0000898430-01-503262.txt : 20011119 0000898430-01-503262.hdr.sgml : 20011119 ACCESSION NUMBER: 0000898430-01-503262 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 20011106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCE AUTO PARTS INC CENTRAL INDEX KEY: 0001158449 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO & HOME SUPPLY STORES [5531] IRS NUMBER: 542049910 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-68858 FILM NUMBER: 1775938 BUSINESS ADDRESS: STREET 1: 5673 AIRPORT RD CITY: ROANOKE STATE: VA ZIP: 24012 BUSINESS PHONE: 5405613225 MAIL ADDRESS: STREET 1: 5673 AIRPORT RD CITY: ROANOKE STATE: VA ZIP: 24012 S-4/A 1 ds4a.txt AMENDMENT NO. 2 TO FORM S-4 As filed with the Securities and Exchange Commission on November 6, 2001 Registration No. 333-68858 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- AMENDMENT NO. 2 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- ADVANCE AUTO PARTS, INC. (Exact name of registrant as specified in its charter) Delaware 5531 54-2049910 (State or other jurisdiction of (Primary Standard Industrial (Employer incorporation or organization) Classification Code Number) Identification No.)
5673 Airport Road, Roanoke, VA 24012 (540) 362-4911 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------- Jimmie L. Wade President and Chief Financial Officer 5673 Airport Road, Roanoke, VA 24012 (540) 362-4911 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- Copies To: Thomas M. Cleary, Esq. Gary I. Teblum, Esq. Thomas A. Waldman, Esq. Trenam, Kemker, Scharf, Riordan & McKinzie Barkin, Frye, O'Neill & Mullis, P.A. 300 South Grand Avenue, 29th Floor 101 E. Kennedy Boulevard, Suite 2700 Los Angeles, California 90071 Tampa, Florida 33602
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective and all other conditions to the transactions described herein have been satisfied or waived. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] CALCULATION OF REGISTRATION FEE
-------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- Proposed Maximum Proposed Title of Each Class of Aggregate Maximum Amount of Securities to be Amount to be Offering Offering Price Registration Registered Registered(1)(2) Price(3) Per Share(4) Fee -------------------------------------------------------------------------------------- Common Stock, par value $0.0001 per share..... 4,305,632 $109,019,197.60 $25.32 $27,255.00(5) -------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------
(1) This Registration Statement relates to securities of the registrant issuable to holders of common stock, par value $0.01 per share (the Discount common stock), of Discount Auto Parts, Inc., a Florida corporation (Discount), pursuant to the proposed merger of AAP Acquisition Corporation, a Florida corporation and a wholly owned subsidiary of the registrant, with and into Discount. (2) Represents the maximum number of shares of Advance common stock issuable upon completion of the merger described in this document, assuming the conversion of each outstanding share of common stock (or common stock equivalent) of Discount Auto Parts, Inc. into 0.2577 shares of Advance common stock. (3) Estimated solely for purposes of calculating the registration fee required by Section 6(b) of the Securities Act and calculated pursuant to Rule 457(f) under the Securities Act. Pursuant to Rule 457(f)(1) and Rule 457(f)(3) under the Securities Act, the proposed maximum aggregate offering price of the registrant's common stock was calculated based upon (a) the market value of shares of Discount common stock (the securities to be cancelled in the merger) in accordance with Rule 457(c) under the Securities Act, determined as the product of (i) $14.025, the average of the high and low prices per share of Discount common stock on August 24, 2001, as reported on the New York Stock Exchange, and (ii) 16,707,923, the aggregate number of shares of Discount common stock outstanding as of August 24, 2001, less (b) the cash to be paid by the registrant in connection with the exchange of such aggregate number of shares of Discount common stock. (4) The Proposed Maximum Offering Price Per Share is derived by dividing the number of shares of common stock to be registered into the Proposed Maximum Aggregate Offering Price. There is no current market for Advance common stock. The actual value of a share of Advance common stock issued upon consummation of the merger may be higher or lower than the amount shown here, and will reflect the market price of Discount common stock immediately prior to consummation of the merger. (5) Previously paid. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this proxy statement and prospectus is not complete and + +may be subject to change. We may not sell these securities until the + +registration statement filed with the Securities and Exchange Commission is + +effective. This prospectus is not an offer to sell these securities and we + +are not soliciting offers to buy these securities in any jurisdiction where + +these activities are not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED NOVEMBER 6, 2001 [LOGO OF ADVANCE AUTO PARTS] [LOGO OF DISCOUNT AUTO PARTS] November 6, 2001 PROPOSED MERGER--YOUR VOTE IS VERY IMPORTANT The board of directors of Advance Auto Parts, Inc. and Discount Auto Parts, Inc. have each unanimously approved a merger transaction that will combine the two companies. We believe that the merger will benefit the shareholders of Discount Auto Parts, Inc. and we ask for your support in voting for the merger proposal. Under the terms of the proposed merger, Discount Auto Parts, Inc., or Discount, will merge with a subsidiary of Advance Auto Parts, Inc., or Advance, and continue as the surviving corporation and wholly owned subsidiary of Advance. Immediately after the merger, Advance will contribute the common stock of Discount received in the merger to Advance Stores Company, Incorporated, or Advance Stores, a company that will have become a wholly owned subsidiary of Advance as a result of a simultaneous merger of Advance Holding Corporation, or Advance Holding, the current parent company of Advance Stores, into Advance. You should read carefully the merger agreement, a copy of which is attached as Annex A to the accompanying proxy statement and prospectus. As a result of the merger, each share of Discount common stock will be converted into the right to receive 0.2577 of a share of Advance common stock and $7.50 in cash. Advance expects to issue approximately 4.3 million shares of common stock to Discount shareholders in the merger, which will represent approximately 13.2% of the total number of shares of Advance after the merger. Discount's common stock is listed on the New York Stock Exchange. Advance's common stock is not currently listed on an exchange or Nasdaq, but Advance has applied for listing of its common stock on the New York Stock Exchange. The affirmative vote of holders of a majority of Discount's outstanding shares of common stock is necessary to approve the merger agreement and the merger. The accompanying proxy statement and prospectus provides you with a summary of the merger agreement and additional information about the parties involved. If the merger agreement is approved by the requisite holders of Discount's common stock, the closing of the merger will occur after a special meeting of Discount's shareholders and when all of the other conditions to the closing of the merger are satisfied or waived. This document provides you with detailed information about the merger and the shareholders meeting. You can also obtain financial and other information about Discount, Advance, Advance Holding and Advance Stores from documents filed with the Securities and Exchange Commission. We encourage you to carefully read this entire document. Jimmie L. Wade Peter J. Fontaine President and Chief Financial Officer Chairman and Chief Executive Officer Advance Auto Parts, Inc. Discount Auto Parts, Inc. See "Risk Factors" beginning on page 16 for a discussion of risks that should be considered by Discount's shareholders before voting at the Discount special meeting of shareholders. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the shares of Advance common stock to be issued in the merger or determined if this proxy statement and prospectus is accurate or adequate. Any representation to the contrary is a criminal offense. This proxy statement and prospectus is dated November 6, 2001 and is first being mailed to shareholders of Discount on or about November 7, 2001. DISCOUNT AUTO PARTS, INC. 4900 Frontage Road South Lakeland, Florida 33815 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS To Be Held on November 28, 2001 To the Shareholders of Discount Auto Parts, Inc.: A special meeting of shareholders of Discount Auto Parts, Inc. will be held at The Lakeland Center, 700 West Lemon Street, Lakeland, Florida, on Wednesday, November 28, 2001 at 9:00 a.m. local time, for the following purposes: 1. To consider and vote upon a proposal to approve the merger of Discount with a wholly owned subsidiary of Advance Auto Parts, Inc., or Advance, and adopt the merger agreement, under which: . Discount will be merged with a wholly owned merger subsidiary of Advance, and Discount will continue as the surviving corporation and be a wholly owned, indirect subsidiary of Advance; immediately after the merger, Advance will contribute the common stock of Discount received in the merger to Advance Stores Company, Incorporated, or Advance Stores, a company that will become a wholly owned subsidiary of Advance as a result of a simultaneous merger of Advance Holding Corporation, or Advance Holding, the current parent of Advance Stores, into Advance, and Discount will become a wholly owned subsidiary of Advance Stores; and . each issued and outstanding share of Discount common stock will be converted into and represent the right to receive 0.2577 of a share of Advance common stock and $7.50 in cash and any cash in lieu of a fractional share of Advance common stock. 2. To transact any other business or act on any other matter, including any proposal to adjourn or postpone the meeting for the purpose of soliciting additional proxies or for any other purpose, as may properly come before the special meeting or any adjournment or postponement of the special meeting. Our board of directors has approved the merger agreement and the merger and recommends that you vote FOR approval of the merger agreement and the merger. These proposals are described in more detail in the accompanying proxy statement and prospectus, which you should read in its entirety before voting. A copy of the merger agreement is attached as Annex A to the accompanying proxy statement and prospectus. Only shareholders of record at the close of business on October 25, 2001 are entitled to notice of the special meeting and to vote at the special meeting and at any adjournments thereof. For ten days prior to the special meeting, a complete list of shareholders entitled to vote at the special meeting will be available for examination by any shareholder for any purpose relevant to the special meeting during ordinary business hours at the principal executive offices of Discount located in Lakeland, Florida. All Discount shareholders are cordially invited to attend the special meeting in person. However, to ensure your representation at the special meeting, you are urged to complete, sign and return the enclosed proxy card as promptly as possible in the enclosed postage-prepaid envelope. You may revoke your proxy in the manner described in the accompanying proxy statement and prospectus at any time before it is voted at the special meeting. If you fail to return a properly executed proxy card or vote in person at the special meeting, the effect will be a vote against the proposal to approve the merger agreement and the merger. Please do not send any stock certificates at this time. By order of the board of directors, C. Michael Moore Secretary Lakeland, Florida November 6, 2001 TABLE OF CONTENTS
Page ---- QUESTIONS AND ANSWERS ABOUT THE PROPOSALS................................ 1 SUMMARY.................................................................. 4 UNAUDITED COMPARATIVE PER SHARE DATA..................................... 15 RISK FACTORS............................................................. 16 Risk Factors Relating to the Merger...................................... 16 Risk Factors Relating to Advance's Business.............................. 19 Special Note Regarding Forward-Looking Statements........................ 23 THE SPECIAL MEETING...................................................... 24 Date, Place and Time..................................................... 24 Purpose of the Special Meeting........................................... 24 Record Date and Stock Entitled to Vote................................... 24 Quorum Requirement....................................................... 24 Vote Required............................................................ 24 Proxies.................................................................. 24 Proxy Solicitation....................................................... 25 No Appraisal Rights...................................................... 25 Other Matters Brought Before the Special Meeting; Adjournments and Postponements........................................................... 25 THE MERGER............................................................... 27 Background of the Merger Between Advance and Discount.................... 27 Discount's Reasons for the Merger........................................ 32 Advance's Reasons for the Merger......................................... 34 Recommendation of the Board of Directors of Discount..................... 34 Opinion of Discount's Financial Advisor.................................. 35 Discount Standalone Analyses............................................. 38 Contribution Analysis.................................................... 40 Other Factors............................................................ 40 Miscellaneous............................................................ 40 Certain Financial Projections and Forecasts.............................. 41 Interests of Discount's Officers and Directors in the Merger............. 43 Accounting Treatment..................................................... 46 Material U.S. Federal Income Tax Consequences of the Merger.............. 46 Delisting and Deregistration of Discount Common Stock.................... 48 Regulatory Matters....................................................... 48 Restrictions on Sales by Discount Affiliates............................. 48 Financing Commitments.................................................... 49 THE MERGER AGREEMENT..................................................... 52 Structure of Merger and Certain Related Transactions..................... 52 Merger Consideration..................................................... 52 Post Closing Capitalization.............................................. 52 Effective Time of the Merger............................................. 52 Directors and Officers of Discount....................................... 52 Treatment of Discount Stock Options in the Merger........................ 53 Exchange Agent; Procedures for Exchange of Certificates.................. 53 Representations and Warranties........................................... 54 Definition of Material Adverse Effect.................................... 55 No Solicitation.......................................................... 55 Conduct of the Business.................................................. 57
