424B4
FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-100921
8,583,937 Shares
 
LOGO
 
Common Stock
 

 
The shares of common stock are being sold by the selling stockholders. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders.
 

 
Our common stock is listed on The New York Stock Exchange under the symbol “AAP.” The last reported sale price on December 10, 2002 was $52.80 per share.
 

 
The underwriters have an option to purchase a maximum of 858,394 additional shares from us and one of the selling stockholders to cover over-allotments of shares.
 

 
Investing in our common stock involves risks. See “Risk Factors” on page 7.
 
    
Price to
Public

  
Underwriting
Discounts and
Commissions

  
Proceeds to
Selling
Stockholders

Per Share
  
$52.60
  
$2.5774
  
$50.0226
Total
  
$451,515,086.20
  
$22,124,239.22
  
$429,390,846.98
 
Delivery of the shares of common stock will be made on or about December 16, 2002.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
Joint Book-Running Managers
 
Credit Suisse First Boston
 
Morgan Stanley    
 
Lehman Brothers
 
Merrill Lynch & Co.
 
The date of this prospectus is December 10, 2002.


LOGO


 

 
TABLE OF CONTENTS
 
   
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43
    
F-1
 

 
You should rely only on the information contained in, or incorporated by reference into, this document. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.


 
PROSPECTUS SUMMARY
 
You should read this summary together with the more detailed information regarding us and the common stock being sold in this offering and the consolidated financial statements and the related notes appearing elsewhere in, or incorporated by reference into, this prospectus. This prospectus includes the specific terms of the common stock being offered, as well as information regarding our business, certain recent transactions entered into by us and risk factors. Because this is only a summary, it may not contain all of the information important to you or that you should consider before deciding to invest in our common stock. Therefore, we urge you to read this prospectus and the documents incorporated by reference into this prospectus in their entirety.
 
Unless the context otherwise requires, “Advance,” “we,” “us,” “our” and similar terms refer to Advance Auto Parts, Inc., its predecessor, its subsidiaries (including Discount Auto Parts, Inc., which we acquired on November 28, 2001) and their respective operations. Our fiscal year consists of 52 or 53 weeks ending on the Saturday closest to December 31 of each year.
 
Our Business
 
We are the second largest specialty retailer of automotive parts, accessories and maintenance items primarily to “do-it-yourself,” or DIY, customers in the United States, based on store count and sales. We are the largest specialty retailer of automotive products in the majority of the states in which we currently operate, based on store count. At October 5, 2002, we had 2,393 stores, which included 1,936 stores operating under the “Advance Auto Parts” tradename in 37 states in the Northeastern, Southeastern and Midwestern regions of the United States, and 419 stores operating under the “Discount Auto Parts” trade name primarily in Florida. In addition, as of that date, we had 38 stores operating under the “Western Auto” tradename located primarily in Puerto Rico and the Virgin Islands. Our stores offer a broad selection of brand name and private label automotive products for domestic and imported cars and light trucks. In addition to our DIY business, we serve “do-it-for-me,” or DIFM, customers via sales to commercial accounts. Sales to DIFM customers represented approximately 15% of our retail sales for the forty weeks ended October 5, 2002.
 
Since 1997, we have achieved significant growth through a combination of comparable store sales growth, new store openings, increased penetration of our commercial delivery program and strategic acquisitions. We believe that our sales growth has exceeded the automotive aftermarket industry average as a result of our industry leading selection of quality brand name and private label products, our strong name recognition and our high levels of customer service. From 1997 through 2001, we:
 
 
Ÿ
 
increased our store count at year-end from 814 to 2,484;
 
 
Ÿ
 
achieved positive comparable store sales growth in every quarter, averaging 6.9% annually;
 
 
Ÿ
 
increased our net sales at a compound annual growth rate of 38.8%, from $848.1 million to $3.1 billion (pro forma for the Discount acquisition); and
 
 
Ÿ
 
increased our EBITDA, as adjusted, at a compound annual growth rate of 39.9%, from $68.4 million to $261.9 million (pro forma for the Discount acquisition).
 
During the twelve months ended October 5, 2002, our comparable store sales growth was 6.0%, not including Discount. EBITDA, as adjusted, for this period was $317.7 million (pro forma for the Discount acquisition).
 
We operate within the large and growing automotive aftermarket industry, which includes replacement parts, accessories, maintenance items, batteries and automotive fluids for cars and light trucks. Between 1991 and 2001, this industry grew at a compound annual growth rate of 5.9%, from approximately $58 billion to

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$103 billion. We believe the automotive aftermarket industry benefits from several important trends, including the: (1) increasing number and age of vehicles in the United States; (2) increasing number of miles driven annually; (3) increasing number of cars coming off of warranty, particularly leased vehicles; (4) increasing number of light trucks and sport utility vehicles that require more expensive parts, resulting in higher average sales per customer; (5) consolidation of automotive aftermarket retailers, resulting in a reduction in the number of stores in the marketplace; and (6) continued market share expansion of specialty automotive parts retailers, like us, primarily by taking market share from discount stores and mass merchandisers. We believe these trends will continue to support strong comparable store sales growth in the industry.
 
Competitive Strengths
 
We believe our competitive strengths include the following:
 
Leading Market Position.    We enjoy significant advantages over most of our competitors. We believe we have strong brand recognition and customer traffic in our stores as a result of our number one position in the majority of our markets, based on store count, and our significant marketing activities. In addition, we have purchasing, distribution and marketing efficiencies due to our economies of scale. In particular, the Discount acquisition has provided us with the leading market position in Florida, which is especially attractive due to that state’s strong DIY customer demographics.
 
Industry Leading Selection of Quality Products.    We offer one of the largest selections of brand name and private label automotive parts, accessories and maintenance items in the automotive aftermarket industry. Our stores carry between 16,000 and 21,000 in-store stock keeping units, or SKUs. We also offer approximately 105,000 additional SKUs that are available on a same-day or overnight basis through our Parts Delivered Quickly, or PDQ®, distribution systems, including harder-to-find replacement parts, which typically carry a higher gross margin. We believe that our ability to deliver an aggregate of approximately 120,000 SKUs, as well as the capabilities provided by our electronic parts catalog, are highly valued by our customers and differentiate us from our competitors, particularly mass merchandisers.
 
Superior Customer Service.    We believe that our customers place significant value on our well-trained sales associates, who offer knowledgeable assistance in product selection and installation. We invest substantial resources in the recruiting and training of our employees, which we believe differentiates us from mass merchandisers and has led to higher employee retention levels, increased customer satisfaction and higher sales.
 
Experienced Management Team with Proven Track Record.    The 17 members of our senior management team have an average of 11 years experience with us and 20 years in the industry and have successfully grown our company to the second largest specialty retailer of automotive products in the United States. Our management team has accomplished this using a disciplined strategy of growing comparable store sales, opening new stores, increasing the penetration of our commercial delivery program and making selective acquisitions. Through our acquisitions, including the 671-store acquisition of Discount in November 2001 and the 545-store acquisition of Western Auto Supply Company in November 1998, our team has demonstrated its ability to efficiently and successfully integrate both large and small acquisitions.
 
Growth Strategy
 
Our growth strategy consists of the following:
 
Increase Our Comparable Store Sales.    We have been an industry leader in comparable store sales growth over the last five years, averaging 6.9% annually. We plan to increase our comparable store sales in both the DIY and DIFM categories by, among other things, (1) implementing merchandising and marketing initiatives, (2) investing in store-level systems to enhance our ability to recommend complementary products in order to

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increase sales per customer, (3) refining our store selection and in-stock availability through customized assortments and other supply chain initiatives, (4) continuing to increase customer service through store staffing and retention initiatives and (5) increasing our commercial delivery sales primarily by focusing on key customers to grow average sales per program.
 
Continue to Enhance Our Margins.    We have improved our EBITDA, as adjusted, margin by 430 basis points from 5.5% in 1999 to 9.8% for the twelve months ended October 5, 2002 (pro forma for the Discount acquisition). In addition to driving operating margin expansion via continued strong comparable store sales growth, we will continue to focus on increasing margins by: (1) improving our purchasing efficiencies with vendors; (2) utilizing our supply chain infrastructure and existing distribution network to optimize our inventory mix and maximize distribution capacity; and (3) leveraging our overall scale to reduce other operating expenses as a percentage of sales.
 
Increase Return on Capital.    We believe we can successfully increase our return on capital by generating strong comparable store sales growth and increasing our margins. We believe we can also increase our return on capital by leveraging our supply chain initiatives to increase inventory turns and selectively expanding our store base in existing markets. Based on our experience, such in-market openings provide higher returns on our invested capital by enabling us to leverage our distribution infrastructure, marketing expenditures and local management resources. We intend to add approximately 110 stores in existing markets in 2002 through new store openings and from our Trak Auto Parts acquisition.
 
Continue to Successfully Integrate Discount.    Our management team continues to successfully execute its integration plan for Discount. To date, we have completed the conversion of all of the Discount stores located outside of the Florida market (including the Florida panhandle) to the Advance Auto Parts store name, format, information systems and merchandise offerings. In addition, for the Discount stores located in the Florida market, we have completed remerchandising and continue to implement the Advance information systems in these stores, which we expect to complete in 2003. We will also continue to complete the format and signage conversions for the Florida stores over the next two to three years.
 
General
 
Our principal executive offices are located at 5673 Airport Road, Roanoke, Virginia 24012, and our telephone number is (540) 362-4911. Our website is located at “www.advanceautoparts.com.” Information contained on our website is not a part of this prospectus.
 
All brand names and trademarks appearing in this prospectus, including “Advance,” are the property of their respective holders.

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THE OFFERING
 
Common stock offered by the selling stockholders
  
8,583,937 shares
Common stock to be outstanding after this offering
  
35,692,563 shares
Use of proceeds
  
We will not receive any of the proceeds from the shares sold in the offering by the selling stockholders, including the shares sold in the over-allotment option by one of the selling stockholders.
    
We intend to use the net proceeds we receive from the sale of our shares in the over-allotment option, if any, to repay outstanding indebtedness.
NYSE Symbol
  
AAP
 
Unless otherwise indicated, all share information in this prospectus is based on 35,692,563 shares of our common stock outstanding as of November 13, 2002 and excludes 3,297,001 shares subject to options at a weighted average exercise price of $24.79 per share.
 
Except as otherwise indicated, all information in this prospectus assumes no exercise of the underwriters’ over-allotment option.

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
 
The following table is a summary of our consolidated financial and other data for the periods presented, as well as our pro forma financial data, after giving effect to the Discount acquisition and related financing transactions. The summary consolidated financial and other data for the three years ended December 29, 2001 have been derived from our audited consolidated financial statements and the related notes included elsewhere in this prospectus. The summary consolidated financial and other data at October 5, 2002 and for the forty weeks ended October 5, 2002 have been derived from our audited consolidated financial statements and the related notes included elsewhere in this prospectus. The summary consolidated financial and other data at October 6, 2001 and for the forty weeks ended October 6, 2001 have been derived from our unaudited consolidated financial statements and the related notes included elsewhere in this prospectus. The results of operations for the forty weeks ended October 5, 2002 are not necessarily indicative of the results of operations to be expected for the full year. You should read this data along with the sections of this prospectus titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Unaudited Pro Forma Consolidated Financial and Other Data” and the consolidated financial statements and related notes of Advance and Discount included elsewhere in, or incorporated by reference into, this prospectus. The unaudited pro forma consolidated statement of operations data does not purport to represent what our results of operations 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, Discount Auto Parts, Inc. (November 2001), Carport Auto Parts, Inc. (April 2001) and Western Auto Supply Company (November 1998).
 
    
Fiscal Year(1)

    
Forty Weeks Ended

 
    
1999

    
2000

    
 2001

    
Pro Forma  2001

    
October 6, 2001

    
October 5, 2002

 
                         
(unaudited)
    
(unaudited)
        
    
(in thousands, except per share and selected store data)
 
Statement of Operations Data:
                                                     
Net sales
  
$
2,206,945
 
  
$
2,288,022
 
  
$
2,517,639
 
  
$
3,144,693
 
  
$
1,935,630
 
  
$
2,585,466
 
Gross profit(2)
  
 
802,832
 
  
 
895,895
 
  
 
1,076,026
 
  
 
1,323,106
 
  
 
825,412
 
  
 
1,135,184
 
Selling, general and administrative expenses(3)
  
 
740,481
 
  
 
801,521
 
  
 
947,531
 
  
 
1,153,180
 
  
 
726,011
 
  
 
940,593
 
Operating income(3)
  
 
20,235
 
  
 
92,789
 
  
 
89,113
 
  
 
130,544
 
  
 
99,401
 
  
 
168,149
 
Interest expense
  
 
62,792
 
  
 
66,640
 
  
 
61,895
 
  
 
97,849
 
  
 
45,195
 
  
 
62,734
 
Income (loss) before extraordinary item and cumulative effect of a change in accounting principle(3)(4)
  
 
(25,326
)
  
 
16,626
 
  
 
17,189
 
  
 
26,013
 
  
 
33,229
 
  
 
65,094
 
Net income (loss)(3)
  
 
(25,326
)
  
 
19,559
 
  
 
11,442
 
  
 
—  
 
  
 
33,229
 
  
 
56,400
 
Income (loss) before extraordinary item and cumulative effect of a change in accounting principle per basic share(4)
  
$
(0.90
)
  
$
0.59
 
  
$
0.60
 
  
$
0.80
 
  
$
1.17
 
  
$
1.87
 
Income (loss) before extraordinary item and cumulative effect of a change in accounting principle per diluted share(4)
  
$
(0.90
)
  
$
0.58
 
  
$
0.59
 
  
$
0.78
 
  
$
1.16
 
  
$
1.81
 
Net income (loss) per basic share
  
$
(0.90
)
  
$
0.69
 
  
$
0.40
 
  
 
—  
 
  
$
1.17
 
  
$
1.62
 
Net income (loss) per diluted share
  
$
(0.90
)
  
$
0.68
 
  
$
0.39
 
  
 
—  
 
  
$
1.16
 
  
$
1.57
 
Weighted average basic shares outstanding
  
 
28,269
 
  
 
28,296
 
  
 
28,637
 
  
 
32,611
 
  
 
28,295
 
  
 
34,851
 
Weighted average diluted shares outstanding
  
 
28,269
 
  
 
28,611
 
  
 
29,158
 
  
 
33,159
 
  
 
28,642
 
  
 
36,014
 
Other Financial Data:
                                                     
EBITDA, as adjusted(5)
  
$
121,899
 
  
$
161,876
 
  
$
199,710
 
  
$
261,966
 
  
$
157,111
 
  
$
266,999
 
Capital expenditures(6)
  
 
105,017
 
  
 
70,566
 
  
 
63,695
 
  
 
85,991
 
  
 
49,550
 
  
 
68,524
 
Cash flows provided by (used in):
                                                     
Operating activities
  
$
(20,976
)
  
$
103,951
 
  
$
103,536 
 
  
 
—  
 
  
$
126,294
 
  
$
218,880
 
Investing activities
  
 
(113,824
)
  
 
(64,940
)
  
 
(451,008
)
  
 
—  
 
  
 
(68,705
)
  
 
(51,946
)
Financing activities
  
 
121,262
 
  
 
(43,579
)
  
 
347,580
 
  
 
—  
 
  
 
(63,680
)
  
 
(128,208
)
Selected Store Data:
                                                     
Comparable store sales growth(7)
  
 
10.3
 %
  
 
4.4
 %
  
 
6.2
 %
  
 
—  
 
  
 
6.5
 %
  
 
6.2
 %
Net new stores(8)
  
 
50
 
  
 
112
 
  
 
755
 
  
 
755
 
  
 
62
 
  
 
(91
)
Number of stores, end of period
  
 
1,617
 
  
 
1,729
 
  
 
2,484
 
  
 
2,484
 
  
 
1,791
 
  
 
2,393
 
Stores with commercial delivery program, end of period
  
 
1,094
 
  
 
1,210
 
  
 
1,370
 
  
 
1,370
 
  
 
1,195
 
  
 
1,408
 
Total commercial delivery sales, as a percentage of total retail sales
  
 
9.9
 %
  
 
14.1
 %
  
 
14.1
 %
  
 
12.6
%
  
 
14.4
 %
  
 
12.8
 %
Total retail store square footage, end of period (in thousands)
  
 
12,476
 
  
 
 13,325
 
  
 
18,717
 
  
 
18,717
 
  
 
13,782
 
  
 
17,990
 
Average net retail sales per store (in thousands)(9)
  
$
1,267
 
  
$
1,295
 
  
$
1,346
 
  
$
1,251
 
  
$
1,054
 
  
$
1,031
 
Average net retail sales per square foot(10)
  
$
164
 
  
$
168
 
  
$
175
 
  
$
166
 
  
$
137
 
  
$
137
 

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At October 5, 2002

    
Actual

    
As adjusted
for this Offering(11)

           
(unaudited)
Balance Sheet Data (in thousands):
  
(in thousands)
Cash and cash equivalents
  
$
56,843
    
$
56,843
Net working capital
  
 
474,144
    
 
474,144
Total assets
  
 
2,083,203
    
 
2,083,203
Total net debt
  
 
715,925
    
 
674,536
Total stockholders’ equity
  
 
456,191
    
 
497,580

(1)
Our fiscal year consists of 52 or 53 weeks ending on the Saturday nearest to December 31. All fiscal years presented are 52 weeks.
(2)
Gross profit for 2001 and pro forma 2001 exclude a non-recurring charge associated with our supply chain initiatives that occurred during the twelve weeks ended December 29, 2001. The effects of these items are included in operating income, income (loss) before extraordinary item and cumulative effect of a change in accounting principle and net income (loss).
(3)
Selling, general and administrative expenses exclude certain non-recurring charges. The effects of these items are included in operating income, income (loss) before extraordinary item and cumulative effect of a change in accounting principle and net income (loss).
(4)
Income (loss) before extraordinary item and cumulative effect of a change in accounting principle per basic and diluted shares presented for pro forma 2001 represents income (loss) from continuing operations.
(5)
EBITDA, as adjusted, represents operating income plus depreciation and amortization, non-cash and other employee compensation expenses, merger and integration expense and certain non-recurring charges and gains included in operating income. EBITDA, as adjusted, is not intended to represent cash flow from operations as defined by generally accepted accounting principles, or 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. We have included EBITDA, as adjusted, herein because our management believes this information is useful to investors, as such measure provides additional information with respect to our ability to meet our future debt service, capital expenditures and working capital requirements and, in addition, certain covenants in our indentures and credit facility are based upon an EBITDA calculation. Our method for calculating EBITDA, as adjusted, may differ from similarly titled measures reported by other companies. Our management believes certain non-recurring charges and gains, non-cash and other employee compensation expenses, and merger and integration expenses should be eliminated from the EBITDA calculation to evaluate our operating performance, and we have done so in our calculation of EBITDA, as adjusted.
(6)
Capital expenditures for 2001 and pro forma 2001 exclude $34.1 million for our November 2001 purchase of Discount’s Gallman, Mississippi distribution facility from the lessor in connection with the Discount acquisition.
(7)
Comparable store sales growth 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 sales from the original date of opening. Additionally, the Parts America stores acquired in the Western merger and subsequently converted to Advance Auto Parts stores are included in the comparable store sales calculation after thirteen complete accounting periods following their physical conversion. Stores acquired in the Carport acquisition are included in the comparable store sales calculation following thirteen complete accounting periods after their system conversion to the Advance Auto Parts store system. Stores acquired in the Discount acquisition will be included in the comparable stores sales calculation beginning in December 2002, which is thirteen complete accounting periods after the acquisition date of November 28, 2001. Comparable store sales do not include sales from our Western Auto stores.
(8)
Net new stores represents new stores opened and acquired less stores closed. The negative net new stores count for the forty weeks ended October 5, 2002 is a result of closing 130 Discount and Advance stores in our existing markets as part of the integration of Discount.
(9)
Average net retail sales per store is based on the average of beginning and ending number of stores for the respective period. The fiscal 2001 amounts were calculated giving effect to the Discount retail net sales and number of stores for the period from December 2, 2001 through December 29, 2001.
(10)
Average net retail sales per square foot is based on the average of beginning and ending total store square footage for the respective period. The fiscal 2001 amounts were calculated giving effect to the Discount retail net sales and square footage for the period from December 2, 2001 through December 29, 2001.
(11)
Assumes the exercise of the full amount of the underwriters’ over-allotment option.

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RISK FACTORS
 
The value of an investment in our common stock will be subject to significant risks inherent in our business. You should carefully consider the risks described below, together with all of the other information included in, or incorporated by reference into, this prospectus, before purchasing our common stock. If any of the following risks and uncertainties actually occur, our business, financial condition or results of operations could be materially and adversely affected. This could cause the trading price of our common stock to decline, and you may lose all or part of your investment.
 
Risks Relating to Our Business
 
We will not be able to expand our business if our growth strategy is not successful.
 
We have significantly increased our store count from 814 stores at the end of 1997 to 2,393 stores at October 5, 2002. We intend to continue to expand our base of stores as part of our 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 depend on a number of factors, including, among other things, our ability to manage the 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 we will be able to open and operate new stores on a timely or profitable basis or that opening new stores in markets we already serve will not harm existing store profitability or comparable store sales. The newly opened and existing stores’ profitability will depend on our ability to properly merchandise, market and price the products required in their respective markets.
 
Furthermore, we may acquire or try to acquire stores or businesses from, make investments in, or enter into strategic alliances with, companies that have stores or distribution networks in our current markets or in areas into which we intend to expand our presence. Any future acquisitions, investments, strategic alliances or related efforts will be accompanied by risks, including:
 
 
Ÿ
the difficulty of identifying appropriate acquisition candidates;
 
 
Ÿ
the difficulty of assimilating and integrating the operations of the respective entities;
 
 
Ÿ
the potential disruption to our ongoing business and diversion of our management’s attention;
 
 
Ÿ
the inability to maintain uniform standards, controls, procedures and policies; and
 
 
Ÿ
the impairment of relationships with employees and customers as a result of changes in management.
 
We cannot assure you that we will be successful in overcoming these risks or any other problems encountered with these acquisitions, investments, strategic alliances or related efforts.
 
We may not be able to successfully implement our business strategy, including increasing comparable store sales, enhancing our margins and increasing our return on capital, which could adversely affect our business, financial condition and results of operations.
 
We have implemented numerous initiatives to increase comparable store sales, enhance our margins and increase our return on capital in order to increase our earnings and cash flow. If these initiatives are unsuccessful, or if we are unable to efficiently and effectively implement the initiatives, our business, financial condition and results of operations could be adversely affected.
 
Successful implementation of our growth strategy also depends on factors specific to the retail automotive parts industry and numerous other factors that may be beyond our control. These include adverse changes in:
 
 
Ÿ
general economic conditions and conditions in local markets, which could reduce our sales;
 
 
Ÿ
the competitive environment in the automotive aftermarket parts and accessories retail sector that may force us to reduce prices or increase spending;

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Ÿ
the automotive aftermarket parts manufacturing industry, such as consolidation, which may disrupt or sever one or more of our vendor relationships;
 
 
Ÿ
our ability to anticipate and meet changes in consumer preferences for automotive products, accessories and services in a timely manner; and
 
 
Ÿ
our continued ability to hire and retain qualified personnel, which depends in part on the types of recruiting, training and benefit programs we adopt.
 
Disruptions in our relationships with vendors or in our vendors’ operations could increase our cost of goods sold.
 
Our business depends on developing and maintaining close relationships with our vendors and upon the vendors’ ability or willingness to sell products to us at favorable prices and other terms. Many factors outside of our control may harm these relationships and the ability or willingness of these vendors to sell us products on favorable terms. For example, financial or operational difficulties that some of our vendors may face may increase the cost of the products we purchase from them. In addition, the trend towards consolidation among automotive parts suppliers may disrupt or sever our relationship with some vendors, and could lead to less competition and, consequently, higher prices.
 
