant to the Option Plans.
Fixed Price Service Options vest over a three-year period in three equal
installments beginning on the first anniversary of the grant date. Performance
Options are earned in installments based upon satisfaction of certain
performance targets for the four-year period ending in fiscal 2001. Variable
Price Service Options vest in equal annual installments over a two-year period
beginning in 1999, and have an exercise price that increases over time.
As a result of the Recapitalization certain continuing stockholders received
stock options to purchase up to 500,000 shares of common stock. The stock
options are fully vested, nonforfeitable and provide for a $10 per share
exercise price, increasing $2.00 per share annually, through the expiration
date of April 2005. The Company retained a reputable firm with expertise in
valuing stock options to determine the fair value of these options as of April
15, 1998 (the "valuation date"). Based on their analysis, the fair value of the
options was approximately $300 in the aggregate. The value of the options as of
the valuation date has been reflected as additional consideration for the
shares of common stock repurchased in the Recapitalization.
F-28
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
Total option activity was as follows:
2000 1999 1998
------------------------- ------------------------ ------------------------
Weighted- Weighted- Weighted-
Number of Average Number of Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- --------- --------------
Fixed Price Service
Options
Outstanding at beginning
of year................ 296,655 $14.79 104,580 $10.00 -- $ --
Granted................. 1,335,500 19.80 230,000 16.82 104,580 10.00
Exercised............... -- -- -- -- -- --
Forfeited............... (22,500) 14.55 (37,925) 13.90 -- --
--------- ------ ------- ------ ------- ------
Outstanding at end of
year................... 1,609,655 $18.95 296,655 $14.79 104,580 $10.00
========= ====== ======= ====== ======= ======
Variable Price Service
Options
Outstanding at beginning
of year................ 329,235 $15.00 397,085 $15.00 -- $ --
Granted................. -- -- -- -- 397,085 15.00
Exercised............... -- -- -- -- -- --
Forfeited............... (32,500) 15.00 (67,850) 15.00 -- --
--------- ------ ------- ------ ------- ------
Outstanding at end of
year................... 296,735 $15.00 329,235 $15.00 397,085 $15.00
========= ====== ======= ====== ======= ======
Performance Options
Outstanding at beginning
of year................ 329,235 $10.00 397,085 $10.00 -- $ --
Granted................. -- -- -- -- 397,085 10.00
Exercised............... -- -- -- -- -- --
Forfeited............... (32,500) 10.00 (67,850) 10.00 -- --
--------- ------ ------- ------ ------- ------
Outstanding at end of
year................... 296,735 $10.00 329,235 $10.00 397,085 $10.00
========= ====== ======= ====== ======= ======
Other Options
Outstanding at beginning
of year................ 500,000 $12.00 500,000 $10.00 -- $ --
Granted................. -- -- -- -- 500,000 10.00
Exercised............... -- -- -- -- -- --
Forfeited............... -- -- -- -- -- --
--------- ------ ------- ------ ------- ------
Outstanding at end of
year................... 500,000 $14.00 500,000 $12.00 500,000 $10.00
========= ====== ======= ====== ======= ======
As of December 30, 2000, 118,270 of the Fixed Price Service Options, 148,368
of the variable options and 500,000 of the other options were exercisable. Only
the 500,000 of other options and 29,385 of the fixed options were exercisable
at January 1, 2000. The exercise price for the above options range from $10.00
per share to $16.82 per share. The remaining weighted-average contractual life
of all options, excluding 1,050,000 of the options granted in fiscal 2000, is
five years. The 1,050,000 options have a weighted-average contractual life of
six years and five months for which none of the options are exercisable as of
December 30, 2000.
F-29
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
The exercise price for each option grant during the fiscal years ended 1998
and 1999 equaled the fair market value of the underlying stock on the grant
date as determined by the board of directors. The weighted-average fair value
for the grants during fiscal 1998 and 1999 was $1.06 and $2.05, respectively.
During fiscal 2000, options were granted at an exercise price of $16.82, which
equaled the fair market value, and $20.00 and $25.00, which exceeded the fair
market value. The weighted-average fair value of options granted at $16.82 was
$1.44. The options granted at $20.00 and $25.00 had no fair value on the grant
date.
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company accounts for its employee stock options using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"). Under APB No. 25, compensation
cost for stock options is measured as the excess, if any, of the market price
of the Company's common stock at the measurement date over the exercise price.
Accordingly, the Company did not recognize compensation expense on the issuance
of its Fixed Price Service Options because the exercise price equaled the fair
market value of the underlying stock on the grant date. The fair market value
of the stock as of December 30, 2000 and January 1, 2000, as determined by the
Board of Directors, was $21.00 and $16.82, respectively. The excess of the fair
market value per share over the exercise price per share for the Performance
Options and Variable Price Service Options is recorded as outstanding stock
options and unamortized stock option compensation and is included in other
stockholders' equity. At December 30, 2000, outstanding stock options and
unamortized stock option compensation was $3,948 and $1,488, respectively. This
compensation is amortized to expense over the vesting periods. Compensation
expense related to these options of $729, $1,082 and $695 is included in
selling, general and administrative expenses in the accompanying consolidated
statements of operations for the fiscal year ended December 30, 2000, January
1, 2000 and January 2, 1999, respectively.
The following information is presented as if the Company elected to account
for compensation cost related to the stock options using the fair value method
as prescribed by SFAS No. 123:
2000 1999 1998
------- -------- -------
Net income (loss):
As reported....................................... $19,559 ($25,326) ($2,182)
Pro-forma......................................... 19,674 (24,842) (1,700)
======= ======== =======
For the above information, the fair value of each option granted in fiscal
2000 was estimated on the grant date using the Black-Scholes option-pricing
model with the following assumptions: (i) risk-free interest rate of 4.47% and
4.57%; (ii) weighted-average expected life of options of two and three years
and (iii) expected dividend yield of zero. As permitted by SFAS No. 123 for
companies with non-public equity securities, the Company used the assumption of
zero volatility in valuing their options.
For the above information, the fair value of each option granted in fiscal
1999 was estimated on the grant date using the Black-Scholes option-pricing
model with the following assumptions: (i) risk-free interest rate of 5.19% and
5.27%; (ii) weighted-average expected life of options of two and three years
and (iii) expected dividend yield of zero. As permitted by SFAS No. 123 for
companies with non-public equity securities, the Company used the assumption of
zero volatility in valuing their options.
For the above information, the fair value of each option granted in fiscal
1998 was estimated on the grant date using the Black-Scholes option-pricing
model with the following assumptions: (i) risk-free interest rate of 5.61%,
5.62% and 5.65%; (ii) weighted-average expected life of options of two, three
and four years and
F-30
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
(iii) expected dividend yield of zero. As permitted by SFAS No. 123 for
companies with non-public equity securities, the Company used the assumption of
zero volatility in valuing their options.
24. Fair Value of Financial Instruments:
The carrying amount of cash and cash equivalents, receivables, bank
overdrafts, accounts payable, borrowings secured by receivables and current
portion of long-term debt approximates fair value because of the short maturity
of those instruments. The carrying amount for variable rate long-term debt
approximates fair value for similar issues available to the Company. The fair
value of all fixed rate long-term debt was determined based on current market
prices, which approximated $163,473 and $222,640 at December 30, 2000 and
January 1, 2000, respectively.
25. Segment and Related Information:
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". This statement requires entities to
report financial and descriptive information related to segments within the
organization.
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" in the United States and "Western Auto" in
Puerto Rico and the Virgin Islands. Wholesale consists of the wholesale
operations, including distribution services to independent dealers, franchisees
and one Company-owned store in California all operating under the "Western
Auto" trade name. The California store location generates approximately 13% of
the total Wholesale segment revenues.
The financial information for fiscal 1999 and 1998 has been restated to
reflect the operating segments described above. 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
"Advance Auto Parts" retail locations and the Western segment consisted of the
"Western Auto" retail locations and wholesale operations described above. The
accounting policies of the reportable segments are the same as those of the
Company.
F-31
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
Advance
Holding Retail Wholesale(b) Eliminations Totals
------- ---------- ------------ ------------ ----------
2000
Net sales(a)............ $ -- $2,148,904 $139,118 $ -- $2,288,022
Gross profit............ -- 873,119 22,776 -- 895,895
Operating income........ -- 87,600 5,189 -- 92,789
Net interest (expense)
income................. (9,871) (49,976) (5,849) -- (65,696)
(Loss) income before
(benefit) provision for
income taxes and
extraordinary item(c).. (9,871) 37,345 (313) -- 27,161
Extraordinary item, gain
on debt extinguishment,
net of $1,759 income
taxes.................. -- 2,933 -- -- 2,933
Segment assets(c)....... 10,556 1,293,208 56,088 (3,492) 1,356,360
Depreciation and
amortization........... 66,513 313 -- 66,826
Capital expenditures.... -- 70,492 74 -- 70,566
1999(d)
Net sales(a)............ $ -- $1,999,002 $207,943 $ -- $2,206,945
Gross profit............ -- 784,147 18,685 -- 802,832
Operating income
(loss)................. -- 24,588 (4,353) -- 20,235
Net interest (expense)
income................. (8,717) (50,789) (2,654) -- (62,160)
Loss before benefit for
income taxes(c)........ (8,717) (26,200) (2,993) -- (37,910)
Segment assets(c)....... 13,036 1,250,654 94,298 (9,359) 1,348,629
Depreciation and
amortization........... -- 53,280 4,867 -- 58,147
Capital expenditures.... -- 96,989 8,028 -- 105,017
1998(d)
Net sales(a)............ $ -- $1,186,167 $ 34,592 $ -- $1,220,759
Gross profit............ -- 452,817 1,744 -- 454,561
Operating (loss)
income................. (564) 41,228 (8,818) (17) 31,829
Net interest (expense)
income................. (6,252) (28,310) 416 1,068 (33,078)
(Loss) income before
(benefit) provision for
income taxes(c)........ (6,825) 11,901 (8,402) 1,060 (2,266)
Segment assets(c)....... 6,749 1,150,592 110,924 (2,910) 1,265,355
Depreciation and
amortization........... -- 29,208 756 -- 29,964
Capital expenditures.... -- 64,131 1,659 -- 65,790
--------
(a) For fiscal years 2000, 1999, and 1998, total net sales include
approximately $356,000, $245,000 and $130,000, respectively, related to
revenues derived from commercial sales.
(b) 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.
Additionally, throughout fiscal 2000, the Company transferred certain
assets to the Retail segment related to the Western Auto retail operations
in Puerto Rico and the Virgin Islands.
(c) Excludes investment in and equity in net earnings or losses of
subsidiaries.
(d) Fiscal 1999 and 1998 results of operations do not reflect the allocation of
certain shared expenses to the Wholesale segment. During fiscal 2000,
Management adopted a method for allocating shared expenses.
F-32
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 30, 2000, January 1, 2000, and January 2, 1999
(Dollars in thousands, except per share data)
26. Quarterly Financial Data (Unaudited):
The following table summarizes quarterly financial data for fiscal years
2000 and 1999:
First Second Third Fourth
-------- -------- -------- --------
2000
Net sales............................... $677,582 $557,650 $552,138 $500,652
Gross profit............................ 258,975 216,533 223,903 196,484
Operating income........................ 19,184 32,249 30,111 11,245
Net (loss) income....................... (956) 10,381 12,440 (2,306)
Basic net (loss) income per common
share.................................. (0.03) 0.37 0.44 (0.08)
Diluted net (loss) income per common
share.................................. (0.03) 0.36 0.44 (0.08)
1999
Net sales............................... $670,453 $542,320 $522,846 $471,326
Gross profit............................ 226,361 196,526 199,637 180,308
Operating (loss) income................. (17,002) 14,096 14,860 8,281
Net (loss) income....................... (24,942) 2,067 191 (2,642)
Basic net (loss) income per common
share.................................. (0.88) 0.07 0.01 (0.09)
Diluted net (loss) income per common
share.................................. (0.88) 0.07 0.01 (0.09)
F-33
ADVANCE HOLDING CORPORATION
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
December 30, 2000 and January 1, 2000
Condensed Parent Company Balance Sheets
(dollars in thousands, except per share data)
December 30, January
2000 1, 2000
------------ ---------
ASSETS
------
Cash and cash equivalents.............................. $ 178 $ 467
Merchandise and other receivables...................... 214 203
Refundable income taxes................................ -- 5,252
Investment in subsidiary............................... 231,371 202,528
Deferred income taxes.................................. 8,185 4,911
Other assets........................................... 1,979 2,203
--------- ---------
Total assets....................................... $ 241,927 $ 215,564
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accrued expenses....................................... $ 838 $ 716
Long-term debt......................................... 84,215 74,362
Other long-term liabilities............................ -- 620
Intercompany liabilities............................... 603 5,912
--------- ---------
Total liabilities.................................. 85,656 81,610
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; 28,288,550 and
28,144,050 issued and outstanding................... 283 281
Common stock, Class B, nonvoting; $.01 par value,
21,875,000 shares authorized; no shares issued or
outstanding......................................... -- --
Additional paid-in capital........................... 372,169 369,399
Other................................................ 396 69
Accumulated deficit.................................. (216,577) (235,795)
--------- ---------
Total stockholders' equity......................... 156,271 133,954
--------- ---------
Total liabilities and stockholders' equity......... $ 241,927 $ 215,564
========= =========
The accompanying notes to condensed parent company financial statements
are an integral part of these balance sheets.
F-34
ADVANCE HOLDING CORPORATION
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
Condensed Parent Company Statements of Operations
(dollars in thousands, except per share data)
For the Years Ended
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Selling, general and administrative
expenses.............................. $ -- $ -- $ (564)
Interest expense....................... (10,121) (8,948) (7,436)
Interest income........................ 250 231 1,184
Other, net............................. -- -- (9)
Equity in earnings of subsidiaries..... 26,104 (19,565) 2,322
Income tax benefit..................... 3,326 2,956 2,321
----------- ----------- -----------
Net income (loss)...................... $ 19,559 $ (25,326) $ (2,182)
=========== =========== ===========
Net income (loss) per basic share...... $ 0.69 $ (0.90) $ (0.12)
Net income (loss) per diluted share.... $ 0.68 $ (0.90) $ (0.12)
=========== =========== ===========
Average common shares outstanding...... 28,295,873 28,269,431 18,606,048
Dilutive effect of stock options....... 314,995 -- --
----------- ----------- -----------
Average common shares outstanding--
assuming dilution..................... 28,610,868 28,269,431 18,606,048
=========== =========== ===========
The accompanying notes to condensed parent company financial statements
are an integral part of these balance sheets.
F-35
ADVANCE HOLDING CORPORATION
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
Condensed Parent Company Statements of Cash Flows (dollars in thousands)
For the Years Ended
---------------------------
2000 1999 1998
------- -------- --------
Cash flows from operating activities:
Net income (loss).............................. $19,559 $(25,326) $ (2,182)
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Amortization of deferred debt issuance costs... 224 248 179
Amortization of bond discount.................. 9,853 8,700 5,645
Benefit for deferred income taxes.............. (3,326) (2,994) (1,894)
Equity in earnings of subsidiary............... (26,104) 19,565 (2,322)
Net decrease (increase) in:
Other assets.................................. 5,225 (59) 3,647
Other liabilities............................. 40 1,154 (303)
------- -------- --------
Net cash provided by operating activities... 5,471 1,288 2,770
------- -------- --------
Cash flows from investing activities:
Change in net intercompany with subsidiaries... (5,309) (2,944) 49,799
Purchase of Advance Stores Class A Common
Stock......................................... (2,053) -- --
Distributions from subsidiaries................ -- -- 242,023
Capital contributions.......................... -- -- (10,259)
Purchase of stores common stock--Western
Merger........................................ -- -- (263,000)
------- -------- --------
Net cash (used in) provided by investing
activities................................. (7,362) (2,944) 18,563
------- -------- --------
Cash flows from financing activities:
Repayments of long-term debt................... -- -- 184,616
Borrowings under new credit facilities......... -- -- (218,725)
Payment of debt issuance costs................. -- (42) (2,587)
Proceeds from issuance of Class A Common
Stock......................................... 1,602 423 368,045
Redemption of preferred and common stock....... -- -- (351,000)
Payment of preferred dividend.................. -- -- (15)
------- -------- --------
Net cash provided by (used in) financing
activities................................. 1,602 381 (19,666)
------- -------- --------
Net (decrease) increase in cash and cash
equivalents..................................... (289) (1,275) 1,667
Cash and cash equivalents, beginning of year..... 467 1,742 75
------- -------- --------
Cash and cash equivalents, end of year........... $ 178 $ 467 $ 1,742
======= ======== ========
Supplemental cash flow information:
Interest paid.................................. $ -- $ -- $ 1,848
Income taxes paid, net of refunds received..... -- 939 2,272
Noncash transactions:
Net issuances of common stock under stockholder
subscription receivable plan.................. 538 1,316 --
Loans receivable related to issuance of common
stock......................................... 402 344 2,527
Appreciation of cancelled shares under
stockholder subscription receivable plan...... 341 -- --
Debt issuance and acquisition costs accrued at
January 1, 2000............................... -- -- 137
Stock options issued for redemption of stock... -- -- 300
Issuance of common stock--Western Merger....... -- -- 193,003
Equity method impact of outstanding stock
options....................................... (729) (1,082) (695)
The accompanying notes to condensed parent company financial statements
are an integral part of these balance sheets.
F-36
ADVANCE HOLDING CORPORATION
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
Notes to Condensed Parent Company Statements
December 30, 2000 and January 1, 2000
(dollars in thousands, except per share data)
1. Presentation
These condensed financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to those rules and
regulations, although management believes that the disclosures made are
adequate to make the information presented not misleading.
2. Organization
Advance Holding Corporation (the "Company") is a holding company which was
the 100% shareholder of Advance Stores Company, Incorporated ("Stores") and
certain other subsidiaries during the periods presented. During fiscal 1998,
the other subsidiaries of the Company were liquidated, leaving Stores as the
only operating subsidiary of the Company. The parent/subsidiary relationship
between the Company and its subsidiaries includes certain related party
transactions. These transactions consist primarily of interest on intercompany
advances, dividends, capital contributions and allocations of certain costs.
Deferred income taxes have not been provided for financial reporting and tax
basis differences on the undistributed earnings of the subsidiaries.
3. Recapitalization
On April 15, 1998, the Company consummated its recapitalization pursuant to
an Agreement and Plan of Merger dated March 4, 1998 (the "Merger Agreement").
In connection with the Merger, the Company's Board of Directors authorized a
12,500 to 1 split of the common stock and a change in the par value of the
common stock from $100 to $.01 per share. The effects of the 12,500 to 1 stock
split have been retroactively applied to all common share information for all
periods presented in these financial statements.
Pursuant to the Merger Agreement, AHC Corporation ("AHC"), a corporation
controlled by an investment fund organized by Freeman Spogli & Co. Incorporated
("FS&Co."), merged into the Company (the "Merger"), with the Company as the
surviving corporation. In the Merger, a portion of the common stock and all of
the preferred stock of the Company were converted into the right to receive in
the aggregate approximately $351,000 in cash and certain stock options (see
below). Certain shares representing approximately 14% of the outstanding Class
A common stock remained outstanding upon consummation of the Merger.
Immediately prior to the Merger, FS&Co. purchased approximately $80,500 of the
common stock of AHC which was converted in the Merger into approximately 64% of
the Company's outstanding common stock and Ripplewood Partners, L.P. and its
affiliates (Ripplewood) purchased approximately $20,000 of the common stock of
AHC which was converted in the Merger into approximately 16% of the Company's
outstanding common stock. In connection with the Merger, management purchased
approximately $8,000, or approximately 6%, of the Company's outstanding common
stock. The purchase of common stock by management resulted in stockholder
subscription receivables. The notes provide for annual interest payments, at
the prime rate, with the entire principal amount due in five years.
On April 15, 1998, the Company entered into a Credit Facility that provides
for (i) three senior secured term loan facilities in the aggregate amount of
$250,000 and (ii) a secured revolving credit facility of up to $125,000. At the
closing of the Merger, $125,000 was borrowed under one of the term loan
facilities. On April 15, 1998, the Company also issued $200,000 of senior
subordinated notes and approximately $112,000 of
F-37
ADVANCE HOLDING CORPORATION
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
Notes to Condensed Parent Company Statements
December 30, 2000 and January 1, 2000
(dollars in thousands, except per share data)
senior discount debentures (see Note 4). In connection with these transactions,
the Company extinguished a substantial portion of its existing notes payable
and long-term debt.
The merger, the retirement of debt, borrowings under the Credit Facility,
the issuance of the senior discount debentures and the issuance of the senior
subordinated notes collectively represent the "Recapitalization". The Company
has accounted for the Recapitalization for financial reporting purposes as the
sale of common stock, the issuance of debt, the redemption of common and
preferred stock and the repayment of notes payable and long-term debt.
The stock options received by the existing stockholders are for 500,000
shares of common stock. The stock options are fully vested, nonforfeitable and
provide for a $10 per share exercise price, increasing $2.00 per share
annually, through the expiration date of April 2005. The Company retained a
reputable firm with expertise in valuing stock options to determine the fair
value of these options as of April 15, 1998 (the valuation date). Based on
their analysis, the fair value of the options is approximately $300 in the
aggregate. The value of the options has been reflected as additional
consideration for the shares of common stock repurchased in the
Recapitalization.
Concurrent with the Recapitalization, the Company incurred $3,404 of costs
and expenses. Of these costs, $2,629 were capitalized as debt issuance costs
and $775 has been recorded as a reduction of proceeds from the sale of common
stock.
In connection with the Recapitalization, FS&Co. and an affiliate of
Ripplewood collectively received $5,000 in fees for negotiating the
Recapitalization, advisory and consulting services, arranging financing and
raising equity funding.
4. Long-term Debt
Long-term debt at December 30, 2000 consists of senior discount debentures
(the "Debentures") issued during fiscal 1998 in connection with the
Recapitalization. The Debentures were issued at a discount and accrue at a rate
of 12.875%, compounded semi-annually, to an aggregate principal amount of
$112,000 by April 15, 2003. Cash interest will not accrue on the Debentures
prior to April 15, 2003. Commencing April 15, 2003, cash interest on the
Debentures will accrue and be payable, at a rate of 12.875% per annum, semi-
annually in arrears on each April 15 and October 15. As of December 30, 2000
and January 1, 2000, the Debentures have been accreted by $24,198 and $14,345
with corresponding interest expense of $9,853, $8,700 and $5,645 recognized for
the years ended December 30, 2000, January 1, 2000 and January 2, 1999,
respectively.
The Debentures are redeemable at the option of the Company, in whole or in
part, at any time on or after April 15, 2003. In addition, at any time prior to
April 15, 2001 the Company may, at its option, redeem up to 35% of the
aggregate principal amount at maturity of the Debentures originally issued at a
redemption price equal to 112.875% of the accreted value thereof, plus
liquidated damages, if any, with the net cash proceeds of one or more equity
offerings; provided that at least 65% of the original aggregate principal
amount at maturity of the Debentures will remain outstanding immediately
following each such redemption.
Upon the occurrence of a change of control (as defined), each holder of the
Debentures will have the right to require the Company to purchase the
Debentures at a price in cash equal to 101% of the accreted value thereof plus
liquidated damages, if any, thereon in the case of any such purchase prior to
April 15, 2003, or
F-38
ADVANCE HOLDING CORPORATION
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
Notes to Condensed Parent Company Statements
December 30, 2000 and January 1, 2000
(dollars in thousands, except per share data)
101% of the aggregate principal amount thereof, plus accrued and unpaid
interest and liquidated damages, if any, thereon to the date of purchase in the
case of any such purchase on or after April 15, 2003. The Company may not have
any significant assets other than capital stock of the Stores (which is pledged
to secure the Company's obligations under the Credit Facility). As a result,
the Company's ability to purchase all or any part of the Debentures will be
dependent upon the receipt of dividends or other distributions from Stores or
its subsidiaries. The Credit Facility and the Senior Subordinated Notes have
certain restrictions for Stores with respect to paying dividends and making any
other distributions.
The Debentures are subordinated to all of the Company's other liabilities.
The Debentures contain certain non-financial restrictive covenants that are
similar to the covenants contained in the notes. Substantially all of the net
assets of the Company's subsidiaries are restricted at December 30, 2000.
5. See Notes to Consolidated Financial Statements for Additional Disclosures
F-39
ADVANCE HOLDING CORPORATION
AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
Balance at Balance at
Beginning Charges to End of
of Period Expenses Deductions Other Period
---------- ---------- ---------- ------- ----------
Allowance for doubtful
accounts receivable:
January 2, 1999....... $ 575 $1,193 $ (582)(2) $ 2,594(1) $ 3,780
January 1, 2000....... 3,780 3,901 (754)(2) -- 6,927
December 30, 2000..... 6,927 2,152 (4,058)(2) -- 5,021
--------
(1) Allowance for doubtful accounts receivable assumed in the Western Merger.
(2) Accounts written off during the period.
Restructuring reserves:
January 2, 1999....... $ -- $6,774 $ (2,026)(2) $33,015(1) $37,763
January 1, 2000....... 37,763 58 (18,165)(2) 1,660(1) 21,316
December 30, 2000..... 21,316 1,673 (11,143)(2) (1,261)(3) 10,585
--------
(1) Restructuring reserves assumed and established in the Western Merger.
(2) Represents amounts paid for restructuring charges.
(3) Reductions to reserves assumed and established in the Western Merger that
exceeded the ultimate cost expended by the Company.
F-40
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 14, 2001 and December 30, 2000
(dollars in thousands, except per share data)
July 14, December 30,
2001 2000
ASSETS ----------- ------------
(unaudited)
Current assets:
Cash and cash equivalents............................. $ 19,620 $ 18,009
Receivables, net...................................... 90,401 80,578
Inventories........................................... 788,773 788,914
Other current assets.................................. 18,878 10,274
---------- ----------
Total current assets.............................. 917,672 897,775
Property and equipment, net of accumulated
depreciation of $210,776 and $191,897................ 400,973 410,960
Assets held for sale.................................. 23,640 25,077
Other assets, net..................................... 22,029 22,548
---------- ----------
$1,364,314 $1,356,360
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdrafts....................................... $ -- $ 13,599
Current portion of long-term debt..................... -- 9,985
Accounts payable...................................... 401,039 387,852
Accrued expenses...................................... 138,839 124,962
Other current liabilities............................. 50,770 42,794
---------- ----------
Total current liabilities......................... 590,648 579,192
---------- ----------
Long-term debt........................................ 554,819 576,964
---------- ----------
Other long-term liabilities........................... 39,488 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; 28,321,150 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............................ 372,970 372,169
Other................................................. 1,396 396
Accumulated deficit................................... (195,290) (216,577)
---------- ----------
Total stockholders' equity........................ 179,359 156,271
---------- ----------
$1,364,314 $1,356,360
========== ==========
The accompanying notes to the condensed consolidated financial statements
are an integral part of these balance sheets.
F-41
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Twenty-eight Week Periods Ended July 14, 2001 and July 15, 2000
(Dollars in thousands, except per share data)
(Unaudited)
Twenty-eight Week
Periods Ended
----------------------
July 14, July 15,
2001 2000
---------- ----------
Net sales.............................................. $1,336,837 $1,235,232
Cost of sales, including purchasing and warehousing
costs............................................... 796,557 759,724
---------- ----------
Gross profit......................................... 540,280 475,508
Selling, general and administrative expenses......... 472,361 424,075
---------- ----------
Operating income..................................... 67,919 51,433
---------- ----------
Other (expense) income:
Interest expense..................................... (33,074) (36,601)
Other................................................ 569 532
---------- ----------
Total other expense, net........................... (32,505) (36,069)
---------- ----------
Income before provision for income taxes............... 35,414 15,364
Provision for income taxes............................. (14,010) (5,939)
---------- ----------
Net income............................................. $ 21,404 $ 9,425
========== ==========
Net income per basic share............................. $ 0.76 $ 0.33
========== ==========
Net income per diluted share........................... $ 0.74 $ 0.33
========== ==========
Average common shares outstanding...................... 28,284,636 28,295,150
Dilutive effect of stock options....................... 475,424 214,727
---------- ----------
Average common shares outstanding--assuming dilution... 28,760,060 28,509,877
========== ==========
The accompanying notes to the condensed consolidated financial statements are
an integral part of these statements.
F-42
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000
(Dollars in thousands)
(Unaudited)
Twenty-Eight Week
Periods Ended
--------------------
July 14, July 15,
2001 2000
--------- ---------
Cash flows from operating activities:
Net income.............................................. $ 21,404 $ 9,425
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 37,069 34,402
Amortization of stock option compensation.............. 1,342 600
Amortization of deferred debt issuance costs........... 1,717 1,750
Amortization of bond discount.......................... 5,855 5,173
Amortization of interest on capital lease obligation... ---- 42
Losses on sales of property and equipment, net......... 806 215
Impairment of assets held for sale..................... 1,600 --
Provision for deferred income taxes.................... 8,422 5,452
Net (increase) decrease in:
Receivables, net....................................... (8,915) 1,706
Inventories............................................ 17,351 (17,551)
Other assets........................................... (8,952) (6,298)
Net increase (decrease) in:
Accounts payable....................................... 13,187 33,285
Accrued expenses....................................... 17,172 (17,308)
Other liabilities...................................... (5,442) 2,411
--------- ---------
Net cash provided by operating activities............ 102,616 53,304
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment..................... (31,048) (28,031)
Acquisition, net of cash acquired....................... (21,472) --
Proceeds from sales of property and equipment........... 1,381 2,531
--------- ---------
Net cash used in investing activities.................. (51,139) (25,500)
--------- ---------
Cash flows from financing activities:
Decrease in bank overdrafts............................. (13,599) (2,885)
(Payment) borrowing of note payable..................... (784) 2,313
Borrowings under credit facilities...................... 171,400 191,200
Payments on credit facilities........................... (208,601) (233,200)
(Repurchases of) proceeds from Class A common stock
under the stockholder subscription plan................ (790) 2,650
Other................................................... 2,508 6,139
--------- ---------
Net cash used in financing activities.................. (49,866) (33,783)
--------- ---------
Net increase (decrease) in cash and cash equivalents.... 1,611 (5,979)
Cash and cash equivalents, beginning of period.......... 18,009 22,577
--------- ---------
Cash and cash equivalents, end of period................ $ 19,620 $ 16,598
========= =========
Supplemental cash flow information:
Interest paid.......................................... $ 23,271 $ 28,040
Income taxes paid, net of refunds received............. 1,241 321
Non-cash transactions:
Accrued purchases of property and equipment............ 4,717 2,460
Equity transactions under the stockholder subscription
and employee stock option plans....................... 864 703
Conversion of capital lease obligation................. -- 3,509
========= =========
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
F-43
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 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 July 14, 2001, the condensed
consolidated statements of operations for the twenty-eight week periods ended
July 14, 2001 and July 15, 2000 and the condensed consolidated statements of
cash flows for the twenty-eight week periods ended July 14, 2001 and July 15,
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 twenty-eight 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 the first quarter of fiscal 2001. The implementation had no impact on
the Company's financial position or the results of its operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets". SFAS No. 141 addresses accounting
and reporting for all business combinations and requires the use of the
purchase method for business combinations. SFAS No. 141 also requires
recognition of intangible assets apart from goodwill if they meet certain
criteria. SFAS No. 142 establishes accounting and reporting standards for
acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and
F-44
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000
(Dollars in thousands)
intangibles with indefinite useful lives are no longer amortized but are
instead subject to at least an annual assessment for impairment by applying a
fair-value based test. SFAS No. 141 applies to all business combinations
initiated after June 30, 2001. SFAS No. 142 is effective for existing goodwill
and intangible assets beginning on December 31, 2001. SFAS No. 142 is effective
immediately for goodwill and intangibles acquired after June 30, 2001. Although
the Company is currently evaluating the impact of SFAS Nos. 141 and 142,
management does not expect that the adoption of these statements will have a
material impact on existing goodwill or intangibles. For the twenty-eight week
period ended July 14, 2001, the Company had amortization expense of
approximately $150 related to existing goodwill. Such amortization will be
eliminated upon adoption of SFAS No. 142.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 establishes accounting standards for
recognition and measurement of an asset retirement obligation and an associated
asset retirement cost and is effective for fiscal years beginning after June
15, 2002. The Company does not expect SFAS No. 143 to have a material impact on
its financial statements.
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.
Per Share Information
The Company presents basic and diluted income per share in accordance with
the Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Basic income per share is computed as net income divided by the weighted-
average number of common shares outstanding for the period. Diluted income
per share reflects the potential dilution that could occur from common shares
issuable through stock-based compensation including stock options.
Reclassifications
Certain 2000 amounts have been reclassified to conform with their 2001
presentation.
F-45
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000
(Dollars in thousands)
2. Accounts Receivable:
Receivables consist of the following:
July 14, December 30,
2001 2000
-------- ------------
(unaudited)
Trade:
Wholesale............................................. $12,253 $12,202
Retail................................................ 18,174 15,666
Vendor................................................ 46,141 36,260
Installment........................................... 14,897 14,197
Related parties....................................... 785 3,540
Employees............................................. 901 607
Other................................................. 2,841 3,127
------- -------
Total receivables..................................... 95,992 85,599
Less--Allowance for doubtful accounts................. (5,591) (5,021)
------- -------
Receivables, net...................................... $90,401 $80,578
======= =======
3. Inventories:
Inventories are stated at the lower of cost or market using the last-in,
first-out (LIFO) method. An actual valuation of inventory under the LIFO method
can be made only at the end of each fiscal year based on the inventory levels
and costs at that time. Accordingly, interim LIFO calculations must be based on
management's estimates of expected fiscal year-end inventory levels and costs.
The Company capitalizes certain purchasing and warehousing costs into
inventory. Purchasing and warehousing costs included in inventory at July 14,
2001 and December 30, 2000 were $56,561 and $56,305, respectively. Inventories
consist of the following:
July 14, December 30,
2001 2000
----------- ------------
(unaudited)
Inventories at FIFO................................. $776,704 $779,376
Adjustments to state inventories at LIFO............ 12,069 9,538
-------- --------
Inventories at LIFO................................. $788,773 $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"). Additionally, the Company assumed a
portion of the pre-acquisition reserves related to the restructuring activities
of the recently acquired Carport Auto Parts, Inc. (the "Carport Acquisition")
(See Note 5). Expenses associated with restructuring are included in selling,
general and administrative expenses in the accompanying condensed consolidated
statements of operations. During the first and second quarters of fiscal 2001,
the Company closed two stores included in the fiscal 2000 restructuring
activities and made the decision to close or relocate 24 additional stores not
meeting profitability objectives, of which 18 had been closed or relocated as
of July 14, 2001. As of July 14, 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.
F-46
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000
(Dollars in thousands)
A reconciliation of activity with respect to these restructuring accruals is
as follows:
Other Exit
Costs
-----------
(unaudited)
Balance, December 30, 2000..................................... $6,788
New provisions................................................. 3,275
Change in estimates............................................ 179
Reserves utilized.............................................. (2,469)
------
Balance, July 14, 2001......................................... $7,773
======
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. Additionally, the Carport
Acquisition resulted in restructuring reserves for closing 21 acquired stores
not expected to meet long-term profitability objectives and the termination of
certain administrative employees of the acquired company. As of July 14, 2001,
the other exit costs represent 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
Severance Costs
--------- ----------
(unaudited)
Balance, December 30, 2000.............................. $ -- $ 3,797
Purchase accounting adjustments......................... 837 1,715
Reserves utilized....................................... (705) (1,015)
----- -------
Balance, July 14, 2001.................................. $ 132 $ 4,497
===== =======
5. Carport Acquisition:
On April 23, 2001, the Company completed its acquisition of Carport Auto
Parts, Inc. ("Carport"). The acquisition included a net 30 retail stores
located in Alabama and Mississippi, and substantially all of the assets used in
Carport's operations. The acquisition has been accounted for under the purchase
method of accounting and, accordingly, Carport's results of operations have
been included in the Company's statement of operations since the acquisition
date.
The purchase price of $21,533, has been allocated to the assets acquired and
the liabilities assumed based on their fair values at the date of acquisition.
This allocation resulted in the recognition of $3,239 in goodwill.
6. 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 a facility included in assets
held for sale to $6,000. The facility, which is held in the Wholesale segment,
consists of excess space not required for the Company's current needs.
F-47
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000
(Dollars in thousands)
7. 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 twenty-eight week periods ended July 14, 2001 and July 15,
2000 and the condensed consolidated balance sheets as of July 14, 2001 and
December 30, 2000:
Twenty-Eight Week
Periods Ended
-----------------------
July 14, July 15,
2001 2000
----------- -----------
(unaudited) (unaudited)
Net sales to Sears................................... $3,879 $3,976
Credit card fees expense............................. 194 228
Receivables from Sears............................... 702 3,160
Payables to Sears.................................... 1,220 1,321
8. 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 names "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.
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 twenty-eight
weeks ended July 15, 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.
Twenty-Eight Week Period Ended
-----------------------------------------------------
Advance
July 14, 2001 Holding Retail Wholesale Eliminations Totals
------------- ------- ---------- --------- ------------ ----------
(unaudited)
Net sales............... $ -- $1,275,582 $61,255 $ -- $1,336,837
(Loss) income before
benefit (provision) for
income taxes........... (5,908) 43,230 (1,908) -- 35,414
Segment assets(a)....... 12,670 1,325,165 43,696 (17,217) 1,364,314
Twenty-Eight Week Period Ended
-----------------------------------------------------
Advance
July 15, 2000 Holding Retail Wholesale Eliminations Totals
------------- ------- ---------- --------- ------------ ----------
(unaudited)
Net sales............... $ -- $1,160,310 $74,922 $ -- $1,235,232
(Loss) income before
benefit (provision) for
income taxes........... (5,149) 23,591 (3,078) -- 15,364
Segment assets(a)....... 15,648 1,294,571 64,112 (24,018) 1,350,313
--------
(a) Excludes investment in and equity in net earnings or losses of
subsidiaries.