i TABLE OF CONTENTS--(Continued)
Page ---- Meeting of Discount Shareholders; Obligations to Recommend............... 59 Filings; Other Actions................................................... 59 Proxy Statement; Registration Statement.................................. 60 Expenses................................................................. 60 Certain Employee Benefit Plan Obligations of Advance..................... 60 Cooperation and Access Between Advance and Discount...................... 60 Notification of Specified Events......................................... 61 Conditions to Obligation of Each Party to Complete the Merger............ 61 Additional Conditions to Obligations of Advance to Complete the Merger... 62 Additional Conditions to Obligations of Discount to Complete the Merger.. 62 Termination.............................................................. 62 Termination Fee and Expenses............................................. 63 Amendments to Merger Agreement; Extension and Waiver..................... 64 Indemnification, Exculpation and Insurance............................... 65 OTHER AGREEMENTS OR TRANSACTIONS......................................... 66 Voting Agreement......................................................... 66 Option Agreement......................................................... 66 Advance Voting Agreement................................................. 67 Reincorporation Merger Between Advance and Advance Holding............... 67 INFORMATION CONCERNING ADVANCE........................................... 68 Advance's Business....................................................... 68 Advance's History...................................................... 68 Store Operations....................................................... 69 Purchasing and Merchandising........................................... 71 Marketing and Advertising.............................................. 71 Warehouse and Distribution............................................. 71 Management Information Systems......................................... 72 Logistics and Purchasing Information Systems........................... 74 Employees.............................................................. 74 Competition............................................................ 74 Trade Names, Service Marks and Trademarks.............................. 75 Environmental Matters.................................................. 75 Properties............................................................. 76 Legal Proceedings...................................................... 76 Selected Historical Consolidated Financial and Other Data of Advance Holding................................................................. 77 Management's Discussion and Analysis of Financial Condition and Results of Operations of Advance Holding........................................ 81 General................................................................ 81 Acquisitions and Recapitalization...................................... 81 Recent Developments.................................................... 83 Results of Operations.................................................. 84 Net Sales.............................................................. 85 Cost of Sales.......................................................... 85 Selling, General and Administrative Expenses........................... 85 Liquidity and Capital Resources........................................ 89 Seasonality............................................................ 93 Quantitative and Qualitative Disclosures About Market Risks............ 93 Recent Accounting Pronouncements....................................... 94
ii TABLE OF CONTENTS--(Continued)
Page ---- Principal Stockholders of Advance Holding................................ 95 Related Party Transactions of Advance.................................... 97 INFORMATION CONCERNING DISCOUNT.......................................... 101 Discount's Business...................................................... 101 Operating Strategies................................................... 101 Utilizing Advanced Information Systems................................. 104 Growth Strategies...................................................... 105 Commercial Market Business............................................. 107 Store Operations....................................................... 108 Purchasing and Distribution............................................ 109 Advertising and Promotion.............................................. 109 Competition............................................................ 109 Team Members........................................................... 110 Trademarks............................................................. 110 Discount's Properties.................................................. 110 Legal Proceedings...................................................... 111 Selected Historical Consolidated Financial and Other Data of Discount.... 112 Management's Discussion and Analysis of Financial Condition and Results of Operations of Discount............................................... 114 Results of Operations.................................................. 114 Liquidity and Capital Resources........................................ 117 Inflation and Seasonality.............................................. 119 Quantitative and Qualitative Disclosures about Market Risk............. 119 Principal Shareholders of Discount....................................... 120 Agreement and Plan of Merger--Potential Changes in Control............... 122 Related Party Transactions of Discount................................... 122 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA.......................... 124 MARKET FOR ADVANCE'S AND DISCOUNT'S COMMON STOCK AND DIVIDENDS........... 133 MANAGEMENT OF ADVANCE AFTER THE MERGER................................... 134 Directors and Executive Officers of Advance After the Merger............. 134 Executive Compensation................................................... 137 Executive Employment Contracts........................................... 138 Consulting Agreement..................................................... 138 Compensation of Directors................................................ 139 Stock Subscription Plans................................................. 139 Stock Option Plans....................................................... 139 Option Grants............................................................ 140 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values.................................................................. 141 Compensation Committee Interlocks and Insider Participation.............. 141 DESCRIPTION OF THE CAPITAL STOCK OF ADVANCE.............................. 142 Common Stock............................................................. 142 Preferred Stock.......................................................... 142 Stockholders Agreement................................................... 142 Registration Rights of Stockholders...................................... 144 Potential Anti-takeover Effect of Delaware Law, Advance's Certificate of Incorporation and Bylaws................................................ 144 Listing.................................................................. 145 Transfer Agent and Registrar............................................. 145 Lock-up Agreements....................................................... 145
iii TABLE OF CONTENTS--(Continued)
Page ---- Rule 144................................................................. 145 Rule 701................................................................. 146 Registration of Shares Under Stock Option Plans.......................... 146 COMPARISON OF RIGHTS BETWEEN DISCOUNT SHAREHOLDERS AND ADVANCE STOCKHOLDERS............................................................ 147 LEGAL MATTERS............................................................ 154 EXPERTS.................................................................. 154 WHERE YOU CAN FIND MORE INFORMATION ABOUT ADVANCE AND DISCOUNT........... 154
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES............................... F-1 Annex A--Merger Agreement, dated August 7, 2001, among Advance Holding Corporation, Advance Auto Parts, Inc., Advance Stores Company, Incorporated, AAP Acquisition Corporation and Discount Auto Parts, Inc. Annex B--Opinion of Salomon Smith Barney Inc.
iv QUESTIONS AND ANSWERS ABOUT THE PROPOSALS Q: What am I being asked to vote upon? A: You are being asked to adopt a merger agreement that provides for a wholly owned subsidiary of Advance to be merged into Discount. If the merger and related transactions are completed, Discount will be an indirect, wholly owned subsidiary of Advance. Discount will no longer be a publicly-traded corporation, and you will no longer own shares of Discount common stock. Upon the closing of the merger, Advance will become a public company and the Advance shares that you will receive are expected to be listed for trading on the New York Stock Exchange. Advance has applied for such listing. Q: What will I receive in the merger? A: If we complete the merger, you will receive $7.50 in cash and 0.2577 of a share of Advance common stock for each share of Discount common stock you hold on the date of the merger. Advance will not issue fractional shares in the merger. Instead, you will receive cash in an amount determined by multiplying the fraction of a share of Advance common stock to which you are entitled by $29.11. Q: Does Discount's board of directors recommend voting in favor of the merger agreement and merger? A: Yes. After careful consideration, your board of directors has determined that the merger is fair to you and in your best interests as a shareholder of Discount. Discount's board of directors has unanimously approved the merger agreement and the merger and unanimously recommends that you vote in favor of the merger agreement and the merger. Q: Will I recognize taxable gain or loss for U.S. federal income tax purposes in the merger? A: Legal counsel to Discount has opined, subject to some assumptions and based on certain representations of fact, that the merger should be treated for U.S. federal income tax purposes as part of an exchange within the meaning of Section 351 of the Internal Revenue Code, assuming the contemporaneous merger of Advance Holding into Advance. Assuming that the merger so qualifies, in general, a Discount shareholder will not recognize loss, but will recognize gain to the extent of the lesser of (i) the excess, if any, of (x) the sum of the fair market value (on the effective date of the merger) of the Advance common stock and the cash received by you pursuant to the merger over (y) your tax basis in your shares of Discount common stock, and (ii) the cash received by you pursuant to the merger. Such gain, if any, should be long-term capital gain if your Discount common stock was held for more than one year at the time the merger becomes effective. Tax matters are very complicated, and the tax consequences of the merger to each Discount shareholder will depend on the shareholder's particular facts and circumstances. We strongly encourage you to consult your own tax advisor to determine your particular tax consequences. For a more complete description of the tax consequences of the merger, see the section entitled "Material U.S. Federal Income Tax Consequences of the Merger." Q: Are there risks I should consider in deciding whether to vote for the merger? A: Yes. The number of shares of Advance common stock that you will receive in the merger will not be adjusted based on changes in the market price of Discount common stock before the completion of the merger. Advance's common stock is not currently publicly traded and therefore the value of the stock cannot be precisely determined. As a result, you will not know the market value of the Advance shares you would receive in the merger at the time you vote on the merger. Discount is not permitted to "walk away" from the merger or resolicit the vote of its shareholders based on changes in the market price of 1 Discount common stock. You should carefully consider these and other factors discussed in the section entitled "Risk Factors." You should also see the sections entitled "The Merger--Discount's Reasons for the Merger" and "-- Recommendation of Discount's Board of Directors of Discount." Q: Do I have dissenters' rights of appraisal? A: No. Under Florida law, Discount shareholders are not entitled to dissenters' rights of appraisal in connection with the merger. Q: What do I need to do now? A: We urge you to read this proxy statement and prospectus carefully, including its annexes, and to consider how the merger affects you as a