If demand for products sold by our stores slows, our business, financial condition and results of operations will suffer.
 
Demand for products sold by our stores depends on many factors and may slow for a number of reasons, including:
 
 
Ÿ
the weather, as vehicle maintenance may be deferred during periods of inclement weather; and
 
 
Ÿ
the economy, as during periods of good economic conditions, more of our DIY customers may pay others to repair and maintain their cars instead of working on their own cars. In periods of declining economic conditions, both DIY and DIFM customers may defer vehicle maintenance or repair.
 
If any of these factors cause demand for the products we sell to decline, our business, financial condition and results of operations will suffer.
 
We depend on the services of our existing management team and may not be able to attract and retain additional qualified management personnel.
 
Our success depends to a significant extent on the continued services and experience of our executive officers and senior management team. If for any reason our senior executives do not continue to be active in management, our business could suffer. We have entered into employment agreements with some of our executive officers and senior management; however, these agreements do not ensure their continued employment with us. Additionally, we cannot assure you that we will be able to attract and retain additional qualified senior executives as needed in the future, which could adversely affect our financial condition and results of operations.
 
If we are unable to compete successfully against other companies in the retail automotive parts industry, we could lose customers and our 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. We compete 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 our competitors possess advantages over us, including substantially greater financial and marketing resources, a larger number of stores, longer operating histories, greater name recognition,

8


larger and more established customer bases and more established vendor relationships. Our response to these competitive disadvantages may require us to reduce our prices or increase our spending, which would lower revenue and profitability. Competitive disadvantages may also prevent us from introducing new product lines or require us to discontinue current product offerings or change some of our current operating strategies. If we do not have the resources or expertise or otherwise fail to develop successful strategies to address these competitive disadvantages, we could lose customers and our revenues may decline.
 
Because we are involved in litigation from time to time, and are subject to numerous governmental laws and regulations, we could incur substantial judgments, fines, legal fees and other costs.
 
We are sometimes the subject of complaints or litigation from customers, employees or other third parties for various actions. In particular, we are currently involved in litigation involving claims relating to, among other things, breach of contract, anti-competitive behavior, tortious conduct, employment discrimination, asbestos exposure and product defect. The damages sought against us in some of these litigation proceedings are substantial. Although we maintain liability insurance for some litigation claims, if one or more of the claims greatly exceeds our coverage limits or our insurance policies do not cover a claim, it could have a material adverse affect on our business and operating results.
 
Additionally, we are subject to numerous federal, state and local governmental laws and regulations relating to employment matters, environmental protection and building and zoning requirements. If we fail to comply with existing or future laws or regulations, we may be subject to governmental or judicial fines or sanctions. In addition, our capital expenses could increase due to remediation measures that may be required if we are found to be noncompliant with any of these or future laws or regulations.
 
We may not be able to successfully complete the integration of Discount, which could adversely affect our business, financial condition and results of operations.
 
We acquired Discount to capitalize on its leading market position in Florida, to increase our store base in our Southeastern markets and to create the opportunity for potential cost savings through operational synergies. Achieving the expected benefits of the Discount acquisition will depend in large part on our completion of the integration of Discount’s operations and personnel in a timely and efficient manner. Some of the objectives we still need to accomplish include:
 
 
Ÿ
successfully converting Discount’s information and accounting systems to ours;
 
 
Ÿ
integrating our distribution operations with Discount’s distribution operations; and
 
 
Ÿ
successfully completing the format and signage conversion of Discount stores to Advance Auto Parts stores in the Florida market.
 
If we cannot overcome the challenges we face in completing the integration of Discount, our ability to effectively and profitably manage Discount’s business could suffer. Moreover, the integration process itself may be disruptive to our business as it will divert the attention of management from its normal operational responsibilities and duties. Our failure to successfully complete the integration of Discount could harm our business, financial condition and results of operations.

9


 
Risks Relating to Our Financial Condition
 
Our level of debt and restrictions in our debt instruments may limit our ability to take certain actions, including obtaining additional financing in the future, that we would otherwise consider in our best interest.
 
We currently have a significant amount of debt. At October 5, 2002, we had total debt of approximately $772.8 million. Our high level of debt could have important consequences to you. For example, it could:
 
 
Ÿ
 
impair our ability to implement our growth strategy;
 
 
Ÿ
 
impair our ability to obtain additional financing, if needed, for working capital, capital expenditures, acquisitions or other purposes in the future;
 
 
Ÿ
 
place us at a disadvantage compared to competitors that have less debt;
 
 
Ÿ
 
restrict our ability to adjust rapidly to changing market conditions;
 
 
Ÿ
 
increase our vulnerability to adverse economic, industry and business conditions; or
 
 
Ÿ
 
cause our interest expense to increase if interest rates in general were to increase because a portion of our indebtedness bears interest at a floating rate.
 
Our ability to service our debt will require a significant amount of cash and our operations may not generate the amount of cash we need.
 
We will need a significant amount of cash to service our debt. Our ability to generate cash depends on our successful financial and operating performance. We cannot assure you that we will generate sufficient cash flow from operations or that we will be able to obtain sufficient funding to satisfy all of our obligations. Our financial and operational performance also depends upon a number of other factors, many of which are beyond our control. These factors include:
 
 
Ÿ
economic and competitive conditions in the automotive aftermarket industry; and
 
 
Ÿ
operating difficulties, operating costs or pricing pressures we may experience.
 
If we are unable to service our debt, we will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our debt or raising additional equity capital. However, we cannot assure you that any alternative strategies will be feasible or prove adequate. Also, some alternative strategies would require the consent of at least a majority in interest of the lenders under our credit facility, the holders of our senior subordinated notes and the holders of our senior discount debentures, and we can provide no assurances that we would be able to obtain this consent. If we are unable to meet our debt service obligations and alternative strategies are unsuccessful or unavailable, our lenders would be entitled to exercise various remedies, including foreclosing on our assets. Under those circumstances, you may lose all or a portion of your investment.
 
The covenants governing our debt impose significant restrictions on us.
 
The terms of our senior credit facility and the indentures for our senior subordinated notes and senior discount debentures impose significant operating and financial restrictions on us and our subsidiaries and require us to meet certain financial tests. These restrictions may also have a negative impact on our business, financial condition and results of operations by significantly limiting or prohibiting us from engaging in certain transactions, including:
 
 
Ÿ
incurring or guaranteeing additional indebtedness;
 
 
Ÿ
paying dividends or making distributions or certain other restricted payments;
 
 
Ÿ
making capital expenditures and other investments;

10


 
 
Ÿ
creating liens on our assets;
 
 
Ÿ
issuing or selling capital stock of our subsidiaries;
 
 
Ÿ
transferring or selling assets currently held by us;
 
 
Ÿ
repurchasing stock and certain indebtedness;
 
 
Ÿ
engaging in transactions with affiliates;
 
 
Ÿ
entering into any agreements that restrict dividends from our subsidiaries; and
 
 
Ÿ
engaging in mergers or consolidations.
 
The failure to comply with any of these covenants would cause a default under our indentures and other debt agreements. Furthermore, our credit facility contains certain financial covenants, including establishing a maximum leverage ratio and requiring us to maintain a minimum interest coverage ratio and a funded senior debt to current assets ratio, which, if not maintained by us, will cause us to be in default under our senior credit facility. Any of these defaults, if not waived, could result in the acceleration of all of our debt, in which case the debt would become immediately due and payable. If this occurs, we may not be able to repay our debt or borrow sufficient funds to refinance it. Even if new financing were available, it may not be on terms that are acceptable to us.
 
Risks Relating to Our Offering
 
Our stock price may be volatile, and you could lose all or part of your investment.
 
The market for equity securities has been extremely volatile. The following factors could cause the price of our common stock in the public market to fluctuate significantly from the price you will pay in this offering:
 
 
Ÿ
 
actual or anticipated variations in our quarterly results of operations;
 
 
Ÿ
 
changes in market valuations of companies in the retail automotive parts industry;
 
 
Ÿ
 
changes in expectations of future financial performance or changes in estimates of securities analysts;
 
 
Ÿ
 
fluctuations in stock market prices and volumes;
 
 
Ÿ
 
issuances of common stock or other securities in the future;
 
 
Ÿ
 
the addition or departure of key personnel; and
 
 
Ÿ
 
announcements by us or our competitors of acquisitions, investments or strategic alliances.
 
Volatility in the market price of our common stock may prevent investors from being able to sell their common stock at or above the public offering price. In the past, class action litigation has often been brought against companies following periods of volatility in the market price of those companies’ common stock. We may become involved in this type of litigation in the future. Litigation is often expensive and diverts management’s attention and company resources and could have a material adverse effect on our business and results of operations.
 
The sale of a substantial number of shares of our common stock after this offering may cause the market price of our common stock to decline.
 
If our existing stockholders sell shares of common stock in the public market following this offering, including shares issued upon the exercise of outstanding options, or if the market perceives that these sales could occur, the market price of our common stock could decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate, or to use equity as consideration for future acquisitions.

11


 
Upon completion of this offering, we will have outstanding 35,692,563 shares of common stock, assuming no exercise of outstanding options. After this offering, approximately 23,354,119 shares, including the shares to be sold in this offering, will be freely tradeable. Subsequent to this offering, 11,402,956 shares and 2,193,000 shares issuable upon exercise of outstanding options are subject to lock-up agreements in which the holders have agreed not to sell any shares for 90 days after the date of this prospectus without the prior written consent of both Credit Suisse First Boston Corporation and Morgan Stanley & Co. Incorporated. The shares and shares subject to options that are subject to lock-up agreements generally will be available for sale after the end of the lock-up period.
 
We also are a party to a registration rights agreement that obligates us, assuming completion of this offering, to register for public resale an aggregate of 11,659,864 shares of common stock (including 500,000 shares subject to immediately exercisable options), at the option of the stockholders who are parties to that agreement. However, under the lock-up agreements described above, the holders of all registrable shares have agreed not to exercise their registration rights for 90 days following this offering without the prior written consent of both Credit Suisse First Boston Corporation and Morgan Stanley & Co. Incorporated. If, upon the expiration of the lock-up agreements, all or a portion of these stockholders exercise their right to require us to register their shares for resale and sell shares of common stock in the public market, the market price of our common stock could decline.
 
Our major stockholders have substantial control over us, and could limit your ability to influence the outcome of matters requiring stockholder approval.
 
Assuming completion of this offering, the holders of 11,159,864 shares of our common stock, or 31.3% of our outstanding common stock, will continue to be parties to a stockholders agreement that provides, among other things, that such stockholders will nominate and vote in favor of up to six members of our board of directors, making it highly likely that these nominees will continue to be elected to our board of directors. We currently have 12 directors and under our certificate of incorporation may have up to 14 directors. If the directors nominated by the parties to the stockholders agreement agree among themselves to take or refrain from taking any course of action, as they could control a large portion and potentially a majority of our board of directors, these directors will be able to significantly influence actions to be taken by our board. The stockholders agreement also provides that, without the approval of Nicholas Taubman, we may not amend our 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. In addition, Freeman Spogli & Co. will continue to own 22.7% of the shares of our common stock outstanding after this offering. As a result, Freeman Spogli & Co. will be able to significantly influence the vote on matters submitted for approval by our stockholders. In addition, this control 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 us.
 
You may not be able to seek remedies against Arthur Andersen LLP, our former independent accountants, in connection with any material misstatement or omission that may be contained in our financial statements that were audited by Arthur Andersen.
 
Arthur Andersen LLP audited our consolidated financial statements for our 1999 through 2001 fiscal years, which are included in and incorporated into this prospectus. On June 15, 2002, Arthur Andersen was convicted of obstruction of justice by a federal jury in Houston, Texas in connection with Arthur Andersen’s work for Enron Corporation. On September 15, 2002, a federal judge upheld this conviction, and on October 15, 2002, a federal judge sentenced Arthur Andersen to five years probation and a $500,000 fine. Arthur Andersen ceased its audit practice before the SEC on August 31, 2002. Consequently, Arthur Andersen has not consented to the inclusion of their audit report for our consolidated financial statements for our 1999 through 2001 fiscal years included in and incorporated into this prospectus, and we have dispensed with the requirement to file their consent in reliance upon Rule 437a of the Securities Act.

12


 
Because Arthur Andersen has not consented to the inclusion of their report, it will be more difficult for you to seek remedies against Arthur Andersen in connection with any material misstatement or omission contained in our consolidated financial statements for our 1999 through 2001 fiscal years that are included in this prospectus. In particular, and without limitation, you will not be able to recover from Arthur Andersen under Section 11 of the Securities Act for any untrue statement of a material fact contained in the financial statements audited by Arthur Andersen or any omission of a material fact required to be stated in those financial statements. In addition, relief in connection with claims which may be available to stockholders under the federal securities laws against auditing firms may not be available against Arthur Andersen as a practical matter due to recent events regarding Arthur Andersen.
 
We have anti-takeover defense provisions in our certificate of incorporation and bylaws, and provisions in our debt instruments, that may deter potential acquirors and depress the price of our common stock.
 
Our certificate of incorporation and bylaws 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 us. These provisions:
 
 
Ÿ
authorize our board of directors to issue “blank check” preferred stock and determine the powers, preferences and privileges of those shares without prior stockholder approval;
 
 
Ÿ
prohibit the right of our stockholders to act by written consent;
 
 
Ÿ
limit the calling of special meetings of stockholders; and
 
 
Ÿ
impose a requirement that holders of 66 2/3% 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.
 
Our 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 us. Specifically, the terms of our senior subordinated notes and senior discount debentures require that they be redeemed at a premium over their principal amount in the event that we undergo a change of control. In addition, our senior credit facility contains a covenant that prohibits us from undergoing a change of control, and provides that a change of control constitutes an event of default under that facility and will cause the related indebtedness to become immediately due. The need to repay all of this indebtedness may deter potential third parties from acquiring us.
 
Under these various provisions in our certificate of incorporation, bylaws and debt instruments, a takeover attempt or third-party acquisition of us, including a takeover attempt that may result in a premium over the market price for shares of our common stock, could be delayed, deterred or prevented. In addition, these provisions may prevent the market price of our common stock from increasing in response to actual or rumored takeover attempts and may also prevent changes in our 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 our common stock.

13


 
FORWARD-LOOKING STATEMENTS
 
Certain statements in this prospectus are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities 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. We intend those forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are included in this statement for purposes of complying with these safe harbor provisions.
 
These forward-looking statements reflect current views about our plans, strategies and prospects, which are based on the information currently available and on current assumptions.
 
Although we believe that our plans, intentions and expectations as reflected in or suggested by those forward-looking statements are reasonable, we can give no assurance that the plans, intentions or expectations will be achieved. Listed below and discussed elsewhere in this prospectus are some important risks, uncertainties and contingencies which could cause our actual results, performances or achievements to be materially different from the forward-looking statements made in this prospectus. These risks, uncertainties and contingencies include, but are not limited to, the following:
 
 
Ÿ
 
our ability to expand our business;
 
 
Ÿ
 
the implementation of our business strategies and goals;
 
 
Ÿ
 
integration of our previous and future acquisitions;
 
 
Ÿ
 
a decrease in demand for our products;
 
 
Ÿ
 
competitive pricing and other competitive pressures;
 
 
Ÿ
 
our relationships with our vendors;
 
 
Ÿ
our involvement as a defendant in litigation or incurrence of judgments, fines or legal costs;
 
 
Ÿ
 
deterioration in general economic conditions;
 
 
Ÿ
 
our ability to meet debt obligations and adhere to the restrictions and covenants imposed under our debt instruments;
 
 
Ÿ
our critical accounting policies; and
 
 
Ÿ
 
other statements that are not of historical fact made throughout this prospectus, including in the sections entitled “Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”
 
We assume no obligation to update publicly any forwarded-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 our reports and documents filed with the SEC, and you should not place undue reliance on those statements.

14


 
USE OF PROCEEDS
 
If the over-allotment is exercised in full, we will receive an estimated $41.4 million, after deducting estimated underwriting discounts and commissions and estimated offering expenses. We intend to use the net proceeds from the sale by us of the over-allotment shares, if any, to repay, on a pro rata basis, borrowings under the tranche A and tranche C term loans under our credit facility (borrowings which mature in November 2006 and November 2007, bore interest at 4.56% and 4.38% at October 5, 2002, and were incurred in connection with the Discount acquisition and to refinance a portion of our tranche B term loans). In addition, we may use a portion of the proceeds, within 90 days of the date of this offering, to repurchase in the market a portion of our 12.875% senior discount debentures due 2009 and 10.25% senior subordinated notes due 2008. Our determination of whether to repurchase any of the senior discount debentures or senior subordinated notes will depend on prevailing market prices, and would reduce the amount of the net proceeds that we would use to repay borrowings outstanding under the term loans.
 
We will not receive any of the proceeds from the sale of shares by the selling stockholders, including the sale of any over-allotment shares by one of the selling stockholders.
 
PRICE RANGE OF COMMON STOCK
 
Our common stock is listed on the New York Stock Exchange, or NYSE, under the symbol “AAP.” The table below sets forth, for the fiscal periods indicated, the high and low sale prices per share for our common stock, as reported by the NYSE. Our common stock has been listed on the NYSE since November 29, 2001, the closing date of the Discount acquisition. Prior to that date, there was no public market for our common stock.
 
    
High

  
Low

Fiscal Year Ended December 29, 2001
             
Fourth Quarter from November 29
  
$
47.65
  
$
39.70
Fiscal Year Ending December 28, 2002
             
First Quarter
  
$
50.05
  
$
39.85
Second Quarter
  
$
62.19
  
$
44.90
Third Quarter
  
$
55.60
  
$
41.40
Fourth Quarter (through December 10, 2002)
  
$
58.34
  
$
48.20
 
The closing sale price of our common stock on December 10, 2002 was $52.80. At November 13, 2002, there were 427 holders of record of our common stock.
 
DIVIDEND POLICY
 
We have not declared or paid cash dividends on our common stock in the last two years. We anticipate that we will retain all of our earnings in the foreseeable future to finance the expansion of our business and repay indebtedness and, therefore, we do not anticipate paying any dividends on our common stock. In addition, the terms of our credit facility and the indentures governing our senior subordinated notes and senior discount debentures currently prohibit us from declaring or paying any dividends or other distributions on any shares of our capital stock. Any payments of dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, earnings, capital requirements, contractual restrictions contained in our amended credit facility and indentures, or other agreements, the General Corporation Law of the State of Delaware, which provides that dividends are only payable out of surplus or current net profits, and other factors deemed relevant by our board of directors.

15


CAPITALIZATION
 
The following table sets forth our cash and capitalization at October 5, 2002:
 
 
Ÿ
on an actual basis; and
 
 
Ÿ
on an as adjusted basis to give effect to the sale of 845,394 shares of our common stock by us to the underwriters, assuming the underwriters’ exercise the full amount of the over-allotment option, and the use of the proceeds received by us from that sale, net of underwriting discounts and commissions and estimated offering expenses, to repay approximately $41.4 million of borrowings, on a pro rata basis, under the tranche A and tranche C term loans under our credit facility. Although this table reflects prepayment of these term loans, we may also use the proceeds to repurchase a portion of our 12.875% senior discount debentures and 10.25% senior subordinated notes.
 
You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes and the other financial information included in, or incorporated by reference into, this prospectus.
 
    
At October 5, 2002

 
    
Actual

    
As Adjusted

 
           
(unaudited)
 
    
(dollars in thousands)
 
Cash and cash equivalents
  
$
56,843
 
  
$
56,843
 
    


  


Total debt:
                 
Senior credit facility:(1)
                 
Revolving credit facility
  
 
—  
 
  
 
—  
 
Tranche A term loan facility
  
 
89,611
 
  
 
78,686
 
Tranche C term loan facility
  
 
249,873
 
  
 
219,409
 
Industrial revenue bonds(2)
  
 
10,000
 
  
 
10,000
 
10.25% Senior Subordinated Notes due 2008(3)
  
 
333,784
 
  
 
333,784
 
12.875% Senior Discount Debentures due 2009
  
 
89,500
 
  
 
89,500
 
    


  


Total debt
  
 
772,768
 
  
 
731,379
 
    


  


Stockholders equity:
                 
Common stock, $.0001 par value; authorized—100,000,000; 35,692,563 and 36,537,957 issued and outstanding
  
 
4
 
  
 
4
 
Capital in excess of par value
  
 
607,189
 
  
 
647,978
 
Stockholder subscription receivable(4)
  
 
(1,819
)
  
 
(1,219
)
Other comprehensive income (loss)
  
 
(289
)
  
 
(289
)
Accumulated deficit
  
 
(148,894
)
  
 
(148,894
)
    


  


Stockholders’ equity
  
 
456,191
 
  
 
497,580
 
    


  


Total capitalization
  
$
1,228,959
 
  
$
1,228,959
 
    


  



(1)
In June 2002, we repaid a portion of our tranche A and tranche B term loans and refinanced the remaining portion of our tranche B term loans, and amended and restated our senior credit facility to provide for (i) $430 million in term loans, consisting of a $180 million tranche A term loan facility due November 2006 and a $250 million tranche C term loan facility due November 2007 and (ii) a revolving credit facility of $160 million (a portion of which can be used for the issuance of letters of credit), with a maturity of five years. We had approximately $27.3 million in letters of credit outstanding and had no borrowings under the revolving credit facility at October 5, 2002, which reduced availability under the revolving credit facility to approximately $132.7 million as of that date.
(2)
In November 2002, we repurchased the entire $10 million in indebtedness under the McDuffie County Authority taxable industrial revenue bonds.
(3)
Subsequent to October 5, 2002, we repurchased and retired $8.5 million of our senior subordinated notes.
(4)
Reflects a stockholder subscription receivable and the repayment of the receivable by one of the selling stockholders from the proceeds received by the selling stockholder from shares sold in the offering.

16


SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
 
The following table sets forth our selected historical consolidated statement of operations, balance sheet and other operating data. The selected historical consolidated financial and other data at December 30, 2000 and December 29, 2001 and for the three years ended December 29, 2001 have been derived from our audited consolidated financial statements and the related notes included elsewhere in this prospectus. The historical consolidated financial and other data at January 3, 1998, January 2, 1999 and January 1, 2000 and for the years ended January 3, 1998 and January 2, 1999 have been derived from our audited consolidated financial statements and the related notes that have not been included in this prospectus. The historical consolidated financial and other data at October 5, 2002 and for the forty weeks ended October 5, 2002 have been derived from our audited consolidated financial statements and the related notes included elsewhere in this prospectus. The historical consolidated financial and other data at October 6, 2001 and for the forty weeks ended October 6, 2001 have been derived from our unaudited consolidated financial statements and the related notes included elsewhere in this prospectus. In the opinion of our management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of our financial position, the results of our operations and cash flows have been made. The results of operations for the forty weeks ended October 5, 2002 are not necessarily indicative of the results of operations to be expected for the full year. You should read this data along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Consolidated Financial Data” and the consolidated financial statements and the related notes of Advance and Discount included elsewhere in, or incorporated by reference into, this prospectus. The results include the activities of the following acquired businesses since their respective dates of acquisition, Discount Auto Parts, Inc. (November 2001), Carport Auto Parts, Inc. (April 2001) and Western Auto Supply Company (November 1998).
 
