10-Q 1 d10q.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 6, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________. Commission file number - 333-56013 _______________ ADVANCE STORES COMPANY, INCORPORATED (Exact name of registrant as specified in its charter) _______________ Virginia 54-0118110 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5673 Airport Road 24012 Roanoke, Virginia (Zip Code) (Address of Principal Executive Offices) (540) 362-4911 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report). Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of November 8, 2001, the registrant had outstanding 538 shares of Class A Common Stock, par value $100 per share (the only class of common stock of the registrant outstanding). The registrant's Class A Common Stock is not traded in a public market. ================================================================================ ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES Twelve and Forty Week Periods Ended October 6, 2001 TABLE OF CONTENTS

i Advance Stores Company, Incorporated and Subsidiaries Condensed Consolidated Balance Sheets October 6, 2001 and December 30, 2000 (dollars in thousands, except per share data)

The accompanying notes to the condensed consolidated financial statements are an integral part of these balance sheets. 1 Advance Stores Company, Incorporated and Subsidiaries Condensed Consolidated Statements of Operations For the Twelve and Forty Week Periods Ended October 6, 2001 and October 7, 2000 (dollars in thousands) (unaudited)

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements. 2 Advance Stores Company, Incorporated and Subsidiaries Condensed Consolidated Statements of Cash Flows For the Forty Week Periods Ended October 6, 2001 and October 7, 2000 (dollars in thousands) (unaudited)