F-48
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000
(Dollars in thousands)
9. 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 existing as of the
merger date and fully indemnified by Sears, have been settled. Accordingly, the
Company reversed a $2,500 receivable due from Sears and reduced the
corresponding environmental liability.
10. Subsequent Events:
On August 7, 2001, the Company signed a definitive agreement to acquire
Discount Auto Parts, Inc. ("Discount") in a merger transaction. Discount
shareholders will receive $7.50 per share in cash plus 0.2577 shares of common
stock in the combined company for each share of Discount common stock.
Accordingly, upon consummation of the merger, Discount shareholders will own
approximately 13% of the total shares outstanding of the combined company. The
Company will file a registration statement covering the shares issued to
Discount shareholders, and, through this offering, become a public company
renamed Advance Auto Parts, Inc. Discount operates approximately 667 retail
auto parts stores in Florida, Georgia, South Carolina, Alabama, Louisiana and
Mississippi. The merger, subject to certain regulatory filings and approvals,
will be accounted for under the purchase method of accounting in accordance
with SFAS No. 141, "Business Combinations."
On July 27, 2001, the Company made the decision to close a duplicative
distribution facility located in Jeffersonville, Ohio. This 382,000 square foot
owned facility opened in 1996 and served stores operating in the retail segment
throughout the Mid-west portion of the United States. The Company has operated
two distribution facilities in overlapping markets since the Western Merger, in
which the Company assumed the operation of a Western distribution facility in
Ohio. The decision to close this facility allows the Company to utilize the
operating resource requirements more productively in other areas of the
business. The Company does not anticipate closure of this facility and the
severing of certain of its employees to materially impact its financial
position or future results of operations.
F-49
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Discount Auto Parts, Inc.
We have audited the accompanying consolidated balance sheets of Discount
Auto Parts, Inc. as of May 29, 2001 and May 30, 2000, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended May 29, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Discount Auto
Parts, Inc. at May 29, 2001 and May 30, 2000 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended May 29, 2001, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 2 to the financial statements, during fiscal 1999 the
Company changed its method of accounting for inventories.
/s/ Ernst & Young LLP
Tampa, Florida
June 29, 2001
F-50
DISCOUNT AUTO PARTS, INC.
CONSOLIDATED BALANCE SHEETS
May 30 May 29
2000 2001
--------- ---------
(In thousands)
ASSETS
------
Current assets:
Cash................................................... $ 12,612 $ 9,669
Inventories............................................ 253,113 242,718
Prepaid expenses and other current assets.............. 13,986 14,391
Deferred income taxes.................................. 469 --
--------- ---------
Total current assets................................. 280,180 266,778
Property and equipment................................... 524,053 507,255
Less allowances for depreciation and amortization........ (104,771) (122,742)
--------- ---------
419,282 384,513
Other assets............................................. 5,247 4,638
--------- ---------
Total assets......................................... $ 704,709 $ 655,929
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Trade accounts payable................................. $ 100,804 $ 96,442
Accrued salaries, wages and benefits................... 8,804 8,649
Other current liabilities.............................. 14,403 16,637
Current maturities of long-term debt................... 2,400 1,200
--------- ---------
Total current liabilities............................ 126,411 122,928
Deferred gain on sale/leaseback.......................... -- 5,966
Deferred income taxes.................................... 10,494 13,273
Long-term debt........................................... 264,600 192,900
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized, none issued or outstanding................ -- --
Common Stock, $.01 par value, 50,000 shares authorized,
16,700 and 16,708 shares issued and outstanding at May
30, 2000 and May 29, 2001, respectively............... 167 167
Additional paid-in capital............................. 142,379 142,429
Retained earnings...................................... 160,658 178,266
--------- ---------
Total stockholders' equity........................... 303,204 320,862
--------- ---------
Total liabilities and stockholders' equity........... $ 704,709 $ 655,929
========= =========
See accompanying notes.
F-51
DISCOUNT AUTO PARTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Fiscal Year Ended
----------------------------
June 1 May 30 May 29
1999 2000 2001
-------- -------- --------
Net sales....................................... $511,483 $598,258 $661,717
Cost of sales, including distribution costs..... 302,843 356,783 404,199
-------- -------- --------
Gross profit................................ 208,640 241,475 257,518
Selling, general and administrative expenses.... 152,777 184,371 215,353
-------- -------- --------
Income from operations.......................... 55,863 57,104 42,165
Other income, net............................... 817 2,770 6,957
Interest expense................................ (12,856) (18,079) (21,634)
-------- -------- --------
Income before income taxes and cumulative effect
of change in accounting principle.............. 43,824 41,795 27,488
Income taxes.................................... 16,766 15,506 9,880
-------- -------- --------
Income before cumulative effect of change in
accounting principle........................... 27,058 26,289 17,608
Cumulative effect of change in accounting
principle, net of income tax benefit........... (8,245) -- --
-------- -------- --------
Net income.................................. $ 18,813 $ 26,289 $ 17,608
======== ======== ========
Net income per basic share from:
Income before cumulative effect of change in
accounting principle......................... $ 1.63 $ 1.57 $ 1.05
Cumulative effect of change in accounting
principle.................................... (0.50) -- --
-------- -------- --------
Net income.................................. $ 1.13 $ 1.57 $ 1.05
======== ======== ========
Net income per diluted share from:
Income before cumulative effect of change in
accounting principle......................... $ 1.61 $ 1.57 $ 1.05
Cumulative effect of change in accounting
principle.................................... (0.49) -- --
-------- -------- --------
Net income.................................. $ 1.12 $ 1.57 $ 1.05
======== ======== ========
Average common shares outstanding............... 16,650 16,695 16,703
Dilutive effect of stock options................ 153 30 4
-------- -------- --------
Average common shares outstanding-assuming
dilution................................... 16,803 16,725 16,707
======== ======== ========
See accompanying notes.
F-52
DISCOUNT AUTO PARTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional
Preferred ------------- Paid-In Retained
Stock Shares Amount Capital Earnings Total
--------- ------ ------ ---------- -------- --------
Balance at June 2, 1998... -- 16,630 $166 $141,163 $115,556 $256,885
Stock issued under stock
purchase and stock
option plans........... -- 60 1 1,067 -- 1,068
Net income.............. -- -- -- -- 18,813 18,813
--- ------ ---- -------- -------- --------
Balance at June 1, 1999... -- 16,690 167 142,230 134,369 276,766
Stock issued under stock
purchase and stock
option plans........... -- 10 -- 149 -- 149
Net income.............. -- -- -- -- 26,289 26,289
--- ------ ---- -------- -------- --------
Balance at May 30, 2000... -- 16,700 167 142,379 160,658 303,204
Stock issued under stock
purchase and stock
option plans........... -- 8 -- 50 -- 50
Net income.............. -- -- -- -- 17,608 17,608
--- ------ ---- -------- -------- --------
Balance at May 29, 2001... -- 16,708 $167 $142,429 $178,266 $320,862
=== ====== ==== ======== ======== ========
See accompanying notes.
F-53
DISCOUNT AUTO PARTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
-----------------------------
June 1 May 30 May 29
1999 2000 2001
-------- -------- ---------
(In thousands)
Operating activities
Net income..................................... $ 18,813 $ 26,289 $ 17,608
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 18,555 22,441 23,498
Cumulative effect of change in accounting
principle................................... 8,245 -- --
Deferred income tax (benefit) expense........ (1,489) 5,344 5,262
Gain on disposals of property and equipment.. (594) (2,565) (89)
Changes in operating assets and liabilities:
(Increase) decrease in inventories......... (37,840) (44,085) 10,395
(Increase) decrease in prepaid expenses and
other current assets...................... (2,706) 6,377 (405)
Increase in other assets................... (112) (534) (47)
Increase (decrease) in trade accounts
payable................................... 20,784 12,937 (4,362)
Increase (decrease) in accrued salaries,
wages and benefits........................ 691 796 (155)
Decrease (increase) in other current
liabilities............................... (504) 1,021 220
-------- -------- ---------
Net cash provided by operating
activities.............................. 23,843 28,021 51,925
Investing activities
Net proceeds from sales of property and
equipment..................................... 3,904 5,104 1,304
Purchases of property and equipment............ (80,964) (69,257) (43,053)
Business acquisition........................... (8,225) -- --
Net proceeds from sales/leaseback.............. -- -- 59,731
-------- -------- ---------
Net cash (used in) provided by investing
activities.............................. (85,285) (64,153) 17,982
Financing activities
Proceeds from short-term borrowings and long-
term debt..................................... 105,359 92,344 92,829
Payments of short-term borrowings and long-term
debt.......................................... (41,254) (52,544) (165,729)
Proceeds from issuances of common stock........ 1,068 149 50
-------- -------- ---------
Net cash provided by (used in) financing
activities.............................. 65,173 39,949 (72,850)
Net increase (decrease) in cash................ 3,731 3,817 (2,943)
Cash at beginning of year...................... 5,064 8,795 12,612
-------- -------- ---------
Cash at end of year...................... $ 8,795 $ 12,612 $ 9,669
======== ======== =========
See accompanying notes.
F-54
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business
Discount Auto Parts, Inc. is one of the Southeast's leading specialty
retailers and suppliers of automotive replacement parts, maintenance items and
accessories to both do-it-yourself ("DIY") consumers and professional mechanics
and service technicians. As of June 1, 1999, May 30, 2000, and May 29, 2001,
the Company operated a chain of 558, 643, and 666 stores, respectively. As of
May 29, 2001, 438 of the stores were located in Florida, 114 were located in
Georgia, 46 in Louisiana, 42 in Mississippi, 19 in Alabama, and 7 in South
Carolina.
Fiscal Year End
The Company's fiscal year consists of 52 or 53 weeks ending on the Tuesday
closest to May 31. The years ended June 1, 1999, May 30, 2000, and May 29, 2001
all consisted of 52 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of Discount Auto
Parts, Inc. and its subsidiaries (the "Company" or "Discount"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue upon delivery of products for commercial
sales and upon sale to the customer for retail sales.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets principally include amounts due
from vendors related to cooperative advertising and various incentive programs
and trade accounts receivable resulting from the Company's commercial delivery
program.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided using
accelerated and straight-line methods over periods that approximate the assets'
estimated useful lives. Maintenance and repairs are charged against operations
as incurred.
Pre-Opening Costs
Costs associated with the opening of new stores, which primarily consist of
payroll and occupancy costs, are charged against operations as incurred.
Advertising Costs
The Company expenses its share of all advertising costs as such costs are
incurred. The portion of advertising expenditures, which is to be recovered
through vendor cooperative advertising and other similar programs, is recorded
as receivables. Advertising expense, net of vendor rebates, was approximately
$4.0 million for fiscal 1999, $1.9 million for fiscal 2000, and $2.9 million
for fiscal 2001.
F-55
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities.
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options and presents
disclosures required under Statement of Financial Accounting Standards
Statement No. 123, Accounting for Stock-Based Compensation. Under APB 25,
because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Fair Values of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and long-term debt. The carrying value of cash, accounts
receivable and accounts payable approximates fair market values. The carrying
amount of long-term debt approximates fair market value based on current
interest rates.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 (Statement 133), Accounting for Derivative Instruments and Hedging
Activities. The Company expects to adopt Statement 133 effective the beginning
of fiscal year 2002. The Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Because the Company is not
party to any derivative instruments at May 29, 2001, the adoption of this
Statement will not have any effect on its results of operations or financial
position.
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Standards ("SFAS") No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 141 establishes accounting and
reporting standards for business combinations and eliminates the pooling-of-
interests method of accounting for combinations for those combinations
initiated after July 1, 2001. SFAS No. 141 also includes new criteria to
recognize intangible assets separately from goodwill. SFAS No. 142 establishes
the accounting and reporting standards for goodwill and intangible lives.
Goodwill and intangibles with indefinite lives will no longer be amortized,
but, alternatively, will be reviewed periodically for indicators of impairment.
Separate intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The Company does not
anticipate that the adoption of SFAS No. 141 and SFAS No. 142 will have a
significant effect on its results of operations or financial position.
2. Accounting Change
During the fourth quarter of fiscal year 1999, the Company changed its
method of accounting for store inventories from the first-in, first-out retail
inventory method to the weighted average cost method. The new
F-56
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
method for computing inventory is preferable because it more accurately
measures the cost of the Company's merchandise and produces a better matching
of revenues and expenses.
The effect of the change as of June 3, 1998 has been presented as a
cumulative effect of a change in accounting method, net of a $5,190,000 income
tax benefit, of $8,245,000, and has been recorded as of the beginning of fiscal
year 1999. The effect of this change in fiscal year 1999 was to decrease income
before cumulative effect of change in accounting principle by $805,000 ($.05
per diluted share).
3. Property and Equipment
Property and equipment consists of the following (dollars in thousands):
May 30, May 29, Life
2000 2001 (Years)
-------- -------- ------
Land............................................. $197,489 $178,660
Buildings........................................ 182,982 169,136 5-31.5
Furniture, fixtures and equipment................ 121,698 133,064 5-7
Building and leasehold improvements.............. 4,470 4,628 5-31.5
Automotive equipment............................. 4,907 4,911 3-7
Construction in progress......................... 12,507 16,856
-------- --------
$524,053 $507,255
======== ========
Depreciation expense totaled approximately $18,415,000, $22,013,000, and
$23,032,000 for fiscal years 1999, 2000 and 2001, respectively.
4. Long-Term Debt
Long-term debt consists of the following (in thousands):
May 30, May 29,
2000 2001
-------- --------
Revolving credit agreements............................ $211,000 $140,500
Senior term notes...................................... 50,000 50,000
Senior secured notes................................... 6,000 3,600
-------- --------
267,000 194,100
Less current maturities................................ (2,400) (1,200)
-------- --------
$264,600 $192,900
======== ========
Effective July 29, 1999, the Company entered into a five year $265 million
unsecured revolving credit agreement (the "Revolver"). The rate of interest
payable under the Revolver is a function of LIBOR or the prime rate of the lead
agent bank, at the option of the Company. During the term of the Revolver, the
Company is also obligated to pay a fee, which fluctuates based on the Company's
debt-to-capitalization ratio, for the unused portion of the Revolver.
Effective August 8, 1997, the Company issued a $50 million senior term notes
facility (the "Notes"). The Notes provide for interest at a fixed rate of
7.46%, payable semi-annually, with semi-annual principal payments of $7.1
million, beginning July 15, 2004.
At May 30, 2000 and May 29, 2001, the Company's weighted average interest
rate on its borrowings under the revolving credit agreement was 7.3% and 7.1%,
respectively.
F-57
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of May 29, 2001, the Company had approximately $124.5 million of
available borrowings.
The Company issued two senior secured notes, each for an original principal
of $12 million, to an insurance company. The notes were collateralized by a
first mortgage on certain store properties, equipment and fixtures. During
fiscal 2001, the Company retired one of the two senior secured notes. The
remaining agreement provides for interest at a fixed rate of 9.8%, payable
quarterly, with annual principal payments of $1.2 million due on May 31.
The carrying value of all assets mortgaged or otherwise subject to lien
totaled approximately $8.2 million at May 29, 2001.
The Company's debt agreements contain various restrictions, including the
maintenance of certain financial ratios and restrictions on dividends, with
which the Company is in compliance. Based on the terms of the debt agreements,
as of May 29, 2001, $42.7 million of the retained earnings were available for
dividend distribution.
Annual maturities, as of May 29, 2001, of all long-term debt for the next
five years are as follows (in thousands):
Amount
-------
2002............................................................. $ 1,200
2003............................................................. 1,200
2004............................................................. 1,200
2005............................................................. 14,286
2006............................................................. 14,286
The table excludes amounts due under the Revolver in 2005 as it is expected
to be renewed or replaced prior to its expiration.
Total interest paid during fiscal years 1999, 2000 and 2001was approximately
$13,843,000, $19,242,000, and $22,088,000, respectively. Capitalized interest
for fiscal years 1999, 2000 and 2001 totaled approximately $668,000, $684,000,
and $319,000, respectively.
5. Stockholders' Equity
The Board of Directors is authorized, without further stockholder action, to
divide any or all shares of the authorized preferred stock into series and to
fix and determine the designation, preferences and relative participating,
option or other special rights, and qualifications, limitations, or
restrictions thereon, of any series so established, including voting powers,
dividend rights, liquidation preferences, redemption rights and conversion
privileges. As of May 29, 2001, the Board had not authorized any series of
preferred stock and there are no plans, agreements or understandings for the
authorization or issuance of any shares of preferred stock.
6. Leases
Certain of the Company's retail stores and equipment are leased under
noncancelable operating leases. The majority of the retail store leases include
options to purchase and provisions for rental increases based on the consumer
price index.
F-58
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum annual rental commitments under noncancelable operating
leases with initial or remaining terms of one year or more are as follows (in
thousands):
Amount
--------
2002............................................................ $ 13,289
2003............................................................ 11,749
2004............................................................ 10,605
2005............................................................ 9,677
2006 and thereafter............................................. 128,767
--------
$174,087
========
Rental expense for fiscal years 1999, 2000 and 2001 totaled approximately
$5,094,000, $7,720,000, and $11,053,000, respectively.
The Company also leases certain portions of its owned facilities to outside
parties. Rental income for fiscal years 1999, 2000 and 2001 totaled
approximately $719,000, $1,099,000, and $666,000, respectively.
In May 2000, the Company entered into a lease agreement, as amended, in
which the lessor agreed to fund up to $34 million for construction of a new
400,000 square foot distribution center in Copiah County, Mississippi. The
agreement continues for five years following completion of the construction.
Construction of the distribution center was completed in May 2001. At the end
of the lease term, the Company has the option to renew the lease for two five-
year terms, or to purchase the building for a price including the outstanding
lease balance. If the Company elects not to renew the lease or purchase the
building, the Company must arrange the sale of the building to a third party.
Under the sale option, the Company has guaranteed a percentage of the total
original cost as the residual fair value of the building. Lease payments are
expected to be approximately $2.0 million on an annual basis and are included
in the table above.
On February 27, 2001, the Company completed a sale/leaseback transaction.
Under the terms of the transaction, the Company sold 101 properties, including
land, buildings, and improvements, for $62.2 million. The stores were leased
back from the purchaser over a period of 22.5 years. The sale of the properties
generated a gain, net of expenses incurred, of $6.0 million, which gain has
been deferred and is being amortized over the lease term. Rent expense during
the first five years of the lease will be approximately $6.4 million annually,
with increases periodically thereafter, and is included in the table of future
minimum annual rental commitments under non-cancelable operating leases.
7. Benefit Plans
The Company has a 401(k) profit-sharing plan covering substantially all of
its team members (employees) who have at least one year of service and work
more than 1,000 hours per year. Team members may contribute up to 15% of their
annual compensation subject to Internal Revenue Code maximum limitations. The
Company has agreed to make matching contributions, based upon the team member's
first six percent of compensation, ranging from 25% to 100% of the team
member's contribution depending on the team member's years of service. After
three years of service, Company contributions and earnings thereon vest at the
rate of 20% per year of service with the Company. Expense recognized under this
plan for fiscal years 1999, 2000 and 2001 was approximately $964,000, $947,000,
and $1,279,000, respectively.
The Company has a Supplemental Executive Profit Sharing Plan (the SEPS
Plan). The SEPS Plan is an unfunded deferred compensation plan covering certain
key members of management. The amount of benefit each participant is entitled
to is established annually by the Board of Directors or, in certain cases, by a
F-59
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
committee of the Board of Directors. Each participant's account accrues
interest on unpaid awards at a rate determined annually as defined in the plan
agreement. As of May 30, 2000 and May 29, 2001, the Company has accrued
approximately $1,049,000 and $1,122,000, respectively, for benefits due under
the SEPS Plan.
The Board of Directors has adopted a stock purchase plan (the Purchase
Plan), which initially reserved an aggregate of 550,000 shares of common stock.
Under the Purchase Plan, all team members have the right to purchase shares of
common stock of the Company at a price equal to 85% of the value of the stock
immediately prior to the beginning of each exercise period. All team members
are eligible to participate except for those who have been employed by the
Company for less than one year, team members who customarily work twenty hours
or less per week, team members who customarily work five months or less in any
calendar year, and team members owning at least 5% of the Company's stock.
During fiscal years 1999, 2000 and 2001, 8,805, 6,499, and 7,454 shares,
respectively, were purchased under the terms of the Purchase Plan. As of
May 29, 2001, 464,002 shares of common stock remain reserved for issuance under
the Purchase Plan.
8. Stock Option Plans
The Company has stock option plans, which provide for the granting to key
team members options to purchase shares of its common stock. A total of
2,540,000 shares of common stock were reserved for issuance under the plans
and, as of May 29, 2001, a total of 2,448,808 shares of common stock remain so
reserved. The per share exercise price of each stock option is not less than
the fair market value of the stock on the date of the grant or, in the case of
a team member owning more than 10% of the outstanding stock of the Company, the
price for incentive stock options is not less than 110% of such fair market
value.
A summary of the Company's stock option activity and related information is
as follows (shares in thousands):
June 1, 1999 May 30, 2000 May 29, 2001
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at beginning of
year...................... 1,127 $21 1,337 $23 1,515 $22
Granted.................... 333 27 376 19 427 9
Exercised.................. (51) 18 (4) 19 -- --
Canceled................... (72) 24 (194) 22 (432) 18
----- ----- -----
Outstanding at end of
year...................... 1,337 23 1,515 22 1,510 19
===== ===== =====
Exercisable at end of
year...................... 445 21 556 24 536 21
===== ===== =====
Weighted-average fair value
of options granted during
the year.................. 14 11 6
Options outstanding and exercisable at May 29, 2001 are summarized as
follows (options in thousands):
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Weighted Average Weighted
Average Remaining Exercisable Average
Exercise Number Contractual Stock Exercise
Range of Exercise Prices Prices Outstanding Life Options Price
------------------------ -------- ----------- ----------- ----------- --------
$7-$10................... $ 9 353 9.3 -- $ --
$16-$19.................. 18 562 5.9 232 17
$22-$31.................. 26 595 5.2 304 25
----- ---
$7-$31................... 19 1,510 6.4 536 21
===== ===
F-60
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
All options outstanding generally vest beginning after three years and then
in equal installments over a four-year period and have a ten-year duration. In
the event of a change of ownership control, all options become 100% vested.
The Company also has a Non-Employee Directors' Stock Option Plan. A total of
40,000 shares are reserved for future issuance under this plan. As of May 29,
2001, 25,000 options had been granted under this plan at an average price of
$19.18. As of May 29, 2001, 8,250 of such options were exercisable.
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123 (SFAS 123), and
has been determined as if the Company had accounted for its employee and non-
employee director stock options under the fair value method of SFAS 123.
The fair values for these options were estimated at the date of grant using
a Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of return of 6.50% for 1999, 6.57% for 2000 and 5.8% for 2001;
volatility factor of .41 for 1999, .44 for 2000 and .56 for 2001, and weighted
average expected option life of seven years for all options. The Company
assumed that no dividends would be paid over the expected life of the options.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing model does not necessarily provide a
reliable single measure of the fair value of its employee stock options. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. The effects of applying
SFAS 123 for pro forma disclosures are not likely to be representative of the
effects on reported net income or losses for future years.
The Company's pro forma information follows (in thousands, except per share
amounts):
1999 2000 2001
------- ------- -------
Pro forma net income.............................. $18,579 $25,534 $16,727
Pro forma net income per basic share.............. $ 1.12 $ 1.53 $ 1.00
Pro forma net income per diluted share............ $ 1.11 $ 1.53 $ 1.00
9. Income Taxes
The provision for income taxes is comprised of the following (in thousands):
Fiscal Year Ended
-----------------------
June 1, May 30, May 29,
1999 2000 2001
------- ------- -------
Current:
Federal.......................................... $12,233 $ 9,264 $4,618
State............................................ 2,129 898 --
------- ------- ------
14,362 10,162 4,618
Deferred:
Federal.......................................... 2,062 5,219 4,884
State............................................ 342 125 378
------- ------- ------
2,404 5,344 5,262
------- ------- ------
$16,766 $15,506 $9,880
======= ======= ======
F-61
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the provision for income taxes to the amounts computed
at the federal statutory tax rate is as follows (in thousands):
Fiscal Year Ended
------------------------
June 1, May 30, May 29,
1999 2000 2001
------- ------- -------
Federal income taxes at statutory rate.......... $15,339 $14,635 $9,621
State income taxes, net of federal tax benefit.. 1,606 850 378
Other items, net................................ (179) 21 (119)
------- ------- ------
$16,766 $15,506 $9,880
======= ======= ======
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
May 30, May 29,
2000 2001
-------- --------
Deferred tax assets:
Change in inventory accounting method............... $ 2,487 $ 1,296
Various accrued expenses............................ 735 932
Deferred gain from sale/leaseback................... -- 2,711
Other, net.......................................... 736 1,067
-------- --------
Total deferred tax assets......................... 3,958 6,006
Deferred tax liabilities:
Depreciation........................................ 10,977 16,881
Accrued liabilities................................. 1,397 1,796
Inventory related items............................. 1,124 2,006
Other, net.......................................... 485 610
-------- --------
Total deferred tax liabilities.................... 13,983 21,293
-------- --------
Net deferred tax liability........................ $ 10,025 $ 15,287
======== ========
Classified as follows:
Current asset (liability)........................... $ 469 $ (2,014)
Noncurrent asset (liability)........................ (10,494) (13,273)
-------- --------
$(10,025) $(15,287)
======== ========
For fiscal years 1999, 2000 and 2001, the Company paid income taxes of
approximately $15,526,000, $9,922,000, and $2,820,000, respectively.
10. Commitments And Contingencies
The Company is involved in various legal proceedings arising out of the
normal conduct of its business. Although the Company cannot ascertain the
amount of liability that it may incur from any of these matters, it does not
believe that, individually or in the aggregate, these legal proceedings will
have a material adverse effect on the consolidated financial position, results
of operations or cash flows of the Company.
As of May 29, 2001, the Company's cost to complete construction contracts
in progress was approximately $3.4 million.
F-62
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Litigation Settlement
In May 2001, the Company settled a claim related to litigation that was
concluded in August 1997 by entering into a settlement agreement. The 1997
litigation stemmed from the sale and distribution of freon. The Company
recorded a net gain of $6.5 million resulting from the settlement. Such amount
is included in the other income caption on the income statement.
12. Subsequent Event (Unaudited)
On August 7, 2001, the Company entered into a definitive agreement with
Advance Holding Corporation, Advance Auto Parts, Inc., Advance Stores Company,
Incorporated and AAP Acquisition Corporation (collectively, Advance) under
which the Company would be acquired by Advance in a merger transaction. Terms
of the agreement call for each share of Discount common stock to be exchanged
for $7.50 in cash and 0.2577 shares of common stock of Advance Auto Parts,
Inc., a holding company which has been formed to own and operate the combined
companies. The transaction has been approved by the boards of directors of both
companies and is subject to approval by the shareholders of Discount, clearance
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other
customary closing conditions. The transaction is expected to close in the
fourth calendar quarter of 2001.
13. Quarterly Results Of Operations (Unaudited)
The following quarterly financial data is unaudited, but in the opinion of
management, all adjustments necessary for a fair presentation of the selected
data for these interim periods presented have been included.
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except per share
amounts)
Fiscal year ended May 30, 2000:
Net sales............................. $143,625 $142,643 $147,374 $164,616
Gross profit.......................... 58,427 58,547 58,683 65,818
Net income............................ 7,346 6,020 5,813 7,110
Basic net income per common share..... .44 .36 .35 .43
Diluted net income per common share... .44 .36 .35 .43
Fiscal year ended May 29, 2001:
Net sales............................. $167,074 $160,950 $159,477 $174,216
Gross profit.......................... 63,924 63,364 61,594 68,636
Net income............................ 3,569 2,281 2,309 9,449
Basic net income per common share..... .21 .14 .14 .57
Diluted net income per common share... .21 .14 .14 .57
F-63
DISCOUNT AUTO PARTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
May 29 August
2001 28 2001
-------- --------
(In thousands)
ASSETS
------
Current assets:
Cash....................................................... $ 9,669 $ 6,372
Inventories................................................ 242,718 243,053
Prepaid expenses and other current assets.................. 14,391 18,734
-------- --------
Total current assets...................................... 266,778 268,159
Property and equipment...................................... 507,255 513,102
Less allowances for depreciation and amortization........... (122,742) (128,639)
-------- --------
384,513 384,463
Other assets................................................ 4,638 4,431
-------- --------
Total assets.............................................. $655,929 $657,053
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Trade accounts payable..................................... $ 96,442 $ 75,609
Other current liabilities.................................. 25,286 25,105
Current maturities of long-term debt....................... 1,200 1,200
-------- --------
Total current liabilities................................. 122,928 101,914
Deferred gain on sale/leaseback............................. 5,966 5,874
Deferred income taxes....................................... 13,273 13,333
Long-term debt.............................................. 192,900 209,608
Stockholders' equity:
Preferred stock............................................ -- --
Common stock............................................... 167 167
Additional paid-in capital................................. 142,429 142,640
Retained earnings.......................................... 178,266 183,517
-------- --------
Total stockholders' equity................................. 320,862 326,324
-------- --------
Total liabilities and stockholders' equity................ $655,929 $657,053
======== ========
See accompanying notes.
F-64
DISCOUNT AUTO PARTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Thirteen Weeks
Ended
------------------
August August
29 2000 28 2001
-------- --------
(In thousands,
except per share
amounts)
Net sales................................................... $167,074 $173,381
Cost of sales, including distribution costs................. 103,150 104,189
-------- --------
Gross profit............................................... 63,924 69,192
Selling, general and administrative expenses................ 52,850 56,830
Merger related expenses..................................... -- 943
-------- --------
Income from operations..................................... 11,074 11,419
Other income, net........................................... 85 100
Interest expense............................................ (5,583) (3,318)
-------- --------
Income before income taxes.................................. 5,576 8,201
Income taxes................................................ 2,007 2,950
-------- --------
Net income.................................................. $ 3,569 $ 5,251
======== ========
Net income per share:
Basic net income per common share.......................... $ 0.21 $ 0.31
Diluted net income per common share........................ $ 0.21 $ 0.31
-------- --------
Average common shares outstanding........................... 16,695 16,708
Dilutive effect of stock options............................ -- 156
-------- --------
Average common shares outstanding--assuming dilution........ 16,695 16,864
======== ========
See accompanying notes.
F-65
DISCOUNT AUTO PARTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Thirteen Weeks Ended
-----------------------
August 29 August 28
2000 2001
---------- ----------
(In Thousands)
Operating activities
Net income.......................................... $ 3,569 $ 5,251
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization...................... 6,129 6,070
Gain on disposals of property and equipment........ (3) (47)
Amortization of deferred gain on sale/leaseback.... -- (92)
Changes in operating assets and liabilities:
(Increase) decrease in inventories................ 4,324 (335)
Increase in prepaid expenses and other current
assets........................................... (973) (4,013)
Decrease (increase) in other assets............... (423) 36
Decrease in trade accounts payable................ (35,436) (20,833)
Decrease in other current liabilities............. (4,640) (240)
---------- ----------
Net cash used in operating activities............ (27,453) (14,203)
Investing activities
Proceeds from sales of property and equipment....... 282 520
Purchases of property and equipment................. (10,616) (6,322)
---------- ----------
Net cash used in investing activities............ (10,334) (5,802)
Financing activities
Proceeds from short-term borrowings and long-term
debt............................................... 57,374 36,819
Payments of short-term borrowings and long-term
debt............................................... (26,261) (20,111)
---------- ----------
Net cash provided by financing activities........ 31,113 16,708
Net decrease in cash................................. (6,674) (3,297)
Cash at beginning of period.......................... 12,612 9,669
---------- ----------
Cash at end of period................................ $ 5,938 $ 6,372
========== ==========
See accompanying notes.
F-66
DISCOUNT AUTO PARTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
August 28, 2001
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Discount Auto Parts, Inc. (the Company) have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended May 29,
2001.
Operating results for the thirteen-week period ended August 28, 2001 are not
necessarily indicative of the results that may be expected for the entire
fiscal year.
2. Sale/Leaseback Transaction
On February 27, 2001, the Company completed a sale/leaseback transaction.
Under the terms of the transaction, the Company sold 101 properties, including
land, buildings, and improvements, for a net price of approximately $62.2
million. The stores were leased back from the purchaser under non-cancelable
operating leases with lease terms of 22.5 years each. The sale of the
properties generated a gain for financial reporting purposes, net of expenses
incurred, of $6.0 million, which gain has been deferred and is being amortized
over the lease term.
3. Long-Term Debt
Long-term debt consists of the following (in thousands):
May 29, August
2001 28, 2001
-------- --------
Revolving credit agreements............................ $140,500 $158,408
Senior term notes...................................... 50,000 50,000
Senior secured notes................................... 3,600 2,400
-------- --------
194,100 210,808
Less current maturities................................ (1,200) (1,200)
-------- --------
$192,900 $209,608
======== ========
Effective July 29, 1999, the Company entered into a five year $265 million
unsecured revolving credit agreement (the Revolver). The rate of interest
payable under the Revolver is a function of LIBOR or the prime rate of the lead
agent bank, at the option of the Company. During the term of the Revolver, the
Company is also obligated to pay a fee, which fluctuates based on the Company's
debt-to-capitalization ratio, for the unused portion of the Revolver.
Effective August 8, 1997, the Company issued $50 million of senior term
notes (the Notes). The Notes provide for interest at a fixed rate of 7.46%,
payable semi-annually, with semi-annual principal payments of $7.1 million,
beginning July 15, 2004.
F-67
DISCOUNT AUTO PARTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
August 28, 2001
3. Long-Term Debt -- Continued
At May 29, 2001 and August 28, 2001, the Company's weighted average interest
rate on its borrowings under the revolving credit agreement was 7.1% and 5.3%,
respectively.
As of August 28, 2001, the Company had approximately $106.6 million of
available borrowings.
As of August 28, 2001, the Company has outstanding a senior secured note of
$2.4 million. The note provides for interest at a fixed rate of 9.8%, payable
quarterly, with annual principal payments of $1.2 million due on May 31. The
note is collateralized by a first mortgage on certain store properties,
equipment and fixtures.
The Company's debt agreements contain various restrictions, including the
maintenance of certain financial ratios and restrictions on dividends, with
which the Company is in compliance.
4. Pending Merger
On August 7, 2001, the Company entered into a definitive agreement with
Advance Holding Corporation, Advance Auto Parts, Inc., Advance Stores Company,
Incorporated and AAP Acquisition Corporation (collectively, Advance) under
which the Company will be acquired by Advance in a merger transaction. Terms of
the agreement call for each share of Discount Auto Parts common stock to be
exchanged for $7.50 in cash and 0.2577 shares of common stock of Advance Auto
Parts, Inc., a holding company which has been formed to own and operate the
combined companies. The transaction has been approved by the boards of
directors of both companies and is subject to approval by shareholders of the
Company, and other customary closing conditions. The Hart-Scott-Rodino
Antitrust Improvements Act of 1976 waiting period expired September 18, 2001.
The transaction is expected to close in the fourth calendar quarter of 2001.
As a result of the above described transaction, the Company incurred
expenses in the first quarter of fiscal 2002 of $943,000. Additional expenses
associated with the described transaction are expected to be incurred during
the second quarter of fiscal 2002.
5. Comprehensive Income
Comprehensive income for the periods presented equals net income.
F-68
ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
ADVANCE HOLDING CORPORATION,
ADVANCE AUTO PARTS, INC.,
AAP ACQUISITION CORPORATION,
ADVANCE STORES COMPANY, INCORPORATED
AND
DISCOUNT AUTO PARTS, INC.