 
   
Fiscal Year(1)

   
Forty Weeks Ended

 
   
1997

   
1998

   
1999

   
2000

   
2001

   
October 6, 2001

   
October 5, 2002

 
Consolidated Statement of
       
 
(unaudited)
 
       
Operations Data:
 
(in thousands, except per share and selected store data)
 
Net sales
 
$
848,108
 
 
$
1,220,759
 
 
$
2,206,945
 
 
$
2,288,022
 
 
$
2,517,639
 
 
$
1,935,630
 
 
$
2,585,466
 
Cost of sales
 
 
524,586
 
 
 
766,198
 
 
 
1,404,113
 
 
 
1,392,127
 
 
 
1,441,613
 
 
 
1,110,218
 
 
 
1,450,282
 
Supply chain initiatives(2)
 
 
—  
 
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
9,099
 
 
 
—  
 
 
 
—  
 
   


 


 


 


 


 


 


Gross profit
 
 
323,522
 
 
 
454,561
 
 
 
802,832
 
 
 
895,895
 
 
 
1,066,927
 
 
 
825,412
 
 
 
1,135,184
 
Selling, general and administrative expenses(3)
 
 
278,039
 
 
 
392,353
 
 
 
740,481
 
 
 
801,521
 
 
 
947,531
 
 
 
721,549
 
 
 
940,593
 
Expenses associated with supply chain initiatives(4)
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
1,394
 
 
 
—  
 
 
 
—  
 
Impairment of assets held for sale(5)
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
856
 
 
 
12,300
 
 
 
1,600
 
 
 
—  
 
Expenses associated with the recapitalization(6)
 
 
— 
 
 
 
14,277
 
 
 
— 
 
 
 
— 
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
Expenses associated with the merger related restructuring(7)
 
 
— 
 
 
 
6,774
 
 
 
— 
 
 
 
— 
 
 
 
3,719
 
 
 
—  
 
 
 
525
 
Expenses associated with merger and integration(8)
 
 
— 
 
 
 
7,788
 
 
 
41,034
 
 
 
— 
 
 
 
1,135
 
 
 
—  
 
 
 
25,917
 
Expenses associated with private company(9)
 
 
3,056
 
 
 
845
 
 
 
— 
 
 
 
— 
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
Non-cash stock option compensation expense(10)
 
 
— 
 
 
 
695
 
 
 
1,082
 
 
 
729
 
 
 
11,735
 
 
 
2,862
 
 
 
—  
 
   


 


 


 


 


 


 


Operating income
 
 
42,427
 
 
 
31,829
 
 
 
20,235
 
 
 
92,789
 
 
 
89,113
 
 
 
99,401
 
 
 
168,149
 
Interest expense
 
 
(6,086
)
 
 
(35,038
)
 
 
(62,792
)
 
 
(66,640
)
 
 
(61,895
)
 
 
(45,195
)
 
 
(62,734
)
Other income (expense), net
 
 
(321
)
 
 
943
 
 
 
4,647
 
 
 
1,012
 
 
 
1,283
 
 
 
879
 
 
 
949
 
   


 


 


 


 


 


 


Income (loss) before income taxes, extraordinary items and cumulative effect of a change in accounting principle
 
 
36,020
 
 
 
(2,266
)
 
 
(37,910
)
 
 
27,161
 
 
 
28,501
 
 
 
55,085
 
 
 
106,364
 
Income tax expense (benefit)
 
 
14,733
 
 
 
(84
)
 
 
(12,584
)
 
 
10,535
 
 
 
11,312
 
 
 
21,856
 
 
 
41,270
 
   


 


 


 


 


 


 


Income (loss) before extraordinary item and cumulative effect of a change in accounting principle
 
 
21,287
 
 
 
(2,182
)
 
 
(25,326
)
 
 
16,626
 
 
 
17,189
 
 
 
33,229
 
 
 
65,094
 
Extraordinary item, gain (loss) on debt extinguishment, net of ($1,759), $2,424 and $5,512 income taxes, respectively
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
2,933
 
 
 
(3,682
)
 
 
—  
 
 
 
(8,694
)

17


   
Fiscal Year(1)

   
Forty Weeks Ended

 
   
1997

   
1998

   
1999

   
2000

   
2001

   
October 6, 2001

   
October 5, 2002

 
         
(unaudited)
       
   
(in thousands, except per share and selected store data)
 
Cumulative effect of a change in accounting principle, net of $1,360 income taxes
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
(2,065
)
 
 
—  
 
 
 
—  
 
   


 


 


 


 


 


 


Net income (loss)
 
$
21,287
 
 
$
(2,182
)
 
$
(25,326
)
 
$
19,559
 
 
$
11,442
 
 
$
33,229
 
 
$
56,400
 
Income (loss) before extraordinary item and cumulative effect of a change in accounting principle per basic share
 
$
0.87
 
 
$
(0.12
)
 
$
(0.90
)
 
$
0.59
 
 
$
0.60
 
 
$
1.17
 
 
$
1.87
 
Income (loss) before extraordinary item and cumulative effect of a change in accounting principle per diluted share
 
$
0.87
 
 
$
(0.12
)
 
$
(0.90
 
$
0.58
 
 
$
0.59
 
 
$
1.16
 
 
$
1.81
 
Net income (loss) per basic share
 
$
0.87
 
 
$
(0.12
)
 
$
(0.90
)
 
$
0.69
 
 
$
0.40
 
 
$
1.17
 
 
$
1.62
 
Net income (loss) per diluted share
 
$
0.87
 
 
$
(0.12
)
 
$
(0.90
)
 
$
0.68
 
 
$
0.39
 
 
$
1.16
 
 
$
1.57
 
Weighted average basic shares outstanding
 
 
24,288
 
 
 
18,606
 
 
 
28,269
 
 
 
28,296
 
 
 
28,637
 
 
 
28,295
 
 
 
34,851
 
Weighted average diluted shares outstanding
 
 
24,288
 
 
 
18,606
 
 
 
28,269
 
 
 
28,611
 
 
 
29,158
 
 
 
28,642
 
 
 
36,014
 
Other Financial Data:
                                                       
EBITDA, as adjusted(11)
 
$
68,361
 
 
$
92,612
 
 
$
121,899
 
 
$
161,876
 
 
$
199,710
 
 
$
157,111
 
 
$
266,999
 
Capital expenditures(12)
 
 
48,864
 
 
 
65,790
 
 
 
105,017
 
 
 
70,566
 
 
 
63,695
 
 
 
49,550
 
 
 
68,524
 
Cash flows provided by (used in):
                                                       
Operating activities
 
$
42,478
 
 
$
44,022
 
 
$
(20,976
)
 
$
103,951
 
 
$
 103,536
 
 
$
126,294
 
 
$
 218,880
 
Investing activities
 
 
(48,607
)
 
 
(230,672
)
 
 
(113,824
)
 
 
(64,940
)
 
 
(451,008
)
 
 
(68,705
)
 
 
(51.946
)
Financing activities
 
 
6,759
 
 
 
207,302
 
 
 
121,262
 
 
 
(43,579
)
 
 
347,580
 
 
 
(63,680
)
 
 
(128,208
)
Selected Store Data:
                                                       
Comparable store sales growth(13)
 
 
5.7
%
 
 
7.8
%
 
 
10.3
%
 
 
4.4
%
 
 
6.2
%
 
 
6.5
%
 
 
6.2
%
Net new stores(14)
 
 
165
 
 
 
753
 
 
 
50
 
 
 
112
 
 
 
755
 
 
 
62
 
 
 
(91
)
Number of stores, end of period
 
 
814
 
 
 
1,567
 
 
 
1,617
 
 
 
1,729
 
 
 
2,484
 
 
 
1,791
 
 
 
2,393
 
Stores with commercial delivery program, end of period
 
 
421
 
 
 
532
 
 
 
1,094
 
 
 
1,210
 
 
 
1,370
 
 
 
1,195
 
 
 
1,408
 
Total commercial delivery sales, as a percentage of total retail sales
 
 
7.4
%
 
 
9.0
%
 
 
9.9
%
 
 
14.1
%
 
 
14.1
%
 
 
14.4
%
 
 
12.8
%
Total retail store square footage, end of period (in thousands)
 
 
5,857
 
 
 
12,084
 
 
 
12,476
 
 
 
13,325
 
 
 
18,717
 
 
 
13,782
 
 
 
17,990
 
Average net retail sales per store (in thousands)(15)
 
$
1,159
 
 
$
1,270
 
 
$
1,267
 
 
$
1,295
 
 
$
1,346
 
 
$
1,054
 
 
$
1,031
 
Average net retail sales per square foot(16)
 
$
161
 
 
$
172
 
 
$
164
 
 
$
168
 
 
$
175
 
 
$
137
 
 
$
137
 
 
   
At

   
1/3/98

 
1/2/99

 
1/1/00

 
12/30/00

 
12/29/01

 
10/6/01

 
10/5/02

                       
(unaudited)
   
   
(in thousands)
Balance Sheet Data:
                                       
Cash and cash equivalents
 
$
15,463
 
$
36,115
 
$
22,577
 
$     18,009
 
$
      18,117
 
$
      11,918
 
$
      56,843
Net working capital
 
 
121,140
 
 
310,113
 
 
355,608
 
318,583
 
 
442,099
 
 
318,078
 
 
474,144
Total assets
 
 
461,257
 
 
1,265,355
 
 
1,348,629
 
1,356,360
 
 
1,950,615
 
 
1,375,392
 
 
2,083,203
Total net debt(17)
 
 
95,633
 
 
485,476
 
 
627,467
 
582,539
 
 
972,368
 
 
531,010
 
 
715,925
Total stockholders’ equity
 
 
143,548
 
 
159,091
 
 
133,954
 
156,271
 
 
288,571
 
 
196,373
 
 
456,191

(1)
Our 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 1997, which consisted of 53 weeks.
(2)
Represents restocking and handling fees associated with the return of inventory as a result of our supply chain initiatives.
(3)
Selling, general and administrative expenses exclude certain non-recurring charges discussed in notes (4), (5), (6), (7), (8), (9) and (10) below. The 1997 amount includes an unusual medical claim that exceeded our

18


 
stop loss insurance coverage. The pre-tax amount of this claim, net of related increased insurance costs, was $882. We have increased our stop loss coverage effective January 1, 1998 to a level that would provide insurance coverage for a medical claim of this magnitude.
(4)
Represents costs of relocating certain equipment held at facilities closed as a result of our supply chain initiatives.
(5)
Represents the devaluation of certain property held for sale, including the $1.6 million charge taken in the first quarter of 2001 and a $10.7 million charge taken in the fourth quarter of 2001.
(6)
Represents expenses incurred in our 1998 recapitalization related primarily to non-recurring bonuses paid to certain employees and to fees for professional services.
(7)
Represents expenses related primarily to lease costs associated with 31 Advance Auto Parts stores closed in overlapping markets in connection with the Western merger and 27 Advance Auto Parts stores identified to be closed at December 29, 2001 as a result of the Discount acquisition.
(8)
Represents certain expenses related to the Western merger and integration, conversion of the Parts America stores and the Discount acquisition.
(9)
Reflects our estimate of expenses eliminated after the recapitalization that related primarily to compensation and other benefits of our chairman, who prior to our recapitalization was our principal stockholder.
(10)
Represents non-cash compensation expenses related to stock options granted to certain of our employees, including a non-recurring charge of $8.6 million in the fourth quarter of 2001 related to variable provisions of our stock option plans that were in place when we were a private company and that have since been eliminated.
(11)
EBITDA, as adjusted, represents operating income plus depreciation and amortization, non-cash and other employee compensation expenses and certain non-recurring charges as scheduled 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. We have included EBITDA, as adjusted, herein because our management believes this information is useful to investors, as such measure provides additional information with respect to our ability to meet our future debt service, capital expenditures and working capital requirements and, in addition, certain covenants in our indentures and our credit facility are based upon an EBITDA calculation. Our method for calculating EBITDA, as adjusted, may differ from similarly titled measures reported by other companies. Our management believes certain recapitalization expenses, non-recurring charges, private company expenses, non-cash and other employee compensation expenses, and merger and integration expenses should be eliminated from the EBITDA calculation to evaluate our operating performance, and we have done so in our calculation of EBITDA, as adjusted.

19


 
The following table reflects the effect of these items:
 
    
Fiscal Year

  
Forty Weeks Ended

    
1997

  
1998

  
1999

  
2000

  
2001

  
October 6,
2001

  
October 5,
2002

    
(in thousands)
  
(unaudited)
    
Other Data:
                                                
EBITDA(a)
  
$
65,110
  
$
61,793
  
 
$78,382
  
$
159,615
  
$
160,344
  
$
153,030
  
$
239,604
Supply chain initiatives (see note 2 above)
  
 
—  
  
 
—  
  
 
—  
  
 
—  
  
 
9,099
  
 
—  
  
 
—  
Expenses associated with supply chain initiatives (see note 4 above)
  
 
—  
  
 
—  
  
 
—  
  
 
—  
  
 
1,394
  
 
—  
  
 
—  
Impairment of assets held for sale (see note 5 above)
  
 
—  
  
 
—  
  
 
—  
  
 
—  
  
 
10,700
  
 
—  
  
 
—  
Recapitalization expenses (see note 6 above)
  
 
—  
  
 
14,277
  
 
—  
  
 
—  
  
 
—  
  
 
—  
  
 
—  
Merger related restructuring expenses (see note 7 above)
  
 
—  
  
 
6,774
  
 
—  
  
 
—  
  
 
3,719
  
 
—  
  
 
525
Merger and integration expenses (see note 8 above)
  
 
—  
  
 
7,788
  
 
41,034
  
 
—  
  
 
1,135
  
 
—  
  
 
25,917
Private company expenses (see note 9 above)
  
 
3,056
  
 
845
  
 
—  
  
 
—  
  
 
  —  
  
 
—  
  
 
—  
Non-cash stock option compensation expense (see note 10 above)
  
 
—  
  
 
695
  
 
1,082
  
 
729
  
 
11,735
  
 
2,862
  
 
—  
Non-operating interest expense on postretirement benefits(b)
  
 
195
  
 
440
  
 
1,401
  
 
1,532
  
 
1,584
  
 
1,219
  
 
953
    

  

  

  

  

  

  

EBITDA, as adjusted(c)
  
$
68,361
  
$
92,612
  
$
121,899
  
$
161,876
  
$
199,710
  
$
157,111
  
$
266,999
    

  

  

  

  

  

  


 
(a)
The 1997 EBITDA amount excludes an unusual medical claim that exceeded our stop-loss insurance coverage. The pre-tax amount of this claim, net of related increased insurance costs, was $882. We have increased our stop-loss coverage effective January 1, 1998 to a level that would provide insurance coverage for a medical claim of this magnitude.
 
(b)
Represents the interest component of the net periodic postretirement benefit cost associated with our postretirement benefit plan.
 
(c)
EBITDA, as adjusted, for 2000 includes a non-recurring net gain of $3.3 million, which represents a portion of a cash settlement received in connection with a lawsuit against a supplier. EBITDA, as adjusted, for 2001 includes a non-recurring net gain of $3.2 million, recorded in the first quarter of 2001, which represents a portion of the cash settlement received in connection with the lawsuit against a supplier, partially offset by nonrecurring closed store expenses and the $1.6 million write-down of an administrative facility taken in the first quarter of 2001.
(12)
Capital expenditures for 2001 exclude $34.1 million for our November 2001 purchase of Discount’s Gallman, Mississippi distribution facility from the lessor in connection with the Discount acquisition.
(13)
Comparable store sales growth 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 sales from the original date of opening. The Parts America stores acquired in the Western merger and subsequently converted to Advance Auto Parts stores are included in the comparable store sales calculation after thirteen complete accounting periods following their physical conversion. Stores acquired in the Carport acquisition are included in the comparable store sales calculation following thirteen complete accounting periods after their system conversion to the Advance Auto Parts store system. Stores acquired in the Discount acquisition will be included in the comparable stores sales calculation beginning in December 2002, which is thirteen complete accounting periods after the acquisition date of November 28, 2001. Comparable store sales do not include sales from our Western Auto stores.

20


(14)
Net new stores represent new stores opened and acquired, less stores closed. The negative net new stores count for the forty weeks ended October 5, 2002 is a result of closing 130 Discount and Advance stores in our existing markets as part of the integration of Discount.
(15)
Average net retail sales per store is based on the average of beginning and ending number of stores for the respective period. The 1998 amounts were calculated giving effect to the Parts America retail net sales and number of stores for the period from November 1, 1998 through January 2, 1999. The fiscal 2001 amounts were calculated giving effect to the Discount retail net sales and number of stores for the period from December 2, 2001 through December 29, 2001.
(16)
Average net retail sales per square foot is based on the average of beginning and ending total store square footage for the respective period. The 1998 amounts were calculated giving effect to the Parts America retail net sales and square footage for the period from November 1, 1998 through January 2, 1999. The fiscal 2001 amounts were calculated giving effect to the Discount retail net sales and number of stores for the period from December 2, 2001 through December 29, 2001.
(17)
Net debt includes total debt and bank overdrafts, less cash and cash equivalents.

21


 
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
 
The following pro forma consolidated financial data has been prepared by our management by applying pro forma adjustments to the historical consolidated financial statements of us and Discount and the related notes thereto after giving effect to the Discount acquisition and related financing transactions. The pro forma adjustments, which are based upon available information and upon certain assumptions that our management believes are reasonable, are described in the accompanying notes. The unaudited pro forma consolidated statement of operations combines our consolidated statement of operations for the year ended December 29, 2001 (comprising fifty-two weeks and including Discount’s four-week results from December 2, 2001) with the Discount unaudited consolidated income statement for the eleven-month period ended November 27, 2001 (comprising forty-seven weeks), to reflect the Discount acquisition and related financing transactions, as if such transactions had been consummated and were effective as of December 31, 2000. Our year ends on the Saturday closest to December 31 of each year, while Discount’s 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 period results for the respective companies have been combined in order to provide comparable results for the periods presented.
 
The financial effects to us of the Discount acquisition as presented in the pro forma consolidated financial data are not necessarily indicative of our consolidated financial position or results of operations which would have been obtained had the Discount acquisition actually occurred on the date 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 hereto, which are an integral part hereof, the consolidated historical financial statements of us and Discount and the notes thereto that are included elsewhere in, or incorporated by reference into, this prospectus.

22


 
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
 
   
Fiscal Year Ended December 29, 2001

 
   
Advance Historical

    
Discount Historical

    
Acquisition
Adjustments

    
Pro Forma
for Discount
Acquisition

 
Net sales
 
$
2,517,639
 
  
$
627,054
 
  
$
—  
 
  
$
3,144,693
 
Cost of sales
 
 
1,450,712
 
  
 
379,974
 
  
 
—  
 
  
 
1,830,686
 
   


  


  


  


Gross profit
 
 
1,066,927
 
  
 
247,080
 
  
 
—  
 
  
 
1,314,007
 
Selling, general and administrative expenses
 
 
977,814
 
  
 
207,522
 
  
 
(1,873
)(1)
  
 
1,183,463
 
   


  


  


  


Operating income
 
 
89,113
 
  
 
39,558
 
  
 
1,873
 
  
 
130,544
 
Interest expense
 
 
(61,895
)
  
 
(14,059
)
  
 
(21,895
)(2)
  
 
(97,849
)
Other expenses, net
 
 
1,283
 
  
 
7,032
 
  
 
—  
 
  
 
8,315
 
   


  


  


  


Income before provision for taxes
 
 
28,501
 
  
 
32,531
 
  
 
(20,022
)
  
 
41,010
 
Provision for income taxes
 
 
(11,312
)
  
 
(11,694
)
  
 
8,009
(3)
  
 
(14,997
)
   


  


  


  


Income from continuing operations(4)
 
$
17,189
 
  
$
20,837
 
  
$
(12,013
)
  
$
26,013
 
   


  


  


  


Earnings per share from  continuing operations:
                                  
Basic
 
$
0.60
 
  
$
1.25
 
           
$
0.80
 
Diluted(5)
 
$
0.59
 
  
$
1.24
 
           
$
0.78
 
   


  


           


Weighted average common shares outstanding:
                                  
Basic
 
 
28,637
 
  
 
16,705
 
           
 
32,611
 
Diluted
 
 
29,158
 
  
 
16,808
 
           
 
33,159
 
   


  


           


 
 
 
See notes to Unaudited Pro Forma Consolidated Statement of Operations

23


 
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
 
    
December 29, 2001

 
(1)    Reflects the following:
        
Reduction in depreciation and amortization as a result of pro forma purchase price allocation based on average useful lives of 12 years and 3 years, respectively (a)
  
$
(1,488
)
Less:  Amortization of debt issuance costs and goodwill included in selling, general and administrative expenses in historical statement of operations of Discount
  
 
(607
)
Elimination of amortization of deferred gain on sale leaseback
  
 
222
 
    


Net decrease in selling, general and administrative expenses
  
$
(1,873
)
    


(2)    Gives effect to the increase in estimated interest expense from the use of borrowings to finance the Discount acquisition(b):
        
Commitment fees on unused borrowings related to the revolving credit facility
  
$
(655
)
Interest related to the tranche A term loan facility
  
 
(9,138
)
Interest related to the tranche B term loan facility
  
 
(19,708
)
Interest related to the new senior subordinated notes
  
 
(18,923
)
Amortization of original issuance discount related to the senior subordinated notes amortized over 6 years
  
 
(1,423
)
Amortization of debt issuance costs related to the senior credit facility and the new senior subordinated notes amortized over 6 years
  
 
(3,438
)
Less:  Interest expense and amortization of debt issuance costs in historical statement of operations related to debt extinguished in connection with the Discount acquisition
  
 
31,390
 
    


Net increase in interest expense
  
$
(21,895
)
    



 
(a)
The valuations of the fair values of Discount’s tangible and intangible assets are reflected in our historical balance sheet at December 29, 2001. Accordingly, this adjustment reflects the pro forma effect on depreciation and amortization for 2001.
 
(b)
Reflects pro forma interest expenses calculated assuming (i) a LIBOR rate of 2.0% plus a spread of 3.5% for the tranche A term loan and a LIBOR rate of 3.0% (the established floor) plus a spread of 4.0% for the tranche B term loan portions of our senior credit facility, respectively, (ii) a yield to maturity of 11.875% on the senior subordinated notes, which includes a cash interest component based on a coupon rate of 10.25%, and (iii) commitment fees on unused borrowings on our senior credit facility using a rate of 0.5% per annum. The interest rates on the senior 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 year ended December 29, 2001 by $488. The adjustments for the year ended December 29, 2001, excluding the historical interest expense and amortization of debt issuance costs, represent pro forma amounts through the date of the acquisition.
 
(3)
Estimated tax effects of the pro forma adjustments at a statutory rate of approximately 40%.
(4)
Income (loss) from continuing operations represents income (loss) before extraordinary item and the cumulative effect of a change in accounting principle.
(5)
Diluted earnings per share from continuing operations includes certain non-recurring charges of $20.9 million after-tax, or $0.72 per diluted share. These charges consist of $0.7 million in conversion expenses associated with the Discount acquisition, $2.2 million in lease termination expenses, $5.2 million in stock option compensation charges, $6.3 million in supply chain initiatives and a $6.5 million reduction in book value of property currently held for sale.

24


 
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of financial condition and results of operations should be read in conjunction with “Selected Consolidated Historical Financial and Other Data,” the consolidated historical financial statements of us and Discount, the unaudited pro forma consolidated financial information of us and Discount, and the notes to those statements that appear elsewhere in, or that are incorporated by reference into, this prospectus. Our fiscal year ends on the Saturday nearest December 31 of each year. Our first quarter consists of 16 weeks, and the other three quarters consist of 12 weeks. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under “Risk Factors” and “Business” and elsewhere in this prospectus.
 