shareholder. You may also want to review the documents referenced under "Where You Can Find More Information About Advance And Discount." Q: How do I vote? A: Simply indicate on your proxy card how you want to vote, and sign and mail your proxy card in the enclosed return envelope as soon as possible so that your shares may be represented at the special meeting. If you do not include instructions on how to vote your proxy, we will vote your shares "FOR" approval and adoption of the merger agreement and the merger unless your shares are held in a brokerage account (see the next Question and Answer regarding shares held by brokers in "street name"). If you fail to return your proxy card or to vote in person, the effect will be a vote against the merger agreement and the merger. For a more complete description of voting at the meeting, see the section entitled "The Special Meeting--Proxies." Q: If my shares are held in "street name" by my broker, will my broker vote my shares for me? A: Your broker will vote your shares only if you provide instructions on how to vote in accordance with the information and procedures provided to you by your broker. If you do not instruct your broker to vote your shares, it will be equivalent to voting against the merger agreement and the merger. For a more complete description of voting shares held in "street name," see the section entitled "The Special Meeting--Proxies." Q: What do I do if I want to change my vote? A: If you want to change your vote, send the secretary of Discount a later- dated, signed proxy card before the special meeting or attend the meeting and vote in person. You may also revoke your proxy by sending a written notice of revocation to the corporate secretary of Discount before the meeting. For a more complete description of how to change your vote, see the section entitled "The Special Meeting--Proxies." Q: Should I send in my stock certificates now? A: No. After we complete the merger, we will send you written instructions for exchanging your Discount stock certificates for Advance common stock certificates and the cash portion of the merger consideration, which will be paid by check. Q: When do you expect to complete the merger? A: Subject to shareholder approval and satisfaction of other important conditions to closing, we expect to complete the merger promptly after the special meeting. For a description of the conditions to completion of the merger, see the section entitled "The Merger Agreement--Conditions to Obligation of Each Party to Complete the Merger." 2 Q: Whom should I call with questions? A: You should call Discount's investor relations department at (863) 687-9226 or Discount's proxy solicitor, Mellon Investor Services LLC, at (917) 320- 6285 with any questions about the merger. You may also obtain additional information about Discount and Advance, Advance Holding and Advance Stores from documents filed by them with the Securities and Exchange Commission by following the instructions in the section entitled "Where You Can Find More Information About Advance and Discount." 3 SUMMARY The Companies Advance Auto Parts, Inc. 5673 Airport Road Roanoke, Virginia 24012 (540) 362-4911 As of July 14, 2001, Advance had 1,765 stores, 1,723 of which operate under the "Advance Auto Parts" trade name in 37 states in the northeast, southeast and midwest. In addition, Advance had 42 stores primarily located in Puerto Rico and the Virgin Islands operating under the "Western Auto" trade name. Advance is based in Roanoke, Virginia, and is the second largest specialty retailer of automotive parts, accessories and maintenance items to "do-it- yourself," or DIY, customers in the United States, based on store count and sales. Advance is the largest or second largest specialty retailer of automotive products in the majority of the states in which it currently operates, based on store count. Discount Auto Parts, Inc. 4900 Frontage Road South Lakeland, Florida 33815 (863) 687-9226 Discount Auto Parts, Inc. is one of the Southeast's leading specialty retailers and suppliers of automotive replacement parts, maintenance items and accessories to both do-it-yourself consumers and professional mechanics and service technicians, based on store count. Discount currently operates 671 stores located throughout Florida, Georgia, Mississippi, Alabama, Louisiana and South Carolina. The Proposed Merger and Related Transactions In the merger, a wholly owned subsidiary of Advance, or Advance Merger Sub, will merge with and into Discount, with Discount surviving the merger. Each Discount shareholder will be entitled to receive for each share of Discount common stock owned immediately prior to the merger $7.50 in cash and 0.2577 of a share of Advance common stock. Advance will not issue fractional shares in the merger. As a result, the total number of shares of Advance common stock that each Discount shareholder receives in the merger will be rounded down to the nearest whole number. Each of these shareholders will receive a cash payment for any remaining fractional share. Contemporaneous with the merger, Advance will effectuate the reincorporation merger pursuant to which Advance Holding Corporation will merge with and into Advance Auto Parts, Inc., with Advance Auto Parts, Inc. surviving the reincorporation merger. As a result, Advance Auto Parts, Inc. will be the parent corporation of Advance Stores Company, Incorporated. In addition, immediately after the merger, Advance Auto Parts, Inc. will contribute the common stock of Discount received in the merger to Advance Stores Company, Incorporated, and Discount will become a wholly owned subsidiary of Advance Stores Company, Incorporated. It is a condition to the closing of the merger that the shares of Advance common stock be listed for trading upon the New York Stock Exchange or the Nasdaq National Market System. Advance has applied for listing of its common stock on the New York Stock Exchange. 4 The following diagrams illustrate the structure of the proposed merger and related transactions and the structure of Advance following completion of such transactions. [GRAPH APPEARS HERE] Discount's Reasons for the Merger (see page 32) After careful consideration, Discount's board of directors believes that the terms of the merger agreement and the merger are fair to, and in the best interests of, Discount and its shareholders. In reaching its decision, Discount's board of directors considered various factors described more fully in this proxy statement and prospectus beginning on page 32. Opinion of Discount's Financial Advisor (see page 35) In connection with the transaction, the Discount board of directors received a written opinion dated August 7, 2001 from Salomon Smith Barney Inc., Discount's financial advisor, as to the fairness, from a financial point of view, of the merger consideration. The full text of Salomon Smith Barney's written opinion dated August 7, 2001 is attached to this proxy statement and prospectus as Annex B. We encourage you to read this opinion carefully in its entirety for a description of the assumptions made, matters considered and limitations on the review undertaken. Salomon Smith Barney's opinion is addressed to the Discount board and does not constitute a recommendation to any shareholder with respect to any matters relating to the proposed transaction. 5 The Merger Agreement (see page 52) We have attached the merger agreement that governs the merger to this proxy statement and prospectus as Annex A. We encourage you to read the merger agreement carefully. Termination of the Merger Agreement (see page 62) Advance and Discount can mutually agree to terminate the merger agreement at any time before completing the merger. Both Advance and Discount can terminate the merger agreement if: . the requisite Discount shareholder approval is not obtained (other than if the party attempting to terminate is in material breach of any of its obligations); . a final decree or injunction by a court or government entity prevents the completion of the merger or if a private party action under the antitrust laws is reasonably likely to have a material adverse effect (as defined in the merger agreement); . the merger is not completed by December 31, 2001 (other than if the party attempting to terminate is in breach of any of its obligations and the breach has been the primary reason for the failure of the merger to be completed by December 31, 2001); or . the other party materially breaches any of its representations, warranties, covenants or agreements and the breach causes specified conditions to fail to be satisfied. Advance can terminate the merger agreement under additional circumstances, including if: . a tender offer or exchange offer for 50% or more of the Discount common stock is commenced and the Discount board of directors recommends to you that you tender or exchange your shares in that offer; . the financial institutions that are parties to the financing commitments for the transaction are not obligated to fund because all conditions to such funding have not been satisfied or waived; . the results of the physical inventory of the salable inventory at Discount's Lakeland, Florida distribution center reflect a reduction of greater than 5% of the inventory amount shown on the balance sheet included in Discount's first quarter financial statements and reflected in Discount's general ledger as of the date of Discount's first quarter financial statements, subject to adjustment as provided in the merger agreement, and Advance exercises its right to terminate within 15 business days after receiving such results (this condition has been satisfied); . Discount shall not have entered into the specifically identified amendments to its Dapper Properties master leases in a manner satisfactory to Advance; . the Discount board of directors withdraws, modifies or qualifies its recommendation to you for adoption of the merger agreement and the merger in a manner adverse to Advance; or . the Discount board of directors shall have approved or recommended to you an alternative transaction that the Discount board of directors has determined in good faith, after consultation with its advisors, would result in a transaction more favorable to Discount shareholders from a financial point of view and to do otherwise would be a breach of its fiduciary duties. Discount can terminate the merger agreement under additional circumstances, including if: . Discount receives a superior proposal and the Discount board of directors determines that its fiduciary duties require it to terminate the merger agreement in order to permit Discount to enter into an agreement with respect to the superior proposal. 6 Termination Fee and Expenses (see page 63) Discount agreed to pay Advance a termination fee of $9.0 million and/or certain expense reimbursements up to $7.0 million if: . the merger agreement is terminated by the Discount board in order to enter into an agreement with respect to a superior proposal; or . the merger agreement is terminated by Advance because of (a) the Discount board (i) resolving to or having withdrawn or changed in a manner adverse to Advance its approval or recommendation of the merger agreement; (ii) failing to include its recommendation regarding the merger in this proxy statement and prospectus; or (iii) approving or recommending any other acquisition proposal or superior proposal; or (b) a tender offer or exchange offer for 50% or more of Discount's shares is begun and the Discount board recommends that Discount shareholders tender their shares. In addition, the merger agreement requires Discount to pay Advance the following termination fees and/or expenses of Advance under other circumstances, including: . if the requisite Discount shareholder approval is not obtained and Advance has not materially breached or failed to fulfill its material obligations under the merger agreement ($2.5 million of expenses plus 50% of any such expenses over $4.0 million, up to a maximum of an additional $1.0 million); . prior to the Discount shareholder meeting there has been a superior proposal and, within 12 months of the Discount shareholder meeting, Discount enters into an agreement with respect to the superior proposal ($9.0 million and any expenses to the extent not previously paid, up to $7.0 million when aggregated with any amount that was previously paid); . prior to the Discount shareholder meeting there has been a superior proposal and, within 12 months of the Discount shareholder meeting, Discount does not enter into an agreement for the superior proposal, but within such 12 month period consummates another acquisition transaction ($9.0 million and any expenses to the extent not previously paid, up to $7.0 million when aggregated with any amount that was previously paid); . prior to the Discount shareholder meeting there has been an acquisition proposal which is not a superior proposal and, within 12 months of the Discount shareholder meeting, Discount consummates an acquisition transaction ($9.0 million and any expenses to the extent not previously paid, up to $7.0 million when aggregated with any amount that was previously paid); . (a) there has been an acquisition proposal prior to December 31, 2001; (b) the Discount shareholder meeting has not been held; (c) Advance would be permitted to terminate the merger agreement because the merger is not consummated prior to December 31, 2001; (d) either Advance or Discount terminates the merger agreement because the merger is not consummated prior to December 31, 2001; and (e) within 12 months of December 31, 2001, Discount consummates an acquisition transaction with the person who made an acquisition proposal or enters into an agreement for an acquisition transaction with the person who made the acquisition proposal, which is subsequently consummated ($9.0 million, and up to $7.0 million of Advance's expenses); . Advance terminates the merger agreement because of a material breach of the merger agreement by Discount (up to $7.0 million of Advance's expenses); or . Advance terminates the merger agreement as a result of Discount's failure to satisfy the closing condition regarding the physical inventory of the Lakeland, Florida distribution center, or the closing condition relating to the amendments to the Dapper