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements. 3 Advance Stores Company, Incorporated and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Forty Week Periods Ended October 6, 2001 and October 7, 2000 (dollars in thousands) 1. Basis of Presentation: Advance Stores Company, Incorporated is a wholly owned subsidiary of Advance Holding Corporation (the "Parent"). The accompanying condensed consolidated financial statements include the accounts of Advance Stores Company, Incorporated and its wholly owned subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of October 6, 2001, the condensed consolidated statements of operations for the twelve and forty week periods ended October 6, 2001 and October 7, 2000 and the condensed consolidated statements of cash flows for the forty week periods ended October 6, 2001 and October 7, 2000, have been prepared by the Company and have not been audited. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial position of the Company, the results of its operations and cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's consolidated financial statements for the fiscal year ended December 30, 2000. The results of operations for the forty week period are not necessarily indicative of the operating results to be expected for the full fiscal year. Recent Accounting Pronouncements In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing Financial Assets and Extinguishment of Liabilities". This statement replaces SFAS No. 125, but carries over most of the provisions of SFAS No. 125 without reconsideration. The Company implemented SFAS No. 140 during the first quarter of fiscal 2001. The implementation had no impact on the Company's financial position or the results of its operations. In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 addresses accounting and reporting for all business combinations and requires the use of the purchase method for business combinations. SFAS No. 141 also requires recognition of intangible assets apart from goodwill if they meet certain criteria. SFAS No. 142 establishes accounting and reporting standards for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangibles with indefinite useful lives are no longer amortized but are instead subject to at least an annual assessment for impairment by applying a fair-value based test. SFAS No. 141 applies to all business combinations initiated after June 30, 2001. SFAS No. 142 is effective for existing goodwill and intangible assets beginning on December 31, 2001. SFAS No. 142 is effective immediately for goodwill and intangibles acquired after June 30, 2001. Although the Company is currently evaluating the impact of SFAS Nos. 141 and 142, management does not expect that the adoption of these statements will have a material impact on existing goodwill or intangibles. For the twelve and forty week periods ended October 6, 2001, the Company had amortization expense of approximately $146 and $296, respectively related to existing goodwill. Such amortization will be eliminated upon adoption of SFAS No. 142. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 establishes accounting standards for recognition and measurement of an asset retirement obligation and an associated asset retirement cost and is effective for fiscal years beginning after June 15, 2002. The Company does not expect SFAS No. 143 to have a material impact on its financial statements. 4 Advance Stores Company, Incorporated and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Forty Week Periods Ended October 6, 2001 and October 7, 2000 (dollars in thousands) In August 2001, the FASB also issued SFAS No. 144, "Accounting for the Impairment or 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 (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 144 retains the basic provisions from both SFAS 121 and APB 30 but includes changes to improve financial reporting and comparability among entities. The provisions of SFAS 144 are effective for fiscal years beginning after December 15, 2001. The Company has not yet determined the impact SFAS No. 144 will have on its financial position or the results of its operations. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain 2000 amounts have been reclassified to conform with their 2001 presentation. 2. Accounts Receivable: Receivables consist of the following: October 6, December 30, 2001 2000 ---------- ------------ (unaudited) Trade: Wholesale $ 9,714 $ 12,202 Retail 18,526 15,666 Vendor 48,014 36,260 Installment 14,915 14,197 Related parties 2,324 4,143 Employees 519 389 Other 2,754 3,131 ---------- ------------ Total receivables 96,766 85,988 Less - Allowance for doubtful accounts (6,040) (5,021) ---------- ------------ Receivables, net $ 90,726 $ 80,967 ========== ============ 5 Advance Stores Company, Incorporated and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Forty Week Periods Ended October 6, 2001 and October 7, 2000 (dollars in thousands) 3. Inventories: Inventories are stated at the lower of cost or market using the last-in, first-out (LIFO) method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management's estimates of expected fiscal year-end inventory levels and costs. The Company capitalizes certain purchasing and warehousing costs into inventory. Purchasing and warehousing costs included in inventory at October 6, 2001 and December 30, 2000 were $56,039 and $56,305, respectively. Inventories consist of the following: October 6, December 30, 2001 2000 ---------- ------------ (unaudited) Inventories at FIFO $ 790,118 $ 779,376 Reserve to state inventories at LIFO 15,274 9,538 ---------- ------------ Inventories at LIFO $ 805,392 $ 788,914 ========== ============ 4. Restructuring Liabilities: The Company's restructuring activities primarily relate to the ongoing analysis of the profitability of store locations and the settlement of restructuring activities undertaken as a result of the fiscal 1998 merger with Western Auto Supply Company ("Western") ("Western Merger"). Additionally, the Company assumed a portion of the pre-acquisition reserves related to the restructuring activities of the recently acquired Carport Auto Parts, Inc. (the "Carport Acquisition") (See Note 5). During the first three quarters of fiscal 2001, the Company closed three stores included in the fiscal 2000 restructuring activities and made the decision to close or relocate 33 additional stores not meeting profitability objectives, of which 25 had been closed or relocated as of October 6, 2001. As of October 6, 2001, this liability represents the current value required for certain facility exit costs, which will be settled over the remaining terms of the underlying lease agreements. On July 27, 2001, the Company made the decision to close a duplicative distribution facility located in Jeffersonville, Ohio. This 382,000 square foot owned facility opened in 1996 and served stores operating in the retail segment throughout the mid-west portion of the United States. The Company has operated two distribution facilities in overlapping markets since the Western Merger, in which the Company assumed the operation of a Western distribution facility in Ohio. The decision to close this facility allows the Company to utilize the operating resource requirements more productively in other areas of the business. The Company has established restructuring reserves for the termination of certain employees and exit costs in connection with the decision to close this facility. Expenses associated with restructuring are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. 6 Advance Stores Company, Incorporated and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Forty Week Periods Ended October 6, 2001 and October 7, 2000 (dollars in thousands) A reconciliation of activity with respect to these restructuring accruals is as follows: Other Exit Severance Costs ------------- ------------- Balance, December 30, 2000 $ - $ 6,788 New provisions 475 3,953 Change in estimates - 121 Reserves utilized (186) (3,928) ------------- ------------- Balance, October 6, 2001 (unaudited) $ 289 $ 6,934 ============= ============= As a result of the Western Merger, the Company established restructuring reserves in connection with the decision to close certain Parts America stores, to relocate certain Western administrative functions, to exit certain facility leases and to terminate certain employees of Western. Additionally, the Carport Acquisition resulted in restructuring reserves for closing 21 acquired stores not expected to meet long-term profitability objectives and the termination of certain administrative employees of the acquired company. As of October 6, 2001, the other exit costs represent the current value required for certain facility exit costs, which will be settled over the remaining terms of the underlying lease agreements. A reconciliation of activity with respect to these restructuring accruals is as follows: Other Exit Severance Costs ------------- ------------- Balance, December 30, 2000 $ - $ 3,797 Purchase accounting adjustments 837 1,422 Reserves utilized (837) (2,295) ------------- ------------- Balance, October 6, 2001 (unaudited) $ - $ 2,924 ============= ============= 5. Carport Acquisition: On April 23, 2001, the Company completed its acquisition of Carport Auto Parts, Inc. ("Carport"). The acquisition included a net 30 retail stores located in Alabama and Mississippi, and substantially all of the assets used in Carport's operations. The acquisition has been accounted for under the purchase method of accounting and, accordingly, Carport's results of operations have been included in the Company's statement of operations since the acquisition date. The purchase price, of $21,533, has been allocated to the assets acquired and the liabilities assumed based on a preliminary estimate of their fair values at the date of acquisition. This allocation resulted in the recognition of $3,239 in goodwill. 6. Assets Held for Sale: During the first quarter of fiscal 2001, the Company recorded an impairment charge of $1,600 reducing the carrying value of a facility included in assets held for sale to $6,000. The facility, which is held in the Wholesale segment, consists of excess space not required for the Company's current needs. 7 Advance Stores Company, Incorporated and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Forty Week Periods Ended October 6, 2001 and October 7, 2000 (dollars in thousands) 7. Related Parties: In September 2001, the Company loaned a member of the Board of Directors $1,300. This loan is evidenced by a full recourse promissory note bearing interest at prime rate, payable annually, and due in full in five years from its inception. Payment of the promissory note is secured by a stock pledge agreement that grants the Company a security interest in all shares of Holding common stock owned by the board member under Holding's stock subscription plan. The following table presents the related party transactions with Sears, Roebuck & Co. ("Sears") included in the condensed consolidated statements of operations for the twelve and forty week periods ended October 6, 2001 and October 7, 2000 and the condensed consolidated balance sheets as of October 6, 2001 and December 30, 2000:

The Company also enters into intercompany transactions with the Parent in the normal course of its business. These transactions are primarily related to intercompany loans and current and deferred income tax assets and liabilities. As of October 6, 2001 and December 30, 2000, the Company had a net receivable from its Parent of $1,235 and $603, respectively. 8. Segment and Related Information: The Company has the following operating segments: Retail and Wholesale. Retail consists of the retail operations of the Company, operating under the trade names "Advance Auto Parts" and "Western Auto" in the United States and "Western Auto" in Puerto Rico and the Virgin Islands. Wholesale consists of the wholesale operations, including distribution services to independent dealers and franchisees all operating under the "Western Auto" trade name. During the first quarter of fiscal 2001, the Company realigned its retail operations to include the Company-owned store operating under the "Western Auto" trade name in California, which was previously included in the Wholesale segment. Therefore, the following segment disclosures for the twelve and forty weeks ended October 7, 2000 have been restated to reflect this new structure. 8 Advance Stores Company, Incorporated and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Forty Week Periods Ended October 6, 2001 and October 7, 2000 (dollars in thousands) The accounting policies of the consolidated company have been consistently applied to the reportable segments listed below.

(a) Excludes investment in and equity in net earnings or losses of subsidiaries. 9. Contingencies: During the first quarter of fiscal 2001, the Company recorded a net gain of $8,300 as a result of a settlement reached with a vendor, in which the vendor repudiated a long-term supply agreement. This gain was recognized as a reduction to cost of sales in the accompanying statement of operations. 9 Advance Stores Company, Incorporated and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Forty Week Periods Ended October 6, 2001 and October 7, 2000 (dollars in thousands) The Company received notification from Sears during the first quarter of fiscal 2001 that certain environmental matters of Western existing as of the merger date and fully indemnified by Sears, have been settled. Accordingly, the Company reversed a $2,500 receivable due from Sears and reduced the corresponding environmental liability. 10. Discount Merger: On August 7, 2001, the Parent signed a definitive agreement to acquire Discount Auto Parts, Inc. ("Discount") in a merger transaction. Discount shareholders will receive $7.50 per share in cash plus 0.2577 shares of common stock in the combined company, collectively Advance Auto Parts, Inc. ("Advance"), for each share of Discount stock. Accordingly, upon consummation of the merger, Discount shareholders will own approximately 13% of the total shares outstanding of Advance. On August 31, 2001, the Company filed a registration statement on behalf of Advance covering the shares issued to Discount's shareholders, which will result in Advance Auto Parts, Inc. becoming a publicly traded company. As of August 28, 2001, Discount operated approximately 668 retail auto parts stores in Florida, Georgia, South Carolina, Alabama, Louisiana and Mississippi. The merger will be accounted for under the purchase method of accounting. In connection with this merger, the Company has obtained financing commitments to fund the cash portion of consideration to be paid to Discount shareholders and in-the-money option holders, refinance its existing senior credit facility ($260,299 at October 6, 2001), repay Discount's indebtedness and premiums ($210,800 at August 28, 2001 plus repayment premiums of $6,300), purchase Discount's Gallman distribution facility from the lessor (approximately $34,000) and pay approximately $35,000 in related transaction fees and expenses. The financing has been secured in the form of senior subordinated notes and the refinancing of the senior credit facility, which is described below. On October 31, 2001, the Company finalized its offering of $200,000 in Senior Subordinated Notes (the "Notes") offered at an issue price of 92.802%, yielding gross proceeds of approximately $185,600. The Notes mature on April 15, 2008 and bear interest at 10.25% payable semi-annually on April 15 and October 15. The Notes will be fully and unconditionally guaranteed on a unsecured senior subordinated basis by each of the Company's existing and future restricted subsidiaries that guarantees any indebtedness of the Company or any other restricted subsidiary. The Notes are redeemable at the Company's option, in whole or in part, at any time on or after April 15, 2003, in cash at the redemption prices described in the offering plus accrued and unpaid interest and liquidating damages, if any, at the redemption date. The Notes also contain certain covenants that will limit, among other things, the Company and its subsidiaries ability to incur additional indebtedness and issue preferred stock, pay dividends or 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. Additionally, the Company has received a binding commitment, subject to customary conditions, for a new senior credit facility (the "Facility") consisting of (1) a $180,000 tranche A term loan facility due 2006 and a $305,000 tranche B term loan facility due 2007 and (2) a $160,000 revolving credit facility (including a letter of credit subfacility). The Facility will be jointly and severally guaranteed by all of the Company's domestic subsidiaries (including Discount and its subsidiaries) and Advance and will be secured by substantially all of the Company's assets, the assets of existing and future domestic subsidiaries (including Discount and its subsidiaries), as well as the assets of Advance. 10 Advance Stores Company, Incorporated and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Forty Week Periods Ended October 6, 2001 and October 7, 2000 (dollars in thousands) 11. Guarantor Subsidiaries: The Company has wholly owned subsidiaries, LARALEV, INC., Advance Trucking Corporation and Western (the "Guarantor Subsidiaries") that are guarantors of the Company's subordinated notes, term loan facility and revolving credit facility. The guarantees are joint and several in addition to full and unconditional. LARALEV, INC. holds certain trademarks, tradenames and other intangible assets for which it receives royalty income from the Company. Advance Trucking Corporation is a wholly owned subsidiary that holds substantially all of the Company's inventory delivery vehicles. The Guarantor Subsidiaries comprise all direct and indirect subsidiaries. Combined condensed financial information for the guarantor subsidiaries is as follows:

11 Advance Stores Company, Incorporated and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Forty Week Periods Ended October 6, 2001 and October 7, 2000 (dollars in thousands)

12 Advance Stores Company, Incorporated and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Forty Week Periods Ended October 6, 2001 and October 7, 2000 (dollars in thousands)

13 Advance Stores Company, Incorporated and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Forty Week Periods Ended October 6, 2001 and October 7, 2000 (dollars in thousands)

14 Advance Stores Company, Incorporated and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Forty Week Periods Ended October 6, 2001 and October 7, 2000 (dollars in thousands)

15 Advance Stores Company, Incorporated and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Forty Week Periods Ended October 6, 2001 and October 7, 2000 (dollars in thousands)

(a) Reflects the push down of guaranteed debt, deferred debt issuance costs and related interest and amortization. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Advance Stores Company, Incorporated and its subsidiaries (the "Company") is a wholly owned subsidiary of Advance Holding Corporation ("Holding"). The Company was formed in 1929. In the 1980's, the Company sharpened its marketing focus to target sales of automotive parts and accessories to "do-it-yourself" ("DIY") customers and accelerated its growth strategy. From the 1980's through the present, the Company has grown significantly through new store openings, strategic acquisitions and a merger with Western Auto Supply Company (the "Western Merger"). Additionally, in 1996, the Company began to aggressively expand its sales to "do-it-for-me" ("DIFM") customers by implementing a commercial delivery program that supplies parts and accessories to third party automotive service and repair providers. As of October 6, 2001, the Company had 1,791 stores in 38 states, Puerto Rico and the Virgin Islands operating under the "Advance Auto Parts" and "Western Auto" trade names (the "Retail" segment). Advance Auto Parts is the second largest retailer of automotive parts and accessories in the United States and, based on store count, the Company believes it is the largest retailer in a majority of its markets. The Western Auto stores (the "Service Stores") included in the Retail segment offer home and garden merchandise in addition to automotive parts, accessories and service. The Company also operates a wholesale distribution network which includes distribution services of automotive parts and accessories and home and garden merchandise to approximately 430 independently owned dealer stores in 45 states operating under the "Western Auto" trade name (the "Wholesale" segment). On April 23, 2001, the Company completed its acquisition of Carport Auto Parts, Inc. ("Carport"). The acquisition included a net 30 retail stores located in Alabama and Mississippi, and substantially all of the assets used in Carport's operation. This acquisition makes the Company the largest retailer of automotive parts in the Alabama and Mississippi markets. The Carport locations have been converted to the Advance Auto Parts store format, which included a physical conversion, merchandise conversion and information systems conversion. The acquisition has been accounted for under the purchase method of accounting. On August 7, 2001, Holding signed a definitive agreement to acquire Discount Auto Parts, Inc. ("Discount") in a merger transaction (the "Discount Merger"). Discount shareholders will receive $7.50 per share in cash plus 0.2577 shares of common stock in the combined company, collectively Advance Auto Parts, Inc. ("Advance"), for each share of Discount stock. Accordingly, upon consummation of the merger, Discount shareholders will own approximately 13% of the total shares outstanding of Advance. On August 31, 2001, the Company filed a registration statement on behalf of Advance covering the shares to be issued to Discount shareholders, which will result in Advance Auto Parts, Inc. becoming a publicly traded company. As of August 28, 2001, Discount operated approximately 668 retail auto parts stores in Florida, Georgia, South Carolina, Alabama, Louisiana and Mississippi. Together, the combined company will operate over 2,400 stores and anticipates generating over $3.0 billion in revenues. Additionally, the combined company's EBITDA would have been approximately $248.0 million, not including approximately $30.0 million in anticipated purchasing, distribution and other expense synergies. The merger will be accounted for under the purchase method of accounting. Additionally through its restructuring program, the Company continually monitors store performance, which results in closing certain store locations not meeting profitability objectives. During the forty weeks ended October 6, 2001 the Company closed three stores included in the fiscal 2000 restructuring activities and made the decision to close or relocate 33 additional stores not meeting profitability objectives, 25 of which were closed or relocated as of October 6, 2001. The following discussion of the consolidated historical results of operations and financial condition of the Company should be read in conjunction with the unaudited condensed consolidated financial statements of the Company and the notes thereto included elsewhere in this Form 10-Q. The Company's first quarter consists of 16 weeks and its other three quarters consist of 12 weeks each. 17 Forward-Looking Statements This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this quarterly report contain certain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. These statements include without limitation the words "believes," "anticipates," "estimates," "intends," "expects," and words of similar import. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Holding and the Company or the retail industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These potential risks and uncertainties include, among others, the following: general economic and business conditions; the Company's substantial leverage and debt service obligations; restrictive loan covenants on the Company's ability to pursue its business strategies; changes in business strategy or development plans; competition; weather conditions; extent of the market demand for auto parts; availability of inventory supply; unexpected fluctuation in merchandise costs; adequacy and perception of customer service, product quality and defect experience; availability of and ability to take advantage of vendor pricing programs and incentives; rate of new store openings; cannibalization of store sites; mix and types of merchandise sold; governmental regulation of products; new store development; performance of information systems; effectiveness of deliveries from distribution centers; ability to hire, train and retain qualified employees and environmental risks. Forward-looking statements regarding revenues, expenses, cash flows and liquidity are particularly subject to a variety of assumptions, some or all of which may not be realized. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 18 Results of Operations The following tables set forth the statement of operations data for the Company expressed in dollars and as a percentage of net sales for the periods indicated.