General
 
We conduct all of our operations through our wholly owned subsidiary, Advance Stores Company, Incorporated and its subsidiaries. We were formed in 1929 and operated as a retailer of general merchandise until the 1980s. In the 1980s, we sharpened our marketing focus to target sales of automotive parts and accessories to “do-it-yourself,” or DIY, customers and accelerated our growth strategy. From the 1980s through the present, we have grown significantly through new store openings, strong comparable store sales growth and strategic acquisitions. Additionally, in 1996, we began to aggressively expand our sales to “do-it-for-me,” or DIFM, customers by implementing a commercial delivery program that supplies parts and accessories to third party professional installers and repair providers.
 
At October 5, 2002, we had 2,393 stores, which included 1,936 stores operating under the “Advance Auto Parts” trade name, in 37 states in the Northeastern, Southeastern and Midwestern regions of the United States and 419 stores operating under the “Discount Auto Parts” trade name primarily in Florida. In addition, we had 38 stores operating under the “Western Auto” trade name primarily located in Puerto Rico and the Virgin Islands. We are 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. We currently are the largest specialty retailer of automotive products in the majority of the states in which we operate, based on store count.
 
Our combined operations are conducted in two operating segments, retail and wholesale. The retail segment consists of our retail operations operating under the trade names “Advance Auto Parts” and “Discount Auto Parts” in the United States and “Western Auto” in Puerto Rico, the Virgin Islands and one store in California. We also operate a wholesale distribution network which includes distribution services of automotive parts and accessories to approximately 430 independently owned dealer stores in 44 states operating under the “Western Auto” trade name. Our wholesale operations accounted for approximately 2.7% of our net sales for the forty weeks ended October 5, 2002.
 
Acquisitions and Recapitalization
 
Trak Auto Parts Acquisition.    During the third quarter of fiscal 2002, we entered into an arrangement to acquire 57 Trak Auto Parts stores. Under this arrangement, we will assume the store leases and pay up to $16.0 million to purchase inventory and fixtures. At October 5, 2002, we had taken ownership and converted 22 of the 57 stores, assumed the respective leases and had paid $2.7 million for inventory and fixtures.
 
Discount Acquisition.    On November 28, 2001, we acquired Discount in a transaction in which Discount’s shareholders received $7.50 per share in cash (or approximately $128.5 million in the aggregate) plus 0.2577 shares of our common stock for each share of Discount common stock. At November 28, 2001, Discount had 671 stores in six states, including the leading market position in Florida, with 437 stores. We issued

25


approximately 4.3 million shares of our common stock to the former Discount shareholders, which represented 13.2% of our total shares outstanding immediately following the acquisition. The acquisition has been accounted for under the purchase method of accounting. Accordingly, the results of operations for Discount for the periods from December 2, 2001 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. Initial negative goodwill of $75.7 million, resulting from total excess fair value over the purchase price, was allocated proportionately as a reduction to non-current assets, primarily property and equipment. During the forty weeks ended October 5, 2002, we reduced negative goodwill by $18.7 million due to purchase accounting adjustments made primarily to adjust the fair market value of certain inventory and property and equipment and the related deferred income tax effects.
 
In connection with the Discount acquisition, we issued an additional $200 million face value of 10.25% senior subordinated notes and entered into a new senior credit facility that provided for (1) a $180 million tranche A term loan facility and a $305 million tranche B term loan facility and (2) a $160 million revolving credit facility (including a letter of credit sub-facility). Upon the closing of the Discount acquisition, we used $485 million of borrowings under the new senior credit facility and net proceeds of $185.6 million from the sale of the senior subordinated notes to, among other things, pay the cash portion of the acquisition consideration, repay all amounts outstanding under our then-existing credit facility, repay $204.7 million of outstanding indebtedness of Discount, including prepayment penalties, and purchase Discount’s Gallman, Mississippi distribution facility from the lessor. In June 2002, we repaid a portion of our tranche A and tranche B term loans and refinanced the remaining portion of our tranche B term loans with a $250 million tranche C term loan facility.
 
Carport Acquisition.    On April 23, 2001, we completed our 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 made us the largest retailer of automotive parts in the Alabama market. Upon the closing of the acquisition, we decided 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 within six weeks of the acquisition. The acquisition has been accounted for under the purchase method of accounting. Accordingly, the results of operations of Carport for the periods from April 23, 2001 are included in the accompanying consolidated financial statements. 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 $3.7 million in goodwill.
 
Western Auto Acquisition.    On November 2, 1998, we acquired Western Auto Supply Company from Sears. The purchase price included the payment of 11,474,606 shares of our common stock and $185.0 million in cash. Certain of our stockholders 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 our prior credit facility, and cash on hand. The Western merger was 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. Negative goodwill of $4.7 million, resulting from total excess fair value over the purchase price, was allocated proportionately as a reduction to non-current assets, primarily property and equipment.
 
We have achieved significant benefits from the combination with Western through improved purchasing efficiencies 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.
 
Recapitalization.    On April 15, 1998, we consummated a recapitalization in which Freeman Spogli & Co. and Ripplewood Partners, L.P. purchased approximately $80.5 million and $20.0 million of our common stock,

26


respectively, representing approximately 64% and 16% of our outstanding common stock immediately following the recapitalization. In connection with the recapitalization, management purchased approximately $8.0 million, or approximately 6%, of our outstanding common stock. The purchase of common stock by management resulted in stockholder subscription receivables. The notes are full recourse and provide for annual interest payments, at the prime rate, with the entire principal amount due on April 15, 2003. In addition, on April 15, 1998, we entered into our prior credit facility and also issued $200 million of senior subordinated notes and approximately $112 million in face amount of senior discount debentures. In connection with these transactions, we extinguished a substantial portion of our existing notes payable and long-term debt. These transactions collectively represent the “recapitalization.” We have 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. In connection with the Discount acquisition, we repaid all amounts outstanding under our prior credit facility and entered into a senior credit facility.
 
Critical Accounting Policies
 
Our financial statements have been prepared in accordance with accounting policies generally accepted in the United States. Our discussion and analysis of the financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of these accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results and other assumptions we believe are reasonable. Actual results could differ from these estimates.
 
The following critical accounting policies are used in the preparation of the financial statements as discussed above.
 
Vendor Incentives
 
We receive incentives from vendors related to cooperative advertising allowances, volume rebates and other miscellaneous agreements. Many of the incentives are under long-term agreements (terms in excess of one year), while others are negotiated on an annual basis. Our vendors require us to use certain cooperative advertising allowances exclusively for advertising. These restricted cooperative advertising allowances are recognized as a reduction to selling, general and administrative expenses as advertising expenditures are incurred. Unrestricted cooperative advertising revenue, rebates and other miscellaneous incentives are earned based on purchases and/or the sale of the product. Amounts received or receivable from vendors that are not yet earned are reflected as deferred revenue in the consolidated balance sheets included elsewhere in, or incorporated by reference into, this prospectus. We record unrestricted cooperative advertising and volume rebates earned as a reduction of inventory and recognize the incentives as a reduction to cost of sales as the inventory is sold. Short-term incentives are recognized as a reduction to cost of sales over the course of the annual agreement term and are not recorded as reductions to inventory.
 
We recognize other incentives earned related to long-term agreements as a reduction to cost of sales over the life of the agreement based on the timing of purchases. These incentives are not recorded as reductions to inventory. The amounts earned under long-term arrangements not recorded as a reduction of inventory are based on our estimate of total purchases that will be made over the life of the contracts and the amount of incentives that will be earned. The incentives are generally recognized based on the cumulative purchases as a percentage of total estimated purchases over the life of the contract. Our margins could be impacted positively or negatively if actual purchases or results differ from our estimates, but over the life of the contract would be the same.
 
During the fourth quarter of 2001, we changed our method of accounting for unrestricted cooperative advertising allowances. These incentives are now treated as a reduction to inventory and the corresponding cost of sales. Previously, we accounted for these incentives as a reduction to selling, general and administrative expenses to the extent advertising expense was incurred.

27


 
Inventory
 
        Minimal inventory shrink reserves are recorded related to Advance Auto Parts stores as a result of our extensive and frequent cycle counting program. Our estimates related to these shrink reserves depend on the effectiveness of the cycle counting programs. We evaluate the effectiveness of these programs on an on-going basis and believe they provide reasonable assurance that minimal shrink reserves are needed.
 
        Minimal reserves for potentially excess and obsolete inventories are recorded as well. The nature of our inventory is such that the risk of obsolescence is minimal. In addition, we have historically been able to return excess items to the vendor for credit. We provide reserves where less than full credit will be received for such returns and where we anticipate that items will be sold at retail prices that are less than recorded cost. Future changes by vendors in their policies or willingness to accept returns of excess inventory could require us to revise our estimates of required reserves for excess and obsolete inventory.
 
Warranties
 
We record accruals for future warranty claims related to warranty programs for batteries, tires, road-side assistance and Craftsman products. Our accruals are based on current sales of the warranted products and historical claim experience. If claims experience differs from historical levels, revisions in our estimates may be required.
 
Restructuring and Closed Store Liabilities
 
We recognize a provision for future obligations at the time a decision is made to close a store location and includes future minimum lease payments, common area maintenance and taxes. Additionally, we make certain assumptions related to potential subleases and lease buyouts that reduce the recorded amount of the accrual. These assumptions are based on our knowledge of the market and the relevant experience. However, the inability to enter into the subleases or obtain buyouts within the estimated timeframe may result in increases or decreases to these reserves.
 
Contingencies
 
We accrue for obligations, including estimated legal costs, when it is probable and the amount is reasonably estimable. As facts concerning contingencies become known, we reassess our position both with respect to gain contingencies and accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change include tax, environmental and legal matters, which are subject to change as events evolve and as additional information becomes available during the administrative and litigation process.
 
Components of Statement of Operations
 
Net Sales
 
Net sales consist primarily of comparable store sales, new store net sales, service net sales, net sales to the wholesale dealer network and finance charges on installment sales. Comparable store 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 sales from the original date of opening. Each 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 sales calculation after 13 complete accounting periods following the completion of its physical conversion to an Advance Auto Parts store. Additionally, the stores acquired in the Carport acquisition are included in the comparable store sales calculation following 13 complete accounting periods after their system conversion to the Advance Auto Parts store system. Stores acquired in the Discount acquisition will be included in the comparable stores sale calculation beginning in December 2002, which is 13 complete accounting periods after the acquisition date of November 28, 2001. We do not include net sales from the 38 Western Auto retail stores in our comparable store sales calculation.

28


 
Cost of Sales
 
Our cost of sales includes merchandise costs and warehouse and distribution expenses, as well as service labor costs of our Western Auto stores. Gross profit as a percentage of net sales may be affected by variations in our product mix, price changes in response to competitive factors and fluctuations in merchandise costs and vendor programs. We seek to avoid fluctuation in merchandise costs and instability of supply by entering into long-term purchasing agreements with vendors when we believe it is advantageous.
 
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 and related benefits of corporate employees, administrative office expenses, data processing, professional expenses and other related expenses. We lease a significant portion of our stores.

29


 
Results of Operations
 
The following table sets forth certain of our operating data expressed as a percentage of net sales for the periods indicated.
 
    
Fiscal Year

      
Forty Weeks Ended

 
    
1999

    
2000

    
2001

      
October 6,
2001

      
October 5, 2002

 
Net sales
  
100.0
%
  
100.0
%
  
100.0
%
    
100.0
%
    
100.0
%
Cost of sales(1)
  
63.6
 
  
60.8
 
  
57.2
 
    
57.4
 
    
56.1
 
Expenses associated with supply chain initiatives
  
—  
 
  
—  
 
  
0.4
 
    
—  
 
    
—  
 
    

  

  

    

    

Gross profit
  
36.4
 
  
39.2
 
  
42.4
 
    
42.6
 
    
43.9
 
Selling, general and administrative expenses(1)(2)
  
33.5
 
  
35.0
 
  
37.6
 
    
37.3
 
    
36.4
 
Expenses associated with supply chain initiatives
  
—  
 
  
—  
 
  
0.1
 
    
—  
 
    
—  
 
Impairment of assets held for sale 
  
—  
 
  
—  
 
  
0.5
 
    
0.1
 
    
—  
 
Expenses associated with merger related restructuring
  
—  
 
  
—  
 
  
0.1
 
    
—  
 
    
0.0
 
Expenses associated with merger and integration
  
1.9
 
  
—  
 
  
0.0
 
    
—  
 
    
1.0
 
Non-cash stock option compensation expense
  
0.1
 
  
0.1
 
  
0.5
 
    
0.1
 
    
—  
 
    

  

  

    

    

Operating income
  
0.9
 
  
4.1
 
  
3.5
 
    
5.1
 
    
6.5
 
Interest expense 
  
(2.8
)
  
(2.9
)
  
(2.5
)
    
(2.3
)
    
(2.4
)
Other income, net
  
0.2
 
  
0.0
 
  
0.1
 
    
0.0
 
    
0.0
 
Income tax (benefit) expense
  
(0.6
)
  
0.5
 
  
0.4
 
    
1.1
 
    
1.6
 
    

  

  

    

    

Income (loss) before extraordinary item and cumulative effect of a change in accounting principle
  
(1.1
)
  
0.7
 
  
0.7
 
    
1.7
 
    
2.5
 
Extraordinary item, gain (loss) on debt extinguishment, net of income taxes 
  
—  
 
  
0.1
 
  
(0.1
)
    
—  
 
    
(0.3
)
Cumulative effect of a change in accounting principle, net of income taxes
  
—  
 
  
—  
 
  
(0.1
)
    
—  
 
    
—  
 
    

  

  

    

    

Net income (loss)
  
(1.1
)%
  
0.8
%
  
0.5
%
    
1.7
%
    
2.2
%
    

  

  

    

    


(1)
Cost of sales and selling, general and administrative expenses presented for fiscal 2001 and the forty weeks ended October 6, 2001 and October 5, 2002 reflect the change in accounting principle related to cooperative advertising funds. This change resulted in lower cost of sales with corresponding increases in selling, general and administrative expenses.
(2)
Selling, general and administrative expenses are adjusted for certain non-recurring and other items.
 
Forty Weeks Ended October 5, 2002 Compared to Forty Weeks Ended October 6, 2001
 
Net sales for the forty weeks ended October 5, 2002 were $2,585.5 million, an increase of $649.8 million, or 33.6%, over net sales for the forty weeks ended October 6, 2001. Net sales for the retail segment increased $659.3 million, or 35.5%, to $2,514.9 million. The net sales increase for the retail segment was due to an increase in the comparable store sales of 6.2%, sales from stores acquired in the Discount acquisition and contributions from new stores opened within the last year. The comparable store sales increase was a result of growth in both the DIY and DIFM market segments, as well as the continued maturation of new stores. Net sales for the wholesale segment decreased $9.4 million due to the decline in the number of dealer stores we serviced and lower average sales to each dealer.
 
During the forty weeks ended October 5, 2002, we opened 61 new stores, relocated 27 stores and closed 152 stores (130 of which were related to the Discount acquisition), bringing the number of total retail stores to 2,393. As of October 5, 2002, we had 1,408 stores participating in our commercial delivery program, as a result of adding 38 net programs during the forty weeks ended October 5, 2002.

30


 
Gross profit for the forty weeks ended October 5, 2002 was $1,135.2 million, or 43.9% of net sales, as compared to $825.4 million, or 42.6% of net sales, for the forty weeks ended October 6, 2001. The increase in gross profit percentage reflects the positive impact in purchasing synergies as a result of renegotiating vendor contracts in conjunction with the Discount acquisition, and the leveraging of logistics costs realized from our recent supply chain initiatives. Additionally, gross profit for the forty weeks ended October 6, 2001 includes an $8.3 million gain from our settlement with a vendor. The gross profit for the retail segment was $1,123.8 million, or 44.7% of net sales, for the forty weeks ended October 5, 2002, as compared to $813.9 million, or 43.9% of net sales, for the forty weeks ended October 6, 2001. The gross profit for the retail segment also includes the $8.3 million gain for the forty weeks ended October 6, 2001.
 
Selling, general and administrative expenses, before merger and integration expenses and merger related restructuring, increased to $940.6 million, or 36.4% of net sales, for the forty weeks ended October 5, 2002, from $726.0 million, or 37.5% of net sales, for the forty weeks ended October 6, 2001. The decrease in selling, general and administrative expenses as a percentage of sales reflects both our ability to leverage our store payroll expenses against a higher sales base, as well as lower rent expense as a result of owning a higher percentage of stores following the Discount acquisition.
 
Operating income, as adjusted for merger and integration expenses and merger related restructuring, was $194.6 million in the forty weeks ended October 5, 2002, or 7.5% of net sales, as compared to $99.4 million, or 5.1% of net sales, for the forty weeks ended October 6, 2001. Merger and integration expenses of $25.9 million include non-recurring expenses associated with integrating the Discount operations. Merger related restructuring expenses primarily relate to lease costs associated with Advance Auto Parts stores in overlapping markets closed as a result of the Discount acquisition.
 
Interest expense for the forty weeks ended October 5, 2002 was $62.7 million, or 2.4% of net sales, as compared to $45.2 million, or 2.3% of net sales, for the forty weeks ended October 6, 2001. Interest expense reflects the overall increase in average borrowings offset by more favorable interest rates during the forty weeks ended October 5, 2002, as compared to the forty weeks ended October 6, 2001. This increase in borrowings is a result of the additional debt incurred in conjunction with the Discount acquisition.
 
During the forty weeks ended October 5, 2002, we recorded $8.7 million in a loss on extinguishment of debt, net of tax. This loss reflects the ratable portion of the deferred loan costs associated with our partial repayment of our tranche A and tranche B term loans, the refinancing of the remaining portion of our tranche B term loans under our credit facility, and the repurchase and retirement of outstanding senior subordinated notes and senior discount debentures at a premium.
 
Income tax expense for the forty weeks ended October 5, 2002 was $41.3 million, as compared to $21.9 million for the forty weeks ended October 6, 2001. Our effective income tax rate decreased to 38.8% for the forty weeks ended October 5, 2002, as compared to 39.7% for the forty weeks ended October 6, 2001. The decrease was primarily due to increases in pre-tax income, which reduced the impact of certain permanent differences on the effective rate.
 
As a result of the above factors, we recorded net income of $81.3 million, or $2.26 per diluted share, before the non-recurring merger and integration expenses and the extraordinary loss on the extinguishment of debt, for the forty weeks ended October 5, 2002, as compared to $33.2 million, or $1.16 per diluted share, for the forty weeks ended October 6, 2001. After merger and integration expenses and the extraordinary loss, we recorded net income of $56.4 million, or $1.57 per diluted share, for the forty weeks ended October 5, 2002. As a percentage of sales, net income for the forty weeks ended October 5, 2002 was 2.2%, as compared to 1.7%, for the forty weeks ended October 6, 2001.

31


 
Fiscal 2001 Compared to Fiscal 2000
 
Net sales for 2001 were $2,517.6 million, an increase of $229.6 million, or 10.0%, over net sales for 2000. Net sales for the retail segment increased $252.4 million, or 11.6%. The net sales increase for the retail segment was due to an increase in comparable store sales of 6.2%, sales from the recently acquired Discount stores and contributions from new stores opened within the last year. The comparable store sales increase of 6.2% was a result of growth in both the DIY and DIFM market segments, as well as the continued maturation of new stores. Net sales for the wholesale segment decreased $22.8 million due to a decline in the number of dealer stores we serviced and lower average sales to each dealer.
 
During 2001, we opened 110 new stores (including the 30 net stores from the Carport acquisition in April 2001), relocated 18 stores and closed 24 stores. Additionally, we acquired 671 stores in the Discount acquisition in November 2001 and closed two of these stores in December 2001, bringing the total number of stores to 2,484. We increased the number of our stores participating in our commercial delivery program to 1,370, primarily as a result of adding 167 Discount stores with existing commercial delivery programs. Additionally, as of December 29, 2001, we supplied approximately 470 independent dealers through the wholesale dealer network.
 
Gross profit for 2001, excluding non-recurring charges associated with our supply chain initiatives, was $1,076.0 million, or 42.7% of net sales, as compared to $895.9 million, or 39.2% of net sales, in 2000. The change in accounting principle accounted for approximately 220 basis points of the increase with the remaining increase attributable to positive shifts in product mix. The $8.3 million net gain recorded as a reduction to cost of sales during the first quarter of 2001 as a result of a vendor contract settlement was equally offset by higher cost of sales during the last three quarters of 2001 as a result of the new supplier contract. The gross profit for the retail segment, excluding non-recurring charges associated with our supply chain initiatives, was $1,062.0 million, or 43.9% of net sales, for 2001, as compared to $881.0 million, or 40.7% of net sales, in 2000. The increase in gross profit was primarily attributable to the change in accounting principle and positive shifts in product mix.
 
Selling, general and administrative expenses, before merger and integration expenses, non-recurring charges and non-cash stock option compensation expense increased to $947.5 million, or 37.6% of net sales for 2001, from $801.5 million, or 35.0% of net sales for 2000. The change in accounting principle accounted for approximately 220 basis points of the increase with the remaining increase attributable to increased investment in store staffing and retention initiatives, which were put in place in the third quarter of 2000, and higher insurance costs due to adverse changes in the insurance market.
 
EBITDA (operating income plus depreciation and amortization), as adjusted for merger and integration expenses, expenses associated with our supply chain initiatives, restructuring expenses, devaluation of assets held for sale and non-cash and other employee compensation, was $199.7 million in 2001, or 7.9% of net sales, as compared to $161.9 million, or 7.1% of net sales, in 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. Our method for calculating EBITDA may differ from similarly titled measures reported by other companies. We believe certain non-recurring charges, non-cash and other employee compensation, and merger and integration expenses, should be eliminated from the EBITDA calculation to evaluate our operating performance.
 
Interest expense for 2001 was $61.9 million, or 2.5% of net sales, as compared to $66.6 million, or 2.9% of net sales, in 2000. The decrease in interest expense was a result of lower average outstanding borrowings and a decrease in average interest rates over 2000.
 
Our effective income tax rate was 39.7% of pre-tax income for 2001, as compared to 38.8% for 2000. This increase is a result of an increase in the amount of permanent differences between book and tax reporting treatment on total income tax expense (benefit).

32


 
We recorded an extraordinary loss on the extinguishment of debt during the fourth quarter of 2001. This loss is the result of the write-off of $3.7 million, net of $2.4 million income taxes, or $0.13 loss per diluted share, of deferred debt issuance costs associated with refinancing our credit facility in connection with the Discount acquisition.
 
We also recorded a loss of $2.1 million, net of $1.4 million of income taxes, or $0.07 loss per diluted share, for the cumulative effect of a change in accounting principle during the fourth quarter of 2001. This change in accounting principle is a result of our change in accounting method related to certain cooperative advertising funds received from vendors. This change resulted in the reduction of the cost of inventory acquired from vendors and the resulting costs of sales.
 
After one-time expenses, we recorded net income of $11.4 million, or $0.39 per diluted share, for 2001, as compared to net income of $19.6 million, or $0.68 per diluted share, for 2000. We recorded certain one-time expenses in 2001, resulting in a net income loss of $0.91 per diluted share. As a percentage of sales, net income for fiscal 2001 was 0.5% as compared to 0.8% for 2000.
 
Fiscal 2000 Compared to Fiscal 1999
 
Net sales for 2000 were $2,288.0 million, an increase of $81.1 million, or 3.7%, over net sales for 1999. Net sales for the retail segment increased $149.9 million, or 7.4%. 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 opened within the last year. The comparable store sales increase of 4.4% was primarily a result of growth in both the DIY and DIFM market segments, as well as the continued maturation of new stores and the converted Parts America stores. Net sales for the wholesale segment decreased 36.3% or $68.8 million due to a decline in the number of dealer stores serviced and lower average sales to each dealer.
 