Properties master leases (in the case of termination resulting from the failure of the closing condition regarding the physical inventory, up to 7 $1.0 million of Advance's expenses, and, in the case of a termination resulting from the failure of the closing condition regarding the amendments to the Dapper Properties master leases, up to $2.5 million of Advance's expenses, plus an additional amount equal to 50% of any such expenses over $4.0 million, up to a maximum additional amount of $1.0 million). Discount Not to Engage in Discussions for Alternative Transactions (see page 55) Until the parties complete the merger or terminate the merger agreement, Discount has agreed not to take any of the following actions: . initiate, solicit, encourage or facilitate the making of any offer or proposal that is or is reasonably likely to lead to an alternative transaction; or . enter into any agreement regarding any alternative transaction. However, if, prior to a shareholder vote, Discount receives an unsolicited proposal for an alternative transaction, it may participate in discussions regarding the transaction if Discount's board of directors determines such proposal is a superior proposal and to not do so would be a breach of its fiduciary duties and notifies Advance, as described in the merger agreement. Material U.S. Federal Income Tax Consequences of the Merger (see page 46) Assuming the contemporaneous merger of Advance Holding into Advance, the merger is intended to be treated as part of an exchange within the meaning of Section 351 of the Internal Revenue Code. If the merger so qualifies, in general, a Discount shareholder will not recognize loss on the exchange, but will recognize gain on the exchange to the extent of the lesser of (i) the excess, if any, of (x) the sum of the fair market value (on the effective date of the merger) of the Advance common stock and the cash received over (y) the tax basis of the shareholder's shares of Discount common stock and (ii) the cash received. Counsel to Discount has opined, subject to some assumptions and based on certain representations of fact, that the merger should be treated as part of an exchange within the meaning of Section 351 of the Internal Revenue Code. The material U.S. federal income tax consequences of the merger to Discount shareholders are described below under the heading "The Merger-- Material U.S. Federal Income Tax Consequences of the Merger." Interests of Discount's Officers and Directors in the Merger (see page 43) When considering the Discount board of directors' recommendation to vote FOR the merger agreement, Discount shareholders should be aware of interests that some of Discount's officers and directors have in the merger that are different from or in addition to, and may conflict with, the interests of Discount shareholders. The Discount board of directors was aware of these interests and specifically considered them before approving and adopting the merger agreement. These interests include the following: . options held by Discount officers and directors will effectively become fully vested as a result of the merger, and such officers and directors will become entitled to receive cash for the designated value of any options with an exercise price of less than $15.00 and will have any options with an exercise price of $15.00 or greater converted into options of Advance; . each of the officers of Discount except for Peter Fontaine is a party to a change of control employment agreement with Discount that provides that, upon the closing of the merger, such officer is entitled to (1) certain benefits upon a subsequent termination or constructive termination of his employment that occurs during a specified period following the merger, subject to certain exceptions, and (2) certain salary and benefit protections during the officer's continued employment following the merger; the officers who are parties to such agreements are C. Michael Moore, Michael Harrah, Clement Bottino, Dave Viele, C. Roy Martin, Tom Merk, Joe Villavicencio, Doug Snyder and Anthony Bottino. 8 . certain officers of Discount are entitled to certain unfunded benefits under Discount's Supplemental Executive Profit Sharing Plan that will become 100% vested as a result of the consummation of the merger; the officers who are parties to such agreements are C. Michael Moore, Michael Harrah, Clement Bottino, Dave Viele, Tom Merk, Joe Villavicencio, Doug Synder and Anthony Bottino. . Peter J. Fontaine, the Chief Executive Officer of Discount, will become a director of Advance effective as of the closing date, and will become entitled to certain piggyback registration rights as to the shares of Advance common stock that he and entities that he controls will receive in the merger; and . Discount's former president, William C. Perkins, will receive the acceleration of certain separation payments and options upon the consummation of the merger. Conditions to the Merger (see page 61) We will not complete the merger unless a number of conditions are satisfied or waived, including the following: . the holders of a majority of Discount's shares of common stock must approve and adopt the merger agreement and the merger; . the federal antitrust authorities must complete their review of the merger and not seek to prohibit the merger; . there must be no law or court order prohibiting the merger; . the shares of Advance common stock issuable to Discount shareholders must be listed on either the New York Stock Exchange or the Nasdaq National Market (Advance has applied for listing of its common stock on the New York Stock Exchange); . Advance Holding and Advance must complete the reincorporation merger; . the representations and warranties of each party in the merger agreement are generally true and correct as of the closing of the merger; . each party has performed in all material respects all of its obligations under the merger agreement; . Discount will have received the written opinion of Discount's legal counsel that the merger should be treated for U.S. federal income tax purposes as part of an exchange within the meaning of Section 351 of the Internal Revenue Code; . there shall not have occurred since the date of the merger agreement a material adverse change in the financial condition, results of operations, properties, assets, business or prospects of either party and its subsidiaries; . Discount shall have performed a physical inventory of its salable inventory at its Lakeland, Florida distribution center, the results of which shall reflect an aggregate inventory value which does not result in a reduction greater than 5% (this condition has been satisfied); . Discount shall have entered into certain identified amendments to each of its three master leases between Discount and the respective Dapper Properties lessor; . the financial institutions who are parties to the financing commitments shall be obligated to fund under the commitments because all conditions to such funding have been, or at the closing thereof will be, satisfied or waived; and . Peter J. Fontaine shall be elected as a member of the board of directors of Advance, and Discount's stockholders agreement with certain of its stockholders shall have been amended to provide entities that Mr. Fontaine controls with certain piggyback registration rights. 9 Regulatory Approvals (see page 48) Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, Advance and Discount must furnish information and materials to the Department of Justice (known as the DOJ) and the Federal Trade Commission (known as the FTC) and wait a specified period of time before they can complete the merger. Each of the DOJ and the FTC has the authority to challenge the merger on antitrust grounds before or after Advance and Discount complete the merger. Advance and Discount filed pre-merger notification forms with the DOJ and the FTC on August 17, 2001, and expiration of the HSR waiting period occurred on September 18, 2001. In addition, both companies may be required to make filings with or obtain approvals from other domestic or international regulatory authorities in connection with the merger. Accounting Treatment (see page 46) The merger will be accounted for as a purchase in accordance with generally accepted accounting principles. Indemnification and Insurance (see page 65) The merger agreement provides for the indemnification of Discount's officers, directors and employees and for the continuation of directors and officers liability insurance for six years following the merger. Vote Required for the Merger (see page 24) The affirmative vote of the holders of a majority of the shares of Discount common stock outstanding on the record date for the special meeting is required to approve the merger. Voting by Discount Directors and Executive Officers On the record date, directors and executive officers of Discount and their affiliates owned and were entitled to vote 4,032,558 shares of Discount common stock, or approximately 24.1% of the shares of Discount common stock outstanding on the record date. Peter J. Fontaine controls virtually all these shares which, as described below, are subject to the terms of a voting agreement with Advance Stores and Advance Holding and are required to be voted in favor of approval of the merger agreement and the merger. The other directors and executive officers of Discount have indicated that they intend to vote the Discount common stock owned by them in favor of the adoption of the merger agreement. Stock Price Information (see page 133) Shares of Discount common stock are listed on the New York Stock Exchange. Shares of Advance common stock are not currently listed but, upon the closing of the merger, are expected to be listed on the New York Stock Exchange. Advance has applied for such listing. The following table presents the ten-day average sale price or last reported sale price, as applicable, of one share of Discount common stock, as reported on the New York Stock Exchange Composite Transaction Tape on August 6, 2001, the last full trading day before the execution of the merger agreement, and on November 2, 2001, the last day for which such information could be calculated before the date of this proxy statement and prospectus. Equivalent per share data for Discount common stock, assuming the completion of the merger, is not meaningful because there is no public market for Advance common stock. Each share of Discount common stock will be converted into .2577 shares of Advance common stock and $7.50 in cash.
Date Discount Common Stock ---- --------------------- Average sale price for the ten trading days up to and including August 6, 2001 $13.52 Last reported sale price on August 6, 2001 $14.20 Last reported sale price on November 2, 2001 $17.91
10 Dividends Advance does not expect to pay any dividends on its common stock for the foreseeable future. Restrictions on Your Ability to Sell Advance Common Stock All shares of Advance common stock received by you in connection with the merger will be freely transferable unless you are considered an "affiliate" of Discount under the Securities Act of 1933. If you are an affiliate of Discount, then prior to the first anniversary of the merger, sales may be made by you only under a registration statement or an exemption under the Securities Act, including Rule 145. Voting Agreement (see page 66) Fontaine Industries, a partnership controlled by Peter J. Fontaine, Chairman of the Board and Chief Executive Officer of Discount, and Discount's largest shareholder (holding approximately 24% of the outstanding shares of common stock of Discount), entered into a voting agreement with Advance Stores whereby Fontaine Industries has agreed to vote all of the shares of Discount common stock beneficially owned by it in favor of the merger and the merger agreement. Fontaine Industries also appointed Advance Stores as its proxy to vote the shares beneficially owned by it in favor of the merger and the merger agreement. As additional parties to the voting agreement, Mr. Fontaine and his revocable trust have agreed to cause Fontaine Industries to maintain its stock ownership of Discount pending the merger and to cause Fontaine Industries to vote in favor of the merger and the merger agreement. Except for 1,000 shares owned by Mr. Fontaine's wife and 1,000 shares owned by Mr. Fontaine's daughter, neither Mr. Fontaine nor his revocable trust have beneficial interest in any shares other than the shares owned by Fontaine Industries. There is no commitment in the voting agreement with respect to how the shares owned by Mr. Fontaine's wife and daughter are to be voted. Option Agreement (see page 66) Fontaine Industries also entered into an option agreement with Advance Stores whereby Fontaine Industries granted to Advance Stores an option to purchase all of the 4,021,509 shares of Discount common stock beneficially owned by it, exercisable if: . a third party has (a) begun a tender or exchange offer for shares of Discount's common stock which would result in the acquisition of 50% or more of the then outstanding voting equity of Discount, (b) acquired in the aggregate 15% or more of the then outstanding voting equity of Discount; or (c) entered into an agreement with Discount to acquire 15% or more of the total assets of Discount or 15% or more of the outstanding voting equity of Discount; . any of the events described in section 9.1(e) of the merger agreement that would allow Advance to terminate the merger agreement has occurred; . a third party has made an acquisition proposal before December 31, 2001, the meeting of the shareholders of Discount to vote on the acquisition proposal has not been held, Advance would be permitted to terminate the merger agreement under section 9.1(b) of the merger agreement, and either Advance or Discount has terminated the merger agreement under section 9.1(b) of the merger agreement; or . Discount shall have terminated the merger agreement pursuant to section 9.1(g) of the merger agreement. 11 Financing Commitments (see page 49) In connection with the merger, Advance Stores has secured financing commitments to provide the funds necessary to close the merger. The following table sets forth the estimated sources and uses of these funds at the closing of the merger and the related financing.