Dated as of August 7, 2001
TABLE OF CONTENTS
Page
----
ARTICLE 1 DEFINITIONS.................................................... A-2
Section 1.1 Definitions of Certain Terms............................ A-2
Section 1.2 Cross Reference Table of Certain Additional Defined
Terms................................................... A-5
ARTICLE 2 THE MERGER..................................................... A-7
Section 2.1 The Merger.............................................. A-7
Section 2.2 Filing.................................................. A-7
Section 2.3 Effective Time of Merger................................ A-7
Section 2.4 Articles of Incorporation and Bylaws.................... A-7
Section 2.5 Directors and Officers.................................. A-7
Section 2.6 Effect of the Merger.................................... A-8
Section 2.7 Contribution of Surviving Corporation Stock............. A-8
Section 2.8 Further Assurances...................................... A-8
Section 2.9 Closing................................................. A-8
ARTICLE 3 CONVERSION OF SECURITIES....................................... A-8
Section 3.1 Conversion of Capital Stock............................. A-8
Section 3.2 Stockholder Approval, Proxy Statement/Prospectus........ A-10
Section 3.3 Exchanging Certificates and In-the-Money Options for
Payment of Merger Consideration and Option Merger
Consideration........................................... A-11
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF DISCOUNT..................... A-14
Section 4.1 Organization of Discount................................ A-14
Section 4.2 Discount Capital Structure.............................. A-14
Section 4.3 Authority; No Conflict; Required Filings and Consents... A-15
Section 4.4 SEC Filings; Financial Statements....................... A-16
Section 4.5 No Undisclosed Liabilities.............................. A-16
Section 4.6 Absence of Certain Changes or Events.................... A-17
Section 4.7 Taxes................................................... A-17
Section 4.8 Properties.............................................. A-18
Section 4.9 Agreements, Contracts and Commitments................... A-19
Section 4.10 Litigation.............................................. A-20
Section 4.11 Employee Benefit Plans.................................. A-20
Section 4.12 Compliance With Laws.................................... A-21
Section 4.13 Registration Statement; Blue Sky Filings; Proxy
Statement/Prospectus; Other Information................. A-22
Section 4.14 Labor Matters........................................... A-22
Section 4.15 Insurance............................................... A-22
Section 4.16 Environmental Matters................................... A-23
Section 4.17 No Existing Discussions................................. A-23
Section 4.18 Opinion of Financial Advisor............................ A-23
Section 4.19 Brokers................................................. A-24
Section 4.20 Anti-Takeover Laws; Stockholder Rights Agreement........ A-24
Section 4.21 Noncompetition Agreements............................... A-24
Section 4.22 Suppliers............................................... A-24
Section 4.23 Potential Conflict of Interest.......................... A-24
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF NEW HOLDING, HOLDING, ASCI
AND MERGER SUB................................................. A-25
Section 5.1 Organization of Holding, New Holding, ASCI and Merger
Sub..................................................... A-25
i
TABLE OF CONTENTS-(Continued)
Page
----
Section 5.2 Capital Structures..................................... A-25
Section 5.3 Authority; No Conflict; Required Filings and Consents.. A-27
Section 5.4 Financing.............................................. A-27
Section 5.5 SEC Filings; Financial Statements...................... A-28
Section 5.6 No Undisclosed Liabilities............................. A-28
Section 5.7 Taxes.................................................. A-28
Section 5.8 Employee Benefit Plans................................. A-29
Section 5.9 Compliance With Laws................................... A-29
Section 5.10 Labor Matters.......................................... A-29
Section 5.11 Environmental Matters.................................. A-30
Section 5.12 Absence of Certain Changes or Events................... A-30
Section 5.13 Registration Statement; Blue Sky Filings; Proxy
Statement/Prospectus; Other Information................ A-31
Section 5.14 Litigation............................................. A-31
Section 5.15 Brokers................................................ A-31
Section 5.16 New Holding and Merger Sub............................. A-32
Section 5.17 No Other Transactions Being Negotiated................. A-32
ARTICLE 6 CERTAIN COVENANTS............................................. A-32
Section 6.1 Covenants of Discount.................................. A-32
Section 6.2 Covenants of Holding and New Holding................... A-34
Section 6.3 Cooperation; Access.................................... A-37
Section 6.4 Confidentiality........................................ A-38
Section 6.5 Notices of Certain Events.............................. A-38
ARTICLE 7 ADDITIONAL AGREEMENTS......................................... A-38
Section 7.1 No Solicitation........................................ A-38
Section 7.2 Proxy Statement/Prospectus; Registration Statement;
Stockholders Meeting................................... A-41
Section 7.3 NYSE Listing........................................... A-42
Section 7.4 Legal Conditions to Merger............................. A-42
Section 7.5 Public Disclosure...................................... A-44
Section 7.6 Certain Employee Benefit Plan Obligations.............. A-44
Section 7.7 Indemnification, Exculpation and Insurance............. A-45
Section 7.8 Control of Operations.................................. A-46
Section 7.9 No Rights Triggered.................................... A-47
Section 7.10 Securityholder Litigation.............................. A-47
Section 7.11 Directors.............................................. A-47
Section 7.12 Delivery of Discount Financial Information............. A-47
Section 7.13 Delivery of Holding Financial Information.............. A-48
ARTICLE 8 CONDITIONS TO MERGER.......................................... A-48
Section 8.1 Conditions to Each Party's Obligation to Effect the
Merger................................................. A-48
Section 8.2 Additional Conditions to Obligations of Holding, New
Holding and Merger Sub................................. A-49
Section 8.3 Additional Conditions to Obligations of Discount....... A-50
ARTICLE 9 TERMINATION AND AMENDMENT..................................... A-51
Section 9.1 Termination............................................ A-51
Section 9.2 Effect of Termination.................................. A-52
Section 9.3 Termination Fee; Expenses.............................. A-53
Section 9.4 Amendment.............................................. A-54
ii
TABLE OF CONTENTS-(Continued)
Page
----
Section 9.5 Extension; Waiver....................................... A-54
ARTICLE 10 MISCELLANEOUS.................................................. A-55
Section 10.1 Survival................................................ A-55
Section 10.2 Notices................................................. A-55
Section 10.3 Interpretation; Headings; Terms......................... A-56
Section 10.4 Counterparts............................................ A-56
Section 10.5 Waivers................................................. A-56
Section 10.6 Entire Agreement; No Third Party Beneficiaries.......... A-56
Section 10.7 Governing Law........................................... A-56
Section 10.8 Jurisdiction; Enforcement............................... A-56
Section 10.9 Assignment.............................................. A-57
Section 10.10 Severability............................................ A-57
Section 10.11 Expenses................................................ A-57
Section 10.12 No Rule of Construction................................. A-57
Section 10.13 Incorporation of Exhibits and Schedules................. A-57
Section 10.14 Waiver of Jury Trial.................................... A-57
Exhibits
Exhibit
-------
Plan of Merger...................................................... A
Articles of Merger.................................................. B
Opinion of Counsel to Discount...................................... C
Amendments to Master Lease.......................................... C-1
Irrevocable Proxy and Voting Agreement.............................. D
Stock Option Agreement.............................................. E
Opinion of Counsel to Holding, New Holding, Merger Sub and ASCI..... F
Schedules
Schedule
--------
Existing Senior Credit Facilities of ASCI to be refinanced.......... A
Certain indebtedness of Discount to be repaid....................... B
Designated Discount Real Properties................................. C
Holding Designated Consents......................................... D
iii
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of August 7, 2001 among
Advance Holding Corporation, a Virginia corporation ("Holding"), Advance Auto
Parts, Inc., a Delaware corporation and wholly-owned subsidiary of Holding
("New Holding"), AAP Acquisition Corporation, a Florida corporation and wholly-
owned subsidiary of New Holding ("Merger Sub"), Advance Stores Company,
Incorporated a Virginia corporation and wholly-owned subsidiary of Holding
("ASCI") and Discount Auto Parts, Inc., a Florida corporation ("Discount").
RECITALS
WHEREAS, Holding will reincorporate in Delaware by merging with and into New
Holding, which is the owner of 100% of the issued and outstanding capital stock
of Merger Sub, pursuant to which merger each outstanding share of Holding
Common Stock will be converted into one outstanding share of New Holding Common
Stock and the existing outstanding shares of New Holding will be cancelled (the
"Reincorporation");
WHEREAS, the Boards of Directors of Holding, New Holding, Merger Sub and
Discount deem advisable and in the best interests of their respective
stockholders that simultaneously with the Reincorporation, a merger of Merger
Sub with and into Discount (the "Merger") be consummated upon the terms and
conditions set forth herein and in accordance with the Florida Business
Corporation Act ("FBCA") (Discount and Merger Sub being hereinafter sometimes
referred to as the "Constituent Corporations" and Discount, following the
effectiveness of the Merger, being hereinafter sometimes referred to as the
"Surviving Corporation");
WHEREAS, immediately following consummation of the Merger and the
Reincorporation, New Holding will contribute all of the issued and outstanding
capital stock of the Surviving Corporation to ASCI;
WHEREAS, simultaneously with the execution and delivery of this Agreement,
Holding, ASCI and Fontaine Industries Limited Partnership, a entity directly or
indirectly controlled by Peter J. Fontaine (the "Principal Stockholder") are
entering into (i) an agreement (the "Irrevocable Proxy and Voting Agreement")
pursuant to which the Principal Stockholder will agree to, among other things,
vote in favor of the Merger and (ii) an agreement (the "Stock Option
Agreement") pursuant to which the Principal Stockholder has granted to ASCI an
option to purchase shares of Discount Common Stock owned by it;
WHEREAS, the Boards of Directors of Holding, ASCI, New Holding, Merger Sub
and Discount, as appropriate, have approved this Agreement, the Merger and the
plan of merger attached hereto as Exhibit A (the "Plan of Merger"), upon the
terms and subject to the conditions set forth herein;
WHEREAS, subject to the terms and conditions of this Agreement, the Board of
Directors of Discount has resolved to recommend that the holders of the
outstanding shares of Discount Common Stock approve this Agreement and the
Merger and the consummation of the transactions contemplated hereby upon the
terms and subject to the conditions set forth herein and in the Plan of Merger;
and
WHEREAS, the Reincorporation and the Merger constitute interdependent steps
of a single plan and Holding, New Holding, Merger Sub and Discount intend that,
after giving effect to the transactions contemplated by this Agreement and the
contemporaneous merger of Holding with and into New Holding, the exchange of
New Holding Common Stock and cash for Discount Common Stock in the Merger be
treated as part of an exchange subject to Section 351 of the Code.
A-1
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants, agreements and conditions contained herein, and in order to set
forth the terms and conditions of the Merger and the mode of carrying the same
into effect, the parties hereby agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.1 Definitions of Certain Terms. As used in this Agreement, the
following terms have the meanings set forth below:
"Affiliate" or "affiliate" means, as to a designated Person, another Person
that, directly or indirectly, through one or more intermediaries, controls, is
controlled by or is under common control with the designated Person.
"Business Day" means any day on which banking institutions in New York, New
York and Lakeland, Florida are open for business.
"Charter Documents" means the articles or certificate of incorporation,
bylaws and other constitutive documents of a Person.
"Code" means the United States Internal Revenue Code of 1986, as amended.
"Designated Discount Real Properties" means those parcels of Discount Owned
Real Property listed on Schedule C to this Agreement.
"Discount Common Stock" means the common stock, par value $.01 per share, of
Discount.
"Discount Intellectual Property Rights" means all intellectual property
rights of Discount and pertaining to the business of Discount and the Discount
Subsidiaries, including all (i) trademarks, tradenames, service marks or other
trade rights, whether or not registered, and all pending applications for any
such registrations; (ii) copyrights, copyrightable materials or pending
applications therefor; (iii) trade secrets; (iv) inventions, discoveries,
designs, and drawings; (v) computer software (including all source and object
codes and manuals); and (vi) patents and patent applications.
"Discount Leased Personal Property" means the personal property leased by
Discount or a Discount Subsidiary under the Discount Personal Property Leases.
"Discount Leased Real Property" means the real property leased by Discount
or a Discount Subsidiary pursuant to the Discount Real Property Leases.
"Discount Owned Personal Property" means all personal property used by
Discount or a Discount Subsidiary in its business, other than Discount Leased
Personal Property and Discount Intellectual Property Rights.
"Discount Owned Real Property" means real property owned by Discount or a
Discount Subsidiary.
"Discount Permitted Liens" means (i) Liens securing Taxes or assessments not
yet due and payable or which are being contested in good faith by appropriate
proceedings, which contested proceedings are disclosed in the relevant Discount
Disclosure Schedule, (ii) statutory or common law Liens of landlords,
warehousemen, mechanics, materialmen, laborers or the like securing obligations
incurred in the ordinary course of business that are not yet delinquent or
which are being contested in good faith by appropriate proceedings, and
(iii) Liens securing Indebtedness reflected in the Discount Balance Sheet
(including changes in the outstanding balances thereof in the ordinary course
of business since the date of the most recent balance sheet included in the
Discount Balance Sheet).
A-2
"Discount Personal Property Lease" means a lease of personal property under
which Discount or a Discount Subsidiary is the lessee, whether the lease is
treated as a capital lease or an operating lease for accounting purposes.
"Discount Real Property" means the Discount Owned Real Property and the
Discount Leased Real Property.
"Discount Real Property Lease" means a lease or sublease (and all amendments
thereto) of real property under which Discount or a Discount Subsidiary is the
lessee or sublessee.
"Discount Subsidiary" means any Subsidiary of Discount.
"Environmental Law" means any and all federal, state, local or foreign law,
regulation, order, decree, permit, authorization, common law or agency
requirement relating to: (i) the protection, investigation or restoration of
the environment or the public health as it relates to the environment, (ii) the
handling, use, presence, disposal, release or threatened release of any
Hazardous Substance or (iii) noise, odor, wetlands, pollution, contamination or
any injury or threat of injury to the environment.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the SEC thereunder.
"Exchange Act Filings" means (i) as to Discount, Discount's Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
proxy statements filed by Discount with the SEC at any time after May 1, 1998
and (ii) as to Holding and ASCI, Holding's Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and proxy
statements filed by Holding with the SEC at any time after May 1, 1998 and
ASCI's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and proxy statements filed by ASCI with the SEC at any time
after May 1, 1998.
"Hazardous Substance" means any substance that is: (i) listed, classified,
regulated or which falls within the definition of a "hazardous substance" or
"hazardous material" pursuant to or is otherwise regulated by any Environmental
Law or (ii) any petroleum product or by-product, asbestos-containing material,
lead-containing paint or plumbing, polychlorinated biphenyls, radioactive
materials or radon.
"Holding Subsidiary" means any Subsidiary of Holding.
"Knowledge" or "knowledge" means (i) with respect to Discount, the knowledge
of one or more of Peter Fontaine, C. Michael Moore, Clement Bottino, Simon
Gregorich, Kristi Mullis or Kevin Sullivan, and (ii) with respect to Holding
and/or ASCI, the knowledge of one or more of Lawrence Castellani, Jimmie Wade,
David Reid or Jeffrey Gray. An individual will be deemed to have knowledge of a
particular fact or other matter if:
(a) that individual is actually aware of that fact or matter; or
(b) a prudent individual similarly situated in a comparable business
organization would be expected to discover or otherwise become aware of
that fact or matter after reasonable inquiry of the executive or senior
managerial employees responsible for the relevant matters.
"Liens" means all liens, pledges, security interests, options, mortgages,
easements, charges, encumbrances or other interests in real or personal
property that secure the payment or performance of an obligation or encumber
real or personal property.
"Material Adverse Effect" or "material adverse effect" or "material adverse
change" means:
(i) as to Discount, any change in or effect on the business of
Discount or a Discount Subsidiary that (after giving effect to any
benefits or beneficial or mitigating consequences or effects
A-3
occasioned by or arising out of or in connection with the availability
of any insurance or any contractual reimbursement or indemnity) is or
has been or is reasonably likely to be materially adverse to the results
of operations, properties, financial condition, assets or business of
Discount and the Discount Subsidiaries, taken as a whole, except for any
such change or effect reasonably attributable to (x) general economic
conditions in the countries in which Discount or any Discount Subsidiary
operates or in which products sold by Discount or any Discount
Subsidiary are sourced, or (y) matters generally affecting the
industries in which Discount or any Discount Subsidiary operates; and
(ii) as to Holding, ASCI or New Holding, any change in or effect on
the business of Holding, a Holding Subsidiary, New Holding or a
Subsidiary of New Holding that (after giving effect to any benefits or
beneficial or mitigating consequences or effects occasioned by or
arising out of or in connection with the availability of any insurance
or any contractual reimbursement or indemnity) is or has been or is
reasonably likely to be materially adverse to the results of operations,
properties, financial condition, assets or business of Holding, New
Holding, the Holding Subsidiaries and the Subsidiaries of New Holding,
taken as a whole, except for any such change or effect reasonably
attributable to (x) general economic conditions in the countries in
which Holding, any Holding Subsidiary, New Holding or any Subsidiary of
New Holding operates or in which products sold by Holding, any Holding
Subsidiary, New Holding or any Subsidiary of New Holding are sourced, or
(y) matters generally affecting the industries in which Holding, any
Holding Subsidiary, New Holding or any Subsidiary of New Holding
operates.
"Merger Consideration" means the aggregate shares of New Holding Common
Stock (the "Stock Consideration") plus the aggregate cash, including without
limitation cash paid for fractional shares, (the "Cash Consideration") payable
upon the conversion of the Discount Common Stock pursuant to Section 3.1
hereof.
"New Holding Common Stock" means the Common Stock, par value $0.0001 per
share, of New Holding.
"Option Merger Consideration" means the aggregate cash payable in respect
of Outstanding Discount Options ("Option-Related Cash Consideration") plus all
of the New Holding Options that Outstanding Discount Options become or are
converted into pursuant to Section 3.1(f) hereof.
"Outstanding Discount Options" means all outstanding stock options to
purchase Discount Common Stock granted under any stock option or compensation
plan or arrangement of Discount and includes all In-the-Money Options and all
Fully Converted Options.
"Per Share Merger Consideration" means (i) cash in the amount of $7.50 and
(ii) 0.2577 of a fully paid and nonassessable share of New Holding Common
Stock. The cash portion of the Per Share Merger Consideration is herein
sometimes referred to as the "Per Share Cash Portion of the Per Share Merger
Consideration" and the New Holding Common Stock portion of the Per Share
Merger Consideration is herein sometimes referred to as the "Per Share Stock
Portion of the Per Share Merger Consideration."
"Person" means an individual and any corporation, partnership, trust,
limited liability company, association, governmental authority or other
entity.
"Principal Holding Stockholders" means FS Equity Partners IV, L.P.,
Ripplewood Partners, L.P., Ripplewood Advance Auto Parts Employee Fund I
L.L.C., Nicholas F. Taubman, the Arthur Taubman Trust dated July 13, 1964, and
WA Holding Co.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC thereunder.
A-4
"Subsidiary" means with respect to any Person, any corporation or other
entity a majority (by number of votes) of the outstanding shares (or other
equity interests) of any class or classes of which shall at the time be
directly or indirectly owned by such Person or by a Subsidiary of such Person,
if the holders of the shares of such class or classes (a) are ordinarily, in
the absence of contingencies, entitled to vote for the election of a majority
of the directors (or Persons performing similar functions) of the issuer
thereof, even though the right so to vote has been suspended by the happening
of such a contingency, or (b) are at the time entitled, as such holders,
directly or indirectly, to vote, or control or direct the outcome of any vote,
for the election of a majority of the directors (or Persons performing similar
functions) of the issuer thereof, whether or not the right so to vote exists by
reason of the happening of a contingency.
"Tax" means any federal, state or local tax or any foreign tax (including,
without limitation, any net income, gross income, profits, premium, estimated,
excise, sales, value added, services, use, occupancy, gross receipts,
franchise, license, ad valorem, real property, personal property, severance,
capital levy, production, stamp, transfer, withholding, employment,
unemployment, social security (including FICA), payroll or property tax,
customs duty, or any other governmental charge or assessment), together with
any interest, addition to tax, or penalty.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
Section 1.2 Cross Reference Table of Certain Additional Defined Terms. In
addition to the terms defined in Section 1.1, the following terms are defined
in the Sections set forth below:
Term Section
---- -------
Acquisition Proposal................................. Section 7.1(a)
Acquiror Plan........................................ Section 3.1(f)(ii)
Acquisition Transaction.............................. Section 9.3(g)
Agreement............................................ Preamble
Antitrust Laws....................................... Section 7.4(b)
Articles of Merger................................... Section 2.2
ASCI................................................. Preamble
ASCI Account......................................... Section 9.3(a)
Bankruptcy and Equity Exception...................... Section 4.3(a)
Blue Sky Filings..................................... Section 7.2(a)
Certificates......................................... Section 3.3(b)
Closing.............................................. Section 2.9
Closing Date......................................... Section 2.9
Commitments.......................................... Section 5.4
Confidentiality Agreements........................... Section 6.4
Constituent Corporations............................. Recitals
Disclosed Discount Employment Arrangements........... Section 7.6(b)
Discount............................................. Preamble
Discount Approvals................................... Section 4.12
Discount Audited Financial Statements................ Section 7.12
Discount Balance Sheet............................... Section 4.4(b)
Discount Disclosure Schedule......................... Preamble to Article 4
Discount Employee Plans.............................. Section 4.11(a)
Discount Employees................................... Section 7.6(a)
Discount Financial Statements........................ Section 4.4(b)
Discount Material Contracts.......................... Section 4.9
Discount Material Leases............................. Section 4.8(b)
Discount Material Personal Property.................. Section 4.8(a)
Discount Material Real Property...................... Section 4.8(a)
A-5
Term Section
---- -------
Discount Meeting..................................... Section 3.2(a)(i)
Discount Option Plans................................ Section 3.1(f)(iii)
Discount Preferred Stock............................. Section 4.2(a)
Discount Q1 Financial Statements..................... Section 7.12
Discount Q1 Form 10-Q................................ Section 7.12
Discount Recommendation.............................. Section 3.2(a)(ii)
Discount SEC Financial Statements.................... Section 4.4(b)
Discount SEC Reports................................. Section 4.4(a)
Discount Stockholder Vote............................ Section 6.2(a)
Discount Unaudited Financial Statements.............. Section 4.4(b)
DOJ.................................................. Section 7.4(b)
Effective Time....................................... Section 2.3
Environmental Law.................................... Section 4.16(b)
ERISA................................................ Section 4.11 (a)
ERISA Affiliate...................................... Section 4.11 (a)
Exchange Agent....................................... Section 3.3(a)
Exchange Fund........................................ Section 3.3(a)
Expenses............................................. Section 9.3(a)
Expenses Cap......................................... Section 9.3(a)
FBCA................................................. Recitals
FTC.................................................. Section 7.4(b)
Fully Converted Option............................... Section 3.1(f)(ii)
Government Action.................................... Section 7.4(b)
Governmental Entity.................................. Section 4.3(c)
Government Order..................................... Section 7.4(b)
Hazardous Substance.................................. Section 4.16(c)
Holding.............................................. Preamble
Holding Approvals.................................... Section 5.9
Holding Balance Sheet................................ Section 5.5(b)
Holding Class B Stock................................ Section 5.2(a)
Holding Common Stock................................. Section 5.2(a)
Holding Designated Consents.......................... Section 7.4(a)
Holding Disclosure Schedule.......................... Preamble to Article 5
Holding Employee Plans............................... Section 5.8(a)
Holding Financial Statements......................... Section 5.5(b)
Holding Option Plans................................. Section
Holding Preferred Stock.............................. Section 5.2(a)
Holding SEC Reports.................................. Section 5.5(a)
HSR Act.............................................. Section 4.3(c)
In-the-Money Option.................................. Section 3.1(f)(i)
IRS.................................................. Section 4.11(b)
Merger............................................... Recitals
Merger Sub........................................... Preamble
Moody's.............................................. Section 7.1(f)
New Holding.......................................... Preamble
New Holding Common Stock............................. Section 5.2(b)
New Holding Merger Agreement......................... Section 5.2(b)
New Holding Preferred Stock.......................... Section 5.2(b)
Option Exchange Ratio................................ Section 3.1(f)(ii)
Outside Date......................................... Section 2.9
Plan of Merger....................................... Recitals
A-6
Term Section
---- -------
Principal Stockholder....................................... Recitals
Private Party Action........................................ Section 7.4(b)
Private Party Order......................................... Section 7.4(b)
Proxy Statement/Prospectus.................................. Section 7.2(c)
Rating Date................................................. Section 7.1(f)
Registration Statement...................................... Section 7.2(a)
Reincorporation............................................. Recitals
Rights...................................................... Section 4.20
S&P......................................................... Section 7.1(f)
Salomon Smith Barney........................................ Section 4.18
Salomon Smith Barney Engagement Letter...................... Section 4.19
significant vendor.......................................... Section 4.22
Stockholder Approval........................................ Section 4.3(a)
Stockholder Rights Agreement................................ Section 4.20
Stockholders Agreement...................................... Section 8.3(c)
Stock Option Agreement...................................... Recitals
Superior Proposal........................................... Section 7.1(b)
Surviving Corporation....................................... Recitals
Termination Fee............................................. Section 9.3(a)
Irrevocable Proxy and Voting Agreement...................... Recitals
ARTICLE 2
THE MERGER
Section 2.1 The Merger. Upon the terms and conditions hereinafter set forth
and in accordance with the FBCA, at the Effective Time, Merger Sub shall merge
with and into Discount and thereupon the separate existence of Merger Sub shall
cease, and Discount, as the Surviving Corporation, shall continue to exist
under and be governed by the FBCA.
Section 2.2 Filing. At the Closing to be held pursuant to Section 2.9, upon
the satisfaction or waiver of the conditions set forth in Article 8 hereof,
Merger Sub and Discount will cause articles of merger, in substantially the
form of Exhibit B attached hereto (the "Articles of Merger"), to be executed
and promptly filed with the Department of State of the State of Florida as
provided in the relevant provisions of the FBCA.
Section 2.3 Effective Time of Merger. The Merger shall become effective upon
the filing of the Articles of Merger pursuant to the FBCA (the "Effective
Time"), it being understood that the parties intend to use their reasonable
best efforts to arrange for the filing of the Articles of Merger pursuant to
the FBCA simultaneously with the effectiveness of the merger of Holding into
New Holding.
Section 2.4 Articles of Incorporation and Bylaws. Upon the effectiveness of
the Merger, the Articles of Incorporation of Merger Sub as in effect
immediately prior to the Effective Time shall be the Articles of Incorporation
of the Surviving Corporation, and the By-Laws of Merger Sub as in effect
immediately prior to the Effective Time shall be the By-Laws of the Surviving
Corporation.
Section 2.5 Directors and Officers. The persons serving as directors of
Merger Sub immediately prior to the Effective Time shall serve as the directors
of the Surviving Corporation after the Effective Time, and the persons serving
as officers of Discount immediately prior to the Effective Time shall serve as
officers of the Surviving Corporation after the Effective Time, in each case
such directors and officers to hold office until their successors have been
duly elected and qualified in accordance with the Articles of Incorporation and
By-Laws of the Surviving Corporation, or their earlier death, resignation or
removal.
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Section 2.6 Effect of the Merger. The Merger shall have the effect set forth
in Section 1106 of the FBCA.
Section 2.7 Contribution of Surviving Corporation Stock. Immediately
following the consummation of the Merger, New Holding, as the owner of 100% of
the issued and outstanding capital stock of the Surviving Corporation, pursuant
to Section 3.1 hereof, shall cause all of such capital stock of the Surviving
Corporation to be contributed to ASCI such that, after giving effect to the
contribution, the Surviving Corporation shall be a wholly-owned subsidiary of
ASCI.
Section 2.8 Further Assurances. If at any time after the Effective Time the
Surviving Corporation shall consider or be advised that any further deeds,
assignments or assurances in law or any other acts are necessary, desirable or
proper (a) to vest, perfect or confirm, of record or otherwise, in the
Surviving Corporation, the title to any property or right of the Constituent
Corporations acquired or to be acquired by reason of, or as a result of, the
Merger, or (b) otherwise to carry out the purposes of this Agreement, the
Constituent Corporations agree that the Surviving Corporation and its proper
officers and directors shall and will execute and deliver all such deeds,
assignments and assurances in law and do all acts necessary, desirable or
proper to vest, perfect or confirm title to such property or right in the
Surviving Corporation and otherwise to carry out the purposes of this
Agreement, and that the proper officers and directors of the Constituent
Corporations and the proper officers and directors of the Surviving Corporation
are fully authorized in the name of the Constituent Corporations or otherwise
to take any and all such action.
Section 2.9 Closing. The closing of the Merger, the Reincorporation and the
contribution pursuant to Section 2.7 (the "Closing") will take place at 10:00
a.m., New York City time, on a date to be specified by the parties (the
"Closing Date"), which shall be no later than the second Business Day after
satisfaction or waiver of the conditions set forth in Article 8 hereof (other
than the conditions with respect to the documents to be delivered at the
Closing), but no later than December 31, 2001 (the "Outside Date"), at the
offices of Cravath, Swaine & Moore, New York, New York, unless another date,
place or time is agreed to in writing by the parties.
ARTICLE 3
CONVERSION OF SECURITIES
Section 3.1 Conversion of Capital Stock. As of the Effective Time, by virtue
of the Merger and without any action on the part of any holder of any shares of
Discount Common Stock, or capital stock of Merger Sub and subject to Section
3.2 and subject to the other terms and conditions of this Agreement:
(a) Capital Stock of Merger Sub. Each issued and outstanding share of the
capital stock of Merger Sub shall be converted into and become one
validly issued, fully paid and nonassessable share of common stock of
the Surviving Corporation.
(b) Cancellation of Treasury Stock. All shares of Discount Common Stock
that are owned directly or indirectly by Discount as treasury stock, if
any, shall be cancelled and retired and shall cease to exist, and no
payment shall be made with respect thereto.
(c) Conversion of Discount Common Stock. Each issued and outstanding share
of Discount Common Stock shall be converted into the right to receive
the Per Share Merger Consideration and any cash in lieu of fractional
shares of New Holding Common Stock to be issued or paid in
consideration therefor. As of the Effective Time, all such shares of
Discount Common Stock shall no longer be outstanding and shall
automatically be cancelled and retired and shall cease to exist, and
each holder of a certificate representing any such shares shall cease
to have any rights with respect thereto, except the right to receive
with respect to each share represented thereby the Per Share Merger
Consideration and any cash in lieu of fractional shares of New Holding
Common Stock to be issued or paid in consideration therefor upon the
surrender of such certificate in accordance with Section 3.3, without
interest.
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(d) Withholding Taxes. The right of any stockholder of Discount to receive
the Per Share Merger Consideration shall be subject to and reduced by
the amount of any required Tax withholding obligation from the Per
Share Cash Portion of the Per Share Merger Consideration.
(e) Fractional Shares. No fraction of a share of New Holding Common Stock
will be issued in the Merger but, in lieu thereof, each holder of
Discount Common Stock who would otherwise be entitled to a fraction of
a share of New Holding Common Stock will be entitled to receive from
the Surviving Corporation, which amount shall be paid by the Exchange
Agent as provided for in Section 3.3 an amount in cash (rounded to the
nearest whole cent) equal to the product of (i) the fraction multiplied
by (ii) $29.11.
(f) Stock Options.
(i) At or immediately before the Effective Time, each outstanding
option to purchase shares of Discount Common Stock, granted under any
stock option or compensation plan or arrangement of Discount, and with
a per share exercise price or strike price of less than $15.00 per
share (an "In-the-Money Option") shall be cancelled and converted into
the right to receive at the Effective Time or as soon as practicable
thereafter in consideration for such cancellation an amount in cash
equal to the product of (1) the number of shares of the Discount Common
Stock previously subject to such In-the-Money Option and (2) the
difference between $15.00 and the exercise price per share of Discount
Common Stock previously subject to such In-the-Money Option. At the
Effective Time, such In-the-Money Options shall no longer be
outstanding and shall automatically be cancelled and retired and
converted into the right to receive the cash payment specified in this
Section 3.1(f)(i), and each holder of an In-the-Money Option shall
cease to have any rights with respect to the In-the-Money Option other
than the right to receive with respect thereto the cash payment
specified in this Section 3.1(f)(i) upon the surrender of the In-the-
Money Option in accordance with Section 3.3, without interest. The
surrender of the In-the-Money Option shall be deemed a release of any
and all rights the holder had or may have had in respect of such
option. In addition, the right of any holder of In-the-Money Options to
receive the cash payment specified in this Section 3.1(f)(i) shall be
subject to and reduced by the amount of any required tax withholding
obligation.
(ii) Each issued and outstanding stock option to purchase shares
of Discount Common Stock granted under any stock option or compensation
plan or arrangement of Discount that is not an outstanding In-the-Money
Option (each, a "Fully Converted Option", and together with the In-the-
Money Options, the "Outstanding Discount Options"), whether or not then
exercisable, shall at the Effective Time be converted into an option to
acquire, on substantially the same terms and conditions as were
applicable under such Fully Converted Option immediately prior to the
Effective Time (but reflecting the acceleration of vesting occasioned
by the consummation of the transactions contemplated by this Agreement)
and which option shall be considered issued under and subject to the
terms of the 2001 Acquiror Executive Stock Option Plan (the "Acquiror
Plan"), the number of shares of New Holding Common Stock determined by
multiplying the number of shares of Discount Common Stock that were
purchasable immediately prior to the Effective Time upon the exercise
of such Fully Converted Option by 0.5154 (the "Option Exchange Ratio")
(rounded as hereinafter provided) at a price per share (rounded up to
the nearest whole cent) equal to (A) the exercise price per share of
Discount Common Stock immediately prior to the Effective Time under
such Fully Converted Option divided by (B) the Option Exchange Ratio;
provided, however, that with respect to a Fully Converted Option with
the same exercise price and option term, the number of shares of New
Holding Common Stock to be represented by the Fully Converted Option
shall be computed on an aggregate basis so as to create options for
whole shares of New Holding Common Stock with any then remaining
fractional share rounded up the nearest whole share. As soon as
practicable after the Effective Time, New Holding shall deliver to each
holder of a Fully Converted Option a stock option agreement or
certificate issued under the Acquiror Plan as a replacement for the
stock option certificate previously provided to such holder by Discount
and evidencing such Fully Converted Option and setting forth such
holder's rights pursuant thereto, including the number of shares of New
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Holding Common Stock purchasable under the converted stock option and
replacement option agreement or certificate and the corresponding
exercise price thereunder. In addition, New Holding shall take all
corporate action necessary to reserve for issuance a sufficient number
of shares of New Holding Common Stock for delivery upon exercise of a
Fully Converted Option. As soon as practicable after the Effective
Time, New Holding shall file a registration statement on Form S-3 or
Form S-8, as the case may be (or any successor or appropriate forms),
or another appropriate form, with respect to the shares of New Holding
Common Stock subject to such Fully Converted Options and shall use its
reasonable best efforts to maintain the effectiveness of such
registration statement or registration statements (and maintain the
current status of the prospectus or prospectuses contained therein) for
so long as such Fully Converted Options, as herein converted, remain
outstanding.
For example, assume an out of the money option for 10,500 shares of
Discount Common Stock with an exercise price of $20.00. At the
Effective Time, the out of the money option shall be converted so as to
thereafter constitute an option to acquire 5,412 shares of New Holding
Common Stock (10,500 X 0.5154) (rounded up) at a price per share equal
to $38.80 ($20.00 / 0.5154).
(iii) As soon as practicable following the date of this
Agreement, Holding, Merger Sub and New Holding (or, if appropriate, any
committee administering any stock option or compensation plan or
arrangement) shall take such additional actions, if any, as may
reasonably be required or necessary to cause each Fully Converted
Option to be converted at the Effective Time by virtue of the Merger
and continued as an option of New Holding under the corresponding New
Holding option plans. On or prior to the Effective Date, Discount shall
take such additional action, if any, as may be reasonably required or
necessary to cause the stock option or compensation plans or
arrangements of Discount providing for the granting of stock options
with respect to stock of Discount ("Discount Option Plans") to
terminate immediately following the Effective Time and for the
provisions in any other plan, program or arrangement providing for the
issuance or grant by Discount of any interest in respect of the capital
stock of Discount to be terminated immediately following the Effective
Time. The holders of Outstanding Discount Options shall be entitled to
enforce this Section 3.1(f) against the Surviving Corporation.
(g) Adjustments to Per Share Merger Consideration. If, subject to Section
6.1, during the period between the date of this Agreement and the
Effective Time, any change in the outstanding shares of Discount Common
Stock or New Holding Common Stock shall occur (other than the change
contemplated by the Reincorporation), including by reason of any
reclassification, recapitalization, stock split or combination,
exchange or readjustment, or stock dividend with a record date during
such period, but excluding any change resulting from the issuance of
shares upon exercise of options, warrants or other rights to acquire
Discount Common Stock outstanding on the date of this Agreement and
listed in the Discount Disclosure Schedule, the Per Share Merger
Consideration (including both the Per Share Cash Portion of the Per
Share Merger Consideration and the Per Share Stock Portion of the Per
Share Merger Consideration) and the Option Merger Consideration
applicable to each Outstanding Discount Option shall be appropriately
adjusted.
Section 3.2 Stockholder Approval, Proxy Statement/Prospectus.
(a) Discount Meeting. Discount, acting through its Board of Directors,
shall in accordance with applicable law and its Charter Documents:
(i) as soon as practicable, duly call, give notice of, convene and
hold a special meeting of its stockholders for the purpose of
considering and taking action upon this Agreement, the Plan of Merger
and the Merger (the "Discount Meeting");
(ii) subject to its fiduciary duties under applicable laws and
subject to Section 7.1, recommend that its stockholders vote in favor
of the approval and adoption of this Agreement, the Plan of Merger, the
Merger and the transactions contemplated hereby (the "Discount
Recommendation") and
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include in the Proxy Statement/Prospectus with respect to the Discount
Meeting, the Discount Recommendation; and
(iii) use its reasonable best efforts (A) to obtain and furnish
the information required to be included by it in the Proxy
Statement/Prospectus, (B) to file the Proxy Statement/Prospectus with
the SEC as promptly as practicable after the date of this Agreement, in
accordance with Section 7.2, (C) to amend or supplement the Proxy
Statement/Prospectus from time to time as necessary to assure that it
does not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made,
not misleading, subject to the approval of Holding, which approval
Holding shall not unreasonably withhold, (D) after consultation with
Holding, ASCI and Merger Sub, to respond as promptly as is reasonably
practicable to any comments made by the SEC with respect to the Proxy
Statement/Prospectus, any preliminary version thereof or any amendments
or supplements thereto, (E) to cause the Proxy Statement/Prospectus and
any amendments or supplements thereto to be mailed to its stockholders
at the earliest practicable time, and (F) subject to the fiduciary
duties of its Board of Directors under applicable laws and subject to
Section 7.1, to obtain the necessary approval of the Merger by its
stockholders.
(b) No Amendment. After the adoption of this Agreement by the stockholders
of Discount, without the affirmative vote of the holders of shares of
Discount Common Stock representing a majority of the votes that may be
cast by the holders of all then outstanding shares of Discount Common
Stock, Discount will not (i) enter into any amendment to this Agreement
that would alter or change any of the terms and conditions of this
Agreement if such alteration or change would materially adversely
affect the holders of shares of Discount Common Stock, or (ii) waive
any condition set forth in Section 8.1 or 8.3 if such waiver would
materially adversely affect the holders of shares of Discount Common
Stock.
(c) New Holding's Consent; Approval of Reincorporation. New Holding, as the
sole stockholder of Merger Sub, hereby consents to the adoption of this
Agreement by Merger Sub and agrees that such consent shall be treated
for all purposes as a vote duly adopted at a meeting of the
stockholders of Merger Sub held for this purpose. The directors and the
stockholder of New Holding and the directors of Holding have each duly
adopted, approved and authorized the Reincorporation. The Principal
Holding Stockholders have entered into a binding and fully enforceable
voting agreement pursuant to which each Principal Holding Stockholder
agrees to vote in favor of adopting, approving and authorizing the
Reincorporation and Discount shall be a third party beneficiary of that
voting agreement. Prior to the Discount Meeting, Holding shall in
accordance with applicable law and its Charter Documents duly call,
give notice of, convene and hold a special meeting of its stockholders
for the purpose of considering and taking action upon the
Reincorporation.