During 2000, we opened 140 new stores, relocated 10 stores and closed 28 stores, bringing the total retail segment stores to 1,729. At year end, we had 1,210 stores participating in our commercial delivery program, a result of adding 116 net stores to the program during 2000. Additionally, at December 30, 2000, we supplied approximately 590 independent dealers through the wholesale dealer network and our one store in California.
 
Gross profit for 2000 was $895.9 million, or 39.2% of net sales, as compared to $802.8 million, or 36.4% of net sales, in 1999. The gross profit percentage increased 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. Additionally, lower inventory shrinkage accounted for approximately 60 basis points and lower logistics costs accounted for approximately 30 basis points of the increased gross profit margin. The higher shrinkage and logistics costs in 1999 were related to merchandise conversions and product liquidations resulting from the Western merger. The gross profit for the retail segment was $881.0 million, or 40.7% of net sales, for 2000, as compared to $792.0 million, or 39.3% of net sales, for 1999. During the fourth quarter of 2000, we 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, we agreed to a cash settlement of $16.6 million from the supplier. The remainder of the cash settlement over the originally recorded gain, reduced by higher product costs incurred under the interim supply agreement and fees and expenses related to the settlement of the matter, was recognized as an $8.3 million reduction to cost of sales during the first quarter of 2001.
 
Selling, general and administrative expenses, before integration expenses and non-cash stock option compensation, increased to $801.5 million, or 35.0% of net sales, for 2000, from $740.5 million, 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, we incurred higher than expected medical claims as well as higher payroll, insurance and depreciation expense, partially offset by a

33


decrease in net advertising costs, as a percentage of sales, as compared to 1999. We made certain investments in personnel and labor, which we believe are critical to our long-term success. 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, was $161.9 million in 2000, or 7.1% of net sales, as compared to $121.9 million, or 5.5% of net sales, in fiscal 1999. EBITDA is not intended to represent cash flow from operations as defined by GAAP and should not be considered as a substitute for net income as an indicator of operating performance or as an alternative to cash flow (as measured by GAAP) as a measure of liquidity. Our method for calculating EBITDA may differ from similarly titled measures reported by other companies. We believe certain non-recurring charges, non-cash and other employee compensation, and merger and integration expenses, should be eliminated from the EBITDA calculation to evaluate our operating performance.
 
Interest expense for 2000 was $66.6 million, or 2.9% of net sales, as compared to $62.8 million, or 2.8% of net sales, for 1999. The increase in interest expense was a result of an increase in interest rates over 1999, offset by a decrease in net outstanding borrowings. During 2000, we repurchased $30.6 million of senior subordinated notes on the open market for $25.0 million.
 
Our effective income tax rate was 38.8% of pre-tax income for 2000, as compared to 33.2% of pre-tax loss for 1999. This increase is due to our pre-tax income in 2000 and pre-tax loss in 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, we recognized additional valuation allowances of $0.9 million during 2000.
 
We recorded net income of $19.6 million, or $0.68 per diluted share, for 2000, as compared to a net loss of $25.3 million, or $0.90 per diluted share, for 1999. In addition to the items previously discussed, we also recorded an extraordinary gain related to the early extinguishment of debt of $2.9 million, or $0.10 per diluted share, 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 2000 was 0.8%, as compared to a net loss of 1.1% for 1999.

34


 
Quarterly Financial Results (unaudited) (in thousands, except per share data)
 
   
16-Weeks Ended 4/22/2000

   
12-Weeks Ended 7/15/2000

 
12-Weeks Ended 10/7/2000

 
12-Weeks Ended 12/30/2000

    
16-Weeks
Ended
4/21/2001(1)

 
12-Weeks
Ended
7/14/2001(1)

  
12-Weeks
Ended
10/6/2001(1)

  
12-Weeks
Ended
12/29/2001(1)

   
16-Weeks
Ended
4/20/02(1)

   
12-Weeks
Ended
7/13/02(1)

   
12-Weeks
Ended
10/5/02(1)

 
Net sales
 
$
677,582
 
 
$
557,650
 
$
552,138
 
$
500,652
 
  
$
729,359
 
$
607,478
  
$
598,793
  
$
582,009
 
 
$
1,004,087
 
 
$
792,717
 
 
$
788,662
 
Gross profit
 
 
258,975
 
 
 
216,533
 
 
223,903
 
 
196,484
 
  
 
311,450
 
 
257,228
  
 
256,734
  
 
241,515
 
 
 
436,508
 
 
 
349,014
 
 
 
349,662
 
(Loss) income before extraordinary item and cumulative effect of a change in accounting principle
 
 
(956
)
 
 
10,381
 
 
9,507
 
 
(2,306
)
  
 
3,873
 
 
14,124
  
 
15,232
  
 
(16,040
)
 
 
12,871
 
 
 
23,565
 
 
 
28,658
 
Extraordinary item, gain (loss) on debt extinguishment, net of ($1,759); $2,424; $491; $4,834; and $187 income taxes, respectively
 
 
—  
 
 
 
—  
 
 
2,933
 
 
—  
 
  
 
—  
 
 
—  
  
 
—  
  
 
(3,682
)
 
 
(775
)
 
 
(7,624
)
 
 
(295
)
Cumulative effect of a change in accounting principle, net of $1,360 income taxes
 
 
—  
 
 
 
—  
 
 
—  
 
 
—  
 
  
 
—  
 
 
—  
  
 
—  
  
 
(2,065
)
 
 
—  
 
 
 
—  
 
 
 
—  
 
   


 

 

 


  

 

  

  


 


 


 


Net (loss) income
 
$
(956
)
 
$
10,381
 
$
12,440
 
$
(2,306
)
  
$
3,873
 
$
14,124
  
$
15,232
  
$
(21,787
)
 
$
12,096
 
 
$
15,941
 
 
$
28,363
 
   


 

 

 


  

 

  

  


 


 


 


Basic earnings (loss) per common share:
                                                                                
Before extraordinary item and cumulative effect of a change in accounting principle
 
$
(0.03
)
 
$
0.37
 
$
0.34
 
$
(0.08
)
  
$
0.14  
 
  $
0.50
  
$
0.54
  
$
(0.54
)  
 
$
0.38
 
 
$
0.67
 
 
$
0.80
 
Extraordinary item, gain on debt extinguishment, net of ($1,759); $2,424; $491; $4,834; and $187 income taxes, respectively
 
 
—  
 
 
 
—  
 
 
0.10
 
 
—  
 
  
 
—  
 
 
—  
  
 
—  
  
 
(0.12
)
 
 
(0.02
)
 
 
(0.22
)
 
 
—  
 
Cumulative effect of a change in accounting principle, net of $1,370 income taxes
 
 
—  
 
 
 
—  
 
 
—  
 
 
—  
 
  
 
—  
 
 
—  
  
 
—  
  
 
(0.07
)
 
 
—  
 
 
 
—  
 
 
 
—  
 
   


 

 

 


  

 

  

  


 


 


 


Net (loss) income
 
$
(0.03
)
 
$
0.37
 
$
0.44
 
$
(0.08
)
  
$
0.14
 
$
0.50
  
$
0.54
  
$
(0.73
)
 
$
0.36
 
 
$
0.45
 
 
$
0.80
 
   


 

 

 


  

 

  

  


 


 


 


Diluted earnings (loss) per common share:
                                                                                
Before extraordinary item and cumulative effect of a change in accounting principle
 
$
(0.03
)
 
$
0.36
 
$
0.33
 
$
(0.08
)
  
$
0.14
 
$
0.49
  
$
0.53
  
$
(0.54
)
 
$
0.36
 
 
$
0.64
 
 
$
0.77
 
Extraordinary item, gain on debt extinguishment, net of ($1,759); $2,424; $491; $4,834; and $187 income taxes, respectively
 
 
—  
 
 
 
—  
 
 
0.10
 
 
—  
 
  
 
—  
 
 
—  
  
 
—  
  
 
(0.12
)
 
 
(0.02
)
 
 
(0.20
)
 
 
—  
 
Cumulative effect of a change in accounting principle, net of $1,370 income taxes
 
 
—  
 
 
 
—  
 
 
—  
 
 
—  
 
  
 
—  
 
 
—  
  
 
—  
  
 
(0.07
)
 
 
—  
 
 
 
—  
 
 
 
—  
 
   


 

 

 


  

 

  

  


 


 


 


Net (loss) income
 
$
(0.03
)
 
$
0.36
 
$
0.44
 
$
(0.08
)
  
$
0.14
 
$
0.49
  
$
0.53
  
$
(0.73
)
 
$
0.34
 
 
$
0.44
 
 
$
0.77
 
   


 

 

 


  

 

  

  


 


 


 



(1)
Reflects the change in accounting principle related to the cooperative advertising funds.

35


 
Liquidity and Capital Resources
 
At October 5, 2002, we had outstanding indebtedness consisting of $89.5 million of senior discount debentures, $333.8 million of senior subordinated notes, borrowings of $339.5 million under our credit facility, and $10.0 million of indebtedness under the McDuffie County Development Authority Taxable Industrial Revenue Bonds (all of which was repurchased on November 1, 2002). At October 5, 2002, we had approximately $27.3 million in letters of credit outstanding and had no borrowings under the revolving credit facility, resulting in available borrowings of $132.7 million under the revolving credit facility. Subsequent to October 5, 2002, we repurchased and retired $8.5 million of our senior subordinated notes.
 
Our future contractual obligations related to long-term debt and operating leases at October 5, 2002 were as follows:
 
Contractual Obligations at
October 5, 2002

  
Total

  
Fiscal 2002

      
Fiscal 2003

  
Fiscal 2004

  
Fiscal
2005

  
Fiscal 2006

  
Thereafter

    
(in thousands)
Long-term Debt(1)
  
$
772,768
  
$
10,000
(2)
    
$
11,393
  
$
28,892
  
$
31,951
  
$
31,951
  
$
658,581
Operating Leases
  
$
899,208
  
$
37,510
 
    
$
142,379
  
$
126,422
  
$
107,851
  
$
89,760
  
$
359,286

(1)
Long-term debt includes the fully accreted senior subordinated notes and senior discount debentures.
(2)
Represents indebtedness under the McDuffie County Development Authority taxable industrial revenue bonds which was repurchased on November 1, 2002.
 
For the forty weeks ended October 5, 2002, net cash provided by operating activities was $218.9 million. Of this amount, $56.4 million was provided by net income and $36.9 million was provided as a result of a net decrease in working capital and other long-term assets and liabilities. Significant non-cash items added back for operating cash purposes include depreciation and amortization of $71.5 million, amortization of bond discounts and deferred debt issuance costs of $13.0 million and provision for deferred income taxes of $41.1 million. Net cash used for investing activities was $51.9 million and was comprised primarily of capital expenditures. Net cash used in financing activities was $128.2 million and was comprised primarily of $193.1 million in net payments on our credit facility and payments to repurchase and retire outstanding bonds and a decrease in bank overdrafts of $34.7 million, all offset by $88.7 million in net proceeds from our equity offering in March 2002.
 
In 2001, net cash provided by operating activities was $103.5 million. This amount consisted of an $11.4 million in net income, depreciation and amortization of $71.2 million, amortization of deferred debt issuance costs and bond discount of $14.6 million, impairment of assets held for sale of $12.3 million, amortization of stock option compensation of $11.7 million and an increase of $17.7 million of net working capital and other operating activities. Net cash used for investing activities was $451.0 million and was comprised primarily of capital expenditures of $63.7 million and cash consideration of $390.0 million in the Discount and Carport mergers. Net cash provided by financing activities was $347.6 million and was comprised primarily of net borrowings and issuance of equity.
 
In 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.
 
Our primary capital requirements have been the funding of our continued store expansion program, including new store openings and store acquisitions, store relocations and remodels, inventory requirements, the construction and upgrading of distribution centers, the development and implementation of proprietary information systems, the Discount acquisition, the Western merger and the Carport acquisition. We have

36


financed our growth through a combination of internally generated funds, borrowings under the credit facility and issuances of equity.
 
Our new 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 inventory investment 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.
 
Our future capital requirements will depend on the number of new stores we open or acquire and the timing of those openings or acquisitions within a given year. We opened 140 new stores during 2000 and 110 new stores during 2001 (including stores acquired in the Carport acquisition, but excluding stores acquired in the Discount acquisition). In addition, we anticipate adding approximately 110 new stores during 2002 through new store openings and from our Trak Auto Parts acquisition, of which 61 (including 22 stores from our Trak Auto Parts acquisition) had been added as of October 5, 2002. During the third quarter of fiscal 2002, we announced that we finalized an arrangement to acquire 57 Trak Auto Parts stores, in which we will assume the existing leases and will pay up to approximately $16.0 million for inventory and fixtures. These stores are included as part of the approximately 110 new stores to be added during fiscal 2002.
 
Our capital expenditures were approximately $63.7 million in 2001 (excluding consideration paid in the Carport and Discount acquisitions). These amounts related to the new store openings, the upgrade of our information systems (including our new point-of-sale and electronic parts catalog system) and remodels and relocations of existing stores. In 2002, we anticipate that our capital expenditures will be approximately $105 million (excluding up to $16.0 million to purchase inventory and fixtures in connection with our acquisition of the 57 Trak Auto Parts stores), of which approximately $35 million will involve conversion and other integration related capital expenditures associated with the Discount acquisition.
 
Historically, we have negotiated extended payment terms from suppliers that help finance inventory growth, and we believe that we will be able to continue financing much of our inventory growth through such extended payment terms. We anticipate that inventory levels will continue to increase primarily as a result of new store openings.
 
As part of normal operations, we continually monitor store performance, which results in our closing or relocating certain store locations that do not meet profitability objectives. During the forty weeks ended October 5, 2002, we closed or relocated nine of the 12 stores identified in 2001 as not meeting profitability objectives and decided to close or relocate 49 additional stores that did not meet profitability objectives, 28 of which were closed or relocated at October 5, 2002. In addition, as part of our integration of Discount, we have closed 130 Advance Auto Parts and Discount stores that were in overlapping markets.
 
The Western merger, Carport acquisition and Discount 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. In addition, we assumed certain restructuring and deferred compensation liabilities previously recorded by Western and Discount. At October 5, 2002, these reserves had a remaining balance of $14.1 million. At October 5, 2002, the total liability for the assumed restructuring and deferred compensation plans was $1.0 million and $3.0 million, respectively, of which $0.4 million and $1.5 million, respectively, is recorded as a current liability. The classification for deferred compensation is determined by payment terms elected by plan participants, primarily former Western employees, which can be changed upon 12 months’ notice.
 
We expect that funds provided from operations and available borrowings of approximately $132.7 million under our revolving credit facility at October 5, 2002, will provide sufficient funds to operate our business, make expected capital expenditures of approximately $105 million in 2002, complete our acquisition of the Trak Auto Parts stores, finance our restructuring activities and fund future debt service on our senior subordinated notes, our senior discount debentures and our credit facility over the next 12 months. We may use additional funds from

37


operations to prepay borrowings under the term loans under our credit facility and, depending upon prevailing market prices, repurchase our senior discount debentures and senior subordinated notes.
 
Long Term Debt
 
Senior Credit Facility.    In July 2002, we amended and restated our senior credit facility in connection with the partial repayment of our tranche A and tranche B term loans and the refinancing of our tranche B term loans with a tranche C term loan facility. Our credit facility, as amended and restated, consists of (1) a tranche A term loan facility with a balance of approximately $89.6 million at October 5, 2002 and a tranche C term loan facility with a balance of approximately $249.9 million at October 5, 2002, and (2) a $160 million revolving credit facility (including a letter of credit subfacility) (of which $132.7 million was available at October 5, 2002). The credit facility is jointly and severally guaranteed by all of our domestic subsidiaries (including Discount and its subsidiaries) and is secured by all of our assets and the assets of our existing and future domestic subsidiaries (including Discount and its subsidiaries).
 
The tranche A term loan facility matures on November 30, 2006 and currently provides for amortization of $1.5 million on May 31, 2003, $7.8 million on November 30, 2003, $12.4 million in May and November 2004 and $13.9 million each May and November in 2005 and 2006 through maturity on November 30, 2006. The tranche C term loan facility matures on November 30, 2007 and amortizes in semi-annual installments of $2.1 million for four years commencing on November 30, 2003, with a final payment of $233.1 million due in 2007. The revolving credit facility matures on November 30, 2006. The interest rates on the tranche A term loan facility, the revolving credit facility and the tranche C term loan facility are based, at our option, on either an adjusted LIBOR rate, plus a margin, or an alternate base rate, plus a margin. The interest rates under the tranche A term loan facility, the revolving credit facility and the tranche C term loan facility are subject to adjustment according to pricing grids based upon our leverage ratio (as defined in our credit facility). The initial margins for the tranche A term loan facility and the revolving credit facility are 3.50% and 2.50% per annum for the adjusted LIBOR rate and alternate base rate borrowings, respectively, and can step down incrementally to 2.25% and 1.25% per annum, respectively, if our leverage ratio is less than 2.00 to 1.00. The initial margins for the tranche C term loan facility are 2.5% and 1.5% per annum for the adjusted LIBOR rate and alternative base rate borrowings, respectively, and can step down to 2.25% and 1.25% per annum, respectively, if our leverage ratio is less than 2.00 to 1.00. The initial margins for the tranche C term loan facility can step up to a maximum of 3.00% and 2.00% per annum, respectively, if our leverage ratio is greater than 3.50 to 1.00. Subsequent to October 5, 2002, we applied for a reduction in the rates based on our leverage ratio being 1.95 to 1.00 at October 5, 2002. A commitment fee of 0.50% per annum will be charged on the unused portion of the revolving credit facility, payable quarterly in arrears.
 
Borrowings under the credit facility are required to be prepaid, subject to certain exceptions, in certain circumstances.
 
The credit facility contains covenants restricting our ability and the ability of our subsidiaries to, among others things, (i) pay cash 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 subsidiaries, (x) change the nature of the business conducted by us and our subsidiaries, (xi) change our passive holding company status and (xii) amend existing debt agreements or our certificate of incorporation, by-laws or other organizational documents. We are 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 ratio of current assets to funded senior debt. We were in compliance with the above covenants under the credit facility at October 5, 2002.

38


 
In addition, we can amend the credit facility without further consent from the lenders, subject to certain conditions, to add a new term loan facility of up to $350 million that will rank pari passu in all respects with other borrowings under the credit facility; provided, that the interest rate margin applicable to such new facility may not exceed the margin on the tranche C term loan facility by more than 25 basis points. We currently have no commitments from the current lenders under the credit facility or from third parties for the new term loan facility, and our ability to obtain the financing will be dependent on our ability to obtain commitments. If we are able to secure commitments for the new term loan facility, we may use the proceeds for general corporate purposes including, without limitation, the redemption of our senior subordinated notes and our senior discount debentures, both of which become redeemable at our option, in full or in part, at any time on or after April 15, 2003.
 
Senior Subordinated Notes.    On October 31, 2001, in connection with the Discount acquisition, we sold an additional $200.0 million in senior subordinated notes at an issue price of 92.802%, yielding gross proceeds of approximately $185.6 million, the accreted value of which was $167.6 million at October 5, 2002. These senior subordinated notes were an addition to the $200.0 million face amount of existing senior subordinated notes that we issued in connection with the recapitalization in April 1998, of which $166.2 million was outstanding at October 5, 2002. All of the notes mature on April 15, 2008 and bear interest at 10.25%, payable semi-annually on April 15 and October 15. The notes are fully and unconditionally guaranteed on an unsecured senior subordinated basis by each of our existing and future restricted subsidiaries that guarantees any indebtedness of us or any restricted subsidiary. The notes are redeemable at our option, in whole or in part, at any time on or after April 15, 2003, in cash at certain redemption prices plus accrued and unpaid interest and liquidating damages, if any, at the redemption date. The indentures governing the notes also contain certain covenants that limit, among other things, our and our subsidiaries’ ability to incur additional indebtedness and issue preferred stock, pay dividends or make certain other distributions, 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, redeem subordinated debt, sell assets, enter into any agreements that restrict dividends from restricted subsidiaries and enter into certain mergers or consolidations.
 
Senior Discount Debentures and Industrial Revenue Bonds.    In April 1998, in connection with the recapitalization, we issued $112.0 million in face amount of senior discount debentures. The debentures mature on April 15, 2009, accrete at a rate of 12.875%, compounded semi-annually, to an aggregate principal amount of $112.0 million by April 15, 2003. At October 5, 2002, $89.5 million principal amount was outstanding. After April 15, 2003, these debentures are redeemable, at our option, in whole or in part, in cash at certain redemption prices plus accrued and unpaid interest and liquidating damages, if any, at the redemption date. Commencing April 15, 2003, cash interest on the debentures will accrue and be payable semi-annually on April 15 and October 15 at a rate of 12.875% per annum. The indenture governing the debentures contains certain covenants that, among other things, limit our ability and the ability of our 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.
 
Our obligations relating to the industrial revenue bonds included an interest factor at a variable rate and required no principal payments until maturity in November 2002. In November 2002, we repurchased the entire $10 million of indebtedness under the industrial revenue bonds.
 
Seasonality
 
Our business is somewhat seasonal in nature, with the highest sales occurring in the spring and summer months. In addition, our 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 or cold weather tends to enhance sales by causing automotive parts to fail.

39


 
Quantitative and Qualitative Disclosures about Market Risks
 
We are exposed to cash flow risk due to changes in interest rates with respect to our long-term debt. While we cannot predict the impact interest rate movements will have on our debt, exposure to rate changes is managed through the use of fixed and variable rate debt. Our future exposure to interest rate risk decreased during the forty weeks ended October 5, 2002 due to decreased interest rates and reduced variable rate debt. Additionally, during the twelve weeks ended October 5, 2002, we entered into a hedge agreement in the form of a zero-cost collar, which will protect against interest rate fluctuations in the LIBOR rate on $150 million of our variable rate debt. The collar consists of an interest rate ceiling of 4.5% and an interest rate floor of 1.56% for a term of twenty-four months. Under this hedge agreement, we will continue to pay interest at prevailing rates plus any spread, as defined by our credit facility, but will be reimbursed for any amounts paid on the LIBOR rate in excess of the ceiling. Accordingly, we will be required to pay the financial institution that originated the collar if the LIBOR rate is less than the 1.56% floor.
 
Our fixed rate debt consists primarily of outstanding balances on our senior discount debentures and senior subordinated notes. Our variable rate debt relates to borrowings under the senior credit facility and the industrial revenue bonds. Our 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 long-term debt we had outstanding at October 5, 2002, by expected maturity dates. Expected maturity dates approximate contract terms. Fair values included herein have been determined based on quoted market prices. Weighted average variable rates are based on implied forward rates in the yield curve at October 5, 2002. Implied forward rates should not be considered a predictor of actual future interest rates.
 
    
Fiscal 2002

    
Fiscal 2003

    
Fiscal 2004

    
Fiscal 2005

    
Fiscal 2006

    
Thereafter

    
Total

    
Fair Market Value

    
(dollars in thousands)
Long-term debt:
                                                                     
Fixed rate
  
 
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
$
440,865
 
  
$
440,865
 
  
$
459,380
Weighted average interest rate
  
 
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
10.8
%
  
 
10.8
%
      
Variable rate
  
$
10,000
 
  
$
11,393
 
  
$
28,890
 
  
$
31,952
 
  
$
31,952
 
  
$
235,297
 
  
$
349,484
 
  
$
349,484
Weighted average interest rate
  
 
4.3
%
  
 
4.4
%
  
 
5.1
%
  
 
6.3
%
  
 
6.8
%
  
 
7.2
%
  
 
5.6
%
      
 
Recent Accounting Pronouncements
 
In June 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or 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. This statement applies to all entities that have legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of the assets and is effective for fiscal years beginning after June 15, 2002. We do not expect SFAS No. 143 to have a material impact on our financial position or results of operations.
 