Sources Amount ------- ------------- (in millions) Revolving credit facility(/1/)............ $ 9 Tranche A term loan facility................. 180 Tranche B term loan facility................. 305 New senior subordinated notes.................... 186 ---- Total................... $680 ====
Uses Amount ---- ------------- (in millions) Cash portion of merger.... $128 Repay existing Discount debt(/2/)................ 251 Repay existing Advance Stores senior debt(/1/).. 266 Estimated fees and expenses................. 35 ---- Total................... $680 ====
-------------------- (/1/)Excludes approximately $18 million of outstanding letters of credit. (/2/)Includes $34 million to purchase Discount's Gallman, Mississippi distribution facility from the lessor and $6.3 million in debt prepayment premiums. 12 Summary Consolidated Financial Data The following table is a summary of historical consolidated financial data of Advance for the periods presented, as well as pro forma financial data of Advance, after giving effect to the merger and related financing transactions. You should read this data along with the sections of this proxy statement and prospectus titled "Management's Discussion and Analysis of Financial Condition and Results of Operations of Advance Holding," "Management's Discussion and Analysis of Financial Condition and Results of Operations of Discount," and "Unaudited Pro Forma Consolidated Financial Data" and the consolidated financial statements and related notes of Advance and Discount included elsewhere in this proxy statement and prospectus. The unaudited pro forma combined statement of operations data does not purport to represent what the results of operations of Advance would have been if the transactions had occurred as of the date indicated or what the results will be for future periods. The results include the activities of the following acquired businesses since their respective dates of acquisition, Western Auto Supply Company, November, 1998 and Carport Auto Parts, Inc., April, 2001.
12 Months Fiscal Year(1) Ended Six Months Ended ------------------------------------------- ---------- --------------------- Pro Forma Pro Forma Pro Forma July 14, July 14, July 14, 1998 1999 2000 2000 2001 2001 2001 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (In thousands, except ratios) Statement of Operations Data: Net sales............... $1,220,759 $2,206,945 $2,288,022 $2,928,036 $3,057,651 $1,336,837 $1,684,434 Cost of sales........... 766,198 1,404,113 1,392,127 1,780,352 1,834,198 796,557 1,006,326 Selling, general and administrative expenses(2)............ 400,546 780,114 800,845 998,736 1,064,206 470,166 581,996 Expenses associated with the Recapitalization(3).... 14,277 -- -- -- -- -- -- Expenses associated with the restructuring in conjunction with the Western merger(4)...... 6,774 -- -- -- -- -- -- Non-cash and other employee compensation(5)........ 1,135 2,483 2,261 2,261 3,031 2,195 2,195 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Operating income........ $ 31,829 $ 20,235 $ 92,789 $ 146,687 $ 156,216 $ 67,919 $ 93,917 Other Financial Data: EBITDA, as adjusted(6).. $ 92,612 $ 121,899 $ 161,876 $ 107,183 Capital expenditures(7)........ 65,790 105,017 70,566 $ 123,411 $ 112,342 31,048 $ 51,824 Pro forma cash interest expense(8)............. 79,383 78,058 Ratio of pro forma EBITDA to pro forma cash interest expense(8)............. 2.98 3.19 Ratio of pro forma net debt to pro forma EBITDA(9).............. 3.98 3.79
(footnotes on the following page) 13
As of Pro Forma ---------------------------------- As of as of January 2, January 1, December 30, July 14, July 14, 1999 2000 2000 2001 2001 ---------- ---------- ------------ ---------- ---------- (In thousands) Balance Sheet Data: Net working capital (10)................... $ 310,113 $ 355,608 $ 321,540 $ 327,024 $ 463,958 Total assets............ 1,265,355 1,348,629 1,356,360 1,364,314 1,988,197 Total net debt (11)..... 485,476 627,467 582,539 535,199 943,335(9) Stockholders' equity.... 159,091 133,954 156,271 179,359 273,125
-------- (1) Advance's fiscal year consists of 52 or 53 weeks ending on the Saturday nearest to December 31. All fiscal years presented are 52 weeks. (2) Fiscal 1999 and fiscal 1998 amounts include certain merger integration and Parts America conversion expenses related to the Western merger that total $41,034 and $7,788, respectively. In addition, $845 is included in fiscal 1998 for private company expenses incurred prior to the Recapitalization that relate primarily to compensation and benefits paid to Advance's chairman that were eliminated after the Recapitalization. There are no private company expenses in fiscal 1999, fiscal 2000, the twelve months ended July 14, 2001 or the six months ended July 14, 2001 amounts. (3) Represents expenses incurred in the Recapitalization related primarily to bonuses paid to certain employees and professional services. (4) Represents fiscal 1998 expenses primarily related to lease costs associated with the 31 Advance Auto Parts stores closed in connection with the Western merger. (5) Represents interest component of net periodic postretirement benefit cost related to Advance's unfunded post retirement benefit obligation and non- cash compensation expenses related to stock options granted to certain of Advance's employees. (6) EBITDA, as adjusted, represents operating income plus depreciation and amortization, non-cash and other employee compensation expenses and certain one-time expenses, as described below, included in operating income. Advance's EBITDA for 2000 includes a non-recurring net gain of $3.3 million. Advance's EBITDA for the twenty-eight week period ended July 14, 2001 includes a non-recurring net gain of $3.2 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Advance Holding--Results of Operations--Fiscal Year 2000 Compared to Fiscal Year 1999" and "--Twenty-Eight Weeks Ended July 14, 2001 Compared to Twenty-Eight Weeks Ended July 15, 2000." EBITDA, as adjusted, is intended to represent cash flow from operations as defined by GAAP, and should not be considered as a substitute for net income as an indicator of operating performance or as an alternative to cash flow (as measured by GAAP) as a measure of liquidity. Advance has included EBITDA, as adjusted, herein because Advance's management believes this information is useful to investors, as such measure provides additional information with respect to Advance's ability to meet its future debt service, capital expenditure and working capital requirements and, in addition, certain covenants in Advance's current and proposed indentures and credit facility are based upon an EBITDA calculation. Advance's method for calculating EBITDA, as adjusted, may differ from similarly titled measures reported by other companies. Advance's management believes certain one-time expenses, private company expenses, recapitalization expenses, non-cash and other employee compensation expenses, restructuring expenses and merger integration expenses should be eliminated from the EBITDA calculation to evaluate the operating performance of Advance, and has done so in its calculation of EBITDA, as adjusted. Advance leases substantially all of its stores. (7) Capital expenditures exclude $34 million for the purchase of Discount's Gallman, Mississippi distribution facility from the lessor. (8) Cash interest expense represents total interest expense, excluding interest related to the Advance Holding discount debentures and amortization of deferred debt issuance costs. (9) Pro forma net debt represents pro forma total debt, including bank overdrafts, less cash and cash equivalents. (10) Net working capital represents total current assets less total current liabilities. (11) Net debt represents total debt (including current maturities and bank overdrafts) less cash and cash equivalents. 14 UNAUDITED COMPARATIVE PER SHARE DATA We have set forth below information concerning income per share from continuing operations, cash dividends, declared and book value per share data for Advance Holding and Discount on both historical and pro forma bases. We have derived the pro forma income per share from continuing operations from the Unaudited Pro Forma Consolidated Financial Data beginning on page 124. Discount has not declared any cash dividends since its initial public offering in August 1992 and Advance Holding has not declared any cash dividends since fiscal 1998. Advance's management does not expect to pay cash dividends for the foreseeable future after the completion of the merger. Basic and diluted net income per share from continuing operations and the book value per share for the pro forma presentation is based upon outstanding shares of Advance common stock, adjusted to include the estimated number of shares of Advance common stock to be issued in the merger in exchange for outstanding shares of Discount common stock at the time the merger is completed. The per share equivalent pro forma data for shares of Discount common stock is based on the assumed conversion of each share of Discount common stock into .2577 of a share of Advance common stock. You should read the information set forth below in conjunction with the respective audited and unaudited financial statements of Advance Holding and Discount included in this proxy statement and prospectus and the Unaudited Pro Forma Consolidated Financial Data and the notes thereto beginning on page 124. See "Where You Can Find More Information About Advance and Discount" beginning on page 154.