Net sales consist primarily of comparable store net sales, new store net sales, Service Store net sales, net sales for Wholesale and finance charges on installment sales. Comparable store net sales is calculated based on the change in net sales starting once a store has been opened for thirteen complete accounting periods (each period represents four weeks). Relocations are included in comparable store net sales from the original date of opening. The Company does not include the Service Stores in the comparable store net sales calculation. 19 The Company's cost of sales includes merchandise costs and warehouse and distribution expenses as well as service labor costs for the Service Stores. Gross profit as a percentage of net sales may be affected by variations in the Company's product mix, price changes in response to competitive factors and fluctuations in merchandise costs and vendor programs. The Company seeks to avoid fluctuation in merchandise costs by entering into long-term purchasing agreements with vendors in exchange for pricing certainty, but there can be no assurance such measures will in fact mitigate the effect of fluctuations in merchandise costs on gross profits. Selling, general and administrative expenses are comprised of store payroll, store occupancy, net advertising expenses, depreciation and amortization, other store expenses and general and administrative expenses, including salaries and related benefits of corporate employees, administrative office expenses, data processing, professional expenses and other related expenses. Twelve Weeks Ended October 6, 2001 Compared to Twelve Weeks Ended October 7, 2000 Net sales for the twelve weeks ended October 6, 2001 were $598.8 million, an increase of $46.7 million or 8.4% over net sales for the twelve weeks ended October 7, 2000. Net sales for the Retail segment increased $52.7 million or 10.0%. The net sales increase for the Retail segment was due to an increase in the comparable store sales and contributions from new stores opened within the last year. The comparable store sales increase of 7.1% was primarily a result of growth in both the DIY and DIFM market segments. Comparable store sales increased 4.0% for the twelve weeks ended October 7, 2000 as compared to the comparable period of fiscal 1999. Net sales for the Wholesale segment decreased $6.0 million or 24.5% reflecting the continued decline of this segment due to increased competition coupled with a decline in the number of independently owned dealer stores. During the twelve weeks ended October 6, 2001, the Company opened 30 new stores, relocated six stores and closed four stores, bringing the total retail stores to 1,791. During the third quarter of fiscal 2001, the Company had 1,195 stores participating in its commercial delivery program, as a result of consolidating five stores during the twelve week period ended October 6, 2001. Gross profit for the twelve weeks ended October 6, 2001 was $244.1 million or 40.8% of net sales, as compared to $223.9 million or 40.6% of net sales in the twelve weeks ended October 7, 2000. The increase in gross profit percentage is reflective of a positive shift in product mix partially offset by higher inventory shrinkage. The gross profit for the Retail segment was $241.0 million or 41.5% of net sales for the twelve week period ended October 6, 2001, as compared to $219.7 million or 41.7% of net sales for the twelve week period ended October 7, 2000. Selling, general and administrative expenses, before non-cash and other employee compensation, increased to $204.6 million or 34.2% of net sales for the twelve week period ended October 6, 2001, from $193.5 million or 35.0% of net sales for the twelve week period ended October 7, 2000. The decrease in selling, general and administrative expenses as a percentage of sales is attributable to decreased medical claims and lower depreciation as a percentage of sales compared to the prior quarter. EBITDA (operating income plus depreciation and amortization), as adjusted for non-cash and other employee compensation, was $56.0 million in the twelve week period ended October 6, 2001 or 9.4% of net sales, as compared to $46.6 million or 8.4% of net sales in the twelve week period ended October 7, 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. The Company's method for calculating EBITDA may differ from similarly titled measures reported by other companies. Management believes certain one-time expenses, expenses associated with merger integration and non-cash and other employee compensation should be eliminated from the EBITDA calculation to evaluate the operating performance of the Company. Interest expense in the twelve weeks ended October 6, 2001 was $9.5 million or 1.6% of net sales, as compared to $12.9 million or 2.3% of net sales in the twelve week period ended October 7, 2000. Interest expense decreased as a result of an overall reduction in average borrowings and a decrease in interest rates for the twelve weeks ended October 6, 2001 as compared to the twelve weeks ended October 7, 2000. 20 Income tax expense for the twelve weeks ended October 6, 2001 was $11.1 million compared to $6.7 million in the twelve weeks ended October 7, 2000. This increase was primarily due to the increase in income before taxes for the twelve weeks ended October 6, 2001 as compared to the twelve weeks ended October 7, 2000. The Company recorded net income of $17.2 million for the twelve weeks ended October 6, 2001, as compared to $14.0 million for the twelve week period ended October 7, 2000. As a percentage of sales, net income for the twelve week period ended October 6, 2001 was 2.9% as compared to 2.5% for the twelve week period ended October 7, 2000. Forty Weeks Ended October 6, 2001 Compared to Forty Weeks Ended October 7, 2000 Net sales for the forty weeks ended October 6, 2001 were $1,935.6 million, an increase of $148.3 million or 8.3% over net sales for the forty weeks ended October 7, 2000. Net sales for the Retail segment increased $168.0 million or 10.0%. The net sales increase for the Retail segment was due to an increase in the comparable store sales of 6.5% and contributions from new stores opened within the last year. The comparable store sales increase of 6.5% was primarily a result of growth in both the DIY and DIFM customer base, as well as the continued maturation of new stores. Comparable store sales increased 3.8% for the forty weeks ended October 7, 2000 as compared to