In August 2001, the FASB also issued SFAS No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets.” This statement replaces both SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and Accounting Principles Board, or APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS No. 144 retains the basic provisions from both SFAS No. 121 and APB No. 30 but includes changes to improve financial reporting and comparability among entities. The provisions of SFAS No. 144 are effective for fiscal years beginning after

40


December 15, 2001. We adopted SFAS No. 144 during the first quarter of fiscal 2002 with no material impact on our financial position or results of operations.
 
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” As a result of rescinding FASB Statement No. 4, “Reporting Gains Losses from Extinguishment of Debt,” gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in APB No. 30. This statement also amends FASB Statement No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Additional amendments include changes to other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. We will adopt the provisions of SFAS No. 145 during the first quarter of fiscal 2003. For the twelve and forty weeks ended October 5, 2002, we recorded extraordinary losses on the extinguishment of debt, net of tax, of $0.3 million and $8.7 million, respectively. Accordingly, reclassifications of these losses to income from continuing operations will be made throughout fiscal 2003 to maintain comparability for the reported periods.
 
In June 2002, the FASB issued SFAS No. 146, “Accounting for Cost Associated with Exit or Disposal Activities.” This statement nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This statement requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred instead of at the date an entity commits to an exit plan. The statement is effective for exit and disposal activities entered into after December 31, 2002. We do not expect adopting this statement will have a material impact on our financial position or results of operations.
 
Change in Accountants
 
Arthur Andersen LLP audited our consolidated financial statements for each of the fiscal years ended December 29, 2001, December 30, 2000 and January 1, 2000. On April 3, 2002, our board of directors, based on the recommendation of our audit committee, dismissed Arthur Andersen LLP as our independent public accountants and selected Deloitte & Touche LLP to serve as our new independent public accountants for 2002. The appointment of Deloitte & Touche LLP was ratified by our stockholders at our 2002 annual meeting of stockholders, held on May 23, 2002.
 
Pursuant to applicable SEC rules, in connection with our dismissal of Arthur Andersen LLP, we provided Arthur Andersen LLP with a copy of the disclosure in the following two paragraphs. In a letter dated April 16, 2002, Arthur Andersen LLP confirmed its agreement with those statements and we included that disclosure in a Current Report on 8-K that we filed on that same date.
 
Arthur Andersen LLP’s reports on our consolidated financial statements for each of the fiscal years ended December 29, 2001 and December 30, 2000, included elsewhere in, and incorporated by reference into, this prospectus, did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.
 
During the two most recent fiscal years ended December 29, 2001, and through the date of the termination of their engagement, there were no disagreements with Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which disagreements, if not resolved to Arthur Andersen LLP’s satisfaction, would have caused them to make reference to the subject matter of the disagreements in connection with their report on our consolidated financial statements for such years, and there were no “reportable events,” as set forth in the applicable SEC rules and regulations, within such periods.
 
During the two most recent fiscal years ended December 29, 2001, and through the date of their engagement, we did not consult with Deloitte & Touche LLP with respect to the application of accounting

41


principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, or any other matters or reportable events as set forth in applicable SEC rules and regulations.
 
On June 15, 2002, Arthur Andersen LLP was convicted of obstruction of justice by a federal jury in Houston, Texas in connection with Arthur Andersen LLP’s work for Enron Corporation. None of the Arthur Andersen LLP personnel who were involved with the Enron account were involved in the audit of our consolidated financial statements for the fiscal years ended December 29, 2001, December 30, 2000 or January 1, 2000.
 
Arthur Andersen LLP has not consented to the inclusion of their report in this registration statement and as such, it will become more difficult for you to seek remedies against Arthur Andersen in connection with any material misstatement or omission that may be contained in our consolidated financial statements and schedules for such periods. See “Risk Factors—You may not be able to seek remedies against Arthur Andersen LLP, our former independent accountants, in connection with any material misstatement or omission that may be contained in our financial statements that were audited by Arthur Andersen” and “Experts” elsewhere in this prospectus.

42


 
BUSINESS
 
Overview
 
We are 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. We are the largest specialty retailer of automotive products in the majority of the states in which we currently operate, based on store count. At October 5, 2002, we had 2,393 stores, which included 1,936 stores operating under the “Advance Auto Parts” trade name in 37 states in the Northeastern, Southeastern and Midwestern regions of the United States and 419 stores operating under the “Discount Auto Parts” trade name primarily in Florida. In addition, as of that date, we had 38 stores operating under the “Western Auto” trade name located in Puerto Rico, the Virgin Islands and California. Our stores offer a broad selection of brand name and private label automotive products for domestic and imported cars and light trucks. Our stores average approximately 7,500 square feet in size and carry between 16,000 and 21,000 stock keeping units, or SKUs. We also offer approximately 105,000 additional SKUs that are available on a same day or overnight basis through our Parts Delivered Quickly, or PDQ®, distribution systems. In addition to our DIY business, we serve DIFM customers via sales to commercial accounts. Sales to DIFM customers represented approximately 15% of our retail sales during the forty weeks ended October 5, 2002. We also operate a wholesale distribution network, which offers automotive parts, accessories and certain other merchandise to approximately 430 independently-owned dealer stores in 44 states. Our wholesale operations accounted for approximately 3.9% of our net sales in 2001.
 
Since 1997, we have achieved significant growth through a combination of comparable store sales growth, new store openings, increased penetration of our commercial delivery program and strategic acquisitions. From 1997 through 2001, we:
 
 
Ÿ
increased our store count at year-end from 814 to 2,484;
 
 
Ÿ
achieved positive comparable store sales growth in every quarter and averaged 6.9% annually;
 
 
Ÿ
increased our net sales at a compound annual growth rate of 38.8%, from $848.1 million to $3.1 billion (pro forma for the Discount acquisition); and
 
 
Ÿ
increased our EBITDA, as adjusted, at a compound annual growth rate of 39.9%, from $68.4 million to $261.9 million (pro forma for the Discount acquisition).
 
During the twelve months ended October 5, 2002, our comparable store sales growth was 6.0%, not including Discount. EBITDA, as adjusted, for this period was $317.7 million (pro forma for the Discount acquisition).
 
We believe that our sales growth has exceeded the automotive aftermarket industry average as a result of our industry leading selection of quality brand name and private label products at competitive prices, our strong name recognition and our high levels of customer service. In addition, we believe our large size provides numerous competitive advantages over smaller retail chains and independent operators, which together generate the majority of the sales in the automotive aftermarket industry. These advantages include: (1) greater product availability; (2) purchasing, distribution and marketing efficiencies; (3) a greater number of convenient locations with longer store hours; and (4) the ability to invest heavily in employee training and information systems.
 
Industry
 
We operate within the large and growing U.S. automotive aftermarket industry, which includes replacement parts (excluding tires), accessories, maintenance items, batteries and automotive fluids for cars and light trucks (pickup trucks, vans, minivans and sport utility vehicles). Based on data from the U.S. Department of Commerce, sales in the automotive aftermarket industry (excluding tires and labor costs) increased at a compound annual growth rate of 5.9%, between 1991 and 2001 from approximately $58 billion to $103 billion.

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The automotive aftermarket industry is generally grouped into two major categories, “do-it-yourself,” or DIY, and “do-it-for-me,” or DIFM. From 1991 to 2001, the DIY category grew at a 5.0% compound annual growth rate from approximately $22 billion to $35 billion. This category represents sales to consumers who maintain and repair vehicles themselves. We believe this category is characterized by stable, recession-resistant demand because the DIY customer is more likely to delay a new vehicle purchase during a recession. In addition, in difficult economic times, we believe people tend to drive more and use air travel less. From 1991 to 2001, the DIFM category grew at a 6.4% compound annual growth rate, from approximately $36 billion to $68 billion. This category represents sales to professional installers, such as independent garages, service stations and auto dealers. DIFM parts and services are typically offered to vehicle owners who are less price sensitive or who are less inclined to repair their own vehicles.
 
We believe the U.S. automotive aftermarket industry will continue to benefit from several favorable trends, including the:
 
 
Ÿ
increasing number and age of vehicles in the United States, increasing number of miles driven annually, increasing number of cars coming off of warranty, particularly leased vehicles;
 
 
Ÿ
higher cost of replacement parts as a result of technological changes in recent models of vehicles and increasing number of light trucks and sport utility vehicles that require more expensive parts, resulting in higher average sales per customer; and
 
 
Ÿ
continued consolidation of automotive aftermarket retailers, resulting in a reduction in the number of stores in the marketplace and enhanced profitability and returns on capital.
 
We believe these trends will continue to support strong comparable store sales growth in the industry.
 
We compete in both the DIY and DIFM categories of the automotive aftermarket industry. Our primary competitors include 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 products. Although the number of competitors and level of competition vary by market, both the DIY and DIFM categories are highly fragmented and generally very competitive. However, as the number of automotive replacement parts has proliferated, we believe discount stores and mass merchandisers have had increasing difficulties in maintaining a broad inventory selection and providing the service levels that DIY customers demand. We believe this has created a strong competitive advantage for specialty automotive parts retailers, like us, that have the distribution capacity, sophisticated information systems and knowledgeable sales staff needed to offer a broad inventory selection to DIY customers. As a result, according to Lang Marketing Resources, a market research firm, specialty automotive parts retailers have significantly increased their market share of DIY sales from 28.6% in 1992 to 42.1% in 2001, primarily by taking market share from discount stores and mass merchandisers.
 
History
 
We were formed in 1929 and operated as a retailer of general merchandise until the 1980s. During the 1980s, we sharpened our focus to target sales of automotive parts and accessories to DIY customers. From the 1980s to the present, we have grown significantly as a result of strong comparable store sales growth, new store openings and strategic acquisitions. In 1996, we began to aggressively expand our sales to DIFM customers by implementing a commercial delivery program. Our 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.
 
The Recapitalization.    In April 1998, Freeman Spogli & Co. and Ripplewood Partners, L.P. acquired a majority ownership interest in us through a recapitalization. Freeman Spogli & Co. and Ripplewood purchased an 80% ownership interest in us, and our management purchased a 6% ownership interest. In the recapitalization, Nicholas F. Taubman and the Arthur Taubman Trust, our existing shareholders, retained a 14% ownership interest in us.

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Western Acquisition.    In November 1998, we acquired Western from Sears. Western operated over 600 stores under the “Parts America” and “Western Auto” trade names, as well as a wholesale distribution network. As consideration, Sears received approximately 11.5 million shares of our common stock, which was valued at $193 million, and $185 million in cash. In addition, Freeman Spogli & Co., Ripplewood, Nicholas F. Taubman and the Arthur Taubman Trust made an additional $70 million equity investment in us to fund a portion of the purchase price. The remaining cash portion of the purchase price was funded through additional borrowings under our prior credit facility.
 
Carport Acquisition.    In April 2001, we acquired the assets of Carport, including 30 stores, net of closures, in Alabama and Mississippi. The acquisition made us the market leader in Alabama and continued our new store development program in Alabama and Mississippi without adding new stores to the market.
 
Discount Acquisition.    In November 2001, we acquired Discount, which was the fifth largest specialty retailer of automotive products to both DIY and DIFM customers in the United States, based on store count. At November 28, 2001, Discount had 671 stores operating under the “Discount Auto Parts” trade name in six states, with 437 stores in Florida, 120 stores in Georgia, 46 stores in Louisiana, 42 stores in Mississippi, 19 stores in Alabama and seven stores in South Carolina. For 2001, Discount generated net sales and EBITDA of $661.7 million and $65.7 million. Since Discount’s inception in 1971, members of the Fontaine family, including Herman Fontaine, Denis L. Fontaine and Peter J. Fontaine, have managed Discount and played key roles in formulating and carrying out its business strategies. 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 continued to hold the position of Chief Executive Officer until January 2002. At the closing of the Discount acquisition, Peter J. Fontaine became a member of our board of directors.
 
Trak Auto Parts Acquisition.    During the third quarter of fiscal 2002, we entered into an arrangement to acquire 57 Trak Auto Parts stores. Under this arrangement, we will assume the store leases and pay up to $16.0 million to purchase inventory and fixtures. At October 5, 2002, we had taken ownership and converted 22 of the 57 stores, assumed the respective leases and had paid $2.7 million for inventory and fixtures.
 
Competitive Strengths
 
We believe our competitive strengths include the following:
 
Leading Market Position.    We are the second largest specialty retailer of automotive products to DIY customers in the United States, based on store count and sales. Our acquisition of Discount further solidified this position and provides us with additional critical mass in our existing markets, particularly in the rapidly growing Southeast. We enjoy significant advantages over most of our competitors. We believe we have strong brand recognition and customer traffic in our stores as a result of our number one position in the majority of our markets, based on store count, and our significant marketing activities. In addition, we have purchasing, distribution and marketing efficiencies due to our economies of scale. As the number of makes and models of vehicles continues to increase, we believe we will continue to have a significant competitive advantage, as many of these competitors may not have the resources, including management information systems, purchasing efficiencies or distribution capabilities, required to stock and deliver a broad selection of brand name and private label automotive products at competitive prices.
 
Industry Leading Selection of Quality Products.    We offer one of the largest selections of brand name and private label automotive parts, accessories and maintenance items in the automotive aftermarket industry. Our stores carry between 16,000 and 21,000 in-store SKUs. We also offer approximately 105,000 additional SKUs that are available on a same-day or overnight basis through our PDQ® distribution systems, including harder-to-find replacement parts, which typically carry a higher gross margin. In 2002, we began to expand our initiative started during 2000 in which we created a local area warehouse concept that utilizes existing space in selected stores to ensure the availability of certain PDQ items on a same-day basis. We now operate 21 local area warehouses that carry a customized assortment of between 7,500 and 12,000 SKUs. In addition, our proprietary

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electronic parts catalog enables our sales associates to identify an extensive number of applications for the SKUs that we carry, as well as parts that are required by our customers to complete their automotive repair projects. We believe that our ability to deliver an aggregate of approximately 120,000 SKUs, as well as the capabilities provided by our electronic parts catalog, are highly valued by our customers and differentiate us from our competitors, particularly mass merchandisers.
 
Superior Customer Service.    We believe that our customers place significant value on our well-trained sales associates, who offer knowledgeable assistance in product selection and installation and that this differentiates us from mass merchandisers. We invest substantial resources in the recruiting and training of our employees and provide formal classroom workshops, seminars and Automotive Service Excellence certification to build technical, managerial and customer service skills. In addition, we enhanced our human resources management capabilities in 2000 by hiring an experienced senior vice president of human resources and by introducing new training programs and human resource systems in order to increase employee retention. As a result of these initiatives, our number of retained employees at December 29, 2001 increased 3.1% when compared with the number retained during 2000. We believe that higher employee retention levels lead to increased customer satisfaction and higher sales, and differentiate us from mass merchandisers.
 
Experienced Management Team with Proven Track Record.    The 17 members of our senior management team have an average of 11 years experience with us and 20 years in the industry and have successfully grown our company to the second largest specialty retailer of automotive products in the United States. Our management team has accomplished this using a disciplined strategy of growing comparable store sales, opening new stores, increasing the penetration of our commercial delivery program and making selective acquisitions. Through our acquisitions, including the 671-store acquisition of Discount in November 2001 and the 545-store acquisition of Western Auto in November 1998, our team has demonstrated its ability to efficiently and successfully integrate both large and small acquisitions. In addition, the Discount acquisition provided us with access to a pool of talented managers. In particular, Peter Fontaine, the former Chairman and CEO of Discount, became a member of our board of directors upon the closing of the Discount acquisition.
 
Growth Strategy
 
Our growth strategy consists of the following:
 
Increase Our Comparable Store Sales.    We have been an industry leader in comparable store sales growth over the last five years, averaging 6.9% annually. We plan to increase our comparable store sales in both the DIY and DIFM categories by, among other things, (1) implementing merchandising and marketing initiatives, (2) investing in store-level systems to enhance our ability to recommend complementary products in order to increase sales per customer, (3) refining our store selection and in-stock availability through customized assortments and other supply chain initiatives, (4) continuing to increase customer service through store staffing and retention initiatives and (5) increasing our commercial delivery sales by primarily focusing on key customers to grow average sales per program. In particular, we intend to continue to make the necessary investments in several applications that are critical to improving our customer service and in-stock availability. We have established strong inventory management systems at the store and distribution center level and in 2001 began to implement a new fully-integrated point-of-sale system and electronic parts catalog.
 
Continue to Enhance Our Margins.    We have improved our EBITDA margin by 430 basis points from 5.5% in 1999 to 9.8% for the twelve months ended October 5, 2002 (pro forma for the Discount acquisition). In addition to driving operating margin expansion via continued strong comparable store sales growth, we will continue to focus on increasing margins by: (1) improving our purchasing efficiencies with vendors; (2) optimizing our supply chain infrastructure and existing distribution network; and (3) leveraging our overall scale to reduce other operating expenses as a percentage of sales. Following a comprehensive review of our supply chain infrastructure, we have identified specific cost savings and opportunities to improve inventory turns. As a result, we believe we can increase supply chain efficiencies through selective facility rationalization, such as the

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closure of our Jeffersonville, Ohio facility in late 2001, more efficient truck scheduling and routing and better utilization of custom inventory mixes.
 
Increase Return on Capital.    We believe we can successfully increase our return on capital by generating strong comparable store sales as well as increasing our margins. We believe we can also increase our return on capital by leveraging our supply chain initiatives to increase inventory turns and selectively expanding our store base in existing markets. Based on our experience, such in-market openings provide higher returns on our invested capital by enabling us to leverage our distribution infrastructure, marketing expenditures and local management resources. We intend to add stores in existing markets, including approximately 110 stores in 2002 through new store openings and from our Trak Auto Parts acquisition.
 
Continue to Successfully Integrate Discount.    Our management team continues to successfully execute its integration plan for Discount. To date, we have completed the conversion of all of the Discount stores located outside of the Florida market (including the Florida panhandle) to the Advance Auto Parts store name, format, information systems and merchandise offerings. In addition, for the Discount stores located in the Florida market, we have completed remerchandising and continue to implement the Advance information systems in these stores, which we expect to complete in 2003. We will also continue to complete the format and signage conversions for the Florida stores over the next two to three years.
 
Store Operations
 
The retail store is the focal point of our operations. Our stores are located in high traffic areas with good visibility and easy access to major roadways. Our stores typically range in size from 5,000 to 10,000 square feet with an average of approximately 7,500 square feet, and offer between 16,000 and 21,000 SKUs. We also offer approximately 105,000 additional SKUs that are available on a same day or overnight basis through our PDQ® and Master PDQ® systems, including harder-to-find replacement parts, which typically carry a higher gross margin. In 2002, we began to expand our initiative started during 2000, in which we created a local area warehouse concept that utilizes existing space in selected stores to ensure the availability of certain PDQ® items on a same-day basis. We now operate 21 local area warehouses that carry a customized assortment of between 7,500 and 12,000 SKUs. In addition, our proprietary electronic parts catalog enables our sales team to identify an extensive number of applications for the SKUs that we carry, as well as parts that are required by our customers to complete their automotive repair projects. Replacement parts sold at our stores include radiators, brake pads, belts, hoses, starters, alternators, batteries, shock absorbers, struts, CV shafts, spark plugs, transmission parts, clutches, electronic ignition components, suspension parts, engines and transmissions.
 
At October 5, 2002, 1,408 of our retail stores, including Discount stores, participated in our commercial delivery program, which serves DIFM customers. We serve our DIFM customers from our existing retail store base.
 
Our retail stores are divided into five areas. Each area is managed by a senior vice president, who is supported by regional vice presidents. District managers report to the regional vice presidents and 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 generally are open from 8:00 a.m. to 9:00 p.m., seven days a week.
 

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Total stores.    Our retail stores were located in the following states and territories at October 5, 2002 (including stores acquired in the Discount acquisition):
 
Location

  
Number of Stores

 
Location

  
Number of Stores

 
Location

  
Number of Stores

Alabama
  
105
 
Louisiana
  
58
 
Pennsylvania
  
133
Arkansas
  
21
 
Maine
  
7
 
Puerto Rico
  
35
California
  
1
 
Maryland
  
43
 
Rhode Island
  
3
Colorado
  
15
 
Massachusetts
  
21
 
South Carolina
  
103
Connecticut
  
23
 
Michigan
  
46
 
South Dakota
  
6
Delaware
  
5
 
Mississippi
  
47
 
Tennessee
  
118
District of Columbia
  
1
 
Missouri
  
35
 
Texas
  
53
Florida
  
432
 
Nebraska
  
17
 
Vermont
  
2
Georgia
  
193
 
New Hampshire
  
4
 
Virgin Islands
  
2
Illinois
  
23
 
New Jersey
  
21
 
Virginia
  
133
Iowa
  
23
 
New York
  
97
 
West Virginia
  
62
Indiana
  
71
 
North Carolina
  
178
 
Wisconsin
  
18
Kansas
  
26
 
Ohio
  
143
 
Wyoming
  
2
Kentucky
  
66
 
Oklahoma
  
1
        
 
The following table sets forth information concerning changes in the number of our stores during the forty weeks ended October 5, 2002 and during the past five years:
 
    
1997

    
1998

    
1999

    
2000

    
2001

      
Forty
Weeks Ended
October 5, 2002

 
Beginning Stores
  
649
 
  
814
 
  
1,567
 
  
1,617
 
  
1,729
 
    
2,484
 
New Stores(1)
  
170
 
  
821
 (2)
  
102
 
  
140
 
  
781
(3)
    
61
 
Stores Closed
  
(5
)
  
(68
)(2)
  
(52
)
  
(28
)
  
(26
)
    
(152
)(4)
    

  

  

  

  

    

Ending Stores
  
814
 
  
1,567
 
  
1,617
 
  
1,729
 
  
2,484
 
    
2,393
 

(1)
Does not include stores that opened as relocations of 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, we closed an additional 15 Western stores resulting in a net of 545 stores obtained in the Western merger. Three Advance stores were also closed during fiscal 1998 in connection with the Western merger.
(3)
Includes 30 Carport stores acquired on April 23, 2001 and 671 Discount stores acquired on November 28, 2001.
(4)
Includes 130 Discount and Advance stores closed in our existing markets as part of the integration of Discount.
 
Wholesale Operations.    Our wholesale dealer operations are managed by a senior vice president (who is also responsible for the Western Auto retail stores and two regions of Advance 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 includes 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 us. Sales centers only have the right to purchase certain products from Western. We also provide services to the wholesale dealer network through various administrative and support functions, as negotiated by each independent location. Our wholesale operations generated approximately 2.7% of our net sales during the forty weeks ended October 5, 2002.

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Purchasing and Merchandising
 
Virtually all of our merchandise is selected and purchased for our stores by personnel at our corporate offices in Roanoke, Virginia. In addition, select specialty merchandise is purchased in our Kansas City, Missouri office. In 2001, we purchased merchandise from over 200 vendors, with no single vendor accounting for more than 8% of purchases. Our purchasing strategy often involves negotiating multi-year agreements with certain vendors. We often enter into these long-term agreements in order to achieve more favorable terms and pricing. Due largely to the purchasing efficiencies that we were able to obtain after the Western merger, we increased our gross margin on a company-wide basis from 36.4% for 1999 to 39.2% for 2000. In conjunction with the Discount acquisition, we have successfully renegotiated the majority of our existing contracts with our major vendors, resulting in lower product costs, improved terms and better delivery parameters.
 
Our purchasing and merchandising 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.
 
Our 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, which generates DIY customer traffic and also appeals to commercial delivery customers. In addition to these branded products, we stock a wide selection of high quality proprietary label products that appeal to value conscious customers. Sales of replacement parts account for a majority of our net sales and typically generate higher gross margins than maintenance items. We are currently in the process of customizing our product mix based on a merchandising program designed to optimize inventory mix at each individual store based on that store’s historical and projected sales mix and regionally specific needs.
 