Fiscal Year Ended Six Month Period December 30, 2000 Ended July 14, 2001 ------------------- --------------------- Advance Holding Historical Data: Basic income per share from continuing operations............. $ 0.59 $ 0.76 Diluted income per share from continuing operations............. 0.58 0.74 Cash dividends per share........... -- -- Book value per share............... 5.52 6.33 Twelve Month Period Ended November 28, Six Month Period 2000 Ended August 28, 2001 ------------------- --------------------- Discount Historical Data: Basic income per share from continuing operations............. $ 1.12 $ 0.88 Diluted income per share from continuing operations............. 1.12 0.88 Cash dividends per share........... -- -- Book value per share............... 18.50 19.53 Fiscal Year Ended Six Month Period December 30, 2000 Ended July 14, 2001 ------------------- --------------------- Pro Forma Combined Data: Basic income per share from continuing operations............. $ 1.04 $ 0.96 Diluted income per share from continuing operations............. 1.03 0.94 Cash dividends per share........... -- -- Book value per share............... N/A 8.38 Pro Forma Equivalent Data: Basic income per share from continuing operations............. 0.27 0.25 Diluted income per share from continuing operations............. 0.27 0.24 Cash dividends per share........... -- -- Book value per share............... N/A 2.16
15 RISK FACTORS You should consider carefully all of the information set forth in this proxy statement and prospectus. Please refer to "Where You Can Find More Information About Advance and Discount" at page 154 of this proxy statement and prospectus for further information about the proposals described herein. You should evaluate the following risks before deciding to vote on the various proposals described in this proxy statement and prospectus. If the merger occurs, you will be receiving shares of Advance common stock. In that circumstance, Advance will combine the businesses of Advance and Discount. Accordingly, you should consider carefully the risks and uncertainties associated with the business and operations of both Advance and Discount. Some statements in this proxy statement and prospectus, including some of the following risk factors, constitute forward-looking statements. Please refer to the section of this proxy statement and prospectus below entitled "Special Note Regarding Forward- Looking Statements." Risk Factors Relating to the Merger You cannot be certain of the market value or the average trading price of the Advance common stock you will receive in the merger in exchange for your shares of Discount common stock. You will be entitled to receive in the merger 0.2577 of a share of Advance common stock plus $7.50 in cash for each share of Discount common stock you hold. Advance common stock is not currently publicly traded. Therefore, you will not be able to establish the market value of the Advance common stock you receive by reference to a public trading price. The actual trading price of Advance common stock you receive at the time of the closing of the merger may be either higher or lower than the trading price prior to the merger of shares of Discount common stock that were exchanged for the Advance common stock less the cash consideration of $7.50 per Discount share you receive in the merger. In addition, the average trading price of Advance common stock you receive may vary after the merger because of factors such as: . changes in the business, operating results, financial condition or prospects of Advance; . the success of the integration of Discount's operations; . the prospects of Advance's operations after the merger; and . general market and economic conditions and specific economic conditions where Advance and Discount operate. In addition, the exchange of the certificates representing shares of Discount common stock for certificates representing shares of Advance common stock will not take place immediately upon completion of the merger. If you do not hold your shares in a brokerage account or another "book-entry" or uncertificated form, you may be unable to sell your shares of Advance common stock for a short period of time following the completion of the merger. The market value of Advance common stock may be either lower or higher at the time when you receive certificates representing shares of Advance common stock after the merger. Advance may not be able to successfully integrate Discount, which could harm its business and results of operations. Advance entered into the merger agreement to capitalize on Discount's leading market position in the State of Florida, to increase Advance's store base in its southeastern markets, and to create the opportunity for potential cost savings through operational synergies. Achieving the expected benefits of the merger will depend in large part on Advance's ability to successfully integrate Discount's operations and personnel in a timely and efficient manner. Some of the difficulties Advance will have to overcome include: . successfully converting Discount's information and accounting systems to those of Advance; 16 . integrating the two companies' respective distribution operations; . implementing and maintaining uniform standards, controls procedures and policies on a company-wide basis; . properly identifying and eliminating or closing unnecessary stores, operations and facilities; and . maintaining good and profitable relationships with suppliers. If Advance cannot overcome the challenges it faces integrating Discount, its ability to effectively and profitably manage Discount's business could suffer. In addition, key employees may leave, supplier relationships could be disrupted and customer service standards could deteriorate. Moreover, the integration process itself may be disruptive to Advance's and Discount's businesses as it requires Advance to coordinate the integration of the information and accounting systems and will divert the attention of management from its normal operational responsibilities and duties. Consequently, we cannot assure you that Discount can be successfully integrated with Advance or that any of the anticipated efficiencies or cost savings will be realized, or realized within the expected time frame, or that revenues will not be lower than expected, any of which could harm Advance's business, financial condition and operating results after the merger. Advance's level of indebtedness and restrictions in its debt instruments may limit Advance's ability to take certain actions, including paying any dividends and obtaining additional financing in the future, that Advance would otherwise consider in its best interest. In connection with the merger, Advance intends to incur additional senior and senior subordinated indebtedness in order to refinance indebtedness of Advance and Discount and to fund a portion of the cash consideration prior to closing. On August 7, 2001 Advance announced that it had received a total of $830 million of committed financing. This financing is subject to the fulfillment of certain conditions. See "The Merger--Financing Commitments" for more information regarding the financing commitments and conditions. The substantial amount of debt that Advance will have and that it may incur in the future, could have important consequences to you. For example, it could: . limit Advance's ability to obtain additional financing, if needed in the future, for working capital, capital expenditures, acquisitions or other purposes; . increase Advance's vulnerability to adverse economic, industry and business conditions; . place Advance at a disadvantage compared to competitors that may have less debt; . restrict Advance's ability to adjust rapidly to changing market conditions; . cause Advance's interest expense to increase if interest rates in general were to increase because a portion of the indebtedness is to bear interest at a floating rate; and . require Advance to dedicate a substantial portion of its cash flow from operations to make principal and interest payments on its debt and accordingly reduce funds available for the funding of operations, future business opportunities or other purposes. The instruments governing the planned and future indebtedness to be incurred by Advance are expected to contain a number of covenants that may significantly limit or prohibit Advance's ability to, among other things: . pay dividends; . borrow additional money; . make capital expenditures and other investments; 17 . merge, consolidate or dispose of assets; and . enter into transactions with related entities. In addition, Advance's current and future debt instruments contain and will contain financial performance covenants, including some establishing a maximum leverage ratio and requiring Advance to maintain a minimum interest coverage ratio and a funded senior debt to current assets ratio. If Advance fails to comply with these covenants, it will be in default under the applicable debt instrument. A default, if not waived, could result in acceleration of indebtedness, in which case the debt would become immediately due and payable. If this occurs, Advance may not be able to repay its debt or borrow sufficient funds to refinance it. Even if new financing is available, it may be on terms that are unacceptable or which may be significantly more costly. Complying with these covenants may cause Advance to take actions, with respect to the growth and management of its business, that it otherwise would not take, or refrain from actions that it otherwise would consider in its best interest. Because of differences in the charter documents of Advance and Discount, Discount shareholders will lose material shareholder rights if the merger is approved. A number of differences exist between Advance's certificate of incorporation and bylaws and Discount's articles of incorporation and bylaws. As a result, Discount's shareholders will lose the following shareholder rights if the merger is approved: . the right to call a special meeting of shareholders by holders of 25% of the outstanding shares if certain notice requirements are met (Advance's certificate of incorporation and bylaws provide that special meetings of stockholders may only be called by the board of directors, the chairman of the board or Advance's chief executive officer); and . the right to act without a shareholder meeting (Advance's certificate of incorporation and bylaws prohibit any action by stockholders unless taken at an annual or special meeting). The termination fee, voting agreement and option agreement may discourage other companies from trying to acquire Discount, which could prevent you from receiving a greater amount of consideration for your Discount common stock. In the merger agreement, Discount agreed to pay Advance a termination fee of $9.0 million and/or up to $7.0 million in expenses in specified circumstances, including where a third party acquires or seeks to acquire Discount. This provision could discourage other companies from trying to acquire Discount, even if those other companies might be willing to offer a greater amount of consideration to Discount shareholders than Advance has offered in the merger agreement. Payment of the termination fee and/or the expenses may have a material adverse effect on Discount's financial condition. In addition, in connection with the execution of the merger agreement, Fontaine Industries, which holds 24% of the outstanding shares of Discount common stock, entered into a voting agreement and an option agreement with Advance Stores. The principal shareholder agreed to vote its shares in favor of the merger agreement and merger, granted Advance Stores and its designees an irrevocable proxy to vote its shares in favor of the merger and merger agreement and granted Advance Stores an option to purchase its shares, exercisable in certain circumstances. These provisions may discourage other companies from trying to acquire Discount. If Discount does not complete the merger, it will incur significant expenses, the price of its common stock could decline and it may not be able to find another party willing to pay the same or a greater amount for your Discount common stock. If the merger is not completed, Discount may be subject to a number of material risks, including the following: . the market price of Discount common stock may decline if the merger is not completed to the extent that the current market price of Discount common stock reflects a market assumption that the merger will be completed; 18 . Discount, in some circumstances, may be required to pay Advance a termination fee of $9.0 million and/or reimburse Advance for up to $7.0 million of certain expenses; and . Discount's own costs related to the merger, such as legal and accounting fees and expenses and certain financial advisor expenses, must be paid even if the merger is not completed. Further, if the merger agreement is terminated and Discount's board of directors seeks another merger or business combination, we cannot assure you that Discount will be able to find a party willing to pay an equivalent or more attractive price than that which will be paid in the merger. In addition, while the merger agreement is in effect, subject to limited exceptions, Discount is prohibited from soliciting, cooperating with, or furnishing non-public information regarding Discount to, or negotiating or entering into an agreement with, any party other than Advance regarding any proposal for an alternative transaction. For additional information regarding Discount's ability to enter into an alternative transaction, see "The Merger Agreement--No Solicitation" and "--Termination Fee and Expenses." The merger and the contemporaneous merger of Advance Holding Corporation and Advance Auto Parts, Inc., taken together, may fail to be treated for U.S. federal income tax purposes as part of an exchange subject to Section 351 of the Internal Revenue Code, resulting in the loss of tax-free treatment for the Advance shares portion of the merger consideration. Advance and Discount have structured the merger and the contemporaneous merger of Advance Holding Corporation and Advance Auto Parts, Inc. to qualify such transactions, taken together, as part of an exchange subject to Section 351 of the Internal Revenue Code. Although the Internal Revenue Service has not provided and will not be asked to provide a ruling on the matter, Discount expects to obtain a legal opinion from its legal counsel that such transactions, taken together, should qualify as part of an exchange subject to Section 351 of the Internal Revenue Code. The opinion will not bind the Internal Revenue Service or prevent the Internal Revenue Service from adopting a contrary position. If the companies proceed with such transactions but such transactions, taken together, were to fail unexpectedly to qualify as part of an exchange subject to Section 351 of the Internal Revenue Code, a Discount shareholder generally would recognize gain or loss on each share of Discount common stock surrendered in an amount equal to the difference between the shareholder's basis in that share and the sum of the per share cash consideration and the fair market value of the Advance common stock received in exchange for that share at the effective time of the merger. Risk Factors Relating to Advance's Business Advance may not be able to successfully implement its business strategy because doing so depends on factors beyond its control, which could prevent it from efficiently and profitably operating its business. Advance's success depends on its ability to implement its business strategy in order to increase its earnings and cash flow. Successful implementation depends on factors specific to the retail automotive parts industry and numerous other factors beyond its control. These include adverse changes in: . general economic conditions and conditions in local markets, which could reduce Advance's sales; . the competitive environment in the automotive aftermarket parts and accessories retail sector which may force Advance to reduce prices or increase spending; . the automotive aftermarket parts manufacturing industry, such as consolidation, which may disrupt or sever one or more of Advance's vendor relationships; . Advance's ability to anticipate and meet changes in consumer preferences for automotive products, accessories and services in a timely manner; and . Advance's continued ability to hire and retain qualified personnel, which depends in part on the types of recruiting, training and benefit programs we adopt. 