the comparable period of fiscal 1999. Net sales for the Wholesale segment decreased $19.7 million or 19.8%, reflecting the continued decline of this segment due to increased competition coupled with a decline in the number of independently owned dealer stores. During the forty weeks ended October 6, 2001, the Company opened 83 new stores, relocated 15 stores and closed 21 stores, bringing the total retail stores to 1,791. The Company has 1,195 stores participating in its commercial delivery program, as a result of consolidating 15 stores during the forty weeks ended October 6, 2001. Gross profit for the forty weeks ended October 6, 2001 was $784.3 million or 40.5% of net sales, as compared to $699.4 million or 39.1% of net sales in the forty weeks ended October 7, 2000. The increase in the gross profit percentage is reflective of an $8.3 million net gain recorded as a reduction to cost of sales during the first quarter of fiscal 2001 as a result of a vendor settlement. The remaining increase in the gross profit percentage is reflective of a positive shift in product mix. The gross profit for the Retail segment was $773.6 million or 41.7% of net sales for the forty week period ended October 6, 2001, as compared to $687.6 million or 40.7% of net sales for the forty week period ended October 7, 2000. Selling, general and administrative expenses, before non-cash and other employee compensation, increased to $674.8 million or 34.9% of net sales for the forty week period ended October 6, 2001, from $616.2 million or 34.5% of net sales for the forty week period ended October 7, 2000. Selling, general and administrative expenses have increased due to closed store expenses associated with the decision to close certain store locations not meeting profitability objectives and the write down of an administrative facility obtained in the Western Merger totaling $5.1 million. Additionally, as a percentage of sales, the increase in selling, general and administrative expenses is attributable to the investment in store personnel since the prior year comparable period. EBITDA (operating income plus depreciation and amortization), as adjusted for non-cash and other employee compensation, was $163.2 million in the forty week period ended October 6, 2001 or 8.4% of net sales, as compared to $133.9 million or 7.5 % of net sales in the forty week period ended October 7, 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. The Company's method for calculating EBITDA may differ from similarly titled measures reported by other companies. Management believes certain one-time expenses, expenses associated with merger integration and non-cash and other employee compensation should be eliminated from the EBITDA calculation to evaluate the operating performance of the Company. Interest expense for the forty week period ended October 6, 2001 was $36.6 million or 1.9% of net sales, as compared to $44.2 million or 2.5% of net sales for the forty week period ended October 7, 2000. The decrease in interest expense is a result of the reduction in net outstanding borrowings as well as a decrease in interest rates over the similar period of fiscal year 2000. 21 Income tax expense for the forty weeks ended October 6, 2001 was $27.1 million compared to $14.4 million in the forty weeks ended October 7, 2000. This increase was primarily due to an increase in income before taxes for the forty week period ended October 6, 2001 as compared to the forty week period ended October 7, 2000. As a result of the above factors, the Company recorded net income of $42.5 million for the forty week period ended October 6, 2001, as compared to $26.8 million for the forty week period ended October 7, 2000. As a percentage of sales, net income for the forty week period ended October 6, 2001 was 2.2% as compared to 1.5% for the forty week period ended October 7, 2000. Liquidity and Capital Resources The Company believes it will have sufficient liquidity to fund its debt service obligations and implement its growth strategy over the next twelve months. As of October 6, 2001, the Company had outstanding indebtedness consisting of $169.5 million of Senior Subordinated Notes (the "Senior Subordinated Notes"), borrowings of $260.3 million under the bank credit facility (the "Credit Facility") and $10.0 million of indebtedness under the McDuffie County Development Authority Taxable Industrial Bonds ("IRB"). The loans under the Credit Facility are secured by a first priority security interest in substantially all tangible and intangible assets of the Company. Amounts available to the Company under portions of the Credit Facility are subject to a borrowing base formula, which is based on certain percentages of the Company's inventories, and certain debt covenants. The Company was in compliance with the above covenants under the Credit Facility as of October 6, 2001. As of October 6, 2001, $108.6 million was available under these facilities. The Company intends to use borrowings under the Credit Facility, as well as internally generated funds, for store expansion and funding of working capital, including funding of the restructuring program. The Company's primary capital requirements have been the funding of its continued store expansion program, store relocations and remodels, inventory requirements, the construction and upgrading of distribution centers, the development and implementation of proprietary information systems, the Western Merger and the Carport acquisition. The Company has financed its growth through a combination of internally generated funds, borrowings under the Credit Facility and issuances of equity. In connection with the Discount Merger, the Company has obtained financing commitments to fund the cash portion of consideration to be paid to Discount shareholders and in-the-money option holders, refinance its existing Credit Facility, repay Discount's indebtedness and premiums ($210.8 million at August 28, 2001 plus repayment premiums of $6.3 million), purchase Discount's Gallman distribution facility from the lessor (approximately $34.0 million) and pay approximately $35.0 million in related transaction fees and expenses. The financing has been secured in the form of senior subordinated notes and the refinancing of the Credit Facility, which is described below. On October 31, 2001, the Company finalized its offering of $200.0 million in senior subordinated notes (the "Notes") offered at an issue price of 92.802%, yielding gross proceeds of approximately $185.6 million. The Notes mature on April 15, 2008 and bear interest at 10.25% payable semi-annually on April 15 and October 15. The Notes will be fully and unconditionally guaranteed on a unsecured senior subordinated basis by each of the Company's existing and future restricted subsidiaries that guarantees any indebtedness of the Company or any other restricted subsidiary. The Notes are redeemable at the Company's option, in whole or in part, at any time on or after April 15, 2003, in cash at the redemption prices described in the offering plus accrued and unpaid interest and liquidating damages, if any, at the redemption date. The Notes also contain certain covenants that will limit, among other things, the Company and its subsidiaries ability to incur additional indebtedness and issue preferred stock, pay dividends or 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. 