Marketing and Advertising
 
We have an extensive marketing and advertising program designed to communicate our merchandise offerings, product assortment, competitive prices and commitment to customer service. The program is focused on establishing us as the solution for a customer’s automotive needs. We utilize a media blend that reinforces our brand image, including print, promotional signage, television, radio and outdoor media, plus our proprietary in-store television network and Internet site.
 
Our 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. Our 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. We also sponsor sporting events, racing teams and other events at all levels in a grass-roots effort to positively impact individual communities.
 
Properties
 
Distribution Centers and Warehouses.    We currently operate eight distribution centers. Seven of these eight distribution centers are equipped with our distribution management system, which includes technologically advanced material handling equipment, including carousels, “pick-to-light” systems, radio frequency technology and automated sorting systems. The eighth distribution center, which we acquired in the Discount acquisition, will be converted to this technology in 2003. Through the continued implementation of our supply chain initiatives, we expect to further increase the efficient utilization of our distribution capacity, allowing us to service over 3,400 stores and our wholesale operations from these eight distribution centers.

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We currently offer over 30,000 SKUs to substantially all of our retail stores via our nineteen PDQ® Express warehouses. Stores place orders to these facilities through an online ordering system, and ordered parts are delivered to substantially all stores on a same day or next day basis through our dedicated PDQ® trucking fleet. In addition, we operate a PDQ® Express warehouse that stocks approximately 80,000 SKUs of harder to find automotive parts and accessories. This facility is known as the “Master PDQ®” warehouse and utilizes existing PDQ® distribution infrastructure to provide next day service to substantially all of our stores. In 2002, we began to expand our initiative started during 2000 in which we created a distribution concept that utilizes store space to provide certain markets with an additional customized mix of approximately 7,500 to 12,000 SKUs. At October 5, 2002, we operated 21 local area warehouse facilities.
 
The following table sets forth certain information relating to our distribution and other principal facilities:
 
Facility

  
Opening Date

  
Area Served

  
Size (Sq. ft.)

    
Nature of Occupancy

Main Distribution Centers:
                     
Roanoke, Virginia(1)
  
1988
  
Mid-Atlantic
  
440,000
    
Leased
Gadsden, Alabama
  
1994
  
South
  
240,000
    
Owned
Lakeland, Florida
  
1982
  
Florida, Georgia and South Carolina
  
600,000
    
Owned
Gastonia, North Carolina
  
1969
  
Western Auto retail stores, wholesale dealer network
  
663,000
    
Owned
Gallman, Mississippi
  
2001
  
Alabama, Mississippi and Louisiana
  
400,000
    
Owned
Salina, Kansas
  
1971
  
West
  
441,000
    
Owned
Delaware, Ohio
  
1972
  
Northeast
  
510,000
    
Owned
Thomson, Georgia(2)
  
1999
  
Southeast
  
383,000
    
Owned
Master PDQ® Warehouse:
                     
Andersonville, Tennessee
  
1998
  
All
  
116,000
    
Leased
PDQ® Express Warehouses:
                     
Salem, Virginia
  
1983
  
Mid-Atlantic
  
50,400
    
Leased
Smithfield, North Carolina
  
1991
  
Southeast
  
42,000
    
Leased
Jeffersonville, Ohio(3)
  
1996
  
Midwest
  
50,000
    
Owned
Thomson, Georgia(4)
  
1998
  
South, Southeast
  
50,000
    
Owned
Goodlettesville, Tennessee
  
1999
  
Central
  
41,900
    
Leased
Youngwood, Pennsylvania
  
1999
  
East
  
49,000
    
Leased
Riverside, Missouri
  
1999
  
West
  
45,000
    
Leased
Guilderland Center, New York
  
1999
  
Northeast
  
47,400
    
Leased
Temple, Texas
  
1999
  
Southwest
  
100,000
    
Leased
Palmas, Puerto Rico
  
2002
  
Puerto Rico
  
38,000
    
Leased
Altamonte Springs, Florida
  
1996
  
Central Florida
  
10,000
    
Owned
Jacksonville, Florida
  
1997
  
Northern Florida and Southern Georgia
  
12,712
    
Owned
Tampa, Florida
  
1997
  
West Central Florida
  
10,000
    
Owned
Hialeah, Florida
  
1997
  
South Florida
  
12,500
    
Owned
West Palm Beach, Florida
  
1998
  
Southeast Florida
  
13,300
    
Leased
Mobile, Alabama
  
1998
  
Alabama and Mississippi
  
10,000
    
Owned
Atlanta, Georgia
  
1999
  
Georgia and South Carolina
  
16,786
    
Leased
Tallahassee, Florida
  
1999
  
South Georgia and Northwest Florida
  
10,000
    
Owned
Fort Myers, Florida
  
1999
  
Southwest Florida
  
14,330
    
Owned
Corporate/Administrative Offices:
                     
Roanoke, Virginia – corporate(5)
  
1995
  
All
  
49,000
    
Leased
Kansas City, Missouri – corporate
  
1999
  
All
  
12,500
    
Leased
Roanoke, Virginia – administrative
  
1998
  
All
  
40,000
    
Leased
Lakeland, Florida – administrative(4)
  
1982
  
All
  
67,000
    
Owned
Roanoke, Virginia – administrative
  
2002
  
All
  
69,200
    
Leased

(1)
This facility is owned by Nicholas F. Taubman. See “Related-Party Transactions.”
(2)
The construction of this facility was financed in 1997 by a $10.0 million industrial revenue bond issuance from the Development Authority of McDuffie County of the State of Georgia, from whom we purchased this facility for $10.00 in November 2002.

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(3)
Total capacity of this facility is approximately 433,000 square feet, of which 50,000 square feet continues to be used as a PDQ® Express warehouse. This facility was also used as a distribution center prior to its closure in the fourth quarter of 2001. This facility is currently held for sale.
(4)
This facility is located within one of our main distribution centers.
(5)
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.”
 
At October 5, 2002, we owned 537 of our stores and leased 1,856 stores. The expiration dates, including the exercise of renewal options, of the store leases are summarized as follows:
 
Years

  
Stores(1)

2002-2003
  
39
2004-2008
  
176
2009-2013
  
363
2014-2023
  
1,078
2024-2033
  
81
2034-2049
  
119

(1)
Of these stores, 17 are owned by our affiliates. See “Related-Party Transactions.”
 
Management Information Systems
 
We have developed a flexible technology infrastructure that supports our growth strategy. Our information technology infrastructure is comprised of software and hardware designed to integrate store, distribution and vendor services into a seamless network. All stores, corporate and regional offices, and distribution centers are linked via a communications network, which is based on frame relay technology. Our stores in Puerto Rico are linked to the communications network via satellite. Electronic documents transferred between us and our vendors expedite the ordering, receiving and merchandise payment processes. We expect to complete the implementation of our technology platform into Discount’s stores, distribution centers and administrative offices in 2003.
 
Store Based Information Systems
 
Our store based information systems, which are designed to improve the efficiency of our operations and enhance customer service, are comprised of point-of-sale, or POS, electronic parts catalog, or EPC, store level inventory management and store intranet, or STORENET, systems. 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. We have completely implemented our store based information systems into all of the Discount stores located outside of the Florida market (including the Florida panhandle) and plan to complete the implementation of the Discount stores located in the Florida market in 2003.
 
Point-of-sale.    Our POS information system is used to formulate pricing, marketing and merchandising strategies and to rapidly replenish inventory. We are currently rolling out a new POS system in all of our stores. The new POS system is designed to improve customer checkout time and decrease the time required to train new store associates. In addition, this new POS system will provide additional customer purchase history, which may be used for customer demographic analysis.
 
Electronic Parts Catalog.    Our EPC system is a software system that enables our store team members to identify over 40 million application uses for automotive parts and accessories. The EPC system enables store team members to assist our customers in their parts selection and ordering based on year, make, model and engine type of their vehicle. If a part is not available at one of our stores, the EPC system can determine whether the part is carried and in-stock through our PDQ® Express system. The EPC system also enables our store team members to identify additional parts that are required by our customers to complete their automotive repair

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projects. This generally leads to an increase in average sales per transaction. The integration of this system with our POS system improves customer service by reducing time spent at the cash register and fully automating the sales process between the parts counter and our POS register. This system enables store team members to order parts and accessories electronically through our PDQ® Express system, with immediate confirmation of price, availability and estimated delivery time. Additionally, 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 one of our stores.
 
In conjunction with the rollout of our new POS system, we are also installing a new EPC system in our stores. The new EPC system, which is fully integrated with the new POS system, will provide the capability of cataloging non-application specific parts and additional product information, such as technical service bulletins, installation instructions, images of parts, and related diagrams of automotive systems. The new EPC system will also use enhanced search engines and more user-friendly navigation tools that will enhance our store team members ability to look-up any needed parts as well as additional products the customer will need to complete their automotive repair project. We believe these components will enhance our customers’ shopping experience with us and help them accurately complete the repair job the first time, saving them time and money.
 
To ensure ongoing improvement of the EPC information in all stores, we have developed a centrally based EPC data management system that enables us to reduce the time needed to exchange data with our vendors and ultimately catalogue and deliver updated product information to our stores. Additionally, we are enhancing the EPC system to provide additional methods of parts look-up while reducing keystrokes and allowing our store team members to more efficiently serve our customers.
 
Store Level Inventory Management System.    Our 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 SKU’s for cycle counts and track merchandise transfers. In conjunction with the roll-out of our new POS system, we are also implementing radio frequency hand held devices in all of our stores, which will increase inventory utilization and help ensure the accuracy of inventory improvements.
 
Store Intranet.    Installed in June of 1998, our 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. Our online learning center delivers online 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.
 
Customer Contact Center.    In the first quarter of 2001, we installed new call routing software and customer service software, established a customer contact center and consolidated all support centers. Implementation of the customer contact center has resulted in a substantial improvement in the speed of call answers, a reduction in calls to voice mail and a reduction in the number of outbound calls required to respond to voice mail.
 
Logistics and Purchasing Information Systems
 
Distribution Center Management System.    Our distribution management system, or DCMS, provides real-time inventory tracking through the processes of receiving, picking, shipping and replenishing at our distribution centers. The DCMS, integrated with material handling equipment, significantly reduces warehouse and distribution costs, while improving efficiency. Seven of our eight distribution facilities currently use this technology, and we anticipate that the eighth distribution facility, which we acquired as part of the Discount acquisition, will be converted to this technology in 2003. As a result, we will have the capacity to service over 3,400 stores and our wholesale operations from these eight distribution centers.
 
Replenishment Systems.    Our E3 Replenishment System monitors the distribution center and PDQ Express warehouse inventory levels and orders additional products when appropriate. In addition, the system tracks sales

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trends by SKU, allowing us to adjust future orders to support seasonal and demographic shifts in demand. During 2001, we completed the implementation of a store-level replenishment version of E3 for our Advance Auto Parts stores. In addition, we intend to implement our replenishment systems in Discount’s stores in 2003.
 
Employees
 
At November 13, 2002, we employed approximately 21,980 full-time employees and 10,569 part-time employees. Approximately 83.5% of our workforce is employed in store-level operations, 10.5% is employed in distribution and 6.0% is employed in our corporate offices in Roanoke, Virginia and Kansas City, Missouri. We have never experienced any labor disruption and are not party to any collective bargaining agreements. We believe that our labor relations are good.
 
We allocate substantial resources to the recruiting, training and retaining of employees. In addition, we have established a number of empowerment programs for employees, such as employee task forces and regular meetings, to promote employee recognition and address customer service issues. We believe that these efforts have provided us with a well-trained, loyal workforce that is committed to high levels of customer service.
 
Trade Names, Service Marks and Trademarks
 
We own and have registrations for the trade names “Advance Auto Parts,” “Western Auto” and “Parts America” and the trademark “PDQ®” with the United States Patent and Trademark Office for use in connection with the automotive parts retailing business. In addition, we own and have registered a number of trademarks with respect to our private label products, and we also acquired from Discount various registered trademarks, service marks and copyrights. We believe that these trade names, service marks and trademarks are important to our merchandising strategy. We do not know of any infringing uses that would materially affect the use of these marks and actively defend and enforce them.
 
Competition
 
We compete in the automotive aftermarket parts industry, which includes replacement parts (excluding tires), accessories, maintenance items, batteries and automotive fluids, and which, according to the U.S. Department of Commerce and the Automotive Aftermarket Industry Association, generated approximately $103 billion in sales in 2001 (excluding tires and labor costs). We compete in both the DIY and DIFM categories of the automotive aftermarket industry. Although the number of competitors and the level of competition vary by market, both categories are highly fragmented and generally very competitive. Our primary competitors are both national and regional retail chains of automotive parts stores, including AutoZone, Inc., O’Reilly Automotive, Inc. and The Pep Boys—Manny, Moe & Jack, wholesalers or jobber stores, independent operators, automobile dealers that supply parts, discount stores and mass merchandisers that carry automotive products, including Wal-Mart, Target and K-Mart. We believe that chains of automotive parts stores, like us, with multiple locations in one or more 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 our business include price, store location, customer service and product offerings, quality and availability.
 
Environmental Matters
 
We are subject to various federal, state and local laws and governmental regulations relating to the operation of our business, including those governing recycling of batteries and used lubricants, and regarding ownership and operation of real property. We handle hazardous materials as part of our operations, and our customers may also use hazardous materials on our properties or bring hazardous materials or used oil onto our properties. We currently provide collection and recycling programs for used automotive batteries and used lubricants at some of our stores as a service to our customers under agreements with third party vendors. Pursuant to these agreements,

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used batteries and lubricants are collected by our employees, deposited into vendor supplied containers or pallets and stored by us 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. In January 1999, we were notified by the United States Environmental Protection Agency, or the EPA, 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 our current financial position or future results of operations.
 
We own and lease 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. These 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. 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. From time to time, we receive notices from the EPA and state environmental authorities indicating that there may be contamination on properties we own or operate or on adjacent properties for which we may be responsible. Compliance with these laws and regulations has not had a material impact on our operations to date. We believe that we are currently in material compliance with these laws and regulations.
 
Legal Proceedings
 
In February 2000, the Coalition for a Level Playing Field and over 100 independent automotive parts and accessories aftermarket warehouse distributors and jobbers filed a lawsuit styled Coalition for a Level Playing Field, et al. v. AutoZone, Inc. et al., Case No. 00-0953 in the United States District Court for the Eastern District of New York against various automotive parts and accessories retailers. In March 2000, we were notified that we had been named defendants in the lawsuit. The plaintiffs claim that the defendants have knowingly induced and received 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 us, filed a motion to dismiss in late October 2000. On October 18, 2001, the court denied the motion to dismiss on one of the two counts. The discovery phase of the litigation has now commenced (including with respect to us). We believe these claims are without merit and intend to defend them vigorously; however, the ultimate outcome of this matter can not be ascertained at this time.
 
Our Western Auto subsidiary, together with other defendants including automobile manufacturers, automotive parts manufacturers and other retailers, has been named as a defendant in lawsuits alleging injury as a result of exposure to asbestos-containing products. We, Discount and Parts America also have been named as defendants in many of these lawsuits. The plaintiffs have alleged that these products were manufactured, distributed and/or sold by the various defendants. To date, these products have included brake and clutch parts and roofing materials. The number of cases in which we or one of our subsidiaries has been named as a defendant has increased in the past year. Many of the cases pending against us or our subsidiaries were filed recently and are in the early stages of litigation. The damages claimed against the defendants in some of these proceedings are substantial. Additionally, some of the automotive parts manufacturers that are named as defendants in these lawsuits have declared bankruptcy, which will limit plaintiffs’ ability to recover monetary damages from those defendants. We believe that we have valid defenses against these claims. We also believe that most of these claims are at least partially covered by insurance. Based on discovery to date, we do not believe the cases currently pending will have a material adverse effect on us. However, if we were to incur an adverse verdict in one or more of these claims and were ordered to pay damages that were not covered by insurance, these claims could have a material adverse affect on our operating results, financial position and liquidity. If the number of

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claims filed against us or any of our subsidiaries alleging injury as a result of exposure to asbestos-containing products increases substantially, the costs associated with concluding these claims, including damages resulting from any adverse verdicts, could have a material adverse effect on our operating results, financial position and liquidity in future periods.
 
In addition to the above matters, we currently and from time to time are involved in litigation incidental to the conduct of our business. The damages claimed against us in some of these proceedings are substantial. Although the amount of liability that may result from these matters cannot be ascertained, we do not currently believe that, in the aggregate, they will result in liabilities material to our consolidated financial condition, future results of operations or cash flow.

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MANAGEMENT
 
Executive Officers and Directors
 
The following table provides information about our executive officers and directors at November 13, 2002:
 
Name

  
Age

  
Position

Nicholas F. Taubman(1)
  
67
  
Chairman of the Board
Garnett E. Smith(2)
  
62
  
Vice Chairman of the Board
Lawrence P. Castellani
  
57
  
Chief Executive Officer and Director
Jimmie L. Wade
  
48
  
President and Chief Financial Officer
David R. Reid
  
40
  
Executive Vice President and Chief Operating Officer
Paul W. Klasing
  
43
  
Executive Vice President, Merchandising and Marketing
Eric M. Margolin
  
49
  
Senior Vice President, General Counsel and Secretary
Jeffrey T. Gray
  
37
  
Senior Vice President, Controller, Assistant Secretary
Robert E. Hedrick
  
55
  
Senior Vice President, Human Resources
S. Lynn Stevens
  
54
  
Senior Vice President and Chief Information Officer
Mark J. Doran(3)
  
38
  
Director
Peter J. Fontaine(3)
  
48
  
Director
Paul J. Liska
  
47
  
Director
Stephen M. Peck(3)
  
67
  
Director
Glenn Richter(1)(3)
  
40
  
Director
John M. Roth(1)(2)
  
44
  
Director
William L. Salter(2)
  
59
  
Director
Francesca Spinelli, Ph.D.(2)
  
49
  
Director
Ronald P. Spogli
  
54
  
Director

(1)
Member of Nominating and Corporate Governance Committee.
(2) 
Member of Compensation Committee.
(3) 
Member of Audit Committee.
 
Mr. Taubman, our Chairman of the Board of Directors, joined us in 1956. Mr. Taubman has served as our Chairman since January 1985 and served as our Chief Executive Officer from January 1985 to July 1997. From 1969 to 1984, Mr. Taubman served as our President. In addition, Mr. Taubman served as our Secretary and Treasurer from May 1992 to February 1998.
 
Mr. Smith, our Vice Chairman of the Board of Directors, joined us in November 1959. Mr. Smith was named Vice Chairman of the Board in February 2000. From August 1997 to February 2000, Mr. Smith served as our Chief Executive Officer, and from January 1985 to October 1999, served as our President. From January 1985 until July 1997, Mr. Smith served as our Chief Operating Officer. Mr. Smith has also served in numerous other positions with us, including Executive Vice President and General Manager, Vice President of Purchasing, Buyer and Store Manager.
 
Mr. Castellani joined us in February 2000 as our Chief Executive Officer and as a Director. Prior to joining us, Mr. Castellani served as President and Chief Executive Officer of Ahold Support Services in Latin America (a division of Royal Ahold, a supermarket company) from February 1998 to February 2000, as Executive Vice President of Ahold USA through 1997, and as President and Chief Executive Officer of Tops Friendly Markets from 1991 through the end of 1996.
 
Mr. Wade, our President and Chief Financial Officer, joined us in February 1994. Mr. Wade was named President in October 1999 and Chief Financial Officer in March 2000. Mr. Wade also served as our Secretary

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from March 2000 until March 2001. From 1987 to 1993, Mr. Wade was Vice President, Finance and Operations, for S.H. Heironimus, a regional department store company, and from 1979 to 1987, he was Vice President of Finance for American Motor Inns, a hotel company. Mr. Wade is a certified public accountant.
 
Mr. Reid, our Executive Vice President and Chief Operating Officer, joined us in October 1984 and has held his current position since October 1999. From August 1999 to August 2000, Mr. Reid served as the Chief Executive Officer of Western Auto Supply Company. Immediately prior to assuming this position, Mr. Reid was our Senior Vice President with responsibility for real estate and store support. Mr. Reid has been a Vice President, Store Support and has also served in various training and store operations positions as Store, Regional and Division Manager.
 
Mr. Klasing, our Executive Vice President, Merchandising and Marketing, joined us in April 1995 and has held his current position since October 1999. From July 1997 to October 1999, Mr. Klasing served as our Senior Vice President, Purchasing. From April 1995 to July 1997, Mr. Klasing held various other positions with us.
 
Mr. Margolin, our Senior Vice President, General Counsel and Secretary, joined us in April 2001. From 1993 to June 2000, Mr. Margolin was Vice President, General Counsel and Secretary of Tire Kingdom, Inc., now TBC Corporation, a retailer of tires and provider of automotive services. From 1985 to 1993, Mr. Margolin served as the general counsel for several companies in the apparel manufacturing and retail field.
 
Mr. Gray, our Senior Vice President, Controller and Assistant Secretary, joined us in March 1994 and has held his current position since April 2000. From March 1994 to March 2000, Mr. Gray held several positions with us, 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, a public accounting firm. Mr. Gray is a certified public accountant.
 
Mr. Hedrick joined us in May 2001 as our Senior Vice President, Human Resources. Mr. Hedrick was previously Vice President, Human Resources for Foodbrands America from January 1997 to April 2001, and before that held various positions in human resources over a 20 year period with Sara Lee Corporation, a producer, marketer and distributor of frozen and refrigerated processed food.
 
Ms. Stevens, our Senior Vice President and Chief Information Officer, joined us in July 1979 and has held her current position since July 1997. From 1979 until June 1997, Ms. Stevens held several positions with us, most recently as Vice President of Systems Development.
 
Mr. Doran became a member of our board of directors in 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. Fontaine became a member of our board of directors upon consummation of the Discount acquisition in November 2001. Mr. Fontaine was with Discount since 1975. Mr. Fontaine was elected Secretary and Treasurer of Discount in 1979, Executive Vice President–Operations in 1992, Chief Operating Officer in 1993 and President, Chief Executive Officer and Chairman of the Board in July 1994. Mr. Fontaine stepped down from his position as President of Discount effective February 1, 1997, and resigned his position as Chairman of the Board in November 2001 and Chief Executive Officer in January 2002.
 
Mr. Liska became a member of our board of directors in January 2002. Mr. Liska has served as Executive Vice President and President, Credit and Financial Products of Sears since October 2002. From June 2001 to October 2002, Mr. Liska served as Executive Vice President and Chief Financial Officer of Sears. Prior to joining Sears, Mr. Liska held the position of Executive Vice President and Chief Financial Officer of The St. Paul Companies, Inc. from February 1997 to May 2001. In March 1994 he joined Specialty Foods Corporation as Senior Vice President and Chief Financial Officer, becoming Chief Operating Officer in December 1994 and President and Chief Executive Officer in March 1996.

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Mr. Peck became a member of our board of directors in January 2002. Since April 1989, Mr. Peck has been a general partner of Wilderness Partners, L.P., a private partnership. Mr. Peck also has been a general partner of the Torrey Funds, LLC since November 2001. Mr. Peck serves on the Board of Trustees and the Executive Committee of Mount Sinai/NYU Health, Mount Sinai Hospital and Mount Sinai School of Medicine. Mr. Peck also serves as a member of the board of directors of Fresenius Medical Care, OFFIT Investment Funds, Canarc Resource Corp., Banyan Strategic Realty Trust, Boston Life Sciences, Inc. and The Jewish Theological Seminary.
 