Section 3.3 Exchanging Certificates and In-the-Money Options for Payment of
Merger Consideration and Option Merger Consideration. The procedures for
exchanging outstanding shares of Discount Common Stock and In-the-Money Options
for Merger Consideration and Option Merger Consideration pursuant to the Merger
are as follows:
(a) Exchange Agent. Prior to the Effective Time, New Holding and Holding
shall designate a United States bank or trust company, which shall be
US Stock Transfer & Trust, to act as exchange agent (the "Exchange
Agent") for the payment of Merger Consideration and Option Merger
Consideration upon surrender of certificates representing Discount
Common Stock and certificates or agreements representing In-the-Money
Options, and for no other purpose. At or immediately following the
Effective Time, (i) New Holding shall provide to the Exchange Agent the
shares of New Holding Common Stock to be issued as the Stock
Consideration and (ii) New Holding and ASCI shall cause the Surviving
Corporation to provide to the Exchange Agent from funds contributed to
or otherwise provided to the Surviving Corporation by ASCI cash in
immediately available funds in an amount sufficient to pay the Cash
Consideration and the Option Merger Consideration (such cash and stock
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being hereinafter referred to as the "Exchange Fund"). The monies in
the Exchange Fund may, as directed by the Surviving Corporation (so
long as such directions do not impair the rights of holders of shares
of Discount Common Stock to receive the Per Share Merger Consideration
promptly upon the surrender of their shares in accordance with this
Agreement or the rights of holders of In-the-Money Options to receive
the Option Merger Consideration promptly upon surrender of their
options in accordance with this Agreement), be invested by the Exchange
Agent in direct obligations of the United States of America,
obligations for which the full faith and credit of the United States of
America is pledged to provide for the payment of principal and
interest, commercial paper rated of the highest quality by Moody's
Investors Services, Inc. or Standard & Poor's Corporation, or
certificates of deposit issued by a commercial bank having at least
$1,000,000,000 in assets. Deposit of funds with the Exchange Agent
shall not relieve the Surviving Corporation of its obligations to make
payments in respect of the shares of Discount Common Stock or in
respect of In-the-Money Options.
(b) Exchange Procedures. Promptly after the Effective Time, New Holding
shall irrevocably instruct the Exchange Agent and the Exchange Agent
shall mail and/or make available to each holder of record of a
certificate or certificates which immediately prior to the Effective
Time represented outstanding shares of Discount Common Stock (the
"Certificates") whose shares of Discount Common Stock were converted
pursuant to Section 3.1 into the right to receive Per Share Merger
Consideration (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent, and shall be in such form and have such other
provisions as New Holding and Discount may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in
exchange for Per Share Merger Consideration. As promptly as practicable
after surrender of a Certificate for cancellation to the Exchange Agent
or to such other agent or agents as may be appointed by New Holding,
together with such letter of transmittal, duly executed, the holder of
such Certificate shall be paid in exchange therefor, subject to any
required withholding of Taxes, the amount of cash and the shares of New
Holding Common Stock that such holder is entitled to receive as Per
Share Merger Consideration plus any cash in lieu of fractional shares
that such holder is entitled to receive with respect to the shares of
Discount Common Stock theretofore represented by such Certificate, and
the Certificate so surrendered shall immediately be cancelled. In the
event of a transfer of ownership of Discount Common Stock which is not
registered in the transfer records of Discount, payment may be made to
a Person other than the Person in whose name the Certificate so
surrendered is registered, if such Certificate shall be properly
endorsed, with signature guaranteed, or otherwise be in proper form for
transfer and the Person requesting such payment shall pay any transfer
or other taxes required by reason of the payment to a Person other than
the registered holder of such Certificate or establish to the
satisfaction of New Holding that such tax has been paid or is not
applicable. Until surrendered as contemplated by this Section 3.3, each
Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the certificate
the shares of New Holding Common Stock and the amount of cash, without
interest, that the holder thereof is entitled to receive as Per Share
Merger Consideration (together with any cash in lieu of fractional
shares) with respect to the shares of Discount Common Stock theretofore
represented by such Certificate, subject to any required withholding of
Taxes from the Per Share Cash Portion of the Per Share Merger
Consideration. No interest shall be paid or shall accrue on the cash
payable upon surrender of any Certificate. Promptly after the Effective
Time, New Holding shall irrevocably instruct the Exchange Agent and the
Exchange Agent shall take similar actions to address payment of cash
with respect to In-the-Money Options.
(c) No Further Ownership Rights in Discount Common Stock. Delivery of the
Merger Consideration and Option Merger Consideration in accordance with
the terms of this Article 3 upon conversion of any shares of Discount
Common Stock and any In-the-Money Options in the Merger, and the
assumption by New Holding of any Fully Converted Option, shall be
deemed to have satisfied in full all rights pertaining to such shares
of Discount Common Stock or such Outstanding Discount
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Options, as the case may be, subject, however, to the Surviving
Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which may
have been declared or made by Discount on such shares of Discount
Common Stock in accordance with the terms of this Agreement (to the
extent permitted under Section 6.1) prior to the date hereof and which
remain unpaid at the Effective Time, and from and after the Effective
Time there shall be no further registration of transfers on the stock
transfer books of the Surviving Corporation of the shares of Discount
Common Stock which were outstanding immediately prior to the Effective
Time and no further exercises of Outstanding Discount Options. If,
after the Effective Time, Certificates or option agreements or
certificates are presented to the Surviving Corporation or the Exchange
Agent for any reason, they shall be cancelled and exchanged as provided
in this Section 3.3.
(d) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the stockholders and optionholders of Discount
for 180 days after the Effective Time shall be delivered to the
Surviving Corporation, upon demand of the Surviving Corporation,
subject to compliance with any applicable abandoned property, escheat
or similar law, and any stockholders or optionholders of Discount who
have not previously complied with this Section 3.3 shall thereafter
look only to New Holding and the Surviving Corporation for payment of
their claim for Merger Consideration or Option Merger Consideration,
without interest; provided, however, that New Holding and the Surviving
Corporation shall continue to be liable for any payments required to be
made thereafter under Section 3.1 hereof.
(e) No Liability. To the extent permitted by applicable law, none of ASCI,
New Holding, the Surviving Corporation or the Exchange Agent or any of
their Affiliates shall be liable to any Person in respect of any cash
or stock from the Exchange Fund delivered to a public official pursuant
to any applicable abandoned property, escheat or similar law. If any
Certificate or option agreement or certificate has not been surrendered
prior to five years after the Effective Time (or immediately prior to
such earlier date on which Merger Consideration in respect of such
Certificate would otherwise escheat to or become the property of any
Governmental Entity), any such shares, cash, dividends or distributions
in respect of such Certificate and any such rights in respect of such
option agreement or certificate shall, to the extent permitted by
applicable law, become the property of the Surviving Corporation, free
and clear of all claims or interest of any Person previously entitled
thereto.
(f) Withholding Rights. The Surviving Corporation shall be entitled to
deduct and withhold from the cash portion of the consideration
otherwise payable pursuant to this Agreement to any holder of shares of
Discount Common Stock or In-the-Money Options such amounts as it is
required to deduct and withhold with respect to the making of such
payment under the Code, or any provision of state, local or foreign tax
law. To the extent that amounts are so withheld by the Surviving
Corporation, such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the holder of the shares of
Discount Common Stock or In-the-Money Options in respect of which such
deduction and withholding was made by the Surviving Corporation.
(g) Lost Certificates and Lost Option Agreements and Certificates. If any
Certificate or any option agreement or certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact
by the Person claiming such Certificate or such option agreement or
certificate to be lost, stolen or destroyed, the satisfaction of any
applicable rules of the New York Stock Exchange and, if required by the
Surviving Corporation, the posting by such Person of a bond in such
reasonable amount as the Surviving Corporation may direct as indemnity
against any claim that may be made against it with respect to such
Certificate or such option agreement or certificate, the Exchange Agent
will pay in exchange for such lost, stolen or destroyed Certificate or
option agreement or certificate, as the case may be, the Merger
Consideration or the Option Merger Consideration deliverable in respect
thereof pursuant to this Agreement.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF DISCOUNT
Discount represents and warrants to Holding, New Holding, ASCI and Merger
Sub that the statements contained in this Article 4 are true and correct,
except as set forth herein or as set forth in the disclosure schedule delivered
by Discount to Holding on or before the date of this Agreement (the "Discount
Disclosure Schedule"). The Discount Disclosure Schedule shall be arranged in
paragraphs corresponding to the numbered and lettered sections contained in
this Article 4 (and in the other Articles of this Agreement) and the disclosure
in any paragraph shall qualify other sections in this Article 4 (and in the
other Articles of this Agreement) to the extent that it is readily apparent
from a reading of such disclosure that it should also qualify or apply to such
other sections.
Section 4.1 Organization of Discount.
(a) Discount and each of its Subsidiaries is duly organized, validly
existing and in active status or good standing under the laws of the
jurisdiction of its incorporation, has all requisite corporate power to
own, lease and operate its properties and to carry on its business as
now being conducted, and is duly qualified to do business and is in
good standing as a foreign corporation in each jurisdiction in which
the failure to be so qualified would have a Material Adverse Effect.
(b) The Discount Disclosure Schedule lists each Discount Subsidiary and its
jurisdiction of incorporation. All the outstanding shares of capital
stock of each Discount Subsidiary have been validly issued and are
fully paid and nonassessable and, except as set forth in the Discount
Disclosure Schedule, are owned by Discount, by another Discount
Subsidiary or by Discount and another Discount Subsidiary, free and
clear of all Liens and free of any other restriction (including any
restriction on the right to vote, sell or otherwise dispose of such
capital stock).
(c) Except for the Subsidiaries listed in the Discount Disclosure Schedule,
neither Discount nor any of its Subsidiaries directly or indirectly
owns any equity or similar interest in, or any interest convertible
into or exchangeable or exercisable for, any corporation, partnership,
joint venture or other business association or entity.
(d) The copies of the Charter Documents of Discount and each Subsidiary
provided to Holding are complete and correct as of the date of this
Agreement.
Section 4.2 Discount Capital Structure.
(a) The authorized capital stock of Discount consists of 50,000,000 shares
of Common Stock ("Discount Common Stock") and 5,000,000 shares of
Preferred Stock ("Discount Preferred Stock"). As of June 30, 2001, (i)
16,707,923 shares of Discount Common Stock were issued and outstanding,
all of which are validly issued, fully paid and nonassessable, (ii) no
shares of Discount Common Stock were held in the treasury of Discount
or by Subsidiaries of Discount, and (iii) no shares of Discount
Preferred Stock were issued and outstanding. The Discount Disclosure
Schedule shows the number of shares of Discount Common Stock reserved
for future issuance pursuant to stock options and warrants granted and
outstanding as of June 30, 2001 and the Discount Option Plans and the
number of shares of Discount Common Stock and the number of shares of
Discount Preferred Stock reserved for issuance in connection with the
rights issued pursuant to the Stockholder Rights Agreement dated as of
November 21, 2000, as amended from time to time between Discount and
ChaseMellon Shareholder Services, LLC (n/k/a Mellon Investor Services
LLC). No change in such capitalization has occurred between June 30,
2001 and the date of this Agreement. All shares of Discount Common
Stock reserved for issuance as specified above are duly authorized and,
upon issuance on the terms and conditions specified in the instruments
pursuant to which they are issuable, shall be validly issued, fully
paid and nonassessable. There are no bonds, debentures, notes or other
indebtedness of Discount having the right to vote (or convertible into
securities having the right to vote) on any
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matters on which stockholders of Discount may vote. There are no
obligations, contingent or otherwise, of Discount or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of
Discount Common Stock, Discount Preferred Stock, or the capital stock
of any Subsidiary or to provide funds to or make any material
investment (in the form of a loan, capital contribution or otherwise)
in any such Subsidiary or any other entity other than guarantees of
bank obligations of Subsidiaries entered into in the ordinary course of
business. The Discount Disclosure Schedule sets forth a true and
complete description of the changes in vesting of Outstanding Discount
Options that would occur if the Merger were consummated.
(b) Except as set forth in the Discount Disclosure Schedule or as reserved
for future grants of options and warrants under the Discount Option
Plans, there are no equity securities of any class of Discount or any
of its Subsidiaries, or any security exchangeable or convertible into
or exercisable for such equity securities, issued, reserved for
issuance or outstanding, and there are no options, warrants, equity
securities, calls, rights, commitments, undertakings or agreements of
any character to which Discount or any of its Subsidiaries is a party
or by which such entity is bound (including under letters of intent,
whether binding or nonbinding) obligating Discount or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock or other equity
interests of Discount or any of its Subsidiaries or obligating Discount
or any of its Subsidiaries to grant, extend, accelerate the vesting of,
otherwise modify or amend or enter into any such option, warrant,
equity security, call, right, commitment or agreement. To the Knowledge
of Discount, there are no voting trusts, proxies or other voting
agreements or understandings with respect to the shares of capital
stock or other equity interests of Discount or any Subsidiary.
Section 4.3 Authority; No Conflict; Required Filings and Consents.
(a) Discount has all requisite corporate power and authority to execute and
deliver this Agreement and, subject only to the approval of the Merger
by Discount's stockholders under the FBCA, to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby
by Discount have been duly authorized by all necessary corporate action
on the part of Discount, subject only to the approval of the Merger by
Discount's stockholders under the FBCA; the vote of Discount's
stockholders required to approve the Merger is the affirmative vote of
the holders of a majority of the shares of Discount Common Stock
outstanding on the record date for the Discount Meeting ("Stockholder
Approval"). This Agreement has been duly executed and delivered by
Discount and constitutes the valid and binding obligation of Discount,
enforceable against Discount in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium
and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles (the "Bankruptcy and
Equity Exception").
(b) Except as set forth in the Discount Disclosure Schedule, the execution
and delivery of this Agreement does not, and the consummation of the
transactions contemplated hereby and thereby will not (i) assuming the
approval of the stockholders of Discount as contemplated by Section
3.2, conflict with, or result in any violation or breach of, any
provision of the Charter Documents of Discount or any of its
Subsidiaries, (ii) result in any violation or breach of, or constitute
(with or without notice or lapse of time, or both) a default (or give
rise to a right of termination, cancellation or acceleration of any
obligation or loss of any material benefit) under, or require a consent
or waiver under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, lease, loan, credit agreement,
contract or other agreement, instrument or obligation to which Discount
or any of its Subsidiaries is a party or by which any of them or any of
their properties or assets may be bound, or (iii) conflict with,
violate, or cause the termination of any instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Discount or any of its
Subsidiaries or any of its or their properties or assets, except, in
the case of (ii) and (iii), for any such conflicts, violations,
defaults, terminations, cancellations or accelerations which are not,
individually or in the aggregate, reasonably likely to have a Material
Adverse Effect.
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(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or
commission or other governmental authority or instrumentality
("Governmental Entity") is required by or with respect to Discount or
any of its Subsidiaries in connection with the execution and delivery
of this Agreement or the consummation of the transactions contemplated
hereby, except for (i) the filing of the pre-merger notification report
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended ("HSR Act") and otherwise satisfying the requirements of the
HSR Act, (ii) the filing of the Articles of Merger with the Department
of State of the State of Florida and appropriate documents with the
relevant authorities of the other jurisdictions in which Discount is
qualified to do business, (iii) the simultaneous merger of Holding with
and into New Holding, (iv) the filing of the Proxy Statement/Prospectus
with the SEC in accordance with the Exchange Act, (v) such consents,
approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable state securities laws and
the laws of any foreign country and (vi) such other consents,
authorizations, filings, approvals and registrations which, if not
obtained or made, would not be reasonably likely to have a Material
Adverse Effect.
Section 4.4 SEC Filings; Financial Statements.
(a) Since the date of its initial public offering, and except to the extent
that their failure to do so would not be reasonably likely to have a
Material Adverse Effect, Discount and/or its Subsidiaries have filed
all forms, reports, registration statements, prospectuses, schedules,
statements and documents, including the exhibits thereto, required to
be filed by Discount and/or its Subsidiaries with the SEC under the
Securities Act or the Exchange Act, including without limitation the
Exchange Act Filings (these forms, reports, registration statements,
prospectuses, schedules, statements and documents, including the
exhibits thereto, are referred to collectively as "Discount SEC
Reports"). Each Discount SEC Report (i) at the time filed complied in
all material respects with the applicable requirements of the
Securities Act and the Exchange Act, as the case may be, and (ii) did
not at the time filed (or if amended or superseded by a filing prior to
the date of this Agreement, then on the date of such filing) contain
any untrue statement of a material fact or omit to state a material
fact required to be stated in such Discount SEC Report or necessary in
order to make the statements in such Discount SEC Report, in the light
of the circumstances under which they were made, not misleading. None
of Discount's Subsidiaries is required to file any forms, reports or
other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the Discount SEC Reports, as of the
date of the applicable Discount SEC Report (collectively, the "Discount
SEC Financial Statements"), as well as the unaudited consolidated
balance sheet, statements of income and cash flows of Discount and its
Subsidiaries as of and for the three-month and twelve-month periods
ended May 29, 2001 included in the Discount Disclosure Schedule (the
"Discount Unaudited Financial Statements", and collectively with the
Discount SEC Financial Statements, the "Discount Financial
Statements"), complied as to form in all material respects with the
applicable published rules and regulations of the SEC with respect
thereto, were prepared in accordance with U.S. GAAP applied on a
consistent basis throughout the periods involved (except as may be
indicated in the notes to such Discount Financial Statements, in the
Discount SEC Reports, or, in the case of unaudited interim financial
statements, as permitted by Form 10-Q of the SEC) and fairly presented
the consolidated financial position of Discount and its Subsidiaries as
of the dates and the consolidated results of its operations and cash
flows for the periods indicated, except that the Discount Unaudited
Financial Statements were or are subject to normal and recurring year-
end adjustments, and do not contain any of the footnotes required by
U.S. GAAP or by the requirements of Form 10-Q. The unaudited balance
sheet of Discount as of May 29, 2001 is referred to herein as the
"Discount Balance Sheet."
Section 4.5 No Undisclosed Liabilities. Except as set forth on the Discount
Disclosure Schedule or as disclosed in the Discount SEC Reports that have been
filed and are publicly available prior to the date hereof or
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as disclosed in the Discount Unaudited Financial Statements, and except for
normal or recurring liabilities incurred since the date of the Discount Balance
Sheet in the ordinary course of business consistent with past practices,
Discount and its Subsidiaries do not have any liabilities, either accrued,
contingent or otherwise (whether or not required to be reflected in financial
statements in accordance with GAAP), and whether due or to become due, which
individually or in the aggregate, have had or will have a Material Adverse
Effect.
Section 4.6 Absence of Certain Changes or Events. Except as disclosed in the
Discount SEC Reports that have been filed and are publicly available prior to
the date hereof or the Discount Disclosure Schedule, since the date of the
Discount Balance Sheet, Discount and its Subsidiaries have conducted their
businesses only in the ordinary course and in a manner consistent with recent
past practice and, since such date, there has not been (i) any change in the
financial condition, results of operations, business, prospects, assets or
properties of Discount and its Subsidiaries, taken as a whole, that has had, or
will have, a Material Adverse Effect; (ii) any damage, destruction or loss
(whether or not covered by insurance) with respect to Discount or any of its
Subsidiaries that has had, or will have, a Material Adverse Effect; (iii) any
material change by Discount in its accounting methods, principles or practices
to which Holding has not previously consented in writing; (iv) any revaluation
by Discount of any of its assets or liabilities that has had, or will have, a
Material Adverse Effect; or (v) any other action or event that would have
required the consent of New Holding pursuant to Section 6.1 of this Agreement
had such action or event occurred after the date of this Agreement.
Section 4.7 Taxes.
(a) Except as set forth on the Discount Disclosure Schedule, Discount and
each of its Subsidiaries (i) have timely filed all material Tax Returns
required to be filed by them prior to the date of this Agreement
(taking into account extensions) and will timely file all such material
Tax Returns required to be filed on or before the Closing Date except
where the failure to so file is not, individually or in the aggregate,
reasonably likely to have a Material Adverse Effect, and (ii) have paid
or accrued, or will pay or accrue, all material Taxes payable (whether
or not such Taxes are set forth on the Tax Returns of Discount and its
Subsidiaries or are otherwise then due) for all taxable periods or
partial periods ending on or before the Closing Date except where the
failure to so pay or accrue is not, individually or in the aggregate,
reasonably likely to have a Material Adverse Effect. Discount and each
of its Subsidiaries have withheld or collected and paid over to the
appropriate governmental authorities (or are properly holding for such
payment) all Taxes required by law to be withheld or collected except
where the failure to so pay is not, individually or in the aggregate,
reasonably likely to have a Material Adverse Effect. There are no liens
for Taxes upon the assets of Discount or any of its Subsidiaries (other
than liens for Taxes that are not yet due or that are being contested
in good faith by appropriate proceedings and other than liens for Taxes
that are not, individually or in the aggregate, reasonably likely to
have a Material Adverse Effect).
(b) Except as set forth in the Discount Disclosure Schedule, (i) neither
Discount nor any Discount Subsidiary is currently the beneficiary of
any extension of time within which to file any material Tax Return,
(ii) neither Discount nor any Discount Subsidiary has waived any
statute of limitations in respect of material Taxes or agreed to, or
requested, any extension of time with respect to a material Tax
assessment or deficiency, (iii) no action or proceeding (including, but
not limited to, any audit, examination, deficiency, claim, assessment
or violation) is pending with respect to any past or current material
Tax liability of Discount or any Discount Subsidiary, or, to the
Knowledge of Discount and any Discount Subsidiary, threatened by any
governmental authority, (iv) neither Discount nor any Discount
Subsidiary has received, before the date of this Agreement, a notice of
deficiency or assessment of additional material Taxes which notice or
assessment remains unresolved, and (v) all resolved material Tax
assessments against Discount and any Discount Subsidiary have been paid
or are reflected in the Discount Balance Sheet.
(c) (i) Neither Discount nor any Discount Subsidiary has any liability for
the Taxes of any Person under Treasury Regulation Section 1.1502-6
(or any similar provision of state, local or foreign
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law), as a transferee or successor, by contract, or otherwise other
than liability that is not, individually or in the aggregate,
reasonably likely to have a Material Adverse Effect.
(ii) Except as set forth on the Discount Disclosure Schedule, neither
Discount nor any Discount Subsidiary is or ever has been a party
to or bound by any Tax indemnity, Tax sharing or Tax allocation
agreement (whether written or unwritten or arising under operation
of federal law as a result of being a member of a group filing
consolidated or combined Tax Returns, under operation of any state
or local laws as a result of being a member of a combined,
consolidated or unitary group, or under comparable laws of any
other foreign jurisdiction) which includes a party other than
Discount and the Discount Subsidiaries, nor does Discount or any
Discount Subsidiary owe any amount under any such agreement.
(d) Neither Discount nor any Discount Subsidiary is a "consenting
corporation" within the meaning of Section 341(f) of the Code, and none
of the assets of Discount or the Subsidiaries are subject to an
election under Section 341(f) of the Code.
(e) Except as set forth on the Discount Disclosure Schedule, neither
Discount nor any of its Subsidiaries has made any payments, is
obligated to make any payments, or is a party to any agreement that
could obligate it to make any payments that will be an "excess
parachute payment" under Section 280G of the Code as a result of the
transactions contemplated by this Agreement. Except as set forth on the
Discount Disclosure Schedule, neither Discount nor any Discount
Subsidiary has made any payments, is obligated to make any payments, or
is a party to any agreement that under certain circumstances could
obligate it to make any payments that will be non-deductible under Code
Section 162, 280G or 404.
(f) Discount has made available to Holding and ASCI complete, current and
correct copies of the federal and state Tax Returns of Discount and the
Discount Subsidiaries for the fiscal years ended in 1997, 1998, 1999
and 2000.
Section 4.8 Properties.
(a) Discount has provided to Holding a true and complete list of all owned
stores and all other Discount Owned Real Property with a fair market
value in excess of $100,000 with respect to any parcel (collectively,
"Discount Material Real Property"), as well as all other owned real
property. Except as set forth in the Discount Disclosure Schedule, each
of Discount and each Subsidiary of Discount has good, valid, marketable
and insurable title in fee simple to all of its respective Discount
Material Real Property and good, valid, and marketable title to all of
its other assets as are material to the conduct of the business of
Discount and the Subsidiaries of Discount as currently conducted
(collectively, "Discount Material Personal Property"), in each case
free and clear of all Liens other than (i) Discount Permitted Liens,
(ii) with respect to Discount Material Real Property, imperfections in
title and Liens which individually or in the aggregate do not or will
not have a Material Adverse Effect, or (iii) Liens set forth or
described in the Discount Disclosure Schedule. Discount has permitted
Holding and ASCI to have access to the real estate files and related
documentation for the Discount Material Real Property and all other
Discount Owned Real Property, which files, after taking into account,
as if part of such files, the related documentation which has been
delivered to Holding or its representatives by Discount, are complete,
current and correct in all material respects except as set forth on the
Discount Disclosure Schedule.
(b) Discount has provided to Holding a true and complete list of all
Discount Leased Real Property under leases for stores or with an annual
rent in excess of $25,000 (collectively, "Discount Material Leases"),
all other Discount Leased Real Property and the location of all
Discount Leased Real Property. With respect to each such Discount
Material Lease and except as set forth on the Discount Disclosure
Schedule: (i) each Discount Material Lease is the legal, valid, binding
and enforceable obligation of Discount subject to the Bankruptcy and
Equity Exception, and is in full force and effect; (ii) each Discount
Material Lease will continue to be the legal, valid, binding, and
enforceable obligation of Discount and will remain in full force and
effect immediately following the Closing in
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accordance with the terms thereof as in effect prior to the Closing
(except to the extent that such Discount Material Lease is properly
terminated following the Closing for a failure to secure a consent that
may prove to have been required as a result of the change of control
effectuated by virtue of the consummation of the transactions
contemplated by this Agreement); (iii) neither Discount nor, to the
Knowledge of Discount, any other party to the Discount Material Lease
is in breach or default, and to the Knowledge of Discount no event has
occurred which, with notice or lapse of time, would constitute a breach
or default or permit termination, modification or acceleration
thereunder; (iv) Discount has not assigned, transferred, conveyed,
mortgaged, deeded in trust or encumbered any interest in the leasehold
or subleasehold; (v) Discount has delivered to Holding true, correct
and complete copies of all Discount Material Leases, including all
amendments thereto and such copies reflect any and all provisions or
agreements with the respective landlord which would require consents,
if any, as a result of the change of control effectuated by virtue of
the consummation of the transactions contemplated by this Agreement;
and (vi) each of Discount and its Subsidiaries has good, valid and
marketable leasehold title to each of its respective Discount Leased
Real Properties, free and clear of all Liens other than Discount
Permitted Liens; except, in the case of clauses (i) through (vi), where
the same is not reasonably likely to have a Material Adverse Effect.
Discount has reviewed the schedule (prepared by Holding's advisors) of
consents which may be required to Discount Material Leases as a result
of the change of control effectuated by virtue of the consummation of
the transactions contemplated by this Agreement, and without any
independent investigation, represents that, to its Knowledge, such
schedule of consents is true and accurate.
(c) The Discount Disclosure Schedule contains a complete and accurate list
of all of Discount's and its Subsidiaries material trademarks and
describes all of the other material Discount Intellectual Property
Rights, including information as to all registrations or other filings
related to such trademarks and Discount Intellectual Property Rights.
The Discount Intellectual Property Rights listed in the Discount
Disclosure Schedule are all those material intellectual property rights
necessary for the conduct of the business of Discount and the Discount
Subsidiaries as presently conducted. Except as set forth in the
Discount Disclosure Schedule, neither Discount nor any Discount
Subsidiary has any obligation to compensate any Person for the use of
any material Discount Intellectual Property Rights nor has Discount or
any Discount Subsidiary granted to any Person any license, option or
other rights to use in any manner any of the material Discount
Intellectual Property Rights, whether requiring the payment of
royalties or not. The material Discount Intellectual Property Rights
will not cease to be rights of Discount or any Discount Subsidiary or
be impaired by reason of the performance of this Agreement or the
consummation of the transactions contemplated hereby. No other Person
(i) has notified Discount or any Discount Subsidiary that such Person
claims any ownership of or right to use any material Discount
Intellectual Property Rights or (ii) is infringing upon any Discount
Intellectual Property Rights except for such infringements that are not
reasonably likely to have a Material Adverse Effect. Except as set
forth in the Discount Disclosure Schedule, Discount's and the Discount
Subsidiaries' use of the material Discount Intellectual Property Rights
does not conflict with, infringe upon or otherwise violate the valid
rights of any third party except for such conflicts or infringements
that are not reasonably likely to have a Material Adverse Effect. No
written notice has been received and not fully resolved and, no action
has been instituted or, to the Knowledge of Discount, threatened
against Discount or any Discount Subsidiary alleging that Discount's or
any Discount Subsidiary's use of the material Discount Intellectual
Property Rights infringes upon or otherwise violates any rights of a
third party.
Section 4.9 Agreements, Contracts and Commitments. The Discount Disclosure
Schedule lists, as of the date of this Agreement, (i) all contracts in the
nature of mortgages, indentures, promissory notes, loan or credit agreements,
lease obligations or similar instruments under which Discount or its
Subsidiaries have borrowed or may borrow at least $250,000, (ii) all employment
agreements, change-in-control arrangements or change-in-control bonuses,
retention agreements, severance agreements and non-competition agreements (and
with respect to this subparagraph (ii) only, also lists the individual dollar
amounts that would be payable to the parties to
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such agreements either as a result of the transactions contemplated by this
Agreement or if the services of the counterparty to such agreement were to be
terminated immediately following the Closing based on covered positions and
compensation as of June 30, 2001), (iii) all agreements with vendors and
suppliers involving purchases in excess of $1,000,000 annually and (iv) all
other contracts or other written agreements whether or not made in the ordinary
course of business which are material to the business of Discount and its
Subsidiaries taken as a whole and which, if lost, would be reasonably likely to
have a Material Adverse Effect (collectively, all such contracts and agreements
referenced in items (i) through (iv) are referred to as the "Discount Material
Contracts"). Neither Discount nor any Subsidiary is in default, and no event
has occurred which, whether with or without notice, lapse of time or the
happening or occurrence of any other event, would constitute a default under
any of the contracts or agreements set forth in the Discount Disclosure
Schedule, where such default is reasonably likely to have a Material Adverse
Effect. Each Discount Material Contract that has not expired by its terms is in
full force and effect, and no party to any of the Discount Material Contracts
will have the right to terminate such contract as a result of the transactions
contemplated by this Agreement. Except as set forth on the Discount Disclosure
Schedule, none of the Discount Material Contracts is currently being
renegotiated, and Discount has no Knowledge that any Discount Material Contract
will be the subject of a voluntary or regulatory ordered renegotiation within
12 months after the date of this Agreement.
Section 4.10 Litigation. Except as described in the Discount SEC Reports
that have been filed and are publicly available prior to the date hereof or as
set forth on the Discount Disclosure Schedule, there is no action, suit or
proceeding, claim, arbitration or investigation against Discount or any of its
Subsidiaries pending or as to which Discount or any of its Subsidiaries has
received any written notice of assertion, which, individually or in the
aggregate, will or would be reasonably likely to have a Material Adverse Effect
or a material adverse effect on the ability of Discount to consummate the
transactions contemplated by this Agreement. There is no judgment, decree,
injunction, rule or order of any Governmental Entity or arbitration outstanding
against Discount or any of its Subsidiaries which is reasonably likely to have
a Material Adverse Effect.
Section 4.11 Employee Benefit Plans.
(a) Discount has listed in the Discount Disclosure Schedule all material
employee benefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), a
general description of the type of bonus plans provided to employees
whose positions have historically averaged annual bonuses less than
$25,000, all bonus plans for any current or former employee who has or
whose position has historically averaged annual bonuses of $25,000 or
more or who is an officer, all bonus plans for any current or former
officer and all stock option, stock purchase, incentive, deferred
compensation, supplemental retirement or severance plans covering two
or more employees or material agreements providing for such benefits,
for the benefit of, or relating to, any current or former employee,
director or independent contractor providing services to Discount, any
Subsidiary, or any entity which is a member (an "ERISA Affiliate") of
(i) a controlled group of corporations, (ii) a group of trades or
businesses (whether or not incorporated) under common control with
Discount, or (iii) an affiliated service group, all within the meaning
of Section 414 of the Code, which includes Discount, or any Subsidiary
of Discount (together, the "Discount Employee Plans").
(b) With respect to each Discount Employee Plan, Discount has made
available to Holding a true and correct copy of (i) the most recent
annual report (Form 5500) filed with the Internal Revenue Service
("IRS") (and the related financial statement) relating to a Discount
Employee Plan subject to such reporting requirement, (ii) such Discount
Employee Plan, including all amendments, (iii) the most recent summary
plan description for each Discount Employee Plan for which such summary
plan description is required, (iv) each trust agreement and group
annuity contract, if any, relating to such Discount Employee Plan,
including all amendments, (v) the most recent actuarial report or
valuation relating to a Discount Employee Plan subject to Title IV of
ERISA, and (vi) the most recent IRS determination letter (if
applicable) for each Discount Employee Plan intended to be a qualified
plan under Section 401(a) of the Code.
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(c) With respect to the Discount Employee Plans, individually and in the
aggregate, no event has occurred and there exists no condition or set
of circumstances, in connection with which Discount could be subject to
any liability that is reasonably likely to have a Material Adverse
Effect under ERISA, the Code or any other applicable law.
(d) None of Discount, any Subsidiary of Discount or any entity that is, or
at any time has been, considered one employer with Discount under
Section 4001 of ERISA or Section 414 of the Code contributes or has
ever contributed or been obligated to contribute to any "multiemployer
plan" within the meaning of Sections 3(37) or 4001(a)(3) of ERISA or to
any defined benefit pension plan subject to Title IV of ERISA or to
Part 3 of Subpart B of Title I of ERISA.
(e) With respect to the Discount Employee Plans, individually and in the
aggregate, and except as set forth on the Discount Disclosure Schedule,
there are no funded benefit obligations for which contributions have
not been made or properly accrued and there are no unfunded benefit
obligations which have not been accounted for by reserves, or otherwise
properly footnoted, in either case in accordance with GAAP, on the
financial statements of Discount, which obligations are reasonably
likely to have a Material Adverse Effect.
(f) Except as disclosed in Discount SEC Reports filed prior to the date of
this Agreement, except as set forth on the Discount Disclosure Schedule
and except as provided for in this Agreement, neither Discount nor any
of its Subsidiaries is a party to any oral or written (i) agreement
with any current or former officer or other employee of Discount or any
of its Subsidiaries, the benefits of which are contingent, or the terms
of which are materially altered, upon the occurrence of a transaction
involving Discount of the nature contemplated by this Agreement, or by
the termination of employment following such transaction, (ii)
agreement with any current or former officer or senior management
employee of Discount, or with any other current or former employee of
Discount, providing any term of employment or compensation guarantee
which would continue after the Closing or otherwise preventing the
termination at will of such officer or employee after the Closing, or
(iii) agreement, arrangement or plan, including any stock option plan,
stock appreciation right plan, restricted stock plan or stock purchase
plan, deferred compensation, retirement or similar plan, change of
control plan or arrangement, retention plan or arrangement, or
severance plan or arrangement, any of the benefits of which will be
increased, or the vesting or funding of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement, and with respect to any item disclosed under this Section
4.11(f) the Discount Disclosure Schedule includes, to the extent
determinable, the value of benefits vested, increased or accelerated.
(g) Except as disclosed in the Discount Disclosure Schedule, (i) there are
no pending or, to the Knowledge of Discount, threatened claims,
actions, suits, termination proceedings, or investigations by any
Governmental Entity against or involving any Discount Employee Plan and
(ii) any Discount Employee Plan intended to be qualified under Section
401(a) of the Code has received a determination letter from the
Internal Revenue Service to that effect, which has not been revoked,
and nothing has occurred since the date of the most recent
determination letter that would materially and adversely affect such
qualification.
Section 4.12 Compliance With Laws. Discount and its Subsidiaries have
complied with, are not in violation, and have not received any written notice
that they have been or are in violation of, any federal, state or local
statute, law or regulation or any judgment, decree or order of any Governmental
Entity with respect to the conduct of their respective business, or the
ownership or operation of their respective businesses, except for failures to
comply or violations which, individually or in the aggregate, have not been
fully resolved with no continuing material liability to Discount and the
Discount Subsidiaries or are not reasonably likely to have a Material Adverse
Effect. Discount and its Subsidiaries have in effect all federal, state, local
and foreign governmental approvals, authorizations, certificates, filings,
franchises, notices, permits, variances and rights
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("Discount Approvals") necessary for them to own or lease and operate their
properties and assets and to carry on their respective businesses as now
conducted and there has occurred no default under any Discount Approval, or
failure to obtain such Discount Approval, which would individually or in the
aggregate have a Material Adverse Effect.