19 In addition, because of these and other factors, Advance may not be able to implement its expansion and business plans within planned time periods and budgets and may be unable to satisfy all of its obligations, including those under its indebtedness. If Advance cannot implement its expansion and business plans in a timely fashion or if there are delays or cost overruns or if Advance is unable to service its indebtedness, it may be prevented from efficiently and profitably operating its business and its financial condition and results of operations will suffer. Advance will not be able to expand its business if its growth strategy is not successful. Advance has significantly increased its store count from 536 stores at the end of fiscal 1995 to 1,765 company-operated stores included in the retail segment at July 14, 2001. Advance intends to continue to expand its base of stores as part of its growth strategy, primarily by opening new stores. There can be no assurance that this strategy will be successful. The actual number of new stores to be opened and their success will be dependent on a number of factors, including, among other things, the ability of Advance to manage such expansion and hire, train and retain qualified sales associates, the availability of potential store locations in highly visible, well-trafficked areas, and the negotiation of acceptable lease terms for new locations. There can be no assurance that Advance will be able to open and operate such stores on a timely or profitable basis or that opening new stores in markets already served by Advance will not harm existing store profitability or comparable store sales. The newly opened and existing store's profitability will depend on Advance's ability to properly merchandise, market and price the products required in their respective markets. Furthermore, Advance may acquire or try to acquire stores or businesses from, make investments in, or enter into strategic alliances with, companies which have stores or distribution networks in its current markets or in areas into which it intends to expand its presence. Any future acquisitions, investments, strategic alliances or related efforts will be accompanied by risks such as: . the difficulty of identifying appropriate acquisition candidates; . the difficulty of assimilating the operations of the respective entities; . the potential disruption to Advance's ongoing business; . the inability to maintain uniform standards, controls, procedures and policies; and . the impairment of relationships with employees and customers as a result of changes in management. We cannot assure you that Advance will be successful in overcoming these risks or any other problems encountered with these acquisitions, investments, strategic alliances or related efforts. If demand for products sold by Advance's stores slows, then Advance's business and operating results will suffer. Demand for products sold by Advance's stores depends on many factors and may slow for a number of reasons, including: . the weather, as vehicle maintenance may be deferred during periods of inclement weather; and . the economy, as during periods of good economic conditions, more of Advance's do-it-yourself customers may pay others to repair and maintain their cars instead of working on their own cars. In periods of declining economic conditions, both do-it-yourself and do-it-for-me customers may defer vehicle maintenance or repair. Advance depends on the services of its existing management team and may not be able to attract and retain additional qualified management personnel. Advance is dependent upon the services and experience of its executive officers and senior management team. If for any reason Advance's senior executives do not continue to be active in management, its operating 20 results could suffer. Additionally, Advance cannot assure you that it will be able to attract and retain additional qualified senior executives as needed in the future. If Advance is unable to compete successfully against other companies in the retail automotive parts industry, Advance could lose customers and its revenues may decline. The retail sale of automotive parts, accessories and maintenance items is highly competitive in many areas, including price, name recognition, customer service and location. Advance competes primarily with national and regional retail automotive parts chains, wholesalers or jobber stores, independent operators, automobile dealers that supply parts, discount stores and mass merchandisers that carry automotive replacement parts, accessories and maintenance items. Some of Advance's competitors possess certain advantages over Advance, including substantially greater financial and marketing resources, a larger number of stores, longer operating histories, greater name recognition, larger and more established customer bases and more established vendor relationships. Advance's response to these competitive disadvantages may require it to reduce its prices or increase its spending, which would lower revenue and profitability. Advance's response may also prevent it from introducing new product lines or require it to discontinue current product offerings or change some of its current operating strategies. If Advance does not have the resources or expertise or otherwise fails to develop successful strategies to address these competitive disadvantages, then its business and results of operations will suffer. Disruptions in Advance's relationships or in its vendors' operations could increase its cost of goods sold. Advance's business depends on developing and maintaining close relationships with its vendors and upon the vendors' ability or willingness to sell products to Advance at favorable prices and other terms. Many factors outside of Advance's control may harm these relationships and the ability or willingness of these vendors to sell these products on such terms. For example, financial or operational difficulties that some of its vendors may face may increase the cost of the products it purchases from them. In addition, the trend towards consolidation among automotive parts suppliers may disrupt or sever Advance's relationship with some vendors. In particular, some of Advance's vendor contracts and Discount's vendor contracts require that Advance, Discount and their respective affiliates purchase the automotive parts, accessories and maintenance items that are the subject of these contracts exclusively from these vendors. As a result of the merger, Advance will have multiple vendor contracts for certain parts, accessories and maintenance items that contain such exclusivity clauses, and the effect that this will have on Advance's relationships with these vendors is unclear. A disruption of these vendor relationships or in their operations could cause Advance's business and results of operations to suffer. Advance's existing stockholders will continue to have substantial control over Advance after the merger, including control over a majority of the board of directors and the ability to limit amendments to Advance's certificate of incorporation and bylaws, and could limit your ability to influence the outcome of matters requiring stockholder approval. After the merger, Advance's existing stockholders, including management, will collectively beneficially own 28,320,150 shares, or approximately 86.8% of Advance's outstanding common stock. Holders of approximately 97% of these shares are parties to a stockholders' agreement which provides, among other things, that such stockholders, and, after the merger, Peter Fontaine and entities he controls, will nominate and vote in favor of up to 9 of the 11 (or up to 14 after the addition of independent directors) members of the Advance board of directors, ensuring their election. In addition, the stockholders' agreement provides that, without the approval of Nicholas Taubman, Advance may not amend its certificate of incorporation or bylaws or the stockholders agreement if it would adversely affect the rights and obligations of Mr. Taubman, subject to certain exceptions. If the directors nominated by the parties to the stockholders' agreement, or holders of a majority of Advance's common stock, agree amongst themselves to take or refrain from taking any course of action, the effect may be to act against the wishes of the stockholders who are not a party to the stockholders' agreement. 21 Advance will have anti-takeover defense provisions in its certificate of incorporation and bylaws that may deter potential acquirors and depress its stock price. Advance's certificate of incorporation and bylaws will contain provisions that could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of Advance. These provisions: . authorize Advance's board of directors to issue "blank check" preferred stock and determine the powers, preferences and privileges of those shares without prior stockholder approval; . prohibit the right of Advance's stockholders to act by written consent; . limit the calling of special meetings of stockholders; and . impose a requirement that holders of 66% of the outstanding shares of common stock are required to amend the provisions relating to actions by written consent of stockholders and the limitations of calling special meetings. Advance's debt instruments also contain provisions that could have the effect of making it more difficult or less attractive for a third party to acquire, or of discouraging a third party from attempting to acquire, control of Advance. Specifically, the terms of Advance's existing senior subordinated notes and of the senior subordinated notes that it anticipates issuing in connection with the merger require that they be redeemed at a premium over their principal amount in the event that there is a change of control of Advance. In addition, the terms of the senior credit facility that Advance also intends to enter into in connection with the merger contains a covenant that prohibits Advance from undergoing a change of control, which if it does, will constitute an event of default under that facility and cause the related indebtedness to become immediately due. The need to repay all of this indebtedness may deter potential third parties from acquiring Advance. Under these various provisions in Advance's certificate of incorporation, bylaws and debt instruments, a takeover attempt or third-party acquisition of Advance, including a takeover attempt that may result in a premium over the market price for shares of Advance's common stock, could be delayed, deterred or prevented. In addition, these provisions may prevent the market price of Advance's common stock from increasing in response to actual or rumored takeover attempts and may also prevent changes in its management. As a result, these anti-takeover and change of control provisions may limit the price investors are willing to pay in the future for shares of Advance's common stock. If Advance Stores fails to meet its payment or other obligations under its new senior secured credit facility, the lenders could foreclose on, and acquire control of, substantially all of its and its subsidiaries' assets. In connection with the incurrence of indebtedness under Advance Stores' new senior secured credit facility, upon the closing of the merger, the lenders under the credit facility will receive a pledge of all of the equity interests of Advance Stores' subsidiaries, including Discount and its subsidiaries. Additionally, these lenders generally will have a first priority security interest on substantially all of the accounts receivable, cash, general intangibles, investment property and future acquired material property of Advance, Advance Stores and Advance Stores' subsidiaries, including Discount and its subsidiaries. As a result of these pledges and liens, if Advance Stores fails to meet its payment or other obligations under this credit facility, the lenders would be entitled to foreclose on substantially all of those assets and liquidate these assets. Under those circumstances, holders of Advance common stock may lose a portion of or the entire value of their investment. Advance will be able to incur additional indebtedness. Despite Advance's current and anticipated levels of indebtedness, Advance and its subsidiaries will still be able to incur substantially more indebtedness. Although the debt instruments will limit the amount of additional indebtedness, they do not and will not prohibit Advance and its subsidiaries from incurring certain amounts of additional indebtedness. If Advance incurs such additional indebtedness, the related risks that it now faces and 22 that it expects to face after the merger, including those discussed elsewhere in this proxy statement and prospectus, could intensify. Special Note Regarding Forward-Looking Statements In this proxy statement and prospectus there are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934, which are usually identified by the use of words such as "will," "anticipates," "believes," "estimates," "expects," "projects," "forecasts," "plans," "intends," "should" or similar expressions. Advance and Discount intend those forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995 (it being understood that such statements would not be covered by the safe harbor provisions to the extent they are considered made in connection with an initial public offering of Advance's stock) and are included in this statement for purposes of complying with these safe harbor provisions. These forward-looking statements reflect current views about the relevant company's plans, strategies and prospects, which are based on the information currently available and on current assumptions. Although each company believes that its plans, intentions and expectations as reflected in or suggested by those forward-looking statements are reasonable, it can give no assurance that the plans, intentions or expectations will be achieved. Listed below and discussed elsewhere in this proxy statement and prospectus are some important risks, uncertainties and contingencies which could cause each company's actual results, performances or achievements to be materially different from the forward-looking statements made in this proxy statement and prospectus. These risks, uncertainties and contingencies include, but are not limited to, the following: . the risk that the businesses of Advance and Discount will not be integrated successfully or such integration may be more difficult, time- consuming or costly than expected; . expected efficiencies and cost savings from the merger may not be fully realized or realized within the expected time frame; . revenues following the merger may be lower than expected; . operating costs, customer loss and business disruption following the merger, including, without limitation, difficulties in maintaining relationships with suppliers and employees, may be greater than expected; . inability to obtain or meet conditions imposed for governmental approval for the merger or merger schedule; . the failure of Discount's shareholders to approve the merger; . recessionary trends in general or in specific areas where Advance and Discount operate; . competitive pricing and other competitive pressures; . other economic, business, competitive and/or regulatory factors affecting Advance's and Discount's business generally; and . other factors discussed under the heading "Risk Factors" and elsewhere in this proxy statement and prospectus. Advance and Discount assume no obligation to update publicly any forward- looking statements, whether as a result of new information, future events or otherwise. In evaluating forward-looking statements, you should consider these risks and uncertainties, together with the other risks described from time to time in Advance's, Advance Stores' and Discount's reports and documents filed with the Securities and Exchange Commission, and you should not place undue reliance on those statements. 