Mr. Richter became a member of our board of directors in January 2002. Mr. Richter has served as Senior Vice President and Chief Financial Officer of Sears since October 2002. From July 2001 to October 2002, Mr. Richter served as Senior Vice President of Finance for Sears. In February 2000, Mr. Richter joined Sears as Vice President and Controller. Prior to joining Sears, he was with Dade Behring International, serving as the Senior Vice President and Chief Financial Officer from April 1999 to February 2000 and the Senior Vice President and Corporate Controller from January 1997 to April 1999. Prior to that, Mr. Richter held various financial and strategic positions at PepsiCo and was also a consultant at McKinsey & Company.
 
Mr. Roth became a member of our 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., Galyan’s Trading Company, Inc. and Asbury Automotive Group, Inc.
 
Mr. Salter became a member of our board of directors in April 1999. Mr. Salter is the retired President of the Specialty Retail Division of Sears, a position he held from March 1999 to December 1999. From November 1996 to March 1999 Mr. Salter served as President of the Home Stores division of Sears. From October 1995 to November 1996 he served as the President of the Hardlines division of Sears and from April 1993 to October 1995 he served as the Vice President and General Manager of the Home Appliances and Electronics Division of Sears.
 
Ms. Spinelli became a member of our board of directors in November 2002. Ms. Spinelli is the Senior Vice President—People of RadioShack Corporation, a position she has held since December 1999. From July 1998 to December 1999, she served as Vice President—People of RadioShack Corporation. From February 1997 to July 1998, Ms. Spinelli served as Corporate Vice President of Organizational Development of Wal-Mart Stores, Inc. From March 1993 to February 1997, Ms. Spinelli served as Vice President of Human Resources of McLane Company, Inc., a division of Wal-Mart Stores, Inc.
 
Mr. Spogli became a member of our board of directors in August 2001. He was previously one of our directors 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.
 
We currently have 12 members on our board of directors. All directors are elected annually and hold office until the next annual meeting of stockholders or until their successors are duly elected and qualified.
 
We expect that upon completion of this offering Messrs. Liska and Richter will resign from our board of directors, and that Mr. Salter will remain on the board as a non-Sears nominee.
 
Executive officers are elected by, and serve at the discretion of, our board of directors. We have entered into employment agreements with certain of our executive officers. There are no family relationships among any of our directors or executive officers.
 
Board Committees
 
We currently have an audit committee, a compensation committee and a nominating and corporate governance committee.

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Audit Committee.    Messrs. Doran, Fontaine, Peck and Richter currently serve as members of the audit committee. Mr. Peck is the chairman of the audit committee. The audit committee is responsible for recommending to the board of directors the appointment of our independent auditors, analyzing the reports and recommendations of the auditors and reviewing our internal audit procedures and controls.
 
Compensation Committee.     Messrs. Roth, Salter and Smith and Ms. Spinelli, currently serve as members of the compensation committee. Messrs. Roth and Salter and Ms. Spinelli are “non-employee directors” as defined in the Securities Exchange Act of 1934. Mr. Smith is not a non-employee director because he received compensation as a consultant in excess of $60,000 for 2001 and 2002. The compensation committee is responsible for reviewing and recommending the compensation structure for our officers and directors, including salaries, participation in incentive compensation, benefit and stock option plans, and other forms of compensation.
 
Nominating and Corporate Governance Committee.    Messrs. Richter, Roth and Taubman currently serve as members of our nominating and corporate governance committee. Mr. Taubman is the chairman of the committee. The committee is responsible for reviewing and making recommendations to the board regarding the overall effectiveness, organization and structure of the board and its committees. The committee’s duties also include establishing criteria for membership on the board and its committees and identifying and proposing nominees to the board to fill vacancies on the board as they occur. Additionally, the committee is responsible for reviewing and making recommendations to the board regarding corporate governance matters.
 
Compensation Committee Interlocks and Insider Participation
 
The compensation committee of the board of directors determines the compensation of our officers and directors. During fiscal 2001, Messrs. Roth, Salter and Smith served on the compensation committee. Mr. Smith also served as one of our officers during 2001, but did not participate in the approval of matters related to his compensation. None of our executive officers currently serves on the compensation committee or board of directors of any other company of which any members of our compensation committee is an executive officer. In fiscal 2001, we loaned Mr. Smith $1.3 million, which was repaid in full in June 2002. See “Related—Party Transactions—Certain Payments and Loans.”
 
Director Compensation
 
Under our compensation program, each independent director who is not one of our employees or a designee of Freeman Spogli & Co. or Sears to our board of directors receives (1) a $10,000 annual retainer, (2) $2,000 per board meeting, or $1,000 if attendance is telephonic, and (3) if a committee meeting is held on any day other than a day on which a board meeting is held, $750 per committee meeting, or $375 if attendance is telephonic. In addition, upon appointment to the board, each of these directors receives an initial grant of 7,500 options that vest over three years, conditioned upon continued service as a board member. These directors also receive an annual grant of 5,000 options, subject to the same terms. In addition, we reimburse all of our directors for their reasonable expenses in attending meetings and performing duties as directors.
 
Executive Employment Agreements
 
Mr. Castellani was appointed our Chief Executive Officer and began employment on February 1, 2000, at which time he signed an employment and non-competition agreement. Mr. Castellani signed an irrevocable acceptance letter with us in December 1999 that obligated us to pay him 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 2000. Approximately $1.9 million of the bonus was used to purchase shares of our common stock pursuant to a restricted stock agreement. This portion of the bonus was deferred and amortized over the initial two-year term of the contract. Mr. Castellani’s employment contract had an initial term of two years, and renews automatically each year thereafter unless terminated by us or Mr. Castellani. The contract provides for a base salary of

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$600,000, subject to annual increases at the discretion of the board of directors, and an annual cash bonus based on our 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, and the pro rata share of the bonus due to Mr. Castellani prior to the termination of employment. Mr. Castellani has agreed not to compete with us, to preserve our confidential information, not to recruit or employ our employees to or in other businesses and not to solicit our customers or suppliers for competitors through the later of February 1, 2003 and one year from the effective date of termination.
 
On April 15, 1998, Mr. Smith entered into an employment and non-competition agreement with us, which was amended effective April 2001. In January 2000, Mr. Smith was named as our Vice Chairman. The agreement provided for a base salary of $200,000, effective April 1, 2000, and was subject to annual increases at the discretion of our board of directors. Additionally, Mr. Smith was entitled to earn annual cash bonuses based on our achievement of performance targets established by our board of directors. In 1999, 2000, 2001 and in the forty weeks ended October 5, 2002, Mr. Smith earned $1,380,133, $570,758, $334,293 and $516,082, respectively, pursuant to the consulting agreement. The agreement terminated effective May 30, 2002. Mr. Smith has agreed to preserve our confidential information for two years following the date of the termination of the agreement.
 
On April 15, 1998, Messrs. Reid, Wade and Klasing and Ms. Stevens entered into employment agreements with us. These agreements contain severance provisions that provide for one year of base salary upon termination of employment, by us without cause or by the employee with good reason as defined in the employment agreement, less any amounts earned in other employment, and the pro rata share of the bonus due to the employee prior to the termination of employment. The agreements extend from year-to-year unless terminated by the employee or us. Other provisions require us to pay bonuses earned by the employee upon our achievement of targets relating to sales, earnings and return on invested capital that are approved by our board of directors, and an agreement by the employee not to compete with us, to preserve our confidential information, not to recruit or employ our employees to or in other businesses and not to solicit our customers or suppliers for competitors.
 
Consulting Agreement
 
On April 15, 1998, Mr. Taubman entered into a consulting and non-competition agreement with us, which was amended effective April 2001. The agreement required us to pay consulting fees in an amount of $300,000 per annum, plus an annual bonus of up to $300,000 based upon the achievement of targeted performance goals established by our board of directors. In 1999, 2000, 2001 and in the forty weeks ended October 5, 2002, Mr. Taubman earned $400,000, $320,000, $563,400 and $296,138, respectively, pursuant to the consulting agreement. The agreement terminated on April 15, 2002. Mr. Taubman has agreed to preserve our confidential information for two years after the date of the termination of the agreement. Pursuant to the consulting agreement, we and Mr. Taubman entered into an indemnity agreement whereby we agreed to indemnify Mr. Taubman for actions taken as an officer or director of, or consultant to, us to the fullest extent permitted by law.
 
Discount Change of Control Employment Agreements and Severance Plan
 
Prior to our acquisition of Discount, six executive officers and five non-executive officers of Discount entered into change of control employment agreements with Discount that provided that each of them was entitled to severance benefits upon a termination or constructive termination of their employment that occurred during a specified period of time following our acquisition of Discount, unless the termination was for cause or by the officer for other than good reason, as defined in the agreements, prior to one year following the acquisition. Prior to the date of this prospectus, three of these officers have terminated their employment and received from us the applicable severance payments under their agreements. The other four executive officers

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and four non-executive officers remain employed by us as of the date of this prospectus, and we remain bound by their change of control agreements. Those four executive officers are Michael Harrah, Discount’s Vice President-Information Systems, Clemente Bottino, Discount’s Vice President-Human Resources, C. Roy Martin, Discount’s Vice President-Supply Chain and Logistics, and Tom Merk, Discount’s Vice President-Sales and Marketing.
 
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 the reason the officer’s employment was terminated. The applicable employment period for each of these officers is determined based on a formula that gives specified credit for the executive’s position with Discount and separate credit for the executive’s tenure with Discount. The agreements also provide for specified salary and benefits to be paid to the officers upon a termination of employment as a result of death or disability.
 
The approximate lump sum severance payment that would be due under the change of control employment agreements for Messrs. Harrah, Bottino, Martin and Merk, if their employment were to be terminated by us without cause, would be $255,400, $358,500, $176,800 and $247,900, respectively.
 
As of October 5, 2002, we had paid an aggregate of $3.4 million to former Discount employees under the change of control agreements and to former non-officer employees of Discount under other severance arrangements. As of that date, the total potential remaining payments we may be obligated to make under those change of control agreements and other severance arrangements was $4.2 million (including $1.5 million that would be payable to six officers under change of control agreements upon a termination of their employment after November 28, 2002, but which we have agreed to pay those officers to induce them to continue their employment after such date).
 
In addition to the above benefits that may accrue upon termination of the officer, the change of control employment agreements and arrangements with other non-executive employees provide for benefits during the participant’s continued employment with us following the closing of the acquisition. These benefits include salary protections and provisions that entitle the officer to receive similar benefits as those offered to other officers, including 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 change of control employment agreements also provide that for a period of time during the continued employment of the officer with us following the closing of the Discount acquisition or following termination of employment of the officer, the officer will not (1) act in any manner or capacity in or for any business entity that competes with Discount, (2) divulge any confidential information of Discount to a third party, except for the benefit of Discount or when required by law, and (3) solicit or hire away any person who was an employee of Discount on the effective date of the Discount acquisition.

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Executive Compensation
 
The following table sets forth the compensation received by our Chief Executive Officer and the four other most highly compensated executives serving as officers at the end of our last completed fiscal year. We refer to these individuals as our named executive officers.
 
Summary Compensation Table
 
    
Annual Compensation

    
Long Term Compensation Awards

      
Name and Principal Position

  
Fiscal Year

  
Salary

  
Bonus

    
Securities Underlying Options/SARs

    
All Other
Compensation(2)

Lawrence P. Castellani
Chief Executive Officer
  
2001
2000
1999
  
$
 
 
622,116
542,308
—  
  
$
 
 
391,800
75,000
3,272,700
 
 
(1)
  
60,000
1,050,000
—  
    
$
 
 
5,100
—  
—  
Jimmie L. Wade
President and Chief Financial Officer
  
2001
2000
1999
  
$
 
 
288,270
265,865
174,421
  
$
 
 
218,985
128,502
158,026
 
 
 
  
35,000
30,000
9,500
    
$
 
 
6,460
6,336
6,080
David R. Reid
Executive Vice President and Chief Operating Officer
  
2001
2000
1999
  
$
 
 
258,847
250,000
198,808
  
$
 
 
179,571
84,923
156,625
 
 
 
  
27,500
25,000
9,500
    
$
 
 
6,460
6,379
6,080
Paul W. Klasing
Executive Vice President, Merchandise and Marketing
  
2001
2000
1999
  
$
 
 
222,116
184,128
151,031
  
$
 
 
136,571
80,605
139,359
 
 
 
  
25,000
18,000
9,500
    
$
 
 
6,460
6,298
6,080
S. Lynn Stevens
Senior Vice President and Chief Information Officer
  
2001
2000
1999
  
$
 
 
180,846
172,782
164,665
  
$
 
 
82,408
61,820
130,840
 
 
 
  
10,000
10,000
8,000
    
$
 
 
7,875
6,302
6,080

(1) 
Mr. Castellani received a signing bonus that was accrued on January 1, 2000 in connection with his appointment as Chief Executive Officer. Approximately $1.9 million of the bonus was used to purchase shares of our common stock.
(2) 
Consists of matching contributions made by us under our 401(k) savings plan.
 
Option Grants in Last Fiscal Year
 
The following table sets forth information concerning options granted in 2001 to each of the named executive officers.
 
    
Individual Grants

  
Potential Realizable Value at Assumed Annual Rates of Price Appreciation for Option Term(2)

Name

  
Number of Securities Underlying Options Granted

    
Percent of Total Options Granted to Employees in 2001

    
Exercise or
Base Price
per share(1)

  
Expiration Date

  
                
5%

  
10%

Lawrence P. Castellani
  
60,000
    
17.8
%
  
$
21.00
  
4/5/08
  
$
512,947
  
$
1,195,384
Jimmie L. Wade
  
35,000
    
10.4
%
  
 
21.00
  
4/5/08
  
 
299,219
  
 
697,307
David R. Reid
  
27,500
    
8.1
%
  
 
21.00
  
4/5/08
  
 
235,100
  
 
547,884
Paul W. Klasing
  
25,000
    
7.4
%
  
 
21.00
  
4/5/08
  
 
213,728
  
 
498,076
S. Lynn Stevens
  
10,000
    
3.0
%
  
 
21.00
  
4/5/08
  
 
85,500
  
 
199,200

(1) 
Represents the fair market value of the underlying shares of common stock at the time of the grant, as determined by our board of directors.
(2) 
The potential realizable value is calculated assuming that the fair market value of our common stock appreciates at the indicated annual rate compounded annually for the entire seven-year term of the option, and that the option is exercised and the underlying shares of our common stock sold on the last day of its seven-year term for the appreciated stock price. The assumed 5% and 10% rates of appreciation are mandated by the rules of the SEC and do not represent our estimate of the future prices or market value of our common stock.

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Fiscal Year-End Option Values
 
The following table sets forth information with respect to our named executive officers concerning option exercises for 2001 and exercisable and unexercisable stock options held at December 29, 2001. No options were exercised by these officers during the year ended December 29, 2001.
 
    
Number of Securities Underlying Unexercised Options at December 29, 2001

  
Value of Unexercised In-the-Money Options at December 29, 2001(1)

Name

     
  
Exercisable

  
Unexercisable

  
Exercisable

  
Unexercisable

Lawrence P. Castellani
  
350,000
  
760,000
  
$
9,138,500
  
$
19,840,000
Jimmie L. Wade
  
41,333
  
58,167
  
 
1,332,007
  
 
1,612,078
David R. Reid
  
39,667
  
47,333
  
 
1,281,623
  
 
1,315,937
Paul W. Klasing
  
37,333
  
40,167
  
 
1,211,087
  
 
1,109,738
S. Lynn Stevens
  
33,667
  
19,333
  
 
1,100,243
  
 
542,647

(1) 
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 Advance common stock on December 28, 2001 of $47.05.
 
Stock Subscription Plans
 
We have adopted stock subscription plans pursuant to which, at or since our 1998 recapitalization, certain directors, officers and key employees have purchased 747,550 shares, net of cancellations, of our outstanding common stock at the fair market value at the time of purchase. Agreements entered into in connection with the stock subscription plans provide for certain restrictions on transferability. Approximately $3.2 million of the purchase price for these 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 individual purchased under the plans. At November 13, 2002, $1.7 million under these notes remained outstanding.
 
Messrs. Wade, Reid and Klasing and Ms. Stevens purchased 25,000 shares, 20,000 shares, 20,000 shares and 20,000 shares. For these individuals, $75,000, $115,000, $110,000 and $100,000 of their purchase price was financed through the delivery of promissory notes on the terms described above. At November 13, 2002, the outstanding principal balance on the promissory notes was $110,000 and $75,000 for Mr. Klasing and Ms. Stevens, respectively, and Messrs. Wade and Reid had repaid their promissory notes in full. Mr. Castellani entered into a stock subscription agreement under the stock subscription plan in 2000, pursuant to which he purchased 75,000 shares of our common stock. $900,000 of Mr. Castellani’s purchase price was financed through the delivery of a promissory note to us on the terms described above, a portion of which has been repaid. At November 13, 2002, the outstanding balance of the promissory note was $600,000. Mr. Castellani intends to use a portion of the proceeds he will receive from this offering to repay this loan in full.
 
Garnett E. Smith, Vice Chairman of the Board, purchased 250,000 shares for cash pursuant to a stock subscription plan and did not deliver a promissory note. In September 2001, we loaned Mr. Smith $1.3 million. This loan was evidenced by a full recourse promissory note bearing interest at the prime rate, with such interest payable annually, and due in full five years from its inception. Payment of the promissory note was secured by a stock pledge agreement that grants us a security interest in all of the shares of our common stock acquired by Mr. Smith under our stock subscription plan. In June 2002, Mr. Smith repaid the loan in full.
 
Stock Option Plans
 
As of November 13, 2002, we had granted a total of 2,797,001 shares under our option plans, net of cancellations and exercises. Each option plan participant has entered into an option agreement with us. The option plans and each outstanding option thereunder are subject to termination in the event of a change in control

63


or other extraordinary corporate transactions, as more fully described in the option plans. In addition, all options granted pursuant to the option plans will terminate 90 days after termination of employment, unless termination was for cause, in which case an option will terminate immediately, or in the event of a termination due to death or disability, in which case an option will terminate 180 days after such termination. All options granted under our 2001 Senior Executive Stock Option Plan and 2001 Executive Stock Option Plan will terminate on the seventh anniversary of the option agreement under which they were granted if not exercised prior thereto.
 
On December 12, 2001, our board of directors approved an amendment to our stock option plans that eliminated certain variable provisions established as a result of our being a private company prior to the Discount acquisition. These modifications resulted in accelerating vesting provisions under the performance options and establishing a fixed exercise price on options with variable exercise prices. No additional common shares or options were issued as a result of these modifications.
 
2001 Senior Executive Stock Option Plan
 
Our 2001 Senior Executive Stock Option Plan provides for the grant to our senior executive officers of incentive and nonqualified options to purchase shares of common stock. The plan authorizes the issuance of options to purchase up to 1,710,000 shares of common stock and is administered by the compensation committee. 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. At November 13, 2002, options to purchase 1,175,000 shares of common stock were outstanding under the plan, 720,000 of which were exercisable, and options to purchase 105,500 shares of common stock were available for future grant.
 
2001 Executive Stock Option Plan
 
Our 2001 Executive Stock Option Plan provides for the grant to our directors, consultants and key employees of incentive and nonqualified options to purchase shares of common stock. The plan authorizes the issuance of options to purchase up to 3,600,000 shares of common stock and is administered by the compensation committee. Most of the options granted under the plan become exercisable based on our attainment of certain operating performance criteria, as established by the board of directors.
 
Under the terms of the Discount merger agreement, we were obligated to convert outstanding Discount options with an exercise price greater than $15.00 into options to purchase shares of our common stock, preserving the same economic terms. As a result, we granted 574,765 substitute options under the 2001 Executive Stock Option Plan at a weighted average exercise price of $38.89 per share. Further, we were 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, these options do not contain the same provisions regarding termination as the current options issued by us and will terminate on the tenth anniversary of the date of the option agreement between Discount and the holder.
 
At November 13, 2002, including the substitute options granted to Discount’s option holders, options to purchase 1,622,001 shares of common stock were outstanding under the 2001 Executive Stock Option Plan, 881,683 of which were exercisable, and options to purchase 1,607,699 shares of common stock were available for future grant.
 
Employee Stock Purchase Plan
 
In May 2002, we adopted our employee stock purchase plan. Our employee stock purchase plan provides employees who work more than 20 hours per week (other than highly compensated employees or employees who own more than five percent of our common stock) with the right to purchase shares of our common stock at a purchase price equal to 85% of the fair market value of our common stock at the beginning of each purchase period or the end of each period, whichever is less. The plan authorizes the purchase of up to 700,000 shares of

64


common stock and is administered by our retirement plan committee, which consists of several of our employees. Enrollment under this plan began on July 1, 2002, and as of November 13, 2002, 14,966 shares of common stock had been purchased and 685,034 shares of common stock were available for future purchase.
 
Limitation of Liability and Indemnification
 
As allowed by the Delaware General Corporation Law, our certificate of incorporation contains a provision to limit the personal liability of our directors for violations of their fiduciary duty. This provision eliminates each director’s liability to us or our stockholders for monetary damages to the fullest extent permitted by Delaware law. The effect of this provision is to eliminate the personal liability of directors for monetary damages for actions involving a breach of their fiduciary duty of care, including such actions involving gross negligence. However, our directors will be personally liable to us and our shareholders for monetary damages if they violated their duty of loyalty, acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper benefit from their actions as directors. Our articles further provide that if the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law without further action by the stockholders. These provisions of our articles will limit the remedies available to a stockholder in the event of breaches of a director’s duties to such stockholder or us.
 
Our bylaws provide for indemnification of and the payment of expenses in advance to directors and officers to the fullest extent permitted by applicable law.
 
We have obtained directors’ and officers’ liability insurance, which insures against liabilities that our directors or officers may incur in such capacities. We have also entered into indemnification agreements with our directors and officers. The indemnification agreements provide indemnification to our directors and officers under certain circumstances for acts or omissions that may not be covered by directors’ and officers’ liability insurance.
 
Insofar as the indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

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PRINCIPAL AND SELLING STOCKHOLDERS
 
The following table sets forth certain information known to us regarding the beneficial ownership of our common stock, at November 13, 2002 and as adjusted to reflect the sale of common stock offered in this offering by:
 
 
Ÿ
each person or entity known to us that beneficially owns more than 5% of our common stock;
 
 
Ÿ
each stockholder selling shares of our common stock in this offering;
 
 
Ÿ
each of our named executive officers and certain other executive officers;
 
 
Ÿ
each member of our board of directors; and
 
 
Ÿ
all of our executive officers and directors as a group.
 
Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage of ownership held by that person, shares of common stock subject to options and warrants held by that person that are currently exercisable or will become exercisable within 60 days after November 13, 2002 are deemed outstanding, while these shares are not deemed outstanding for computing percentage ownership of any other person. Unless otherwise indicated in the footnotes below, the persons and entities named in the table have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws where applicable. The address for those individuals for which an address is not otherwise indicated is: c/o Advance Auto Parts, Inc., 5673 Airport Road, Roanoke, Virginia 24012.
 
The percentages of common stock beneficially owned are based on 35,692,563 shares of our common stock outstanding at November 13, 2002.
 
    
Shares Beneficially
Owned
Before Offering

    
Shares to be Sold in the Offering

  
Shares Beneficially
Owned
After Offering

 
Name

  
Number

    
Percentage

    
Number

  
Number

    
Percentage

 
Freeman Spogli & Co. LLC(1)
  
8,092,141
    
22.7
%
  
—  
  
8,092,141
    
22.7
%
Mark J. Doran(1)
  
8,092,141
    
22.7
 
  
—  
  
8,092,141
    
22.7
 
John M. Roth(1)<