Section 4.13 Registration Statement; Blue Sky Filings; Proxy
Statement/Prospectus; Other Information. None of the information supplied or to
be supplied in writing by Discount which is included in either the Registration
Statement, the Blue Sky Filings, or the Proxy Statement/Prospectus and any
other documents to be filed with the SEC or any regulatory agency in connection
with the transactions contemplated hereby will, at the respective times such
documents are filed, or, as applicable, declared effective, and at the
Effective Time, and, with respect to the Proxy Statement/Prospectus, when first
published, sent or given to stockholders of Discount, in light of the
circumstances under which it shall be made, be false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements therein not misleading with respect to any material fact
or, in the case of the Proxy Statement/Prospectus or any amendment thereof or
supplement thereto, at the time of the special meeting of Discount's
stockholders provided for in Section 3.2, be false or misleading with respect
to any material fact, or omit to state any material fact necessary to correct
any statement in any earlier communication with respect to the solicitation of
any proxy for such meeting. If, at any time prior to the Effective Time, any
event relating to Discount or any of its affiliates, officers or directors is
discovered by Discount that should be set forth in an amendment to the
Registration Statement or Blue Sky Filings or a supplement to the Proxy
Statement/Prospectus, Discount will promptly inform Holding, and Discount shall
cooperate so as to enable such amendment or supplement to be promptly filed
with the SEC and appropriate state securities administrators, and disseminated
to the stockholders of Discount, to the extent required by applicable federal
and state securities laws. All documents which Discount files or is responsible
for filing with the SEC and any regulatory agency in connection with the Merger
(including, without limitation, the Proxy Statement/Prospectus) will comply as
to form and, to the extent provided by Discount, as to content, in each case in
all material respects with the provisions of applicable law. Notwithstanding
the foregoing, neither Discount nor the Subsidiary make any representations or
warranties with respect to any information that has been supplied by New
Holding, Holding, Merger Sub or ASCI, or their auditors, attorneys, financial
advisors, other consultants or advisors specifically for use in the
Registration Statement, Blue Sky Filings, the Proxy Statement/Prospectus, or in
any other documents to be filed with the SEC or any regulatory agency in
connection with the transactions contemplated hereby.
Section 4.14 Labor Matters. Neither Discount nor any of its Subsidiaries is
a party to or otherwise bound by or subject to any collective bargaining
agreement, contract or other agreement or understanding with a labor union or
labor organization, nor, as of the date hereof, is Discount or any of its
Subsidiaries the subject of any material proceeding asserting that Discount or
any of its Subsidiaries has committed an unfair labor practice, has failed to
bargain, has denied recognition, or has otherwise interfered with the
representation rights of any labor union or labor organization nor, as of the
date of this Agreement, is there pending or, to the Knowledge of Discount,
threatened, any material labor strike, dispute, walkout, work stoppage, slow-
down or lockout involving Discount or any of its Subsidiaries, nor, has
Discount or any of its Subsidiaries been requested within the last three years
to recognize or bargain with any labor union or labor organization with respect
to any employees of Discount or any of its Subsidiaries.
Section 4.15 Insurance. Discount and its Subsidiaries maintain, in coverages
and amounts believed by Discount to be customary in the industry, property and
casualty insurance with respects to their business, operations, properties and
assets. The Discount Disclosure Schedule contains a list of all insurance
policies (including self-insurance arrangements) maintained by Discount and the
Discount Subsidiaries (including coverage limits, deductibles, named insureds
and policy periods), all of which policies are in full force and effect.
Neither Discount nor any Discount Subsidiary is in default with respect to any
material provision contained in such policy or binder nor has any of Discount
or a Discount Subsidiary failed to give any material notice or present any
material claim under any such policy or binder in due and timely fashion.
Except as set forth in the Discount Disclosure Schedule, neither Discount nor
any Discount Subsidiary has received notice of cancellation or non-renewal of
any such policy or binder.
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Section 4.16 Environmental Matters.
(a) Except as described in the Discount Disclosure Schedule: (i) Discount
and the Discount Subsidiaries have complied in all respects with, and
are currently in compliance in all respects with all, and have no
liability under any, applicable Environmental Laws, except for any
noncompliance or liability that would not reasonably be expected to
result in a Material Adverse Effect; (ii) the properties currently
owned, leased or operated by Discount and the Discount Subsidiaries
(including soils, groundwater, surface water, buildings or other
structures) are in compliance in all respects with all applicable
Environmental Laws, and are not contaminated with any Hazardous
Substances in a manner so as to create any liability for Discount and
the Discount Subsidiaries, except for any noncompliance or
contamination that would not reasonably be expected to result in a
Material Adverse Effect; (iii) the properties formerly owned, leased or
operated by Discount or any of the Discount Subsidiaries were in
compliance in all respects with all applicable Environmental Laws, and
were not contaminated with Hazardous Substances during the period of
ownership or operation by Discount or any of the Discount Subsidiaries
in a manner so as to create any liability for Discount and the Discount
Subsidiaries, except for any noncompliance or contamination that would
not reasonably be expected to result in a Material Adverse Effect; (iv)
neither Discount nor any of the Discount Subsidiaries are or are
alleged to be subject to any liability for any Hazardous Substance
disposal or contamination on the property of any third party, except
for any liability or contamination that would not reasonably be
expected to result in a Material Adverse Effect; (v) neither Discount
nor any of the Discount Subsidiaries have released any Hazardous
Substance except in compliance in all respects with applicable
Environmental Law and in a manner that would not reasonably be expected
to result in a Material Adverse Effect; and (vi) neither Discount nor
any of the Discount Subsidiaries has received any written notice,
demand, letter, claim or request for information alleging that any of
the properties currently or previously owned, leased or operated by
Discount or any of the Discount Subsidiaries, or Discount or any of the
Discount Subsidiaries may be in violation of, liable under or have
obligations under any Environmental Law, except for any violation that
would not reasonably be expected to result in a Material Adverse
Effect. For purposes of this Section 4.16, (A) a property will be
deemed to be "contaminated" with a Hazardous Substance only if the
Hazardous Substance is present in such quantity as to give rise to any
remediation obligation or other liability under applicable
Environmental Laws, and (B) Discount and its Subsidiaries shall include
(x) all partnerships, joint ventures and other entities in which any of
them was at any time a partner, joint venturer, member or participant
and (y) all predecessor or former entities, whether or not in existence
as of the date hereof, the assets or obligations of which have been
acquired or assumed by any of them or to which any of them has
succeeded.
(b) The representations and warranties in this Section 4.16 are intended to
be the only representations and warranties of Discount relating to
environmental matters. No other representation or warranty made by
Discount shall extend to or cover such matters, even though it is, by
its terms, broad enough to do so.
Section 4.17 No Existing Discussions. As of the date hereof, Discount has
terminated all discussions or negotiations with any third party with respect to
an Acquisition Proposal and each such third party has been instructed to return
any Confidential Information obtained from Discount (or to the extent
permitted, has certified the destruction thereof).
Section 4.18 Opinion of Financial Advisor. Salomon Smith Barney Inc.
("Salomon Smith Barney"), the financial advisor to Discount, has delivered to
the Board of Directors of Discount an opinion dated the date of approval by
such Board of Directors of the terms hereof to the effect that, as of such date
and based upon the matters considered by Salomon Smith Barney in connection
with the transactions contemplated by this Agreement, the Per Share Merger
Consideration is fair from a financial point of view to the holders of Discount
Common Stock and a copy of the subsequently delivered confirming written
opinion to such effect based on the review of the executed copy of this
Agreement, which is being addressed to the Board of Directors of Discount
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only, will be provided to Holding promptly following the execution and delivery
of this Agreement and the receipt thereof by Discount.
Section 4.19 Brokers. No broker, investment banker, financial advisor or
other Person, other than Salomon Smith Barney, the fees of which are the
obligation of Discount, is entitled to any broker's, finder's, investment
banker's, financial advisor's or other similar fee or commission in connection
with the transaction contemplated by this Agreement based upon arrangements
made by or on behalf of Discount. Discount has delivered to Holding a fully
executed copy of its engagement letter with Salomon Smith Barney, including all
amendments thereto through the date hereof, and such engagement letter (the
"Salomon Smith Barney Engagement Letter") remains in full force and effect as
of the date hereof.
Section 4.20 Anti-Takeover Laws; Stockholder Rights Agreement. Discount has
taken all actions necessary under Florida law such that no "fair price",
"business combination", "control share acquisition", or similar statute will be
applicable to the transactions contemplated by this Agreement. With respect to
that certain Stockholder Rights Agreement between Discount and ChaseMellon
Shareholder Services, LLC (n/k/a Mellon Investor Services LLC) dated as of
November 21, 2000 (the "Stockholder Rights Agreement") and the preferred stock
purchase rights issued under or pursuant thereto (the "Rights"), Discount has
taken all actions necessary such that the entering into of this Agreement and
the consummation of the transactions contemplated hereby do not and will not
result in any Right becoming exercisable.
Section 4.21 Noncompetition Agreements. Except as described in the Discount
Disclosure Schedule and except for ordinary and customary restrictions in lease
agreements, neither Discount nor any of its Subsidiaries is a party to or bound
by any noncompetition agreement or any other agreement or arrangement that
limits or otherwise restricts Discount or any of its Subsidiaries or any
successor thereto or that would, after the Effective Time, limit or restrict
Holding, ASCI or the Surviving Corporation or any of its affiliates or any
successors thereto, from engaging or competing in any line of business or in
any geographical area.
Section 4.22 Suppliers. Neither Discount nor its Subsidiaries has received
notice, and Discount does not otherwise have Knowledge, that any of their
suppliers or vendors with whom Discount and its Subsidiaries engage in
$1,000,000 or more in business annually ("significant vendors") intend to
cancel, terminate or otherwise materially modify such significant vendor's
relationship with Discount or its Subsidiaries, including with respect to
credit terms or any requirement that Discount or its Subsidiaries provide
letters of credit, nor, to the Knowledge of Discount, has any such significant
vendor threatened such action as a result of execution of this Agreement or the
consummation of the transactions contemplated hereby, which in the case of any
of the foregoing, is reasonably likely to have a Material Adverse Effect.
Except as set forth on the Discount Disclosure Schedule, no contracts with
suppliers or vendors of Discount or any of its Subsidiaries (and regardless of
whether or not they are "significant vendors," as defined in this Section 4.22)
have terms requiring Discount or its Subsidiaries to purchase any services, a
product or line of products exclusively from such supplier or vendor that
extend for a period beyond December 31, 2001.
Section 4.23 Potential Conflict of Interest. As of the date of this
Agreement, except as set forth in the Discount SEC Reports that have been filed
and are publicly available prior to the date hereof, since June 1, 1998, there
have been no transactions, agreements, arrangements or understandings between
Discount or any of it Subsidiaries, on the one hand, and any other person, on
the other hand, that would be required to be disclosed under Item 404 of
Regulation S-K under the Securities Act.
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ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF NEW HOLDING,
HOLDING, ASCI AND MERGER SUB
Holding, New Holding, ASCI and Merger Sub jointly and severally represent
and warrant to Discount that the statements contained in this Article 5 are
true and correct, except as set forth herein in the disclosure schedule
delivered by Holding, New Holding, ASCI and Merger Sub to Discount on or before
the date of this Agreement (the "Holding Disclosure Schedule"). The Holding
Disclosure Schedule shall be arranged in paragraphs corresponding to the
numbered and lettered sections contained in this Article 5 (and in the other
Articles of this Agreement) and the disclosure in any paragraph shall qualify
other sections in this Article 5 (and in the other Articles of this Agreement)
to the extent that it is readily apparent from a reading of such disclosure
that it should also qualify or apply to such other sections.
Section 5.1 Organization of Holding, New Holding, ASCI and Merger Sub. Each
of Holding, New Holding, ASCI and Merger Sub is a corporation duly organized,
validly existing and in good standing or of active status under the laws of the
jurisdiction of its incorporation, has all requisite corporate power to own,
lease and operate its property and to carry on its business as now being
conducted, and is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which the failure to be so
qualified would have or be reasonably likely to have a Material Adverse Effect.
Section 5.2 Capital Structures.
(a) The authorized capital stock of Holding consists of 62,500,000 shares
of Class A Common Stock, par value $0.01 per share ("Holding Common
Stock"), 21,875,000 shares of Class B Common Stock, par value $0.01 per
share ("Holding Class B Stock"), and 100,000 shares of Preferred Stock,
no par value per share ("Holding Preferred Stock"). As of June 30,
2001, (i) 28,321,150 shares of Holding Common Stock were issued and
outstanding, all of which are validly issued, fully paid and
nonassessable, (ii) except as set forth on the Holding Disclosure
Schedule, no shares of Holding Common Stock were held in the treasury
of Holding or by Subsidiaries of Holding, and (iii) no shares of
Holding Preferred Stock or Holding Class B Stock were issued and
outstanding. The option and equity incentive plans in effect for
Holding are set forth on and described in the Holding Disclosure
Schedule (the "Holding Option Plans"). The Holding Disclosure Schedule
also shows the number of shares of Holding Common Stock reserved for
future issuance pursuant to stock options and warrants granted and
outstanding as of June 30, 2001 and under the Holding Option Plans. No
change in such capitalization has occurred between June 30, 2001 and
the date of this Agreement. All shares of Holding Common Stock reserved
for issuance as specified above are duly authorized and, upon issuance
on the terms and conditions specified in the instruments pursuant to
which they are issuable, shall be validly issued, fully paid and
nonassessable. There are no bonds, debentures, notes or other
indebtedness of Holding having the right to vote (or convertible into
securities having the right to vote) on any matters on which
stockholders of Holding may vote. Except as set forth in the Holding
Disclosure Schedule, there are no obligations, contingent or otherwise,
of Holding or any of its Subsidiaries to (x) repurchase, redeem or
otherwise acquire any shares of Holding Common Stock, Holding Class B
Stock, Holding Preferred Stock, or the capital stock of any Subsidiary,
or (y) provide funds to or make any material investment (in the form of
a loan, capital contribution or otherwise) in any such Subsidiary or
any other entity, other than (A) guarantees of bank obligations of
Subsidiaries entered into in the ordinary course of business, and (B)
intercompany loans to and from Subsidiaries through the central
disbursement account located at ASCI.
(b) The authorized capital stock of New Holding consists of 100,000,000
shares of Common Stock, par value $0.0001 per share ("New Holding
Common Stock"), and 10,000,000 shares of Preferred Stock, par value
$0.0001 per share ("New Holding Preferred Stock"). As of the date
hereof and prior to the merger of Holding with and into New Holding,
one share of New Holding Common Stock and no shares of new Holding
Preferred Stock were issued and outstanding. There are no shares of New
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Holding Common Stock reserved for future issuance pursuant to any stock
options or warrants as of June 30, 2001. The option and equity
incentive plans in effect for New Holding are set forth on and
described in the Holding Disclosure Schedule. No material change in
such capitalization has occurred from the date of formation of New
Holding through the date of this Agreement. There are no bonds,
debentures, notes or other indebtedness of New Holding having the right
to vote (or convertible into securities having the right to vote) on
any matters on which stockholders of New Holding may vote. Except for
obligations arising under the merger agreement pursuant to which the
Reincorporation will be effectuated (the "New Holding Merger
Agreement"), there are no obligations, contingent or otherwise, of New
Holding or any of its Subsidiaries to repurchase, redeem or otherwise
acquire any share of New Holding Common Stock, or the capital stock of
any Subsidiary or to provide funds or make any material investment (in
the form of a loan, capital contribution or otherwise) in any such
Subsidiary or any other entity other than guarantees of bank
obligations of Subsidiaries entered into in connection with the
transactions contemplated by this Agreement or investments in
Subsidiaries in connection with the transactions contemplated by this
Agreement. Simultaneously with the execution and delivery of this
Agreement, Holding and New Holding have executed and delivered the New
Holding Merger Agreement which constitutes the valid and binding
obligation of each of Holding and New Holding, enforceable against each
of them in accordance with its terms, subject to the Bankruptcy and
Equity Exception.
(c) Except as set forth in the Holding Disclosure Schedule or as reserved
for future grants of options and warrants under the Holding Option
Plans, there are no equity securities of any class of Holding, New
Holding or any of their respective Subsidiaries, or any security
exchangeable or convertible into or exercisable for such equity
securities, issued, reserved for issuance or outstanding, and there are
no options, warrants, equity securities, calls, rights, commitments,
undertakings or agreements of any character to which Holding, New
Holding or any of their respective Subsidiaries is a party or by which
such entity is bound (including under letters of intent, whether
binding or nonbinding) obligating Holding, New Holding or any of their
respective Subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock or other
equity interests of Holding or any of its Subsidiaries or obligating
Holding, New Holding or any of their respective Subsidiaries to grant,
extend, accelerate the vesting of, otherwise modify or amend or enter
into any such option, warrant, equity security, call, right, commitment
or agreement. To the Knowledge of Holding or New Holding, except as set
forth in the Holding Disclosure Schedule, there are no voting trusts,
proxies or other voting agreements or understandings with respect to
the shares of capital stock or other equity interests of Holding, New
Holding or any of their respective Subsidiaries.
(d) The shares of New Holding Common Stock to be issued in connection with
the Merger have been duly authorized and, when issued as contemplated
hereby at the Effective Time, will be validly issued, fully paid and
non-assessable, and not subject to any preemptive rights.
(e) The authorized capital stock of Merger Sub consists in its entirety of
1,000 shares of common stock, $0.01 par value per share. As of the date
hereof, one share of common stock of Merger Sub is issued and
outstanding, which share is owned by New Holding, free and clear of all
liens, charges, encumbrances, options, rights of first refusal or
limitations or agreements regarding voting rights of any nature. All of
the outstanding shares of capital stock of ASCI and each of the other
Subsidiaries of Holding or ASCI are owned beneficially and of record by
Holding, ASCI or another Subsidiary free and clear of all liens,
charges, encumbrances, options, rights of first refusal or limitations
or agreements regarding voting rights of any nature. All of the
outstanding shares of capital stock of ASCI and each of the other
Subsidiaries of Holding have been validly issued and are fully paid and
nonassessable. All of the outstanding shares of capital stock of Merger
Sub have been validly issued and are fully paid and nonassessable. New
Holding has no Subsidiaries, other than Merger Sub.
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Section 5.3 Authority; No Conflict; Required Filings and Consents.
(a) Each of Holding, New Holding, ASCI and Merger Sub has all requisite
corporate power and authority to execute and deliver this Agreement and
to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby by each of Holding, New Holding, ASCI and Merger
Sub have been duly authorized by all necessary corporate action on the
part of each of Holding, New Holding, ASCI and Merger Sub (including
the approval of the Merger by New Holding as the sole stockholder of
Merger Sub). No vote of Holding's stockholders or of New Holding's
stockholders is required to approve this Agreement or the transactions
contemplated hereby except for the approval and authorization of
Holding's stockholders, which approval and authorization will be sought
at a meeting to be called for such purpose, and the approval and
authorization of New Holding's stockholder of the Reincorporation,
which approval and authorization has been obtained. This Agreement has
been duly executed and delivered by each of Holding, New Holding,
Merger Sub and ASCI and constitutes the valid and binding obligation of
each of Holding, New Holding, ASCI and Merger Sub, enforceable against
each of them in accordance with its terms, subject to the Bankruptcy
and Equity Exception.
(b) The execution and delivery of this Agreement by each of Holding, New
Holding, ASCI and Merger Sub does not, and the consummation of the
transactions contemplated hereby will not, (i) conflict with, or result
in any violation or breach of, any provision of the Charter Documents
of Holding, New Holding, ASCI or Merger Sub, (ii) result in any
violation or breach of, or constitute (with or without notice or lapse
of time, or both) a default (or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of any material
benefit) under, or require a consent or waiver under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, lease,
loan, credit agreement, contract or other agreement, instrument or
obligation to which Holding or any of its Subsidiaries or New Holding
or Merger Sub is a party or by which any of them or any of their
properties or assets may be bound, or (iii) conflict with, violate, or
cause the termination of any instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Holding or any of its Subsidiaries or New
Holding or Merger Sub or any of its or their properties or assets,
except, in the case of (ii) and (iii), for any such conflicts,
violations, defaults, terminations, cancellations or accelerations
which are not, individually or in the aggregate, reasonably likely to
have a Material Adverse Effect.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or
with respect to Holding or any of its Subsidiaries or New Holding or
Merger Sub in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby,
except for (i) the filing of the pre-merger notification report under
the HSR Act and otherwise satisfying the requirements of the HSR Act,
(ii) the filing of the Articles of Merger with the Department of State
of the State of Florida and appropriate documents with the relevant
authorities of the other jurisdictions in which Discount is qualified
to do business, (iii) the simultaneous merger of Holding with and into
New Holding (iv) the filing of the Registration Statement with the SEC
in accordance with the Securities Act, (v) the filing of the Articles
of Merger with respect to the Reincorporation with the State
Corporation Commission of Virginia, (vi) such consents, approvals,
orders, authorizations, registrations, declarations and filings as may
be required under applicable state securities laws and the laws of any
foreign country and (vii) such other consents, authorizations, filings,
approvals and registrations which, if not obtained or made, would not
be reasonably likely to have a Material Adverse Effect.
Section 5.4 Financing. Holding has, or has received binding (subject to the
terms and conditions thereof) written commitments from financially responsible
financial institutions to obtain, the funds necessary to pay the cash portion
of the Merger Consideration and the Option Merger Consideration as provided in
Article 3, to refinance the existing senior credit facilities of ASCI as more
specifically listed on Schedule A to this Agreement, to repay certain
indebtedness of Discount as more specifically listed on Schedule B to this
Agreement, and to pay related fees and expenses, and will make such funds
available to the Surviving
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Corporation. Holding has provided Discount with true and complete copies of all
commitments and agreements from third parties to provide such financing to
Holding or ASCI (the "Commitments"). As of the date hereof, each of the
Commitments is in full force and effect, and neither Holding nor ASCI has any
reason to expect that such Commitments will not remain in full force and effect
or that the conditions included in any of the Commitments will not be satisfied
before the Effective Time. Holding believes that the financing described in
this Section 5.4 is sufficient to enable Holding, New Holding and the Surviving
Corporation to complete the transactions contemplated by this Agreement.
Holding shall give Discount prompt notice of any change with respect to such
financing that would adversely affect the ability of Holding, New Holding or
Merger Sub to consummate the Merger.
Section 5.5 SEC Filings; Financial Statements.
(a) Since April 15, 1998, and except to the extent that their failure to do
so would not be reasonably likely to have a Material Adverse Effect,
Holding and/or its Subsidiaries have filed all forms, reports,
registration statements, prospectuses, schedules, statements and
documents, including the exhibits thereto, required to be filed by
Holding and/or its Subsidiaries with the SEC under the Securities Act
or the Exchange Act, including without limitation the Exchange Act
Filings (these forms, reports, registration statements, prospectuses,
schedules, statements and documents, including the exhibits thereto,
are referred to collectively as "Holding SEC Reports"). Each Holding
SEC Report (i) at the time filed complied in all material respects with
the applicable requirements of the Securities Act and the Exchange Act,
as the case may be, and (ii) did not at the time filed (or if amended
or superseded by a filing prior to the date of this Agreement, then on
the date of such filing) contain any untrue statement of a material
fact or omit to state a material fact required to be stated in such
Holding SEC Report or necessary in order to make the statements in such
Holding SEC Report, in the light of the circumstances under which they
were made, not misleading. Other than ASCI, none of Holding's
Subsidiaries is required to file any forms, reports or other documents
with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the Holding SEC Reports, as of the date
of the applicable Holding SEC Report (collectively, the "Holding
Financial Statements"), complied as to form in all material respects
with the applicable published rules and regulations of the SEC with
respect thereto, were prepared in accordance with U.S. GAAP applied on
a consistent basis throughout the periods involved (except as may be
indicated in the notes to such Holding Financial Statements, in the
Holding SEC Reports, or, in the case of unaudited interim financial
statements, as permitted by Form 10-Q of the SEC) and fairly presented
the consolidated financial position of Holding and its Subsidiaries as
of the dates and the consolidated results of its operations and cash
flows for the periods indicated, except that the unaudited financial
statements were or are subject to normal and recurring year-end
adjustments and may not contain all of the footnotes required by U.S.
GAAP. The unaudited balance sheet of Holding as of April 21, 2001 is
referred to herein as the "Holding Balance Sheet."
Section 5.6 No Undisclosed Liabilities. Except as set forth on the Holding
Disclosure Schedule or as disclosed in the Holding SEC Reports that have been
filed and are publicly available prior to the date hereof, and except for
normal or recurring liabilities incurred since the date of the Holding Balance
Sheet in the ordinary course of business consistent with past practices,
Holding and its Subsidiaries do not have any liabilities, either accrued,
contingent or otherwise (whether or not required to be reflected in financial
statements in accordance with GAAP), and whether due or to become due, which
individually or in the aggregate, have had or will have a Material Adverse
Effect.
Section 5.7 Taxes.
(a) Holding and each of its Subsidiaries, and any consolidated, combined,
unitary or aggregate group for tax purposes of which Holding or any of
its Subsidiaries is or has been a member, has timely filed all material
Tax Returns required to be filed by it in the manner provided by law
and has paid all Taxes shown thereon to be due.
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(b) Holding has made available to Discount complete, current and correct
copies of the federal Tax Returns of Holding and the Holding
Subsidiaries for the fiscal years ended in 1998 and 1999.
Section 5.8 Employee Benefit Plans.
(a) Holding has listed in the Holding Disclosure Schedule all material
employee benefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) and all
material stock option, stock purchase, incentive, deferred
compensation, supplemental retirement or severance plans or agreements,
for the benefit of, or relating to, any current or former employee,
director or independent contractor providing services to Holding, any
Holding Subsidiary, or any entity which is a member (an "ERISA
Affiliate") of (i) a controlled group of corporations, (ii) a group of
trades or businesses (whether or not incorporated) under common control
with Holding, or (iii) an affiliated service group, all within the
meaning of Section 414 of the Code, which includes Holding, or any
Subsidiary of Holding (together, the "Holding Employee Plans").
(b) With respect to the Holding Employee Plans, individually and in the
aggregate, no event has occurred and, to the Knowledge of Holding,
there exists no condition or set of circumstances, in connection with
which Holding could be subject to any liability under ERISA, the Code
or any other applicable law where such liability is reasonably likely
to have a Material Adverse Effect.
(c) With respect to the Holding Employee Plans, individually and in the
aggregate, and except as set forth on the Holding Disclosure Schedule,
there are no funded benefit obligations for which contributions have
not been made or properly accrued and there are no unfunded benefit
obligations which have not been accounted for by reserves, or otherwise
properly footnoted, in either case in accordance with GAAP, on the
financial statements of Holding, which obligations are reasonably
likely to have a Material Adverse Effect.
(d) Except as disclosed in the Holding Disclosure Schedule, (i) there are
no pending or, to the Knowledge of Holding, threatened claims, actions,
suits, termination proceedings, or investigations by any Governmental
Entity against or involving any Holding Employee Plan and (ii) any
Holding Employee Plan intended to be qualified under Section 401(a) of
the Code has received a determination letter from the Internal Revenue
Service to that effect, which has not been revoked, and nothing has
occurred since the date of the most recent determination letter that
would materially and adversely affect such qualification.
Section 5.9 Compliance With Laws. Holding and its Subsidiaries have complied
with, are not in violation of, and have not received any written notice that
they have been or are in violation of, any federal, state or local statute, law
or regulation or any judgment, decree or order of any Governmental Entity with
respect to the conduct of their respective business, or the ownership or
operation of their respective businesses, except for failures to comply or
violations which, individually or in the aggregate, have not been fully
resolved with no continuing material liability to Holding and the Holding
Subsidiaries or are not reasonably likely to have a Material Adverse Effect.
Holding and its Subsidiaries have in effect all federal, state, local and
foreign governmental approvals, authorizations, certificates, filings,
franchises, notices, permits, variances and rights ("Holding Approvals")
necessary for them to own or lease and operate their properties and assets and
to carry on their respective businesses as now conducted and there has occurred
no default under any Holding Approval, or failure to obtain such Holding
Approval, which would individually or in the aggregate have a Material Adverse
Effect.
Section 5.10 Labor Matters. Neither Holding nor any of its Subsidiaries is a
party to or otherwise bound by or subject to any collective bargaining
agreement, contract or other agreement or understanding with a labor union or
labor organization, nor, as of the date hereof, is Holding or any of its
Subsidiaries the subject of any material proceeding asserting that Holding or
any of its Subsidiaries has committed an unfair labor practice, has failed to
bargain, has denied recognition, or has otherwise interfered with the
representation rights of any labor union or labor organization nor, as of the
date of this Agreement, is there pending or, to the
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Knowledge of Holding, threatened, any material labor strike, dispute, walkout,
work stoppage, slow-down or lockout involving Holding or any of its
Subsidiaries, nor, as of the date of this Agreement, has Holding or any of its
Subsidiaries been requested within the last three years to recognize or bargain
with any labor union or labor organization with respect to any employees of
Holding or any of its Subsidiaries.
Section 5.11 Environmental Matters.
(a) Except as described in the Holding Disclosure Schedule, to the
Knowledge of Holding: (i) Holding and the Holding Subsidiaries have
complied in all respects with, and are currently in compliance in all
respects with all applicable Environmental Laws except for any
noncompliance that would not reasonably be expected to result in a
Material Adverse Effect; (ii) the properties currently owned, leased or
operated by Holding and the Holding Subsidiaries (including soils,
groundwater, surface water, buildings or other structures) are in
compliance in all respects with all applicable Environmental Laws, and
are not contaminated with any Hazardous Substances in a manner so as to
create any liability for Holding and the Holding Subsidiaries, except
for any noncompliance or contamination or liability that would not
reasonably be expected to result in a Material Adverse Effect; (iii)
the properties formerly owned, leased or operated by Holding or any of
the Holding Subsidiaries were in compliance in all material respects
with all applicable Environmental Laws, and were not contaminated with
Hazardous Substances during the period of ownership or operation by
Holding or any of the Holding Subsidiaries in a manner so as to create
any liability for Holding and the Holding Subsidiaries, except for any
noncompliance or contamination that would not reasonably be expected to
result in a Material Adverse Effect; (iv) neither Holding nor any of
the Holding Subsidiaries are or are alleged to be subject to any
liability for any Hazardous Substance disposal or contamination on the
property of any third party, except for any liability or contamination
that would not reasonably be expected to result in a Material Adverse
Effect; (v) neither Holding nor any of the Holding Subsidiaries have
released any Hazardous Substance except in compliance in all material
respects with applicable Environmental Law other than such
noncompliance that would not reasonably be expected to result in a
Material Adverse Effect; and (vi) neither Holding nor any of the
Holding Subsidiaries has received any written notice, demand, letter,
claim or request for information alleging that any of the properties
currently or previously owned, leased or operated by Holding or any of
the Holding Subsidiaries, or Holding or any of the Holding Subsidiaries
may be in violation of, liable under or have obligations under any
Environmental Law, except for such violations, liabilities and
obligations that would not reasonably be expected to result in a
Material Adverse Effect. For purposes of this Section 5.11, (A) a
property will be deemed to be "contaminated" with a Hazardous Substance
only if the Hazardous Substance is present in such quantity as to give
rise to any remediation obligation or other liability under applicable
Environmental Laws, and (B) Holding and its Subsidiaries shall include
(x) all partnerships, joint ventures and other entities in which any of
them was at any time a partner, joint venturer, member or participant
and (y) all predecessor or former entities, whether or not in existence
as of the date hereof, the assets or obligations of which have been
acquired or assumed by any of them or to which any of them has
succeeded.
(b) The representations and warranties in this Section 5.11 are intended to
be the only representations and warranties of Holding relating to
environmental matters. No other representation or warranty made by
Holding shall extend to or cover such matters, even though it is, by
its terms, broad enough to do so.
Section 5.12 Absence of Certain Changes or Events. Except as disclosed in
the Holding SEC Reports that have been filed and are publicly available prior
to the date hereof or the Holding Disclosure Schedule, since the date of the
Holding Balance Sheet, Holding and its Subsidiaries have conducted their
businesses only in the ordinary course and in a manner consistent with recent
past practice and, since such date, there has not been (i) any change in the
financial condition, results of operations, business, prospects, assets or
properties of Holding and its Subsidiaries, taken as a whole, that has had, or
will have, a Material Adverse Effect; (ii) any damage, destruction or loss
(whether or not covered by insurance) with respect to Holding or any of its
Subsidiaries that has had, or will have, a Holding Material Adverse Effect;
(iii) any material change by Holding
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in its accounting methods, principles or practices to which Discount has not
previously consented in writing; (iv) any revaluation by Holding of any of its
assets that has had, or will have, a Holding Material Adverse Effect; or (v)
any other action or event that would have required the consent of Discount
pursuant to Section 6.2 of this Agreement had such action or event occurred
after the date of this Agreement.
Section 5.13 Registration Statement; Blue Sky Filings; Proxy
Statement/Prospectus; Other Information. Neither the Registration Statement nor
Blue Sky Filings, nor any of the information supplied or to be supplied in
writing by either Holding, New Holding or their respective Subsidiaries which
is included in the Proxy Statement/Prospectus and any other documents to be
filed with the SEC or any regulatory agency in connection with the transactions
contemplated hereby will, at the respective times such documents are filed or,
as applicable, declared effective and, at the Effective Time, and, with respect
to the Proxy Statement/ Prospectus, when first published, sent or given to
stockholders of Discount, in light of the circumstances under which it shall be
made, be false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements therein not
misleading or, in the case of the Proxy Statement/Prospectus or any amendment
thereof or supplement thereto, at the time of the special meeting of Discount's
stockholders provided for in Section 3.2, be false or misleading with respect
to any material fact, or omit to state any material fact necessary to correct
any statement in any earlier communication with respect to the solicitation of
any proxy for such meeting. If, at any time prior to the Effective Time, any
event relating to Holding, New Holding or any of their affiliates, officers or
directors is discovered by Holding that should be set forth in an amendment to
the Registration Statement or Blue Sky Filings or a supplement to the Proxy
Statement/Prospectus, Holding will promptly inform Discount, and Discount shall
cooperate so as to enable such amendment or supplement to be promptly filed
with the SEC and appropriate state securities administrators, and disseminated
to the stockholders of Discount, to the extent required by applicable federal
and state securities laws. All documents which Holding, New Holding or their
respective Subsidiaries file or are responsible for filing with the SEC and any
regulatory agency in connection with the Merger will comply as to form and, to
the extent provided by Holding, New Holding or their respective Subsidiaries,
as to content, in each case in all material respects with the provisions of
applicable law. Notwithstanding the foregoing, Holding, ASCI, New Holding and
Merger Sub make no representations or warranties with respect to any
information that has been supplied by Discount or its auditors, attorneys,
financial advisors, other consultants or advisors specifically for use in the
Registration Statement, Blue Sky Filings, the Proxy Statement/Prospectus, or in
any other documents to be filed by Holding, New Holding or their respective
Subsidiaries with the SEC or any regulatory agency in connection with the
transactions contemplated hereby.
Section 5.14 Litigation. Except as described in the Holding SEC Reports that
have been filed and are publicly available prior to the date hereof or as set
forth on the Holding Disclosure Schedule, there is no action, suit or
proceeding, claim, arbitration or investigation against Holding, New Holding or
any of their respective Subsidiaries pending or as to which Holding, New
Holding or any of their respective Subsidiaries has received any written notice
of assertion, which, individually or in the aggregate, will have a Material
Adverse Effect or a material adverse effect on the ability of Holding, New
Holding, ASCI or Merger Sub to consummate the transactions contemplated by this
Agreement. There is no judgment, decree, injunction, rule or order of any
Governmental Entity or arbitration outstanding against Holding, New Holding or
any of their respective Subsidiaries having or which is reasonably likely to
have a Material Adverse Effect.
Section 5.15 Brokers. No broker, investment banker, financial advisor or
other Person, other than J.P. Morgan Securities Inc., The Chase Manhattan Bank,
Credit Suisse First Boston and Lehman Commercial Paper Inc. the fees of which
are the obligation of Holding and ASCI, is entitled to any broker's, finder's,
investment banker's, financial advisor's or other similar fee or commission in
connection with the transaction contemplated by this Agreement based upon
arrangements made by or on behalf of the Holding ASCI, New Holding or Merger
Sub. Holding has delivered to Discount a fully executed copy of its engagement
letter with J.P. Morgan Securities Inc. relating to the Merger, including all
amendments thereto through the date hereof, and each such engagement letter
remains in full force and effect as of the date hereof.
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Section 5.16 New Holding and Merger Sub. Neither New Holding nor Merger Sub
has any operations or liabilities, other than liabilities arising out of the
organization of the respective companies and liabilities incurred and
reasonably contemplated in connection with the transactions contemplated by
this Agreement.
Section 5.17 No Other Transactions Being Negotiated. As of the date hereof,
neither New Holding, Holding, ASCI or Merger Sub or any of their respective
representatives or agents are negotiating the acquisition of, or an agreement
to acquire by merging or consolidating with, or by purchasing any interest in
or assets of, or by any other manner, any business or any corporation,
partnership or other business organization or division (other than Discount) or
otherwise to acquire or agree to acquire any assets other than in the ordinary
course of business, which in any such case would be material to Holding and
ASCI, taken as a whole. For the purposes of this Section 5.17 only, the term
"material" shall be deemed not to include up to 14 stores acquired by any of
New Holding, Holding, or ASCI from a third party.