22 Additionally, the Company has received a binding commitment, subject to customary conditions, for a new senior credit facility (the "Facility") consisting of (1) a $180.0 million tranche A term loan facility due 2006 and a $305.0 million tranche B term loan facility due 2007 and (2) a $160.0 million revolving credit facility (including a letter of credit subfacility). The Facility will be jointly and severally guaranteed by all of the Company's domestic subsidiaries (including Discount and its subsidiaries) and Advance and will be secured by substantially all of the Company's assets, the assets of our existing and future domestic subsidiaries (including Discount and its subsidiaries), as well as the assets of Advance. Upon the closing of the Discount Merger, the Company expects to borrow the $485.0 million under the tranche A and tranche B term loan facilities and also anticipates borrowing approximately $10.0 million under the revolving credit facility to fund the merger. In addition, we expect to have approximately $18.0 million in letters of credit outstanding at the closing, which will reduce availability under the revolving credit facility to approximately $132.0 million. The Company's new Advance Auto Parts stores 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. The Company expects to open approximately 110 new stores through internal growth or strategic acquisitions during fiscal 2001, of which 83 have been opened or acquired as of October 6, 2001. Historically, the Company has negotiated extended payment terms from suppliers to help finance inventory growth, and the Company believes that it will be able to continue financing much of its inventory growth through such extended payment terms. The Company anticipates that inventory levels will continue to increase primarily as a result of new store openings. As a result of the Western Merger and the Carport acquisition, the Company closed certain Advance Auto Parts stores in overlapping markets or stores not meeting profitability objectives. As part of normal operations, the Company will continue to review store performance and close additional stores not meeting profitability objectives. The Western Merger and Carport acquisition also resulted in restructuring reserves recorded in purchase accounting for the closure of certain stores, severance and relocation costs and other facility exit costs. As of October 6, 2001, these reserves had a remaining balance of $9.6 million. In addition, the Company also assumed certain restructuring and deferred compensation liabilities previously recorded by Western. At October 6, 2001, the total liability for the restructuring and deferred compensation plans was $1.8 million and $4.3 million, respectively, of which $0.9 million and $1.2 million, respectively, is recorded as a current liability. The classification for deferred compensation is determined by payment terms elected by the plan participants, primarily former Western employees, which can be changed upon 12 months' notice. For the forty weeks ended October 6, 2001, net cash provided by operating activities was $125.6 million. Of this amount, $42.5 million was provided by net income. Depreciation and amortization provided an additional $53.6 million, amortization of deferred debt issuance costs provided $2.3 million and $27.2 million was provided as a result of a net decrease in working capital and other. Net cash used for investing activities was $68.7 million and was comprised primarily of capital expenditures and the purchase of net assets related to the Carport acquisition. Net cash used in financing activities was $63.0 million and was comprised primarily of payments on the Credit Facility. Seasonality The Company's business is somewhat seasonal in nature, with the highest sales occurring in the spring and summer months. In addition, the Company's business is affected by weather conditions. While unusually heavy precipitation tends to soften sales as elective maintenance is deferred during such periods, extremely hot and cold weather tends to enhance sales by causing parts to fail. 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company currently utilizes no material derivative financial instruments that expose it to significant market risk. The Company is exposed to cash flow and fair value risk due to changes in interest rates with respect to its long-term debt. While the Company cannot predict the impact that interest rate movements will have on its debt, exposure to rate changes is managed through the use of fixed and variable rate debt. The Company's exposure to interest rate risk decreased during the first three quarters of fiscal 2001 due to decreased interest rates and reduced variable rate debt. The Company's fixed rate debt consists primarily of outstanding balances on the Senior Subordinated Notes. The Company's variable rate debt relates to borrowings under the Credit Facility and the IRB. The Company's variable rate debt is primarily vulnerable to movements in the LIBOR, Prime, Federal Funds and Base CD rates. The table below presents principal cash flows and related weighted average interest rates on the Company's long-term debt at October 6, 2001 by expected maturity dates. Expected maturity dates approximate contract terms. Fair values included herein have been determined based on quoted market prices. Weighted average variable rates are based on implied forward rates in the yield curve at October 6, 2001. Implied forward rates should not be considered a predictor of actual future interest rates.