ARTICLE 6
CERTAIN COVENANTS
Section 6.1 Covenants of Discount. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, Discount agrees as to itself and its respective
Subsidiaries, taken as a whole, (except to the extent that Holding shall
otherwise consent in writing or except as contemplated in this Agreement or
except as disclosed on the Discount Disclosure Schedule), to carry on its
business in the usual, regular and ordinary course in substantially the same
manner as previously conducted (including without limitation with respect to
the purchase of inventory and supplies), to pay its debts and taxes when due
(subject to good faith disputes over such debts or taxes which are then being
diligently pursued), to pay or perform its other obligations when due, and, to
the extent consistent with such business, use commercially reasonable efforts
consistent with past practices and policies to preserve intact its present
business organization, keep available the services of its present officers and
key employees and preserve in all material respects its relationships with
customers, suppliers, distributors, and others having business dealings with
it, provided that Discount shall not be required to make any payments or enter
into or amend any contractual arrangements or understandings to satisfy the
foregoing obligations. Discount shall promptly notify Holding of any material
event or occurrence not in the ordinary course of its or its Subsidiaries
business and of any event that is reasonably likely to have a Material Adverse
Effect. Except for matters set forth in the Discount Disclosure Schedule or as
otherwise expressly contemplated or permitted by this Agreement, during the
period from the date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time, Discount shall not (and
shall not permit any of its respective Subsidiaries to), without the written
consent of Holding:
(a) declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital
stock (other than dividends and distributions by a direct or indirect
wholly owned subsidiary of Discount to its parent), or split, combine
or reclassify any of its capital stock;
(b) grant any options or other rights to acquire securities of Discount or
accelerate, amend or change the period of exercisability or vesting of
any Outstanding Discount Options or authorize cash payments in exchange
for any such Outstanding Discount Options or purchase any shares of
Discount Common Stock, except as set forth on the Discount Disclosure
Schedule;
(c) issue, deliver or sell, or authorize or propose the issuance, delivery
or sale of, any shares of its capital stock or securities convertible
into shares of its capital stock, or subscriptions, rights, warrants or
options to acquire, or other agreements or commitments of any character
obligating it to issue any such shares or other convertible securities,
other than the issuance of shares of Discount Common Stock pursuant to
the exercise of options and warrants outstanding on the date of this
Agreement and in accordance with their terms;
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(d) acquire or agree to acquire by merging or consolidating with, or by
purchasing any interest in or assets of, or by any other manner, any
business or any corporation, partnership or other business organization
or division, or otherwise acquire or agree to acquire any assets other
than in the ordinary course of business;
(e) sell, lease, license, mortgage or otherwise encumber or otherwise
dispose of any of its material properties or assets in an amount in
excess of $250,000 in any one instance or $1,000,000 in the aggregate,
except as required to carry on Discount's business in the usual,
regular and ordinary course, consistent with past practices, provided
that Discount's sale leaseback consummated in February 2001 shall not
be considered a sale or lease that is consistent with past practice;
(f) except to the extent required under applicable law, and except for
amendments as may be requested by the Internal Revenue Service in
connection with a determination letter request, (i) increase or agree
to increase the compensation payable or to become payable to its
officers or employees, except for increases in salary or wages of non-
officer employees in accordance with past practices or for other
increases in salary or wages as set forth on the Discount Disclosure
Schedule, (ii) grant any additional severance or termination pay to, or
enter into or amend any employment, retention, change of control or
severance agreements or arrangements with, any employees or officers,
(iii) enter into any collective bargaining agreement, (iv) establish,
adopt, enter into or amend any bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement,
deferred compensation, employment, termination, severance, retention,
change of control or other plan, trust, fund, policy or arrangement for
the benefit of any directors, officers or employees, except as
permitted by subsection (vi) of this subsection (f), (v) pay any
bonuses to any directors, officers or employees, except for bonuses
paid to officers or employees based on the performance of Discount and
the respective officer or employee during Discount's fiscal year ended
May 29, 2001 and for any period thereafter up through the Effective
Time and which in each and every case are either (x) set forth on the
Discount Disclosure Schedule, (y) consistent in nature and amount with
bonus payments paid to such officer or employee for Discount's prior
fiscal year (which bonus payments for all officers of Discount and its
Subsidiaries, as well as all bonus payments paid to any other employee
of Discount and its Subsidiaries in an amount in excess of $25,000, are
set forth on the Discount Disclosure Schedule) or (z) in accordance
with contracts or bonus plans in effect on the date hereof or (vi)
elect or appoint any new director or hire any new officer level
employee, with the exception of the appointment or hiring of a
replacement for a director or officer who resigns provided that such
replacement is (x) engaged on an at-will basis and on terms of
compensation comparable to the person being replaced, (y) is not
provided with any employment, change in control or other severance
agreement by Discount other than an oral employment agreement that may
be terminated at any time without any change of control payment and
without any compensation payments due following such termination and
(z) is not engaged as the chief executive officer or president;
(g) amend or propose to amend the Charter Documents of Discount or any
Discount Subsidiary, except as contemplated by this Agreement;
(h) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another Person other than pursuant to credit agreements
in effect as of the date hereof or indebtedness in the form of deferred
purchase price identified on the Discount Disclosure Schedule and
furnished to Holding and its counsel prior to the date hereof;
(i) initiate, compromise, or settle any material litigation or arbitration
proceeding;
(j) enter into, or otherwise modify, amend or violate in any material
respect, or terminate any Discount Material Contract (including without
limitation the Salomon Smith Barney Engagement Letter) or waive,
release or assign any material rights or claims;
(k) make or change any material Tax election, settle, adopt or change any
material accounting method in respect of Taxes (except insofar as such
adoption or change may be required by GAAP), enter into
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any closing agreement, consent to any extension or waiver of the
limitation period applicable to any claim or assessment in respect of
any material Taxes, or compromise any material Tax liability or claim
or amend any material Tax return;
(l) change in any material respect its methods of accounting as in effect
at the date of the Discount Balance Sheet, except insofar as such
change may be required by GAAP;
(m) make or commit to make any capital expenditures, except to the extent
consistent with and within the limits of Discount's capital
expenditures budget by quarter and major categories for its fiscal year
2002 as included as an attachment to the Discount Disclosure Schedule;
(n) adopt, implement or amend any stockholder rights plan that could have
the effect of impeding or restricting the consummation of the
transactions contemplated hereby;
(o) open any new store or enter into or commit to enter into any lease or
purchase contract related to the opening of a new store, except as set
forth on the Discount Disclosure Schedule;
(p) materially change the amount of any insurance coverage provided by
existing insurance policies;
(q) fail to give all notices and other information required to be given by
Discount or any of its Subsidiaries to the employees of Discount or any
of its Subsidiaries, any collective bargaining unit representing any
group of employees of Discount, and any applicable governmental
authority under the WARN Act, the National Labor Relations Act, the
Internal Revenue Code, the Consolidated Omnibus Budget Reconciliation
Act, and other applicable law in connection with the transactions
provided for in this Agreement where the effect of such failure would
be reasonably likely to have a Material Adverse Effect on Discount or
on Holding after consummation of the transactions provided for in this
Agreement;
(r) revalue any of its assets, including without limitation writing down
the value of inventory or writing off notes or accounts receivable
other than in the ordinary course of business except to the extent
required by GAAP;
(s) take, or agree in writing or otherwise to take (i) any of the actions
described in Subsections (a) through (r) above, (ii) any action not
otherwise expressly authorized by this Agreement that would materially
and adversely impact Discount's ability to consummate the transactions
contemplated hereby, or prevent it from performing, cause it not to
perform or impair its ability to perform its covenants hereunder in
each case in any material respect, (iii) any action not otherwise
expressly authorized by this Agreement that will result in any of the
conditions to the transactions contemplated by this Agreement as set
forth in Article 8 not being satisfied or will result in violation of
any provision of this Agreement, or (iv) any other action not otherwise
expressly authorized by this Agreement that would materially adversely
delay or materially adversely impair the ability of Discount to
consummate the transactions contemplated hereby.
Section 6.2 Covenants of Holding and New Holding. During the period from the
date of this Agreement and continuing until the earlier of the termination of
this Agreement or the Effective Time, Holding, ASCI and New Holding agree as to
themselves and their respective Subsidiaries, taken as a whole, (except to the
extent that Discount shall otherwise consent in writing or except as
contemplated in this Agreement or except as disclosed on the Holding Disclosure
Schedule), to carry on their respective business in the usual, regular and
ordinary course in substantially the same manner as previously conducted, to
pay their respective debts and taxes when due (subject to good faith disputes
over such debts or taxes which are then being diligently pursued), to pay or
perform their respective other obligations when due, and, to the extent
consistent with such business, use commercially reasonable efforts consistent
with past practices and policies to preserve intact its present business
organization and preserve in all material respects their respective
relationships with customers, suppliers, distributors and others having
business dealings with them; provided, that Holding, ASCI, New Holding or
Merger Sub shall not be required to make any payments or enter into or amend
any contractual arrangements or understandings to satisfy the foregoing
obligations. Holding shall promptly notify
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Discount of any material event or occurrence not in the ordinary course of its
or its Subsidiaries' business, and of any event which could have a Material
Adverse Effect. Except for matters set forth in the Holding Disclosure Schedule
or as otherwise expressly contemplated or permitted by this Agreement, during
the period from the date of this Agreement and continuing until the earlier of
the termination of this Agreement or the Effective Time, Holding, ASCI and New
Holding shall not (and shall not permit any of its respective Subsidiaries to),
without the written consent of Discount:
(a) grant any options or other rights to acquire securities of Holding or
New Holding or accelerate, amend or change the period of exercisability
or vesting of any options issued under any of the Holding Option Plans
or authorize cash payments in exchange for any such options issued
under any of the Holding Option Plans or purchase any shares of Holding
Common Stock, except (i) as set forth on the Holding Disclosure
Schedule or except as otherwise consistent with the past practice of
grants of options to employees (including without limitation senior
management) of Holding and/or its Subsidiaries (it being understood
that for these purposes prior grants of options to Larry Castellani
and/or Nicholas Taubman will not be considered as part of the past
practice); (ii) in order to repurchase Holding Common Stock from
directors, officers or employees of Holding in connection with such
individuals' termination of employment with Holding, where such
repurchases are consistent with the past practice of Holding and/or its
Subsidiaries; (iii) grants of options to purchase Holding Common Stock
(with an exercise price at or above the then current fair market value
of the Holding Common Stock as determined in accordance with the
applicable Holding Option Plan) which fall within the categories set
forth in the following subsections (x), (y) and (z), but covering up to
but no more than 2% of outstanding Holding Common Stock in the
aggregate: (x) grants to new members of senior management, (y) grants
as integration incentives or (z) grants of options or other such
rights, at any time prior to the taking of the Discount Stockholder
Vote, in connection with the purchase or acquisition of another entity,
whether by acquisition of assets, merger, tender offer, stock purchase,
consolidation or recapitalization, subject in all respects to being in
compliance with Holding's obligations under Section 6.2(g) and provided
that there shall be no such grants of options or other rights to any of
the Principal Holding Stockholders or to any of their respective
Affiliates in connection with such a purchase or acquisition
transaction even if the terms of such grants are determined by the
Board of Directors of Holding, in reasonable good faith, based on full
and fair disclosure to the Board of Directors of Holding, to be no less
favorable to Holding than are available from any unaffiliated third
party and provided further that such grants (A) dilute all stockholders
of Holding (after giving effect to the transactions contemplated by
this Agreement, so that such dilutive impact is measured on a pro forma
basis as if the stockholders of Discount were then holding New Holding
Common Stock as a result of the Merger) on a pro rata basis, (B) are
fully disclosed to Discount promptly following such grants and, (C) to
the extent such grants, individually or collectively, could reasonably
be considered material to the Discount stockholders in their
consideration of whether to vote in favor of the Merger, are fully
disclosed to Discount stockholders as part of or by way of amendment or
supplement to the Proxy Statement/Prospectus prior to the taking of the
vote at the Discount Meeting (the "Discount Stockholder Vote"), as
promptly as reasonably possible following such issuance or sale;
(b) issue, deliver or sell, or authorize or propose the issuance, delivery
or sale of, any shares of its capital stock or securities convertible
into shares of its capital stock, or subscriptions, rights, warrants or
options to acquire, or other agreements or commitments of any character
obligating it to issue any such shares or other convertible securities,
other than: (i) options authorized to be issued pursuant to subsection
(a) of this Section 6.2; (ii) issuances, deliveries, or sales, or
authorizations to issue, deliver, or sell, at any time prior to the
taking of the Discount Stockholder Vote, any of the capital stock or
securities described in this subparagraph (b) in connection with the
purchase or acquisition of another entity, whether by acquisition of
assets, merger, tender offer, stock purchase, consolidation or
recapitalization, subject in all respects to being in compliance with
Holding's obligations under Section 6.2(g); provided, that such
issuances and sales (x) dilute all stockholders of Holding (after
giving effect to the transactions contemplated by this Agreement, so
that such dilutive impact is
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measured on a pro forma basis as if the stockholders of Discount were
then holding New Holding Common Stock as a result of the Merger) on a
pro rata basis, (y) are fully disclosed to Discount promptly following
such issuances and sales and, (z) to the extent such issuances and
sales, individually or collectively, could reasonably be considered
material to the Discount stockholders in their consideration of whether
to vote in favor of the Merger, are fully disclosed to Discount
stockholders as part of or by way of amendment or supplement to the
Proxy Statement/Prospectus prior to the taking of the Discount
Stockholder Vote and as promptly as reasonably possible following such
issuance or sale and, provided, that there shall be no issuances or
sales of capital stock or securities to any of the Principal Holding
Stockholders or to any of their respective Affiliates even if the terms
of such issuances or sales are determined by the Board of Directors of
Holding, in reasonable good faith based on full and fair disclosure to
the Board of Directors of Holding, to be no less favorable to Holding
than are available from any unaffiliated third party; or (iii) the
issuance of shares of Holding Common Stock pursuant to the exercise of
options and warrants outstanding on the date of this Agreement or
granted thereafter in compliance with the terms of subsection (a) of
this Section 6.2;
(c) enter into any transaction or series of related transactions with any
Affiliate of Holding, ASCI, New Holding or Merger Sub unless such
transaction is entered into and consummated on terms (as determined in
reasonable good faith based on full and fair disclosure to the Board of
Directors of Holding) that are no less favorable to Holding, ASCI, New
Holding and Merger Sub than are available from an unaffiliated third
party and is not otherwise prohibited under any other subsection of
this Section 6.2;
(d) change in any material respect its methods of accounting as in effect
at the date of the Holding Balance Sheet, except insofar as such change
may be required by GAAP;
(e) adopt, implement or amend any stockholder rights plan that could have
the effect of impeding or restricting the consummation of the
transactions contemplated hereby;
(f) (i) amend its Articles or Certificate of Incorporation or By-Laws in
any manner that is material and adverse to Discount's stockholders,
(ii) amend the terms of or reclassify, or effect a stock split or
combination with respect to, any of its capital stock, distribute to
stockholders any material assets or securities of Holding, New Holding
or any of their respective Subsidiaries, or otherwise materially alter
its capital structure except (x) in connection with financing
transactions entered into in order to effectuate the consummation of
the transactions contemplated by this Agreement as more particularly
expressly described in the Commitments, and (y) as may be necessary to
consummate the permitted purchase or acquisition of another entity,
whether by acquisition of assets, merger, tender offer, stock purchase,
consolidation or recapitalization subject in all respects to being in
compliance with Holding's obligations under Section 6.3(g) and provided
that such amendment, reclassification, stock split, combination,
distribution or capital structure alteration would not impact (after
giving effect to the transactions contemplated by this Agreement, so
that such impact is measured on a pro forma basis as if the
stockholders of Discount were then holding New Holding Common Stock as
a result of the Merger) any such common stockholder of New Holding in a
manner disproportionate to the relative stock ownership of such common
stockholder otherwise contemplated by the Merger and the
Reincorporation, (iii) pay any dividend to stockholders of Holding or
New Holding, or (iv) adopt a plan of liquidation or dissolution or sell
all or substantially all of its assets;
(g) permit New Holding or Merger Sub to have any operations or incur any
liabilities, other than liabilities arising out of the organization of
the respective companies and liabilities incurred in connection with
the transactions contemplated by this Agreement;
(h) take, or agree in writing or otherwise to take (i) any of the actions
described in Subsections (a) through (g) above, (ii) any action not
otherwise expressly authorized by this Agreement that would materially
and adversely impact Holding's or New Holding's or Merger Sub's or
ASCI's ability to consummate the transactions contemplated hereby, or
prevent any of them from performing or cause
A-36
either of them not to perform its respective covenants hereunder in any
material respect, (iii) any action not otherwise expressly authorized
by this Agreement that will result in any of the conditions to the
transactions contemplated by this Agreement as set forth in Article 8
not being satisfied or will result in violation of any provision of
this Agreement, (iv) amend, modify or terminate the New Holding Merger
Agreement in any material respect, or (v) any other action not
otherwise expressly authorized by this Agreement that would materially
adversely delay or materially adversely impair the ability of Holding,
ASCI, New Holding or Merger Sub to consummate the transactions
contemplated hereby or any action that could reasonably be expected to
materially adversely delay or materially adversely impair the ability
of Holding, New Holding and ASCI to satisfy the conditions to, and/or
to secure, the financing contemplated by or under the Commitments.
Section 6.3 Cooperation; Access.
(a) Subject to compliance with applicable law, from the date hereof until
the Effective Time, each of Holding and Discount shall confer on a
regular and frequent basis with one or more representatives of the
other party to report on the general status of ongoing operations and
shall promptly provide the other party or its counsel with copies of
all filings made by such party with any Governmental Entity in
connection with this Agreement, the Merger and the transactions
contemplated hereby and thereby, or with the SEC pursuant to the
Exchange Act.
(b) Prior to the Closing, Discount will, and will cause each of its
Subsidiaries to, permit representatives of Holding and ASCI to have
full access at all reasonable times and with reasonable advance notice,
and in a manner so as not to interfere with the normal business
operations of Discount and its Subsidiaries, to all premises,
properties, officers (and any other specific employees to whom such
officers may expressly authorize access in writing from time to time),
books, records (including Tax records), contracts, commitments and
documents of or pertaining to each of Discount and its Subsidiaries and
to conduct such inspections and investigations as Holding and ASCI may
reasonably require; provided, however, that, prior to the expiration or
termination of any waiting period under the HSR Act or other similar
law applicable to the transaction, Holding and ASCI shall only be
permitted such reasonable access which, in their discretion, after
consultation with their counsel, is appropriate during such inspection
and investigation process and provided further, Discount may withhold
such portions of documents or information relating to pricing or other
matters that are highly sensitive and the exchange of such documents
(or portions thereof) or information, as determined by Discount or
Discount's outside legal counsel, that might reasonably result in
antitrust difficulties between Discount and Holding (or any of its
Affiliates). If any material is withheld from Holding or ASCI pursuant
to the second proviso of the preceding sentence, Discount shall inform
Holding as to what is being withheld. No information or knowledge
obtained in any investigation pursuant to this Section 6.3 shall affect
or be deemed to modify any representation or warranty contained in the
Agreement or the conditions to the obligations of the parties to
consummate the transactions contemplated by this Agreement. The
confidentiality of all such documents and information furnished in
connection with the transactions contemplated by this Agreement shall
be governed by the terms of Section 6.4. In addition to the foregoing,
with respect to the Designated Discount Real Properties, Discount shall
use its best efforts to complete any and all environmental
questionnaires that may be required or deemed necessary by Holding and
ASCI; and, if required and to the extent required by the providers of
the Commitments, Discount shall arrange for environmental reports to be
prepared and/or further testing to be conducted with respect to those
Designated Discount Real Properties for which the providers of the
Commitments may so require the preparation of such reports and/or
conduct of further testing. The cost of any such environmental reports
and any such further testing shall be borne by Discount.
(c) Prior to the Closing, Holding will, and will cause each of its
Subsidiaries to, permit representatives of Discount to have access at
all reasonable times and with reasonable advance notice, and in a
manner so as not to interfere with the normal business operations of
Holding and its Subsidiaries, to such premises, properties, books,
records (including Tax records), contracts, commitments and documents
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of or pertaining to each of Holding and its Subsidiaries and to conduct
such inspections and investigations in all cases only as Discount may
reasonably believe is necessary in order to confirm the accuracy of the
representations and warranties of Holding and ASCI (if Discount
reasonably believes that a representation or warranty may have been
breached), the compliance by Holding and ASCI of their respective
covenants under this Agreement, and the satisfaction of the conditions
to Discount's obligation to consummate the transactions hereunder;
provided, however, that, prior to the expiration or termination of any
waiting period under the HSR Act or other similar law applicable to the
transaction, Discount shall only be permitted such reasonable access
which, in their discretion, after consultation with their counsel, is
appropriate during such inspection and investigation process and
provided further, Holding may withhold such portions of documents or
information relating to pricing or other matters that are highly
sensitive and the exchange of such documents (or portions thereof) or
information, as determined by Holding or Holding's outside legal
counsel, might reasonably result in antitrust difficulties between
Discount and Holding (or any of its Affiliates). If any material is
withheld from Discount pursuant to the second proviso of the preceding
sentence, Holding shall inform Discount as to what is being withheld.
No information or knowledge obtained in any investigation pursuant to
this Section 6.3 shall affect or be deemed to modify any representation
or warranty contained in the Agreement or the conditions to the
obligations of the parties to consummate the transactions contemplated
by this Agreement. The confidentiality of all such documents and
information furnished in connection with the transactions contemplated
by this Agreement shall be governed by the terms of Section 6.4.
Section 6.4 Confidentiality. The parties acknowledge that ASCI has
previously executed a confidentiality agreement dated as of March 15, 2001 and
Discount has previously executed a confidentiality agreement dated as of June
12, 2001 (the "Confidentiality Agreements"), which Confidentiality Agreements
will continue in full force and effect in accordance with their terms, except
as expressly modified herein, until the Effective Time, and if this Agreement
is terminated or if the Effective Time shall not have occurred for any reason
whatsoever, the Confidentiality Agreements shall thereafter remain in full
force and effect in accordance with their terms. Notwithstanding the foregoing,
each party hereby expressly consents to the disclosure of any information
subject to the Confidentiality Agreements required to be disclosed by
applicable law in connection with the consummation of the transactions
contemplated by this Agreement; provided, that the parties shall consult with
one another prior to the disclosure of any such information.
Section 6.5 Notices of Certain Events. Each of Holding and New Holding, on
the one hand and Discount, on the other hand, shall give prompt notice to the
other of (i) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the Merger;
(ii) any notice of other communication from any Governmental Entity in
connection with the Merger or any party's filings under the Exchange Act; and
(iii) any actions, suits, claims, investigations or proceedings commenced or,
to its knowledge, threatened against, relating to or involving or otherwise
affecting Holding, New Holding or Discount or their respective Subsidiaries
that relate to the consummation of the Merger. Each of Holding and Discount
will use commercially reasonable efforts to promptly notify the other if, in
the course of such party's investigations with respect to the other and the
other's Affiliates, such party obtains knowledge that any representation or
warranty of the other is, or is reasonably expected to be, untrue or inaccurate
so as to have a Material Adverse Effect.
ARTICLE 7
ADDITIONAL AGREEMENTS
Section 7.1 No Solicitation.
(a) From the date hereof until the Effective Time, Discount shall
immediately cease and desist and discontinue and cause to be terminated
any and all existing activities with respect to any of the following
and shall not, nor shall it authorize or permit any of its
Subsidiaries, directly or indirectly,
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to, nor shall it authorize or permit any officer, director, affiliate,
employee, attorney, accountant, financial advisor, independent
representative or independent agent or any other advisor or
representative of Discount or of any of its Subsidiaries to, solicit,
initiate, encourage or take any action to facilitate (including by way
of furnishing information or engaging in discussions or negotiations)
any inquiries, proposals or offers that constitute, or could reasonably
be expected to lead to or relate to, a proposal or offer to acquire any
assets, business or properties of Discount or any of its Subsidiaries
other than assets, businesses or properties that are permitted to be
sold by Discount and its Subsidiaries pursuant to Section 6.1 or any
part of the capital stock of Discount or any of its Subsidiaries,
whether by merger, share purchase or exchange, reorganization,
recapitalization, liquidation, dissolution, consolidation, business
combination, purchase of assets, tender offer, exchange offer or
similar transaction, whether for cash, securities or any other
consideration or combination thereof other than the transactions
contemplated by this Agreement and other than another transaction or
series of related transactions in which Holding, New Holding or a
Subsidiary of Holding or of New Holding is the acquiring Person (any of
the foregoing inquiries or proposals being referred to in this
Agreement as an "Acquisition Proposal"); provided, however, that if, at
any time prior to the Discount Stockholder Vote on this Agreement, the
Plan of Merger and the Merger, the Board of Directors of Discount
determines in good faith, after consultation with outside counsel, that
failure to do so would constitute a breach of its fiduciary duties to
Discount's stockholders under applicable law, Discount in response to a
bona fide written Acquisition Proposal that the Discount Board of
Directors determines in good faith is not subject to a financing
contingency that is more uncertain or conditioned than the financing
contingency applicable to the Merger that is contained in the
Commitments described in Section 8.2(h) of this Agreement and, if
consummated, would constitute a Superior Proposal, and that was
unsolicited or that did not otherwise result from a breach of this
section, may, (x) furnish non-public information with respect to
Discount to the Person or group who made such Acquisition Proposal
pursuant to a confidentiality agreement containing confidentiality
terms at least as stringent as those contained in the Confidentiality
Agreement protecting information of Discount and executed by ASCI and
(y) participate in discussions and negotiations regarding such
Acquisition Proposal. Notwithstanding the foregoing, Discount agrees
not to release any third party from, or waive any provision of, any
confidentiality agreement between Discount and another Person
previously entered into by Discount in the course of Discount's efforts
to identify an acquisition partner, unless the Board of Directors of
Discount determines in good faith, after consultation with outside
legal counsel, that such action is necessary for the Board of Directors
to comply with its fiduciary duties to Discount's stockholders and to
enable such third party to communicate with and make an Acquisition
Proposal addressed to the Board of Directors of Discount, and in such
event, such waiver shall only be made to the extent necessary to permit
such third party to make such Acquisition Proposal directly to the
Board of Directors of Discount, to negotiate a Superior Proposal with
the Board of Directors of Discount, and/or to enter into and to
consummate a Superior Proposal that is ultimately approved by the Board
of Directors of Discount. No other provisions of such confidentiality
agreement shall be released or waived, and no authorization shall be
given to such third party to obtain proxies, voting agreements, options
or option agreements or to purchase shares of any shareholder of
Discount other than pursuant to a tender offer approved by Discount's
Board of Directors in connection with and as part of consummating a
Superior Proposal. In the event that the Board of Directors of Discount
determines in good faith, after consultation with outside legal
counsel, that such action is necessary as described in the foregoing
two sentences, then the Board of Directors of Discount shall concurrent
with its release of such third party from those provisions of the
confidentiality agreement between Discount and such person that are
necessary to accomplish the foregoing, simultaneously release Holding
and ASCI from the comparable provisions of their Confidentiality
Agreement previously entered into with Discount. In addition, in the
event that any third party that has not entered into a confidentiality
agreement with Discount takes any action or actions that would lead to
or constitutes an Acquisition Proposal, then the Board of Directors of
Discount shall immediately release Holding and ASCI from those
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provisions of their Confidentiality Agreement previously entered into
with Discount that would enable Holding and ASCI to take such action or
actions comparable to those then being taken by such third party.
(b) For these purposes, a "Superior Proposal" shall mean any bona fide
unsolicited written proposal made by a third party to acquire all or
substantially all the equity securities or assets of Discount, pursuant
to a tender offer or exchange offer, a merger, a consolidation, a
liquidation or dissolution, a recapitalization, a sale of all or
substantially all of its assets or a similar transaction, (i) on terms
which the Board of Directors of Discount determines in their good faith
judgment is more favorable from a financial point of view for the
holders of Discount Common Stock than the Merger, after consultation
with its outside counsel and financial advisor, taking into account all
the terms and conditions of such proposal and this Agreement (including
any proposal in the form of a firm commitment by Holding to amend the
terms of the Merger) and (ii) that is not subject to a financing
contingency that is more uncertain or conditioned than the financing
contingency applicable to the Merger that is contained in the
Commitments described in Section 8.2(h) of this Agreement and is
reasonably capable of being completed, taking into account all
financial, regulatory, legal and other aspects of such proposal and the
Person making such proposal.
(c) Nothing contained in this Section 7.1 shall prohibit Discount from at
any time taking and disclosing to its stockholders a position
contemplated by Rule 14e-2(a) of the Exchange Act with regard to an
Acquisition Proposal.
(d) Neither the Board of Directors of Discount, nor any committee thereof,
shall withdraw, modify or qualify (or propose to withdraw, modify or
qualify) the Discount Recommendation in any manner adverse to Holding
or ASCI, or take any action or make any statement in connection with
the Discount Meeting inconsistent with such Discount Recommendation.
Notwithstanding the foregoing, at any time prior to the Discount
stockholder vote on this Agreement, the Plan of Merger and the Merger,
the Board of Directors of Discount may, in response to a Superior
Proposal that was unsolicited and did not otherwise result from a
breach of this Section 7.1, withdraw, modify or qualify the Discount
Recommendation if the Board of Directors of Discount determines, in
good faith, after consultation with outside counsel, that its fiduciary
obligations require it to do so.
(e) Notwithstanding the foregoing, (i) two (2) Business Days prior to
providing any information to any Person or entering into discussions or
negotiations with any such Person regarding such Superior Proposal,
Discount shall notify Holding promptly of such inquiries or proposals
received by, any such information requested from, or any such
discussions or negotiations sought to be initiated or continued with,
any of Discount's authorized representatives indicating, in connection
with such notice, the name of such Person and the material terms and
conditions of any inquiries, proposals or offers, and Discount agrees
that it will keep Holding informed in all material respects of the
status and terms of any such inquiries, proposals or offers, and not
enter into any agreements which would prohibit or impair its obligation
to do so hereunder, and (ii) Discount shall not terminate this
Agreement pursuant to Section 9.1(g) nor enter into an agreement with
respect to a Superior Proposal unless Discount shall have first (x)
furnished Holding with written notice not later than 12:00 noon (New
York time) five (5) Business Days in advance of any date that it
intends to terminate this Agreement and enter into such agreement, and
(y) caused its financial and legal advisors to negotiate with Holding
during such five day period in an effort to make such adjustments in
the terms and conditions of this Agreement as would enable Discount to
proceed with the transactions contemplated hereby on such adjusted
terms. In addition, as provided for in Section 9.3, if Discount enters
into an agreement with respect to any Superior Proposal, it shall
concurrently with or prior to entering into such agreement pay, or
cause to be paid, to ASCI the Termination Fee (as defined in Section
9.3), plus any amounts payable for Expenses pursuant to the provisions
of Section 9.3.
(f) Notwithstanding the foregoing, if Holding shall have received notice
from Discount pursuant to the provisions of either Section 7.1(e)(i) or
Section 7.1(e)(ii) and then only in the case where such notice
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is received after the Rating Date, Holding shall have the right, by
written notice to Discount given within five (5) Business Days of the
receipt of such notice, to require Discount to call and hold the
Discount Meeting, notwithstanding the existence of such Superior
Proposal, in which event (i) Discount shall not have the right to
terminate this Agreement pursuant to the provisions of Section 9.1(g)
and (ii) Holding shall not have the right to terminate this Agreement
pursuant to the provisions of Section 9.1(e) due to (x) any approval or
recommendation by the Board of Directors of Discount of such Superior
Proposal reasonably considered necessary as a result of such Superior
Proposal or adoption of a resolution to such effect, (y) any withdrawal
or modification or qualification of its recommendation or qualification
of its approval of this Agreement, the Plan of Merger or the Merger by
the Board of Directors of Discount in a manner adverse to the interests
of Holding or ASCI reasonably considered necessary as a result of such
Superior Proposal or adoption of a resolution to such effect, or (z)
any failure to include in the Proxy Statement/Prospectus the
recommendation without adverse modification or qualification that the
stockholders of Discount approve this Agreement, the Plan of Merger and
the Merger reasonably considered necessary as a result of such Superior
Proposal. For these purposes, the "Rating Date" shall mean the earlier
of (i) thirty (30) days after the date of this Agreement or (ii) the
date on which Holding delivers to Discount copies of letters from each
of Standard & Poors Rating Service ("S&P") and Moody's Investors
Service, Inc. ("Moody's") which confirm that, with respect to ASCI's
Senior Subordinated Facility (as such term is defined in the
Commitments), ASCI's senior subordinated debt, on a pro forma basis,
after giving effect to the Transactions (as is defined in the
Commitments), has been issued ratings from each of S&P and Moody's,
with such ratings (x) being B- or better, in the case of S&P, and B3 or
better, in the case of Moody's and (y) each having an "outlook" of
stable or better.
Section 7.2 Proxy Statement/Prospectus; Registration Statement; Stockholders
Meeting.
(a) As promptly as practicable after the execution of this Agreement,
Discount, ASCI, Holding and New Holding will (i) prepare and file with
the SEC a registration statement on Form S-4 (as amended or
supplemented, the "Registration Statement") relating to the adoption of
this Agreement and the approval of the Merger and Plan of Merger by the
stockholders of Discount pursuant to the Proxy Statement/Prospectus
described in subsection (c) below and the registration under the
Securities Act of the Stock Consideration included in the Merger
Consideration, and (ii) file with state securities administrators such
registration statements or other documents as may be required under
applicable blue sky laws to qualify or register the Stock Consideration
in such states as are designated by Discount (the "Blue Sky Filings").
Discount, ASCI, Holding and New Holding will use their reasonable best
efforts to cause the Registration Statement to become effective as soon
as practicable. Holding and New Holding will notify Discount promptly
of the receipt of any comments from the SEC or its staff or from any
state securities administrators and of any request by the SEC or its
staff or by any state securities administrators for amendments or
supplements to the Registration Statement or any Blue Sky Filings or
for additional information, and will supply Discount with copies of all
correspondence between Holding, New Holding or any of their respective
representatives, on the one hand, and the SEC, its staff or any state
securities administrators, on the other hand, with respect to the
Registration Statement. If at any time prior to receipt of the
Stockholder Approval there shall occur any event that should be set
forth in an amendment or supplement to the Proxy Statement/Prospectus,
Discount, Holding and New Holding shall promptly prepare and arrange
for the mailing to Discount stockholders such an amendment or
supplement. Each party will cause its counsel and independent auditors,
promptly upon request therefor, to deliver any consents, legal opinions
or "cold comfort" letters that may reasonably be required by any party
or its financial advisor or agents in connection with the transactions
contemplated by this Agreement.
(b) Discount hereby represents that its Board of Directors has (i)
determined that the Merger is fair to and in the best interests of
Discount's stockholders, (ii) approved the Merger and (iii) resolved to
recommend in the Proxy Statement/Prospectus adoption of this Agreement
and authorization of the Merger by the stockholders of Discount.
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(c) Discount agrees, subject to Section 7.1, that this Agreement shall be
submitted at the Discount Meeting. As soon as practicable after the
date of this Agreement and following the date on which the Proxy
Statement/Prospectus is in a position to be mailed to the Discount
stockholders, Discount shall take all action, to the extent necessary
in accordance with applicable law and its Charter Documents, to convene
a meeting of its stockholders promptly to consider and vote upon the
approval of the Merger, and Discount shall prepare and file with the
SEC, subject to the prior approval of Holding, which approval Holding
shall not unreasonably withhold, together with the Registration
Statement, the Proxy Statement/Prospectus and proxy and other filings
relating to the Discount Meeting as required by the Exchange Act. The
term "Proxy Statement/Prospectus" shall mean such proxy statement at
the time it initially is mailed to stockholders and all duly filed
amendments or revisions made thereto, if any, similarly mailed. Notice
of the Discount Meeting shall be mailed to the stockholders of Discount
along with the Proxy Statement/Prospectus. Discount, Holding and ASCI
each shall use its reasonable best efforts to obtain and furnish the
information required to be included in the Proxy Statement/Prospectus;
and Discount, Holding and ASCI, as appropriate, shall respond promptly
to any comments made by the SEC with respect to the Proxy
Statement/Prospectus and cause the Proxy Statement/Prospectus and proxy
to be mailed to Discount's stockholders at the earliest practicable
time.
Section 7.3 NYSE Listing. Discount agrees to use reasonable efforts to
continue the listing of Discount Common Stock on the New York Stock Exchange
through the earlier of the Closing or termination of this Agreement.
Section 7.4 Legal Conditions to Merger.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, and subject to Section 7.1 and 9.1(g), Discount, Holding,
ASCI and New Holding shall use their respective reasonable best efforts
to (i) take, or cause to be taken, all appropriate action, and do, or
cause to be done, all things necessary and proper under applicable law
to consummate and make effective, in the most expeditious manner
practicable, the transactions contemplated hereby, (ii) obtain from any
Governmental Entity any consents, licenses, permits, waivers,
approvals, authorizations, or orders required to be obtained or made by
Discount or Holding or New Holding or any of their Subsidiaries in
connection with the authorization, execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby
including, without limitation, the Merger, and (iii) as promptly as
practicable, make all necessary material filings, and thereafter make
any other required material submissions, with respect to this Agreement
and the Merger required under (A) the Securities Act and the Exchange
Act, and any other applicable federal or state securities laws, (B) the
HSR Act and any related governmental request thereunder, and (C) any
other applicable law. Discount, Holding, New Holding and ASCI shall
cooperate with each other in connection with the making of all such
filings, including providing copies of all such documents to the non-
filing party and its advisors prior to filing and, if requested, to
accept all reasonable additions, deletions or changes suggested in
connection therewith. Discount, Holding, New Holding and ASCI shall use
reasonable commercial efforts to furnish to each other all information
required for any application or other filing to be made pursuant to the
rules and regulations of any applicable law (including all information
required to be included in the Proxy Statement/Prospectus) in
connection with the transactions contemplated by this Agreement. If
Discount is requested to do so in writing by Holding, Discount will use
commercially reasonable efforts to obtain those Holding Designated
Consents identified in such request; provided, however, that in no
event shall Discount be required to pay any money or provide any
guarantee to obtain such Holding Designated Consent; provided, further,
that the failure to obtain any Holding Designated Consent shall not in
any way prevent or delay the parties from closing the transactions
contemplated by this Agreement. In connection therewith, and in
connection with its negotiations for such Holding Designated Consents,
Discount may not offer or consent to any modification or amendment of
any lease or other contract without Holding's prior written consent
which consent may be withheld in Holding's sole discretion. At
Holding's election,
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Holding may participate in and jointly control the process of obtaining
any such Holding Designated Consents. Discount agrees to transmit the
form of requested consent to the appropriate parties for approval
promptly after the execution of this Agreement. Holding shall have the
right to approve the form of consent and the transmittal letter used to
transmit such consents to each such party. Discount shall keep Holding
advised of its progress in obtaining such Holding Designated Consents
and shall obtain Holding's written consent which consent may be
withheld in Holding's sole discretion prior to offering or consenting
to any substantive change or modification of the form of the consent
approved by Holding. The "Holding Designated Consents" are set forth on
Schedule D to this Agreement and such Schedule D may be updated from
time to time to add any material consents, material licenses, material
permits, material waivers, material approvals or material
authorizations that are discovered by Holding after the date of this
Agreement. Discount shall take all necessary action so that the Senior
Term Notes issued under the Note Purchase Agreement dated as of July
17, 1997 and the Senior Secured Notes issued under the Note Agreement
dated as of October 30, 1989 may be repaid in full and retired on the
Closing Date. If requested by Holding, Discount shall further take all
necessary action so that, effective on the Closing Date, the Master
Lease Agreement dated as of May 30, 2000 between Atlantic Financial
Group, Ltd. and Discount Auto Parts Distribution Center, Inc. and all
other documents related to said transaction are terminated (except for
obligations that expressly survive termination under the terms of such
documents, as such documents exist as of the date hereof) and the real
property subject thereto is reacquired by Discount in accordance with
their terms free and clear of all monetary liens (other than any lien
for nondelinquent taxes) and take all other action associated therewith
without any liability other than provided for in such Master Lease
Agreement and the other related documents.
(b) Holding, New Holding and Discount agree, and shall cause each of their
respective Subsidiaries and Affiliates, to cooperate and to use
reasonable commercial efforts to obtain any government clearances or
approvals required for Closing under the HSR Act, the Sherman Act, as
amended, the Clayton Act, as amended, the Federal Trade Commission Act,
as amended, and any other Federal, state or foreign law or, regulation
or decree designed to prohibit, restrict or regulate actions for the
purpose or effect of monopolization or restraint of trade (collectively
"Antitrust Laws"), to respond to any government requests for
information under any Antitrust Law and, unless either Holding or New
Holding determines that there is a reasonable basis to conclude that
such action is reasonably likely to have a Material Adverse Effect
either on Holding and its Subsidiaries, on Discount and its
Subsidiaries or on the consolidated entities after the Merger and the
Reincorporation and notifies Discount to such effect or Discount
determines that there is a reasonable basis to conclude that such
action is reasonably likely to have a Material Adverse Effect on the
consolidated entities after the Merger and the Reincorporation and
notifies Holding to such effect, to contest and resist any action,
brought by a private party under the Antitrust Laws (a "Private Party
Action") , and to have vacated, lifted, reversed or overturned any
order, stay, decree, judgment, injunction or other order (whether
temporary, preliminary or permanent) obtained by a private party (a
"Private Party Order") that restricts, prevents or prohibits the
consummation of the Merger or any other transactions contemplated by
this Agreement under any Antitrust Law. Holding and New Holding shall
not be obligated to but may elect to contest and resist any action
brought by a Governmental Entity, including any legislation,
administrative or judicial action (a "Government Action"), or to seek
to vacate, lift, reverse or overturn any order issued by a Governmental
Entity as a consequence or arising out of an action brought by a
Governmental Entity (a "Government Order") that restricts, prevents or
prohibits the consummation of the Merger or any other transactions
contemplated by this Agreement under any Antitrust Law. If Holding or
New Holding so elects, Discount shall fully cooperate and assist
Holding and New Holding therewith. The parties hereto will consult and
cooperate with one another, and consider in good faith the views of one
another, in connection with any analyses, appearances, presentations,
memoranda, briefs, arguments, opinions and proposals made or submitted
by or on behalf of any party hereto in connection with proceedings
under or relating to
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any Antitrust Law. Holding, New Holding and Discount shall mutually
direct any proceedings or negotiations with any private party relating
to proceedings under or relating to any Antitrust Law and constituting
a Private Party Action or a Private Party Order and shall share equally
the reasonable costs and expenses incurred in connection therewith
(except that if such Private Party Action or Private Party Order is to
be contested and Discount determines that there is a reasonable basis
to conclude that such action is reasonably likely to have a Material
Adverse Effect either on Holding and its Subsidiaries, on Discount and
its Subsidiaries or on the consolidated entities after the Merger and
the Reincorporation and notifies Holding to such effect, the parties
shall not share the costs and expenses equally but instead each party
shall bear its own costs and expenses). Holding and New Holding shall
direct any proceedings or negotiations with any Governmental Entity
relating to any Government Action or Government Order, and shall afford
Discount a reasonable opportunity to participate therein, and Discount
shall fully cooperate and assist Holding in any such proceedings or
negotiations. Discount and its Subsidiaries shall cooperate with
Holding and New Holding with respect to any action which Holding and/or
New Holding shall choose to take in response to any demand,
requirement, or other action taken by the United States Federal Trade
Commission ("FTC") or the United States Department of Justice ("DOJ")
or any other regulatory body or agency, including, but not limited to,
divesting any of its businesses, retail stores, product lines or
assets; provided such divestitures or other actions are not required to
be taken, completed or implemented until on or after the Effective Time
and is not reasonably expected to have a Material Adverse Effect on the
consolidated New Holding after the Merger and the Reincorporation. If a
Private Party Action or a Private Party Order is reasonably likely to
have a Material Adverse Effect either on Holding and its Subsidiaries,
on Discount and its Subsidiaries or on the consolidated entities after
the Merger and the Reincorporation, Holding shall not be obligated to
consummate the transactions contemplated by this Agreement and may
terminate this Agreement pursuant to Section 9.1(c). If a Private Party
Action or a Private Party Order is reasonably likely to have a Material
Adverse Effect on the consolidated entities after the Merger and the
Reincorporation, Discount shall not be obligated to consummate the
transactions contemplated by this Agreement and may terminate this
Agreement pursuant to Section 9.1(c). Notwithstanding anything to the
contrary contained in this Section 7.4, Holding, ASCI or their
Subsidiaries shall not be required to (i) divest or agree to divest any
of their or Discount's and its Subsidiaries' respective businesses,
retail stores, product lines or assets or to take or agree to take any
other action with respect to Holding, New Holding, ASCI, Discount or
their respective Subsidiaries, or (ii) take any other action under this
Section 7.4, if the DOJ or the FTC or any other regulatory body or
agency authorizes its staff to seek a preliminary injunction or
restraining order to enjoin consummation of the Merger. Each Person
shall pay any filing fee required under the regulations promulgated
pursuant to the HSR Act with respect to its own filing thereunder.
Section 7.5 Public Disclosure. The initial press release with respect to the
execution of this Agreement shall be a joint press release acceptable to
Holding and Discount. Thereafter, Holding and Discount shall consult with each
other before issuing any press release or otherwise making any public statement
or public filing with respect to the Merger or this Agreement and shall not
issue any such press release or make any such public statement or public filing
prior to such consultation, except as, in the reasonable judgment of the Board
of Directors of either Holding or Discount, may be required by law or the rules
and regulations of the New York Stock Exchange.
Section 7.6 Certain Employee Benefit Plan Obligations.
(a) During the period commencing at the Effective Time and ending twelve
(12) months thereafter, New Holding, ASCI and/or the Surviving
Corporation shall provide the employees of Discount and the Discount
Subsidiaries (the "Discount Employees") with benefits (other than stock
and stock-based benefits and the value thereof) that are in the
aggregate substantially equivalent to or more favorable than the
benefits provided to such employees immediately before the Effective
Time by Discount and the Discount Subsidiaries identified in the
Discount Disclosure Schedule; provided however, this covenant shall not
prohibit changes in benefit plans required by law or in the ordinary
course of
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business on a basis reasonably consistent with the practices of ASCI,
it being understood by Discount, Holding, ASCI and New Holding that the
benefits provided by ASCI to its employees on the date hereof (as
described in a schedule of benefits delivered by ASCI to Discount)
satisfy such agreement. New Holding, ASCI and the Surviving Corporation
will treat, and cause their benefit plans to treat, the service of the
Discount Employees with Discount or any Discount Subsidiary
attributable to any period before the Effective Time as service
rendered to New Holding, ASCI and/or the Surviving Corporation, as
applicable, for purposes of eligibility to participate, vesting,
benefit accrual and for other benefits including, but not limited to,
applicability of minimum waiting periods for participation. Without
limiting the foregoing, New Holding, ASCI and the Surviving Corporation
shall not, except as may be required by applicable law, treat any
Discount Employee as a "new" employee for purposes of any exclusions
under any health or similar plan of New Holding, ASCI and/or the
Surviving Corporation for a pre-existing medical condition, and will
make appropriate arrangements with its insurance carrier(s) to ensure
such result.
(b) Following the Effective Time, the Surviving Corporation shall honor and
shall cause its Subsidiaries to honor (i) in accordance with their
terms, all written individual employment, termination, severance,
bonus, change in control, post-employment and other written
compensation agreements, arrangements and plans existing prior to the
execution of this Agreement and referred to in the Discount Disclosure
Schedule ("Disclosed Discount Employment Arrangements"), which are
between Discount or any Discount Subsidiary and any current or former
director, officer or employee thereof, and (ii) all legally imposed
obligations relating to employment matters pursuant to applicable law.
Notwithstanding anything to the contrary contained herein, no officer
or employee shall have any right to continued employment or any other
right, except to the extent specifically set forth in such officer's or
employee's Disclosed Discount Employment Arrangement or as provided in
Section 7.6(a). New Holding and/or ASCI will cause the Surviving
Corporation to honor its obligations under the Designated Arrangements
on the Discount Disclosure Schedule. As for those items which are
included as part of the Disclosed Discount Employment Arrangements and
which are expressly identified as Designated Arrangements on the
Discount Disclosure Schedule, the provisions of this Section 7.6(b) are
(x) intended to be for the benefit of, and will be enforceable by, each
Person who is a counterparty to the Designated Arrangements, his or her
heirs and his or her representatives and (y) in addition to, and not in
substitution for, any other rights that any such Person may have by
contract or otherwise.
(c) If the Surviving Corporation or any of the Discount Subsidiaries, or
any of their respective successors or assigns, transfers all or
substantially all of its properties and assets to any Person or Persons
within twelve months of the Effective Time, then, and in each such
case, proper provision shall be made so that the transferee assumes
(and if more than one, the transferees assume, jointly and severally)
the obligations set forth in this Section 7.6.
(d) Except as expressly provided in this Section 7.6, the Surviving
Corporation shall have sole discretion with respect to the
determination as to whether to terminate, merge or continue any
employee benefit plans and programs of Discount or any Discount
Subsidiary. Nothing in this Agreement shall alter or limit New
Holding's, ASCI's and/or the Surviving Corporation's obligations, if
any, under ERISA, as amended by the Consolidated Omnibus Budget
Reconciliation Act of 1985 and/or the Health Insurance Portability and
Accountability Act of 1996 with respect to the rights of the Discount
Employees and their qualified beneficiaries in connection with the
group health plan maintained by Discount as of the Effective Time.
Section 7.7 Indemnification, Exculpation and Insurance.
(a) Holding, New Holding and ASCI each agree that all rights to
indemnification, expense advancement and exculpation from liabilities
for acts or omissions occurring at and/or prior to the Effective Time
now existing in favor of the current or former directors, officers,
employees or agents of Discount and its Subsidiaries as provided in
their respective Charter Documents and any indemnification
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agreements or arrangements of Discount or any of its Subsidiaries shall
survive the Merger and shall be assumed in all respects by and will be
fulfilled and honored by the Surviving Corporation and guaranteed by
Holding, New Holding and ASCI and shall continue in full force and
effect, without amendment, for at least six years after the Effective
Time; provided, however, that all rights to indemnification in respect
of any claim asserted or made within such period shall continue until
the final disposition of such claim. Without limiting the foregoing,
(i) Holding, New Holding, ASCI and/or the Surviving Corporation shall
pay any expenses of any indemnified Person under this Section 7.7 in
advance of the final disposition of any action, proceeding or claim
relating to any such act or omission to the fullest extent permitted
under applicable law upon receipt from the applicable indemnified
Person to whom advances are to be advanced of an undertaking to repay
such advances required under applicable law and (ii) each of Holding,
New Holding, ASCI and the Surviving Corporation shall cooperate in the
defense of any such matter. In addition, from and after the Effective
Time, directors or officers of Discount and its Subsidiaries who become
directors or officers of Holding, New Holding or their respective
Subsidiaries will be entitled to the same indemnity rights and
protections as are afforded to other directors and officers of Holding
and/or of New Holding.
(b) For not less than six years after the Effective Time, New Holding, ASCI
or the Surviving Corporation shall maintain in effect Discount's
current directors' and officers' liability insurance covering acts or
omissions occurring at and/or prior to the Effective Time with respect
to those Persons who are currently covered by Discount's directors' and
officers' liability insurance policy on terms with respect to such
coverage and amount no less favorable in the aggregate to Discount's
directors and officers currently covered by such insurance than those
of such policy in effect on the date hereof; provided, that New Holding
may substitute therefor policies of New Holding, ASCI or their
Subsidiaries containing terms with respect to coverage and amount no
less favorable to such directors or officers so long as no lapse in
coverage occurs as a result of such substitution; provided, further,
that in no event shall Holding or New Holding or the Surviving
Corporation be required to pay annual premiums for such insurance in
excess of 150% of the annual premiums currently paid by Discount for
such insurance and if New Holding and/or the Surviving Corporation are
unable to obtain the insurance required by this Section 7.7(b), they
shall obtain as much comparable insurance as possible for an annual
premium equal to such maximum amount. In the event that any claim or
claims are asserted or made within such six-year period, such insurance
shall be continued in respect of any such claim or claims until final
disposition of any and all such claims.
(c) In the event that either of the Surviving Corporation or New Holding or
ASCI or any of their respective successors or assigns (i) consolidates
with or merges with or into any other Person and is not the continuing
or surviving corporation or entity of such consolidation or merger or
(ii) transfers or conveys all or substantially all of its properties
and assets to any Person, then, and in each such case, proper provision
will be made so that the successors and assigns of New Holding, ASCI or
the Surviving Corporation, as applicable, will assume the obligations
thereof set forth in this Section 7.7.
(d) New Holding and ASCI shall cause the Surviving Corporation or any
successor thereto to comply with its obligations under this Section
7.7.
(e) The provisions of this Section 7.7 are (i) intended to be for the
benefit of, and will be enforceable by, each indemnified party, his or
her heirs and his or her representatives and (ii) in addition to, and
not in substitution for, any other rights to indemnification or
contribution that any such Person may have by contract or otherwise.
Section 7.8 Control of Operations. Subject to the terms and provisions
contained in Section 6.1 and Section 6.3 of this Agreement, nothing contained
in this Agreement shall give Holding, directly or indirectly, the right to
control or direct the operations of Discount or its Subsidiaries prior to the
Effective Time. Subject to the terms and provisions contained in Section 6.1
and Section 6.3 of this Agreement, nothing contained in this Agreement shall
give Discount, directly or indirectly, the right to control or direct the
operations of Holding or New Holding or any of their Subsidiaries prior to the
Effective Time. Prior to the Effective Time,
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each of Holding, New Holding and Discount shall exercise, consistent with the
terms and conditions of this Agreement, complete control and supervision over
its respective operations.
Section 7.9 No Rights Triggered. Discount shall take all actions necessary,
and Holding and New Holding shall cooperate in the taking of such actions, such
that the entering into of this Agreement and the consummation of the
transactions contemplated hereby do not and will not result in any Right
becoming exercisable.
Section 7.10 Securityholder Litigation.
(a) Discount and its directors shall use reasonable commercial efforts to
contest and resist any action, including any legislative,
administrative or judicial action, initiated by or in the name of
Discount or its securityholders and to have vacated, lifted, reversed
or overturned any Government Order that restricts, prevents or
prohibits the consummation of the Merger or any other transactions
contemplated by this Agreement arising therefrom. Discount shall give
Holding and New Holding the opportunity to participate in the defense
or settlement of any securityholder litigation against Discount or its
directors relating to any of the transactions contemplated by this
Agreement. No settlement of any such securityholder litigation shall be
agreed to without Holding's consent, which shall not be unreasonably
withheld.
(b) Holding, New Holding, ASCI and their respective directors shall use
reasonable commercial efforts to contest and resist any action,
including any legislative, administrative or judicial action, initiated
by or in the name of Holding, New Holding, ASCI or its securityholders
and to have vacated, lifted, reversed or overturned any Government
Order that restricts, prevents or prohibits the consummation of the
Merger or any other transactions contemplated by this Agreement arising
therefrom. Holding, New Holding and ASCI shall give Discount the
opportunity to participate in the defense or settlement of any
securityholder litigation against Holding, New Holding, or ASCI or
their respective directors relating to any of the transactions
contemplated by this Agreement. No settlement of any such
securityholder litigation shall be agreed to without Discount's
consent, which shall not be unreasonably withheld.
Section 7.11 Directors. At or before the Effective Time, Discount and each
of its Subsidiaries shall have obtained the written resignation of each of
their respective directors in their capacities as such (and not as employees),
it being understood that any such resignation shall not constitute a voluntary
termination of employment, an involuntary termination of employment or a
termination for good reason by any such director for purposes of any change of
control agreement, employment agreement, severance agreement or program or
otherwise and shall not be considered as affecting any contract right then in
existence between Discount and such director.
Section 7.12 Delivery of Discount Financial Information. Discount will
deliver to Holding and ASCI (a) (i) as promptly as is reasonably practicable,
but in no event later than August 15, 2001, an audited consolidated balance
sheet, statements of income and cash flows and stockholders' equity of Discount
and its Subsidiaries as of and for the twelve month period ended May 29, 2001,
complete with a report of Ernst & Young LLP, the auditors for Discount, that is
not qualified in any respect (the "Discount Audited Financial Statements"),
which Discount Audited Financial Statements will not be materially different in
any respect from the Discount Unaudited Financial Statements included in the
Discount Disclosure Schedule, (ii) as promptly as is reasonably practicable,
but in no event later than October 12, 2001, the Form 10-Q (including the
unaudited consolidated balance sheet, statements of income and cash flows of
Discount and its Subsidiaries as of and for the three month period ended August
28, 2001 to be included therein (the "Discount Q1 Financial Statements"), and
the exhibits thereto) required to be filed by Discount and its Subsidiaries
with the SEC under the Exchange Act on or before such date (the "Discount Q1
Form 10-Q") and (iii) promptly upon request, any and all consents of Ernst &
Young LLP, the auditors for Discount, that are required to be included in the
Registration Statement and the Proxy Statement/Prospectus with respect to the
Discount Q1 Financial Statements and the Discount Audited Financial Statements,
and (b) subject to the provisions and limitations of
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Section 6.3, as promptly as is reasonably practicable for all periods after the
date of this Agreement prior to Closing, (i) monthly financial reports,
including profit and loss, a balance sheet and changes in cash position, and
(ii) weekly sales and comparable sales reports (in each case broken down by
Florida sales in the aggregate (and reflecting DIY and commercial sales
separately) and comparable sales in the aggregate (and reflecting DIY and
commercial sales separately) and non-Florida sales in the aggregate (and
reflecting DIY and commercial sales separately) and comparable sales in the
aggregate (and reflecting DIY sales and commercial sales separately)). Once
delivered in accordance with this Section 7.12, (a) the Discount Audited
Financial Statements and the "Discount Q1 Financial Statements" shall
collectively be deemed to be "Discount Financial Statements" for the purposes
of the representations and warranties contained in Section 4.4(b) of this
Agreement (provided, that the Discount Q1 Financial Statements are subject to
normal and recurring year-end adjustments, and contain all of the footnotes
required by Regulation S-X), and (b) the Discount Q1 Form 10-Q shall be deemed
to be included in the definition of "Discount SEC Reports" for the purposes of
the representations and warranties contained in Section 4.4(a) and Section
4.4(b) of this Agreement. Discount will cause Ernst & Young LLP to deliver any
"cold comfort" or similar letters regarding the Discount Financial Statements
(including the Discount Q1 Financial Statements) and the Discount Audited
Financial Statements as are customarily provided in similar transactions.
Section 7.13 Delivery of Holding Financial Information. Holding and New
Holding will deliver to Discount (a) promptly upon request, any and all
consents of Arthur Andersen LLP, the auditors for Holding, that are required to
be included in the Registration Statement and the Proxy Statement/Prospectus
with respect to the Holding Financial Statements and/or the financial
statements of New Holding and (b), subject to the provisions and limitations of
Section 6.3 as promptly as is reasonably practicable for all periods after the
date of this Agreement prior to Closing, (i) monthly consolidated financial
reports, including consolidated profit and loss, a consolidated balance sheet
and consolidated changes in cash position, and (ii) four week period sales
reports and weekly sales reports for the partial four week period prior to the
Closing (in each case exclusive of sales reports by individual location).
Holding will cause Arthur Andersen LLP to deliver any "cold comfort" or similar
letters regarding the Holding Financial Statements as are customarily provided
in similar transactions.
ARTICLE 8
CONDITIONS TO MERGER
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger and
otherwise consummate the transactions contemplated by this Agreement shall be
subject to the satisfaction prior to the Closing Date of the following
conditions, any of which may be waived, in writing, by agreement of all the
parties hereto:
(a) Stockholder Approval. The Agreement, the Merger and the Plan of Merger
shall have received Stockholder Approval.
(b) HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or otherwise been
terminated.
(c) Approvals. Other than the filing provided for by Section 2.2, all
authorizations, consents, orders or approvals of, or declarations or
filings with, or expirations of waiting periods imposed by, any
Governmental Entity, the failure of which to file, obtain or occur is
reasonably likely to have a Material Adverse Effect, have been filed,
been obtained or occurred.
(d) No Injunctions. No Governmental Entity or federal, state or foreign
court of competent jurisdiction shall have enacted, issued,
promulgated, enforced or entered any Government Order or statute, rule,
or regulation which is in effect and which has the effect of making the
Merger illegal or otherwise prohibiting consummation of the Merger.
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(e) Registration Statement. The Registration Statement shall have been
declared effective, and no stop order suspending the effectiveness of
the Registration Statement shall have been issued by the SEC or shall
be continuing to be in effect, and no proceedings for that purpose
shall have been initiated or threatened by the SEC.
(f) Simultaneous Merger. Simultaneously with the Merger and at the
Effective Time, Holding shall have merged with and into New Holding and
said merger shall have become effective under the Delaware General
Corporation Law and the Virginia Stock Corporation Act.
(g) New Holding Common Stock. The shares of New Holding Common Stock
issuable to Discount's stockholders and option holders in the Merger or
thereafter shall have been authorized for listing on either the NYSE or
Nasdaq National Markets, upon official notice of issuance.
Section 8.2 Additional Conditions to Obligations of Holding, New Holding and
Merger Sub. The obligations of Holding, New Holding and Merger Sub to effect
the Merger and otherwise consummate the transactions contemplated by this
Agreement are subject to the satisfaction of each of the following conditions,
any of which may be waived in writing exclusively by Holding or New Holding:
(a) Representations and Warranties. The representations and warranties of
Discount set forth in this Agreement shall be true and correct as of
the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date, except
(other than the representations and warranties contained in Sections
4.1, 4.2, 4.3(a), 4.3(b)(i), 4.17, 4.19 and 4.20 (with respect to
matters of Florida law) which shall be true and correct in all material
respects) where the failures to be true and correct individually or in
the aggregate have not had and would not reasonably be expected to have
a Material Adverse Effect upon Discount or the Surviving Corporation or
a material adverse effect upon the ability of Discount to consummate
the transactions contemplated hereby; and Holding and New Holding shall
have received a certificate signed on behalf of Discount by the Chief
Executive Officer and the Chief Financial Officer of Discount to such
effect.
(b) Performance of Obligations of Discount. Discount shall have performed
in all material respects all obligations required to be performed by it
under this Agreement at or prior to the Closing Date; and Holding and
New Holding shall have received a certificate signed on behalf of
Discount by the Chief Executive Officer and the Chief Financial Officer
of Discount to such effect.
(c) Physical Inventory. Discount shall have performed a physical inventory
observation of its salable inventory at its Lakeland, Florida
distribution center within 45 days of the date hereof, which inventory
shall have been taken in accordance with Discount's historical physical
inventory procedures and practices and consistent with such past
practice and performed in a manner reasonably satisfactory to Holding
and with representatives of Holding being allowed to observe the taking
of the inventory and to review the reconciliation of the inventory to
the general ledger; and the results of such inventory shall reflect an
aggregate inventory value at the Lakeland, Florida distribution center
which does not, on a historic cost basis, result in a reduction greater
than 5% of the portion of the inventory amount shown on the balance
sheet included in Discount's Q1 Financial Statements as pertaining to
that facility and as reflected in the general ledger as of such date,
adjusting such portion of the inventory amount reflected in such
balance sheet as follows: such amount will include adjustments for the
appropriate and necessary normal and recurring reconciling items which
are consistent with Discount's past practices for reconciling
inventory, including without limitation, reconciling items to take into
account activity with respect to such inventory between the actual date
of the inventory observations and August 28, 2001, and which
reconciling items are more particularly set forth on the Discount
Disclosure Schedule.
(d) Sale/Leaseback Agreement. Discount shall have entered into amendments
to each of those certain Master Leases dated as of February 27,
2001between Discount, on the one hand, and Dapper Properties I, LLC,
Dapper Properties II, LLC and Dapper Properties III, LLC, respectively,
on the
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other hand, each of which amends such Master Lease in the manner set
forth in Exhibit C-1 hereto, such amendment shall be satisfactory to
Holding, and each of such Master Leases shall continue to qualify for
off balance sheet treatment under U.S. GAAP. In connection with
obtaining such amendments (including the consent identified in Exhibit
C-1), Discount shall not offer or consent to the modification of any of
such Master Leases or any documents delivered in connection with the
closing of the Master Leases (other than the modifications specifically
set forth in Exhibit C-1 and corresponding modifications in the
documents delivered in connection with the closing of the Master
Leases), except as expressly approved by Holding, and Discount shall
keep Holding apprised of the status of obtaining such amendments
(including the consent identified in Exhibit C-1).
(e) Legal Opinion. Holding shall have received a legal opinion from
Discount's legal counsel, Trenam, Kemker, Scharf, Barkin, Frye, O'Neill
& Mullis, Professional Association, in substantially the form of
Exhibit C.
(f) Irrevocable Proxy and Voting and Stock Option Agreements. The Principal
Stockholder shall have executed and delivered the Irrevocable Proxy and
Voting Agreement, in the form of Exhibit D, and the Stock Option
Agreement, in the form of Exhibit E.
(g) No Material Adverse Change. There shall not have occurred since the
date of this Agreement a material adverse change in the financial
condition, results of operations, properties, assets, business or
prospects of Discount and its Subsidiaries, taken as whole.
(h) Commitments. The financial institutions who are parties to the
Commitments shall under the terms of the Commitments be obligated to
fund under the Commitments because all conditions to such funding have
been, or at the closing thereof will be, in the opinion of the lenders
who are parties to such Commitments, acting in their sole discretion,
satisfied or waived.
(i) Certificates. Discount shall, prior to the Closing Date, provide to
Holding a certificate from the Secretary of State of the State of
Florida as to Discount's active status, and such other certificates and
closing documents as are reasonably requested by Holding and customary
for transactions of the type contemplated hereby.
(j) Other Agreements. Discount shall have executed and delivered each of
the other agreements and instruments to be delivered by it pursuant to
this Agreement.
Section 8.3 Additional Conditions to Obligations of Discount. The obligation
of Discount to effect the Merger and otherwise consummate the transactions
contemplated by this Agreement is subject to the satisfaction of each of the
following conditions, any of which may be waived, in writing, exclusively by
Discount:
(a) Representations and Warranties. The representations and warranties of
Holding, New Holding, ASCI and Merger Sub set forth in this Agreement
shall be true and correct as of the date of this Agreement and (except
to the extent such representations speak as of an earlier date) as of
the Closing Date as though made on and as of the Closing Date, except
(other than the representations and warranties contained in Sections
5.1, 5.2, 5.3(a), 5.3(b)(i) and 5.15, which shall be true and correct
in all material respects) where the failures to be true and correct,
individually or in the aggregate, have not had and would not reasonably
be expected to have a Material Adverse Effect or a material adverse
effect upon the ability of Holding, New Holding, Merger Sub and ASCI to
consummate the transactions contemplated hereby; and Discount shall
have received a certificate signed on behalf of Holding and New Holding
by the chief executive officer and chief financial officer of Holding
and the President of New Holding to such effect.
(b) Performance of Obligations of Holding, New Holding, Merger Sub and
ASCI. Holding, New Holding, Merger Sub and ASCI shall have performed in
all material respects all obligations required to be performed by them
under this Agreement at or prior to the Closing Date, and Discount
shall have received a certificate signed on behalf of Holding and New
Holding by the chief executive officer and chief financial officer of
Holding and the President of New Holding to such effect.
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(c) Election of Peter Fontaine. Effective upon the Closing Date, Peter J.
Fontaine shall be elected as a member of the Board of Directors of New
Holding, and the Amended and Restated Stockholders Agreement dated
November 2, 1998 by and among Holding and certain of its stockholders
(the "Stockholders Agreement") shall have been amended (i) to provide
the Principal Stockholder with registration rights equivalent to those
held by the Existing Stockholder and described in the Terms of the
Registration Rights of the Common Stock attached as Exhibit A to the
Stockholders Agreement; provided, that (i) the Principal Stockholder
shall have no ability to make a written request for a Demand
Registration, and (ii) with respect to the first time that the Existing
Stockholder shall make a written request for a Demand Registration, the
Principal Stockholder shall have registration rights equivalent to
those held by the Ripplewood Stockholder (other than the ability to
make a written request for a Demand Registration). and (ii) to require
that Peter J. Fontaine shall continue to be elected to a seat on the
Board of Directors of New Holding until the earlier of (A) 2004, (B)
his submission of a voluntary resignation from such board, (C) his
removal from such director position for cause, (D) Peter J. Fontaine no
longer having beneficial interest in at least 50% of the shares of New
Holding Common Stock beneficially acquired by Peter J. Fontaine
pursuant to the Merger or (E) the expiration of the voting rights of
the other parties to the Stockholders Agreement. If the voting rights
of the other parties to the Stockholders Agreement expire after Peter
J. Fontaine has been so elected, New Holding will thereafter continue
to nominate Peter J. Fontaine for a seat on the Board of Directors of
New Holding until the earlier of (w) 2004, (x) his submission of a
voluntary resignation from such board, (y) his removal from such
director position for cause, or (z) Peter J. Fontaine no longer having
beneficial interest in at least 50% of the shares of New Holding common
stock beneficially acquired by Peter J. Fontaine pursuant to the
Merger.
(d) No Material Adverse Change. There shall not have occurred since the
date of this Agreement a material adverse change in the financial
condition, results of operations, properties, assets, business or
prospects of Holding and ASCI and their respective Subsidiaries, taken
as a whole.
(e) Exchange Agent. An officer of the Exchange Agent shall have certified
in writing to Discount that the deposit required to be made by Holding
and ASCI, into the Exchange Fund pursuant to Section 3.3 hereof has
been made or is being made immediately following the Closing and the
associated contribution of Discount Common Stock to ASCI.
(f) Legal Opinion. Discount shall have received from Riordan & McKinzie,
counsel to Holding, New Holding, Merger Sub and ASCI, an opinion dated
the date of the Effective Time in substantially the form of Exhibit F.
(g) Tax Opinion. Discount shall have received from Trenam, Kemker, Scharf,
Barkin, Frye & O'Neill, P.A., counsel to Discount, an opinion to the
effect that the exchange of new Holding Common Stock and cash for
Discount Common Stock in the Merger, assuming the contemporaneous
merger of Holding into New Holding, should be treated as part of an
exchange subject to Section 351 of the Code.
(h) Other Agreements. Holding and ASCI shall have executed and delivered
each of the other agreements and instruments to be delivered by them
pursuant to this Agreement.
ARTICLE 9
TERMINATION AND AMENDMENT
Section 9.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time (with respect to Sections 9.1(b) through 9.1(g)), by
written notice by the terminating party to the other party), whether before or
after approval of the matters presented in connection with the Merger by the
stockholders of Discount:
(a) by mutual written consent of Holding, New Holding and Discount; or
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(b) by either Holding or Discount if the Merger shall not have been
consummated by the Outside Date (provided, that the right to terminate
this Agreement under this Section 9.1(b) shall not be available to any
party whose breach of or failure to fulfill any of its obligations
under this Agreement has been the primary cause of, or resulted in, the
failure of the Merger to occur on or before such date); or
(c) by either Holding or Discount, if a court of competent jurisdiction or
other Governmental Entity shall have issued a non-appealable final
Government Order or taken any other non-appealable final action, in
each case having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger or if by such party pursuant to its
right to terminate as provided for in Section 7.4; or
(d) by either Holding or Discount, if at the Discount Meeting (including
any adjournment or postponement), the requisite Stockholder Approval
shall not have been obtained (provided, that the right to terminate
this Agreement under this Section 9.1(d) shall not be available to any
party seeking termination who at the time is in material breach of or
has materially failed to fulfill any of its material obligations under
this Agreement); or
(e) by Holding, if (i) the Board of Directors of Discount shall have
withdrawn or modified or qualified its recommendation or qualified its
approval of this Agreement, the Plan of Merger or the Merger in a
manner adverse to the interests of Holding or ASCI or shall have
adopted a resolution to such effect; (ii) the Board of Directors of
Discount shall have failed to include in the Proxy Statement/Prospectus
its recommendation, without adverse modification or qualification, that
the stockholders of Discount approve this Agreement, the Plan of Merger
and the Merger; (iii) the Board of Directors of Discount shall have
approved or recommended to the stockholders of Discount an Acquisition
Proposal or a Superior Proposal or adopted a resolution to such effect;
or (iv) a tender offer or exchange offer for 50% or more of the
outstanding shares of Discount Common Stock is commenced (other than by
Holding or an Affiliate of Holding) and the Board of Directors of
Discount recommends that the stockholders of Discount tender their
shares in such tender or exchange; or
(f) by either Holding or Discount, if there has been a material breach of
any representation, warranty, covenant or agreement set forth in this
Agreement on the part of Discount (in the case of termination by
Holding) or on the part of Holding, New Holding, Merger Sub or ASCI (in
the case of termination by Discount), which breach (i) causes the
conditions set forth in Section 8.2(a) or (b) (in the case of
termination by Holding) or 8.3(a) or (b) (in the case of termination by
Discount) not to be satisfied, and (ii) shall not have been cured (if
capable of being cured) within 30 days following receipt by Discount
from Holding of written notice of Discount's breach or by Holding from
Discount of written notice of Holding's breach or New Holding's breach
or Merger Sub's breach or ASCI's breach, as the case may be;
(g) by Discount if, at any time prior to the Discount stockholder vote on
this Agreement, the Plan of Merger and the Merger, and after it has
received a Superior Proposal in compliance with Section 7.1 and has
otherwise complied with its obligations under Section 7.1, the Board of
Directors of Discount determines in good faith, after consultation with
outside counsel, that its fiduciary obligations require Discount to
terminate this Agreement, in order to permit Discount to enter into an
agreement with respect to such Superior Proposal pursuant to Section
7.1; provided, that such termination shall not be effective until the
payments required by Section 9.3 are made; or
(h) by Holding, if either of the conditions to closing in Section 8.2(c) or
Section 8.2(d) is not satisfied; provided, however, Holding's right to
exercise this particular right of termination relative to the condition
to closing in Section 8.2(c) shall expire fifteen (15) Business Days
after Discount delivers the results of the physical inventory to
Holding.
Section 9.2 Effect of Termination. In the event of a valid termination of
this Agreement as provided in Section 9.1, this Agreement will immediately
become void and there will be no liability or obligation on the part of
Holding, New Holding, Merger Sub, Discount, ASCI or their respective officers,
directors, stockholders or Affiliates, except as set forth in Sections 6.4 and
9.3; provided that (i) nothing contained herein shall relieve
A-52
any party from liability for any willful breach of its representations,
warranties, covenants or agreements contained in this Agreement, and (ii) the
provisions of Sections 6.4 and 9.3 of this Agreement and the Confidentiality
Agreements shall remain in full force and effect and survive any termination of
this Agreement.
Section 9.3 Termination Fee; Expenses.
(a) If Holding shall terminate this Agreement pursuant to Section 9.1(e),
or Discount shall terminate this Agreement pursuant to Section 9.1(g),
then, in each case, Discount shall pay to ASCI, on or prior to the date
of such termination, a fee, in cash by wire transfer in immediately
available funds to an account designated by ASCI (the "ASCI Account")
in the amount of $9,000,000 (the "Termination Fee"), and shall, within
five (5) Business Days of receipt from Holding or ASCI of reasonably
satisfactory documentation of Holding and ASCI's expenses and out-of-
pocket costs actually incurred by Holding and/or ASCI in connection
with this Agreement and the transactions contemplated hereby,
including, but not limited to, costs and expenses of accountants,
attorneys, sources and arrangers of financing, and financial advisors
(collectively, the "Expenses"), pay to ASCI, in cash by wire transfer
in immediately available funds to the ASCI Account up to $7,000,000
(the "Expense Cap") of the Expenses.
(b) If the requisite Stockholder Approval is not obtained at the Discount
Meeting and Holding, New Holding, Merger Sub and ASCI have not
materially breached or failed to fulfill in any material respect any of
their respective material obligations under this Agreement, Discount
shall pay to ASCI (in cash by wire transfer in immediately available
funds to the ASCI Account), following the Discount Meeting and within
five (5) Business Days of receipt from Holding or ASCI of reasonably
satisfactory documentation thereof, up to $2,500,000 of the Expenses
plus fifty percent (50%) of any Expenses over $4,000,000 up to a
maximum of an additional $1,000,000 being paid by Discount. If prior to
the Discount Meeting (including an adjournment or postponement) there
has been a Superior Proposal and, within twelve (12) months of the
Discount Meeting, Discount enters into an agreement for the Superior
Proposal, then concurrently with entering into the agreement for the
Superior Proposal, Discount shall pay to ASCI the Termination Fee and
any Expenses to the extent not previously paid by Discount (including
Expenses paid by Holding and/or ASCI) up to the Expense Cap when
aggregated with any amount that was previously paid by Discount to ASCI
following the Discount Meeting. If prior to the Discount Meeting
(including an adjournment or postponement) there has been a Superior
Proposal and, within twelve (12) months of the Discount Meeting,
Discount does not enter into an agreement for the Superior Proposal but
within such 12 month period consummates another Acquisition Transaction
or enters into an agreement for another Acquisition Transaction, which
is subsequently consummated, then concurrently with the closing of such
Acquisition Transaction, Discount shall pay to ASCI the Termination Fee
and any Expenses to the extent not previously paid by Discount
(including Expenses paid by Holding and/or ASCI) up to the Expense Cap
when aggregated with any amount that was previously paid by Discount to
ASCI following the Discount Meeting. If prior to the Discount Meeting
(including an adjournment or postponement) there has been an
Acquisition Proposal which is not a Superior Proposal and, within
twelve (12) months of the Discount Meeting, Discount consummates an
Acquisition Transaction or enters into an agreement for an Acquisition
Transaction, which is subsequently consummated, then concurrently with
the closing of the Acquisition Transaction, Discount shall pay to ASCI,
in cash by wire transfer in immediately available funds to the ASCI
Account, the Termination Fee and any Expenses to the extent not
previously paid by Discount (including those Expenses paid by Holding
and/or ASCI) up to the Expense Cap when aggregated with any amount that
was previously paid by Discount to ASCI following the Discount Meeting.