24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Coalition for a Level Playing Field, et. al. v. AutoZone, Inc. et. al, Case No.00-0953 in and for the United District Court, Eastern District of New York. In February 2000, the Coalition for a Level Playing Field and over one hundred independent automotive parts and accessories aftermarket warehouse distributors and jobbers filed a lawsuit in the United States District for the Eastern District of New York against various automotive retailers. In March 2000, Advance was notified that it had been named in the lawsuit. The plaintiffs claim that the defendants have knowingly 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 Advance, led a motion to dismiss in late October 2000. The plaintiffs filed their response to such motion to dismiss in January 2001 and the defendants have filed a response to the plaintiffs' responsive pleadings. Any discovery would follow after disposition by the court of such motion to dismiss. Advance believes these claims are without merit and intends to defend them vigorously; however, the ultimate outcome of this matter can not be ascertained at this time. The Company is also involved in various other claims, lawsuits and environmental issues arising in the normal course of business. The damages claimed against the Company in some of these proceedings are substantial. Although the final outcome of these legal matters cannot be determined, based on the facts presently known, it is management's opinion that the final outcome of such claims and lawsuits will not have a material, adverse effect on the Company's financial position or future results of operations. 25 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADVANCE STORES COMPANY, INCORPORATED a Virginia corporation November 8, 2001 By: /s/ Jimmie L. Wade ----------------------------------------------- Jimmie L. Wade President and Chief Financial Officer (as principal executive and accounting officer) S-1

ADVANCE STORES CO INC 10-Q