(c) If (i) there has been an Acquisition Proposal prior to the Outside Date
(as the same may be extended), (ii) the Discount Meeting has not been
held, (iii) Holding would be permitted to terminate this Agreement
pursuant to Section 9.1(b), (iv) either Holding or Discount terminates
this Agreement pursuant to Section 9.1(b), and (v) within twelve (12)
months of the Outside Date (as the same may
A-53
be extended), Discount consummates an Acquisition Transaction with the
person who made the Acquisition Proposal or enters into an Agreement
for an Acquisition Transaction with the person who made the Acquisition
Proposal, which is subsequently consummated, then concurrently with the
closing of the Acquisition Transaction, Discount shall pay to ASCI the
Termination Fee and, following such closing and within five (5)
Business Days of receipt from Holding or ASCI of reasonably
satisfactory documentation thereof, the Expenses up to the Expense Cap,
in each case in cash by wire transfer in immediately available funds to
the ASCI Account.
(d) If Holding terminates this Agreement pursuant to Section 9.1(f), then
Discount shall within five (5) Business Days of receipt from Holding or
ASCI of reasonably satisfactory documentation thereof, pay to ASCI the
Expenses up to the Expense Cap in cash by wire transfer in immediately
available funds to the ASCI Account.
(e) If Holding terminates this Agreement pursuant to Section 9.1(h) as a
result of the failure of the closing condition set forth in Section
8.2(c) or as a result of the failure of the closing condition set forth
in Section 8.2(d), Discount shall pay to ASCI, within five (5) Business
Days of receipt from Holding or ASCI of reasonably satisfactory
documentation thereof, in cash by wire transfer in immediately
available funds to the ASCI Account, in the case of termination as a
result of the failure of the closing condition set forth in Section
8.2(c) up to $1,000,000 of the Expenses and in the case of a
termination as a result of the failure of the closing condition set
forth in Section 8.2(d), up to $2,500,000, plus fifty percent (50%) of
any Expenses over $4,000,000 up to an additional $1,000,000 being paid
by Discount.
(f) For purposes of this Agreement, an Acquisition Transaction shall mean
the occurrence of any of the following events: (i) the acquisition of
Discount by merger, tender offer, exchange offer, consolidation or
otherwise by any person or entity other than Holding, New Holding or
ASCI or any Affiliate thereof; (ii) the acquisition by any person or
entity other than Holding, New Holding or ASCI or any Affiliate thereof
of all or a substantial portion of the assets of Discount and its
Subsidiaries taken as a whole; (iii) the acquisition by any person or
entity other than Holding, New Holding or ASCI or any Affiliate thereof
of 50% of more of the outstanding shares of Common Stock of Discount;
(iv) the adoption by Discount of a plan of liquidation or the
declaration or payment of an extraordinary dividend; or (v) the
repurchase by Discount or any Subsidiary of Discount of fifty percent
(50%) or more of the outstanding shares of Common Stock of Discount.
(g) Notwithstanding any language in this Section 9.3 which might be
considered to be to the contrary, ASCI shall never be entitled to
receive more than one Termination Fee under this Agreement and shall
never be entitled to be reimbursed for any item of Expense more than
one time (it being understood that reimbursement of the aggregate
Expenses may, where applicable and as set forth in this Section 9.3,
wind up being achieved by way of two separate payments).
Section 9.4 Amendment. Subject to Section 3.2(b), this Agreement may be
amended by the parties hereto, by action taken or authorized by their
respective Boards of Directors, at any time before or after approval of the
matters presented in connection with the Merger by the stockholders of
Discount, but, after any such approval, no amendment shall be made which by law
requires further approval by such stockholders without such further approval.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
Section 9.5 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto and (iii) waive
compliance with any of the agreements or conditions contained herein except
those conditions which are conditions that are imposed by and required to be
satisfied under applicable law. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party.
A-54
ARTICLE 10
MISCELLANEOUS
Section 10.1 Survival. The representations, warranties and covenants set
forth herein or in any instrument, agreement, certificate or other document
delivered pursuant to this Agreement shall not survive the Closing or any
termination of this Agreement, except that (i) the Confidentiality Agreements
shall survive the execution and any termination of this Agreement, and (ii) the
provisions of Sections 2.8, 3.1, 3.3, 7.6 and 7.7 shall survive the Closing,
(iii) Section 9.2 and Section 9.3 shall survive any termination of this
Agreement, and (iv) the provisions of Article 10 shall survive the Closing and
any termination of this Agreement.
Section 10.2 Notices. All notices and other communications required or
permitted hereunder shall be in writing (including any facsimile transmission
or similar writing), and shall be sent by telecopy, hand delivery or reputable
overnight courier. The telecopier numbers and addresses of the parties set
forth below shall be used for the delivery of notices unless and until a party
changes its telecopier number or address for such purposes by notice to the
other parties. Each such notice or other communication shall be effective (i)
if given by telecopy, when transmission of the telecopy is confirmed by the
sender's telecopier, (ii) if given by reputable overnight courier, one Business
Day after being delivered to the courier or (iii) if given by any other means,
when actually received.
(i) if to Holding, New Holding, Merger Sub or ASCI, to
Advance Stores Company, Incorporated
5673 Airport Road
Roanoke, Virginia 24012
Attention: Lawrence Castellani, Chief Executive Officer
Telecopier: (540) 561-1448
with a copy to:
Riordan & McKinzie
300 S. Grand Avenue, 29th Floor
Los Angeles, CA 90071
Attn: Richard J. Welch, Esq.
Telecopier: (213) 229-8550
(ii) if to Discount, to:
Discount Auto Parts, Inc.
4900 Frontage Road South
Lakeland, Florida 33815
Attn: Peter J. Fontaine
C. Michael Moore
Telecopier: (863) 284-2063
with a copy to:
Trenam, Kemker, Scharf, Barkin, Frye,
O'Neill, & Mullis, Professional Association
2700 Bank of America Plaza
101 E. Kennedy Boulevard
Tampa, FL 33601
Attn: Gary I. Teblum
Telecopier: (813) 229-6553
A-55
Section 10.3 Interpretation; Headings; Terms. When a reference is made in
this Agreement to Sections, such reference shall be to a Section of this
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. Defined
terms will have the meanings specified, applicable to both singular and plural
forms, for all purposes of this Agreement. All pronouns (and any variation)
will be deemed to refer to the masculine, feminine or neuter, as the identity
of the Person may require. The singular or plural includes the other, as the
context requires or permits. The word include (and any variation) is used in an
illustrative sense rather than a limiting sense. Unless otherwise specified in
a specific instance, the word day means a calendar day.
Section 10.4 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart. The signatures of the parties on
this Agreement may be delivered by facsimile and any such facsimile signature
shall be deemed an original.
Section 10.5 Waivers. No waiver by any party of any default,
misrepresentation or breach of warranty or covenant hereunder will be deemed to
extend to any prior or subsequent default, misrepresentation or breach of
warranty or covenant hereunder or affect in any way any rights arising by
virtue of any prior or subsequent such occurrence, and no waiver will be
effective unless set forth in writing and signed by the party against whom such
waiver is asserted.
Section 10.6 Entire Agreement; No Third Party Beneficiaries. Except as
specifically otherwise provided in this Agreement, this Agreement (including
the documents and the instruments referred to herein or executed in connection
herewith) (a) constitutes the entire agreement and supersedes all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof, except for the Confidentiality
Agreements, which shall continue in full force and effect, and shall survive
any termination of this Agreement or the Closing, (b) except as provided in
Sections 3.3, 7.6(b) (with respect to the Designated Arrangements on the
Discount Disclosure Schedule) and 7.7, is not intended to confer upon any
Person other than the parties hereto any rights or remedies hereunder. Each
party hereto agrees that, except for the representations and warranties
contained in this Agreement, neither Discount nor Holding, New Holding, Merger
Sub or ASCI makes any other representations or warranties, and each hereby
disclaims any other representations and warranties made by itself or any of its
officers, directors, employees, agents, financial and legal advisors or other
representatives, with respect to the execution and delivery of this Agreement
or the transactions contemplated hereby, notwithstanding the delivery or
disclosure to the other or the other's representatives of any documentation or
other information with respect to any one or more of the foregoing.
Section 10.7 Governing Law. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO OR
GIVING EFFECT TO ANY APPLICABLE CHOICE OR CONFLICTS OF LAW RULE OR PROVISION
THAT WOULD CAUSE THE APPLICATION OF THE DOMESTIC SUBSTANTIVE LAWS OF ANY OTHER
JURISDICTION.
Section 10.8 Jurisdiction; Enforcement.
(a) Each of the parties hereto (i) consents to submit itself to the
personal jurisdiction of any Federal court located in the State of
Delaware or the State of Florida or the State of Virginia or any
Delaware state court or any Florida state court or any Virginia state
court in the event any dispute arises out of this Agreement or any of
the transactions contemplated by this Agreement, (ii) agrees that it
will not attempt to deny or defeat such personal jurisdiction by motion
or other request for leave from any such court, and (iii) agrees that
it will not bring any action relating to this Agreement or any of the
transactions contemplated by this Agreement in any court other than a
Federal court sitting in the State of Delaware or the State of Florida
or the State of Virginia or a Delaware state court or a Florida state
court or any Virginia state court.
A-56
(b) The parties agree that irreparable damage would occur in the event that
any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction
or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement in any court of
the United States located in the State of Florida, in the State of
Virginia or in the State of Delaware or in any Florida state court,
Virginia state court or Delaware state court this being in addition to
any other remedy to which they are entitled at law or in equity.
Section 10.9 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. This Agreement will be binding upon, inure to the
benefit of and be enforceable by the parties and their respective successors
and assigns.
Section 10.10 Severability. In the event that any provision of this
Agreement or the application thereof, becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder of
this Agreement will continue in full force and effect and the application of
such provision to other Persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
Section 10.11 Expenses. Except as otherwise contemplated by this Agreement,
whether or not the transactions contemplated hereby are consummated, each party
shall bear its own costs and expenses (including, without limitation, legal
fees and expenses) incurred either before or after the date of this Agreement
in connection with this Agreement or the transactions contemplated hereby.
Section 10.12 No Rule of Construction. The parties agree that, because all
parties participated in negotiating and drafting this Agreement, no rule of
construction shall apply to this Agreement which construes ambiguous language
in favor of or against any party by reason of that party's role in drafting
this Agreement.
Section 10.13 Incorporation of Exhibits and Schedules. The Exhibits and
Disclosure Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
Section 10.14 Waiver of Jury Trial. Each party hereto waives its right to a
jury trial with respect to any action or claim arising out of any dispute in
connection with this Agreement, any agreement, contract or other document or
instrument executed in connection herewith, or any of the transactions
contemplated hereby.
A-57
IN WITNESS WHEREOF, Holding, New Holding, Merger Sub, ASCI and Discount have
caused this Agreement to be signed by their respective officers thereunto duly
authorized as of the date first written above.
HOLDING:
Advance Holding Corporation
/s/ Lawrence P. Castellani
By: _________________________________
Name: Lawrence P. Castellani
Title: Chief Executive Officer
NEW HOLDING:
Advance Auto Parts, Inc.
/s/ Lawrence P. Castellani
By: _________________________________
Name: Lawrence P. Castellani
Title: Chief Executive Officer
MERGER SUB:
AAP Acquisition Corporation
/s/ Lawrence P. Castellani
By: _________________________________
Name: Lawrence P. Castellani
Title: Chief Executive Officer
ASCI:
Advance Stores Company, Incorporated
/s/ Lawrence P. Castellani
By: _________________________________
Name: Lawrence P. Castellani
Title: Chief Executive Officer
DISCOUNT:
Discount Auto Parts, Inc.
/s/ Peter J. Fontaine
By: _________________________________
Peter J. Fontaine,
Chief Executive Officer
A-58
ANNEX B
[LETTERHEAD OF SALOMON SMITH BARNEY INC.]
August 7, 2001
The Board of Directors
Discount Auto Parts, Inc.
4900 Frontage Road South
Lakeland, Florida 33815
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the common stock of Discount Auto Parts, Inc.
("Discount Auto") of the Merger Consideration (defined below) provided for in
the Agreement and Plan of Merger, dated as of August 7, 2001 (the "Merger
Agreement"), by and among Advance Holding Corporation ("Advance Holding"),
Advance Auto Parts, Inc. ("New Advance Holding"), AAP Acquisition Corporation,
a wholly owned subsidiary of New Advance Holding ("Merger Sub"), Advance Stores
Company, Incorporated, a wholly owned subsidiary of Advance Holding ("Advance
Stores" and, together with Advance Holding, "Advance"), and Discount Auto. As
more fully described in the Merger Agreement, (i) Merger Sub will be merged
with and into Discount Auto (the "Merger") and (ii) each outstanding share of
the common stock, par value $0.01 per share, of Discount Auto ("Discount Auto
Common Stock") will be converted into the right to receive (x) $7.50 in cash
(the "Cash Consideration") and (y) 0.2577 of a share of the common stock, par
value $0.0001 per share, of New Advance Holding ("New Advance Holding Common
Stock" and, the number of shares of New Advance Holding Common Stock into which
each outstanding share of Discount Auto Common Stock will be so converted,
together with the Cash Consideration, the "Merger Consideration"). The Merger
Agreement also provides that (i) concurrently with the Merger, Advance Holding
will merge with and into New Advance Holding (the "Holding Reincorporation")
and (ii) immediately following the Merger and the simultaneous Holding
Reincorporation, all of the outstanding capital stock of the surviving company
in the Merger will be contributed to Advance Stores (such contribution,
together with the Merger and the Holding Reincorporation, the "Transaction"
and, such surviving company and Advance together, the "Combined Company").
In arriving at our opinion, we reviewed the Merger Agreement and certain
related documents referred to in the Merger Agreement, and held discussions
with certain senior officers, directors and other representatives and advisors
of Discount Auto and certain senior officers and other representatives and
advisors of Advance and its affiliates concerning the businesses, operations
and prospects of Discount Auto, Advance and the Combined Company. We examined
certain publicly available business and financial information relating to
Discount Auto and Advance and certain available business and financial
information relating to the Combined Company as well as certain financial
forecasts and other information and data for Discount Auto, Advance and the
Combined Company which were provided to or otherwise discussed with us by the
managements of Discount Auto and Advance and its affiliates, including certain
information relating to the potential strategic implications and operational
benefits anticipated by the managements of Discount Auto and Advance and its
affiliates to result from the Transaction. We reviewed the financial terms of
the Transaction as set forth in the Merger Agreement in relation to, among
other things: current and historical market prices and trading volumes of
Discount Auto Common Stock; the financial condition and historical and
projected operating data of Discount Auto, Advance and the Combined Company;
and the capitalization of Discount Auto, Advance and the Combined Company. We
considered, to the extent publicly available, the financial terms of other
transactions
B-1
The Board of Directiors
Discount Auto Parts, Inc.
August 7, 2001
Page 2
recently effected which we considered relevant in evaluating the Transaction
and analyzed certain financial, stock market and other publicly available
information relating to the businesses of other companies whose operations we
considered relevant in evaluating those of Discount Auto. In addition to the
foregoing, we conducted such other analyses and examinations and considered
such other financial, economic and market criteria as we deemed appropriate in
arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed
by or discussed with us. With respect to financial forecasts and other
information and data provided to or otherwise reviewed by or discussed with us,
we have been advised by the managements of Discount Auto and Advance and its
affiliates that such forecasts and other information and data were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the managements of Discount Auto and Advance and its affiliates as
to the future financial performance of Discount Auto, Advance and the Combined
Company and the potential strategic implications and operational benefits
(including the amount, timing and achievability thereof) anticipated to result
from the Transaction. We have assumed, with your consent, that the Transaction
will be consummated in accordance with its terms, without waiver, modification
or amendment of any material term, condition or agreement. We are not
expressing any opinion as to what the value of New Advance Holding Common Stock
actually will be when issued in the Transaction or the prices at which New
Advance Holding Common Stock will trade or otherwise be transferable at any
time. We have not made or been provided with an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of Discount
Auto, Advance or the Combined Company nor have we made any physical inspection
of the properties or assets of Discount Auto, Advance or the Combined Company.
In connection with our engagement, we were requested to solicit, and we held
discussions with, certain third parties regarding the possible acquisition of
all or a part of Discount Auto. We express no view as to, and our opinion does
not address, the relative merits of the Transaction as compared to any
alternative business strategies that might exist for Discount Auto or the
effect of any other transaction in which Discount Auto might engage. Our
opinion is necessarily based upon information available to us, and financial,
stock market and other conditions and circumstances existing and disclosed to
us, as of the date hereof.
Salomon Smith Barney Inc. has acted as financial advisor to Discount Auto in
connection with the proposed Transaction and will receive a fee for such
services, a significant portion of which is contingent upon the consummation of
the Transaction. We also will receive a fee upon delivery of this opinion. We
and our affiliates in the past have provided services to Discount Auto and
affiliates of Advance unrelated to the proposed Transaction, for which services
we and our affiliates have received compensation. In the ordinary course of our
business, we and our affiliates may actively trade or hold the securities of
Discount Auto and Advance and its affiliates for our own account or for the
account of our customers and, accordingly, may at any time hold a long or short
position in such securities. In addition, we and our affiliates (including
Citigroup Inc. and its affiliates) may maintain relationships with Discount
Auto, Advance and their respective affiliates.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of Discount Auto in its evaluation of the
proposed Transaction, and our opinion is not intended to be and does not
constitute a recommendation to any stockholder as to how such stockholder
should vote on the proposed Transaction or as to any other matters relating to
the Transaction.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the Merger Consideration is
fair, from a financial point of view, to the holders of Discount Auto Common
Stock.
Very truly yours,
/s/ Salomon Smith Barney Inc.
SALOMON SMITH BARNEY INC.
B-2
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Advance Auto Parts, Inc.'s certificate of incorporation and bylaws provide
for indemnification of the officers and directors of Advance Auto Parts to the
fullest extent permitted by law. Section 102(b)(7) of the Delaware General
Corporation Law (the "DGCL") provides that a Delaware corporation has the power
to eliminate or limit the personal liability of a director for violations of
the director's fiduciary duty, except (i) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) pursuant to Section 174 of the DGCL (providing for
liability of directors for unlawful payment of dividends or unlawful stock
purchases or redemptions), or (iv) for any transaction from which a director
derived an improper personal benefit.
Section 145 of the DGCL provides that a corporation may indemnify any
persons, including officers and directors, who are, or are threatened to be
made, parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of such corporation), by reason of the fact
that such person was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, for criminal proceedings, had no reasonable
cause to believe that his conduct was unlawful. A Delaware corporation may
indemnify officers and directors in an action by or in the right of the
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to
be liable to the corporation. Where an officer is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such officer or director actually and
reasonably incurred.
Item 21. Exhibits and Financial Statement Schedules
(a) The following exhibits are filed herewith:
Exhibit
Number Description
------- -----------
2.1(1) Merger Agreement dated as of March 4, 1998 among AHC Corporation and
Advance Holding with FS Equity Partners III, L.P., FS Equity Partners
IV, L.P. ("FSEP IV"), and FS Equity Partners International, L.P.
2.2(3) Agreement and Plan of Merger dated as of August 16, 1998 among Sears,
Roebuck and Co., Western Auto Holding Co., Advance Holding, Advance
Stores, Western Auto Supply Company, Advance Acquisition Corporation
and the stockholders of Advance listed on the signature pages
thereto.
2.3(7) Agreement and Plan of Merger dated as of August 7, 2001 among Advance
Holding, Advance Auto Parts, Inc., AAP Acquisition Corporation,
Advance Stores, Incorporated and Discount Auto Parts, Inc. (schedules
and exhibits omitted).*
2.4(7) Agreement and Plan of Merger dated as of August 7, 2001 among Advance
Holding and Advance.
2.5 Form of Articles of Merger of AAP Acquisition Corporation into
Discount Auto Parts, Inc. and related Plan of Merger.
3.1(8) Form of Restated Certificate of Incorporation of Advance Auto Parts,
Inc.
3.2(8) Bylaws of Advance Auto Parts, Inc.
II-1
Exhibit
Number Description
------- -----------
4.1(1) Indenture dated as of April 15, 1998 between Advance Holding and
United States Trust Company of New York, as Trustee, with respect to
the 12.875% Senior Discount Debentures due 2009 (including the form
of 12.875% Senior Discount Debenture due 2009).
4.2(4) Amended and Restated Stockholders' Agreement dated as of November 2,
1998 among FS Equity Partners IV, L.P., Ripplewood Partners, L.P.,
Ripplewood Advance Auto Parts Employee Fund I L.L.C., Nicholas F.
Taubman, Arthur Taubman Trust dated July 13, 1964, WA Holding Co. and
Advance Holding (including the Terms of the Registration Rights of
the Common Stock).
4.3(2) Indenture dated as of April 15, 1998 among Advance Stores, LARALEV,
INC., as guarantor, and United States Trust Company of New York, as
trustee, with respect to the 10.25% Senior Subordinated Notes due
2008 (including the form of 10.25% Senior Subordinated Note due
2008).
4.4(7) Supplemental Indenture dated as of November 2, 1998 between Western
Auto and United States Trust Company of New York, as trustee.
4.5(7) Irrevocable Proxy and Voting Agreement dated as of August 7, 2001
among Advance Holding, Advance Stores, Fontaine Industries Limited
Partnership ("Fontaine Industries, L.P."), the Peter J. Fontaine
Revocable Trust (the "Fontaine Trust") and Peter J. Fontaine
("Fontaine").
4.6(7) Voting Agreement dated as of August 7, 2001 by and among Advance
Holding and the persons and entities listed on Exhibit A thereto.
4.7 Form of Amendment No. 1 to Amended and Restated Stockholders'
Agreement among Advance Holding, Advance Auto Parts Inc., FS Equity
Partners IV, L.P., Ripplewood Partners, L.P., Ripplewood Advance Auto
Parts Employee Fund I L.L.C., Nicholas F. Taubman, Arthur Taubman
Trust dated July 13, 1964, WA Holding Co., Peter J. Fontaine,
Fontaine Industries Limited Partnership and the Peter J. Fontaine
Revocable Trust.
4.8 Indenture dated as of October 31, 2001 among Advance Stores, Advance
Trucking Corporation, LARALEV, INC., Western Auto Supply Company and
The Bank of New York.
4.9 Exchange and Registration Rights Agreement dated as of October 31,
2001 among Advance Stores, Advance Trucking Corporation, LARALEV,
INC., Western Auto Supply Company, J.P. Morgan Securities Inc.,
Credit Suisse First Boston and Lehman Brothers Inc.
4.10 Registration Rights Agreement dated as of October 31, 2001 among
Advance Stores, Advance Trucking Corporation, LARALEV, INC., Western
Auto Supply Company, Mozart Investments Inc. and Mozart One L.L.C.
5.1(9) Opinion of Riordan & McKinzie as to the legality of securities
registered hereunder.
8.1 Opinion of Trenam Kemker, Scharf, Barkin, Frye, O'Neill & Mullis, P.A.
as to tax matters.
10.1(4) Amended and Restated Credit Agreement dated November 2, 1998 among
Advance Holding, Advance Stores, the lenders party thereto, The Chase
Manhattan Bank ("Chase"), Chase Securities Inc., DLJ Capital Funding,
Inc. and First Union National Bank.
10.2(4) Pledge Agreement dated as of April 15, 1998, as amended and restated
as of November 2, 1998, among Advance Holding, Advance Stores, the
Subsidiary Pledgors listed therein and Chase, as collateral agent.
10.3(4) Guarantee Agreement dated as of April 15, 1998, as amended and
restated as of November 2, 1998, among Advance Holding, the
Subsidiary Guarantors listed therein and Chase, as collateral agent.
10.4(4) Indemnity, Subrogation and Contribution Agreement dated as of April
15, 1998, as amended and restated as of November 2, 1998, among
Advance Stores, Holding, the Guarantors listed therein and Chase, as
collateral agent.
II-2
Exhibit
Number Description
------- -----------
10.5(4) Security Agreement dated as of April 15, 1998, as amended and
restated as of November 2, 1998, among Advance Stores, Advance
Holding, the Guarantors listed therein and Chase, as collateral
agent.
10.6(2) Lease Agreement dated as of March 16, 1995 between Ki, L.C. and
Advance Stores for Advance Stores' headquarters located at 5673
Airport Road, Roanoke, Virginia, as amended.
10.7(2) Lease Agreement dated as of January 1, 1997 between Nicholas F.
Taubman and Advance Stores for the distribution center located at
1835 Blue Hills Drive, N.E., Roanoke, Virginia, as amended.
10.8(2) Trust Indenture dated as of December 1, 1997 among McDuffie County
Development Authority, First Union National Bank, as trustee, and
Branch Banking and Trust Company, as credit facility trustee,
relating to the $10,000,000 Taxable Industrial Development Revenue
Bonds (Advance Stores Company, Incorporated Project) Series 1997
(the "IRB").
10.9(2) Lease Agreement dated as of December 1, 1997 between Development
Authority of McDuffie County and Advance Stores relating to the IRB.
10.10(2) Letter of Credit and Reimbursement Agreement dated as of December 1,
1997 among Advance Stores, Advance Holding and First Union National
Bank relating to the IRB.
10.11 Form of Advance Auto Parts, Inc. 2001 Senior Executive Stock Option
Plan.
10.12 Form of Advance Auto Parts, Inc. 2001 Senior Executive Stock Option
Agreement.
10.13 Form of Advance Auto Parts, Inc. 2001 Executive Stock Option Plan.
10.14 Form of Advance Auto Parts, Inc. 2001 Senior Executive Stock
Subscription Plan.
10.15 Form of Advance Auto Parts, Inc. 2001 Stock Option Agreement.
10.16 Form of Advance Auto Parts, Inc. 2001 Employee Stock Subscription
Plan.
10.17 Form of Advance Auto Parts, Inc. Stock Subscription Agreement.
10.18(2) Form of Secured Promissory Note.
10.19(2) Form of Stock Pledge Agreement.
10.20(2) Form of Employment and Non-Competition Agreement between Childs, Cox,
Gearheart, Gerald, Gray, Gregory, Hale, Helms, Jeter, Knighten,
Kyle, Livesay, McDaniel, Miley, Quinn, Rakes, Richardson, Smith,
Turner and Williams and Advance Stores (one-year agreement).
10.21(2) Form of Employment and Non-Competition Agreement between Bigoney,
Buskirk, Felts, Fralin, Haan, Klasing, Reid, Stevens, Vaughn, Wade,
Weatherly and Wirth and Advance Stores (two-year agreement).
10.22(2) Form of Indemnity Agreement between each of the directors of Advance
Holding (other than Nicholas F. Taubman) and Advance Holding.
10.23(2) Consulting and Non-Competition Agreement among Nicholas F. Taubman,
Holding and Advance Stores.
10.24(2) Indemnity Agreement dated as of April 15, 1998 between Nicholas F.
Taubman and Advance Holding.
10.25(2) Employment and Non-Competition Agreement among Garnett E. Smith,
Advance Holding and Advance Stores.
10.26(8) Amendments Nos. 1 and 2 to Employment and Non-Competition Agreement
among Garnett E. Smith, Advance Holding and Advance Stores.
II-3
Exhibit
Number Description
------- -----------
10.27(5) First Amendment dated as of June 30, 1999, to the Credit Agreement
dated as of April 15, 1998 as amended and restated as of October 19,
1998, among Advance Holding, Advance Stores, the lenders party
thereto and Chase, as administrative agent.
10.28(5) Supplement No. 1 dated as of June 30, 1999, to the Guarantee
Agreement dated as of April 15, 1998 as amended and restated as of
November 2, 1998, among Advance Holding, the Subsidiary Guarantors
listed therein and Chase, as collateral agent.
10.29(5) Supplement No. 1 dated as of June 30, 1999, to the Pledge Agreement
dated as of April 15, 1998 as amended and restated as of November 2,
1998, among Advance Stores, Advance Holding, the Subsidiary Pledgors
listed therein and Chase, as collateral agent.
10.30(5) Supplement No. 1 dated as of June 30, 1999, to the Security Agreement
dated as of April 15, 1998 as amended and restated as of November 2,
1998, among Advance Stores, Advance Holding, the Subsidiary
Guarantors listed therein and Chase, as collateral agent.
10.31(5) Supplement No. 1 dated as of June 30, 1999, to the Indemnity,
Subrogation and Contribution Agreement dated as of April 15, 1998 as
amended and restated as of November 2, 1998 among Advance Stores,
Advance Holding, the Guarantors listed therein and Chase, as
collateral agent.
10.32(6) Employment and Noncompetition Agreement dated as of February 1, 2000,
among Advance Stores, Advance Holding and Lawrence P. Castellani.
10.33(6) Senior Executive Stock Subscription Agreement dated as of February 1,
2000, between Advance Holding and Lawrence P. Castellani.
10.34(6) Restricted Stock Agreement dated as of February 1, 2000, between
Advance Holding and Lawrence P. Castellani.
10.35(6) Second Amendment and Consent, dated as of December 1, 1999, to the
Credit Agreement dated as of April 15, 1998, among Advance Holding,
Advance Stores, the lenders party thereto and Chase, as
Administrative Agent.
10.36(6) Third Amendment, dated as of February 11, 2000, to the Credit
Amendment dated as of April 15, 1998, among Advance Holding, Advance
Stores and Chase, as Administrative Agent.
10.37(7) Irrevocable Proxy and Voting Agreement dated as of August 7, 2001
among Advance Holding, Advance Stores, Fontaine Industries L.P., the
Fontaine Trust and Fontaine.
10.38 Secured Promissory Note dated September 20, 2001 made by Garnett E.
Smith, Vice Chairman of the Board of Advance Holding and Advance
Stores, in favor of Advance Stores.
10.39 Stock Pledge Agreement dated September 20, 2001 between Garnett E.
Smith, Vice Chairman of the Board of Advance Holding and Advance
Stores, and Advance Stores.
10.40 Form of Advance Auto Parts, Inc. 2001 Stock Option Agreement for
holders of Discount fully converted options.
10.41 Purchase Agreement dated as of October 31, 2001 among Advance Stores,
Advance Trucking Corporation, LARALEV, INC., Western Auto Supply
Company, J.P. Morgan Securities Inc., Credit Suisse First Boston and
Lehman Brothers Inc.
11.1 Statement re computation of per share earnings.
21.1(8) Subsidiaries of Advance Auto Parts, Inc.
23.1(9) Consent of Riordan & McKinzie (contained in Exhibit 5.1).
Consent of Trenam Kemker, Scharf, Barkin, Frye, O'Neill & Mullis,
23.2 P.A. (contained in Exhibit 8.1).
23.3 Consent of Arthur Andersen LLP.
23.4 Consent of Ernst & Young LLP.
24.1(8) Power of Attorney.
II-4
--------
(1) Filed on June 4, 1998 as an exhibit to Registration Statement on Form S-4
(No. 333-56031) of Advance Holding Corporation.
(2) Filed on June 4, 1998 as an exhibit to Registration Statement on Form S-4
(No. 333-56013) of Advance Stores Company, Incorporated.
(3) Filed on October 6, 1998 as an exhibit to Amendment No. 2 of the
Registration Statement on Form S-4 (No. 333-56013) of Advance Stores
Company, Incorporated.
(4) Filed on November 2, 1998 as an exhibit to Current Report on Form 8-K of
Advance Stores Company, Incorporated.
(5) Filed on July 17, 1999 as an exhibit to Quarterly Report on Form 10-Q of
Advance Stores Company, Incorporated.
(6) Filed on March 31, 2000 as an exhibit to Annual Report on Form 10-K of
Advance Holding Corporation.
(7) Filed on August 7, 2001 as an exhibit to Current Report on Form 8-K of
Advance Stores Company, Incorporated.
(8) Filed on August 31, 2001 as an exhibit to this Registration Statement.
(9) Filed on October 15, 2001 as an exhibit to Amendment No. 1 to this
Registration Statement.
(*) Schedules to the Agreement and Plan of Merger will be filed with the
Commission on request of the Commission.
II-5
Item 22. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To include any prospectus required by section 10(a)(3) of the
Securities Act.
(b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the Registrant hereby undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(5) That every prospectus: (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to this Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at the time shall be deemed to be the initial
bona fide offering thereof.
(6) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-6
(7) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
this Registration Statement through the date of responding to the request.
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in this Registration Statement when it
became effective.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Roanoke, State of Virginia, on November 6, 2001.
ADVANCE AUTO PARTS, INC.
/s/ Jimmie L. Wade
By: _________________________________
Jimmie L. Wade
President and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to this Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
Signature Title(s) Date
--------- -------- ----
* Chief Executive Officer November 6, 2001
____________________________________ (Principal Executive
Lawrence P. Castellani Officer)
/s/ Jimmie L. Wade President and Chief November 6, 2001
____________________________________ Financial Officer
Jimmie L. Wade (Principal Financial and
Accounting Officer)
* Chairman of the Board and November 6, 2001
____________________________________ Director
Nicholas F. Taubman
* Vice Chairman of the Board November 6, 2001
____________________________________ and Director
Garnett E. Smith
* Director November 6, 2001
____________________________________
Timothy C. Collins
* Director November 6, 2001
____________________________________
Mark J. Doran
* Director November 6, 2001
____________________________________
John M. Roth
* Director November 6, 2001
____________________________________
Ronald P. Spogli
* Director November 6, 2001
____________________________________
William L. Salter
* Director November 6, 2001
____________________________________
Jeffrey B. Conner
/s/ Jimmie L. Wade
* By __________________________
Jimmie L. Wade
Attorney-in-Fact
II-8
DISCOUNT AUTO PARTS, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD ON NOVEMBER 28, 2001
The undersigned, a shareholder of DISCOUNT AUTO PARTS, INC. ("Discount"),
hereby appoints Peter J. Fontaine, C. Michael Moore, and David P. Walling, and
each of them, attorney and proxy of the undersigned, each with full powers of
substitution, for and on behalf of the undersigned, to represent the
undersigned at the Special Meeting of Shareholders of Discount to be held at
The Lakeland Center, 700 West Lemon Street, Lakeland, Florida at 9:00 a.m.,
local time, on Wednesday, November 28, 2001 and any adjournments or
postponements thereof (the "Special Meeting"), and to vote at the Special
Meeting all the shares of Common Stock of Discount that the undersigned is
entitled to vote at the Special Meeting, with the same effect as if the
undersigned were personally present at the Special Meeting, all as described in
the definitive Proxy Statement and Prospectus dated November 6, 2001 relating
to the Special Meeting, and the undersigned hereby authorizes and instructs the
above named proxies to vote as specified on the reverse side.
The shares represented by this Proxy will be voted in the manner directed
herein only if this Proxy is properly executed and timely returned. If the
undersigned does not specify a choice, the shares will be voted FOR the
proposal to approve the merger, the Agreement and Plan of Merger and the
transactions contemplated thereby, in the discretion of the proxies with
respect to any adjournments or postponements of the Special Meeting for the
purpose of allowing Discount to solicit additional proxies or for any other
purpose, and in the discretion of the proxies for other matters that may
properly come before the Special Meeting.
(Continued and to be signed on reverse side)
The Board of Directors recommends voting FOR the following items:
1. PROPOSAL TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF MERGER, DATED AS OF
AUGUST 7, 2001, BY AND AMONG DISCOUNT AND AAP ACQUISITION CORPORATION
("MERGER SUB"), ADVANCE AUTO PARTS, INC., ADVANCE HOLDING CORPORATION, AND
ADVANCE STORES COMPANY, INCORPORATED, AND THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING THE MERGER OF DISCOUNT WITH AND INTO MERGER SUB.
[_] FOR [_] AGAINST [_] ABSTAIN
2. TO GRANT DISCRETIONARY AUTHORITY TO THE PROXIES TO VOTE WITH RESPECT TO ANY
ADJOURNMENTS OR POSTPONEMENTS OF THE SPECIAL MEETING FOR THE PURPOSE OF
ALLOWING DISCOUNT TO SOLICIT ADDITIONAL PROXIES OR FOR ANY OTHER PURPOSE.
[_] FOR [_] AGAINST [_] ABSTAIN
3. OTHER MATTERS. Unless a line is stricken through this sentence, the proxies
herein named may in their discretion vote the shares represented by this
Proxy upon such other matters as may properly come before the Special
Meeting.
The undersigned acknowledges receipt of the Notice of Special Meeting and
Proxy Statement and Prospectus of Discount and Advance Auto Parts, Inc. The
undersigned does hereby revoke any proxy previously given with respect to the
shares represented by this Proxy.
Dated: _________, 2001
----------------------
Signature
----------------------
Signature if held
jointly
NOTE: Your signature
should appear as your
name appears hereon.
As to shares held in
joint names, each
joint owner should
sign. If the signer
is a corporation,
please sign full
corporate name by a
duly authorized
officer. If a
partnership, please
sign in partnership
name by an authorized
person. If signing as
attorney, executor,
administrator,
trustee, guardian, or
in other
representative
capacity, please give
full title as such.
Please mark, sign and date this proxy card and promptly return it using the
enclosed envelope.