23 THE SPECIAL MEETING We are furnishing this proxy statement and prospectus in connection with Discount's solicitation of proxies from the holders of Discount common stock for use at the special meeting of shareholders. We are first mailing this proxy statement and prospectus and accompanying form of proxy to the shareholders of Discount on or about November 7, 2001. Date, Place and Time The special meeting is scheduled to be held at The Lakeland Center, 700 West Lemon Street, Lakeland, Florida, on Wednesday, November 28, 2001, at 9:00 a.m. local time. Purpose of the Special Meeting The purpose of the special meeting is to consider and take action upon the merger agreement and merger, and such other matters as may be appropriate for consideration at the special meeting. The Discount board of directors has determined that the merger is fair and advisable to and in the best interests of Discount and the Discount shareholders and unanimously approved the merger agreement and the merger and unanimously recommends that the shareholders of Discount vote for approval and adoption of the merger agreement and the merger. Record Date and Stock Entitled to Vote Owners of record of shares of Discount common stock at the close of business on October 25, 2001, the record date for the special meeting, are entitled to receive notice of and to vote at the special meeting. Discount's common stock is the only class of voting securities of Discount. On the record date, approximately 16,707,903 shares of common stock were issued and outstanding and entitled to vote at the special meeting. Owners of record of Discount common stock on the record date are each entitled to one vote per share on the approval and adoption of the merger agreement and the merger. Quorum Requirement A quorum of Discount shareholders is necessary to have a valid meeting. A majority of the shares of Discount common stock issued and outstanding and entitled to vote on the record date must be represented in person or by proxy at the special meeting in order for a quorum to be established. Abstentions and "non-votes" count as present for establishing a quorum. A broker "non-vote" occurs on an item when a broker is not permitted to vote on that item without instructions from the beneficial owner of the shares and no instructions are given. Vote Required The affirmative vote of the holders of a majority of shares outstanding on the record date is required to approve the merger agreement and the merger. An abstention or a broker "non-vote" will have the same effect as a vote against the proposal. Fontaine Industries, a limited partnership controlled by Peter J. Fontaine, beneficially owns approximately 24% of Discount's common stock, and is Discount's largest shareholder. Fontaine Industries has agreed to vote all of its shares of Discount common stock in favor of the merger agreement and the merger. Proxies Voting Your Proxies You may vote your shares at the meeting or by proxy. Discount recommends you vote by proxy, even if you plan on attending the special meeting. Voting instructions are included on your proxy card. If you properly give your proxy and submit it to Discount, your shares will be voted in favor of the merger agreement and 24 merger. You may vote by proxy by completing the enclosed proxy card, signing, dating and mailing it in the enclosed postage pre-paid envelope. If you sign a proxy card and return it without specific voting instructions, the shares represented by the proxy will be voted FOR the proposal presented at the special meeting. You may abstain from voting for any of the proposals by properly marking the abstain box on the proxy for the proposal. If you hold your shares in "street name" (i.e., in the name of a broker, bank or other record holder), you must either direct the record holder of your shares as to how to vote your shares or obtain a proxy from the record holder to vote at the special meeting. Revocation of Proxy You may revoke a proxy at any time prior to the time the proxy is to be voted at the special meeting by: . delivering (including by telegram or facsimile) prior to the special meeting a written notice of revocation of proxy to the corporate secretary of Discount; . delivering prior to the special meeting a duly executed proxy bearing a later date than the initial proxy; or . attending the special meeting and voting in person. Your presence at the special meeting will not itself automatically revoke your proxy. If not revoked, the proxy will be voted in accordance with the instructions indicated on the proxy, or if no instructions are indicated on a properly executed proxy, such proxy will be voted "FOR" the approval and adoption of the merger agreement and the merger. Proxy Solicitation Discount and Advance will bear equally the costs of printing and mailing this proxy statement and prospectus. Discount will bear the costs of soliciting proxies from its shareholders. In addition to soliciting proxies by mail, directors, officers and employees of Discount, without receiving additional compensation, may solicit proxies by telephone, by facsimile or in person. Arrangements may also be made with brokerage firms and other custodians, nominees and fiduciaries to forward solicitation materials to the beneficial owners of shares held of record by such persons, and Discount will reimburse such brokerage firms, custodians, nominees and fiduciaries for reasonable out-of-pocket expenses incurred by them in connection therewith. Mellon Investor Services LLC will assist in the solicitation of proxies by Discount. Discount will pay Mellon Investor Services LLC a fee of approximately $6,500, plus reimbursement of certain out-of-pocket expenses, and will indemnify Mellon Investor Services LLC against any losses arising out of Mellon Investor Services LLC's proxy solicitation services on behalf of Discount. Holders of Discount common stock should not send their stock certificates with their proxy cards. If the merger is completed, a separate letter of transmittal will be mailed to shareholders which will enable each of them to receive the merger consideration. No Appraisal Rights Under Florida law, Discount shareholders are not entitled to dissenters' rights of appraisal in connection with the merger because, on the record date, Discount common stock was designated and quoted for trading on the New York Stock Exchange. Other Matters Brought Before the Special Meeting; Adjournments and Postponements It is not expected that any matter not referred to in this proxy statement and prospectus will be presented for action at the special meeting. If any other matters are properly brought before the special meeting the persons named in the proxies will, unless you indicate otherwise on the enclosed proxy card, have discretion to vote on such matters according to their best judgment, including any proposal to adjourn the meeting. Any adjournment of the special meeting may be made without notice, other than by an announcement made at the 25 special meeting, by approval of the holders of a majority of the outstanding shares of Discount common stock present in person or represented by proxy at the special meeting, whether or not a quorum exists. Adjournments may be made for the purpose of, among other things, soliciting additional proxies in favor of the merger transaction. Discount is soliciting proxies to allow the individuals appointed as proxies to exercise discretionary authority to vote in favor of adjournment or postponement of the special meeting. In particular, discretionary authority may be exercised if the purpose of the adjournment or postponement is to provide additional time to solicit additional votes to adopt and approve the merger agreement and the merger. The individuals acting as proxies will exercise their discretion in voting upon the question of whether to adjourn or postpone the meeting depending upon the circumstances at the time. It is likely that the proxies will vote to adjourn or postpone the meeting if they believe that adjourning or postponing the meeting will enable Discount to obtain the additional votes necessary to obtain approval by the holders of a majority of the shares of Discount common stock to adopt and approve the merger transaction. It is unlikely that the proxies will vote to adjourn or postpone the meeting if they do not believe that doing so would enable Discount to obtain the additional necessary votes. The grant of a proxy will also confer discretionary authority on the persons named in the proxy as proxy appointees to vote in accordance with their best judgment on matters incidental to the conduct of the special meeting. 26 THE MERGER Background of the Merger Between Advance and Discount From time to time over the past several years, Peter Fontaine, Chairman and Chief Executive Officer of Discount, had been contacted by various parties, particularly other specialty automotive parts retailers, expressing general interest in exploring business combinations with Discount. Throughout this period, Discount's board of directors was committed to a strategy of independent growth, including expansion into markets outside of Florida and the roll out and development of Discount's commercial delivery operations. Discount's management team and Discount's board of directors believed that remaining independent and implementing Discount's strategic plan would, over the long term, maximize shareholder value. Accordingly, during the past several years and until February 2001, Discount chose not to pursue any of the general expressions of interest from third parties. Starting in fiscal 1999, despite continued growth in its store base and revenues, Discount's profit margins began declining on a quarter over quarter basis, largely because its commercial delivery operations and its new stores outside of Florida were significantly less profitable than its core retail operations in Florida. Discount undertook a number of strategic initiatives to improve profitability. Although Discount continued to experience positive comparable store sales, promising growth in sales in its commercial delivery business and continuing but slow movement towards marginal profitability of its commercial delivery operations, Discount's profit margins continued to decline. In fiscal 2001, as its rate of revenue growth began to slow, Discount's absolute level of profit also began declining on a quarter over quarter basis. In June 2000, Mr. Fontaine received a letter from Merritt A. Gardner (the "Glenden Co-Trustee"), a co-trustee with Mr. Fontaine of several trusts that then together, through a limited partnership, beneficially owned approximately 18% of the outstanding common stock of Discount. The Glenden limited partnership had been engaged for several years in an effort to diversify its assets through regular quarterly sales of Discount's common stock under Rule 144. The letter from the Glenden Co-Trustee expressed the co-trustee's view as a trustee of the respective trusts that he was dissatisfied with the financial performance of Discount and the performance of Discount's stock price. Mr. Fontaine discussed the letter from the Glenden Co-Trustee with each of the members of Discount's board and, based on these discussions, the board engaged in preliminary discussions over the next several months with Discount's management and legal and financial advisors concerning strategic alternatives. The Discount board determined at that time to continue to focus on implementing Discount's business strategy. The board acknowledged, however, that it should not foreclose future consideration of other strategic alternatives if management were to later determine that the successful implementation of the business strategy was not achievable within a reasonable time frame. In October 2000, Mr. Fontaine received another letter from the Glenden Co- Trustee. The Glenden Co-Trustee reiterated his unhappiness with Discount's financial performance and stock price. The letter suggested that Discount pursue one of the following alternative courses of action: bringing in a new qualified chief executive officer, selling the company or repurchasing the shares of Discount common stock held by the Glenden limited partnership. In early October 2000, after consultations among the directors and in part because the October letter from the Glenden Co-Trustee suggested consideration of specific courses of action and in part because implementation of the business strategy was taking longer than management originally contemplated, Discount retained Salomon Smith Barney as its financial advisor, to assist management in a further review of strategic alternatives for Discount. At a regular meeting of the Discount board on October 10, 2000, the directors discussed generally with management and representatives of Salomon Smith Barney various strategic alternatives, including continued implementation of Discount's business strategy as well as the possibility of business combinations and the specific courses of action suggested by the Glenden Co- Trustee. At a special 27 meeting of the Discount board on October 16, 2000, Mr. Fontaine updated the board on the general review of strategic alternatives by management and Salomon Smith Barney. Management reviewed the progress that had been made in, and evaluated the prospects for, the implementation of its business strategy. Based on these reviews and deliberations, the board decided that it was still appropriate and in the best interest of its shareholders to continue to execute Discount's business strategy and that more time was needed to carry out that strategy. On November 21, 2000, the board adopted and implemented a stockholder rights plan. The board arrived at this decision, after a series of meetings beginning at its regular board meeting on October 10, 2000 and after consultation with management and Discount's legal and financial advisors. The decision took into account many factors, including the board's continued belief in its ability to successfully implement the business strategy, the perceived need for additional time to carry out that strategy and the desire to provide management with a sufficient opportunity to implement that strategy. The board's decision was based on its belief that such action would help the board to maximize shareholder value for all Discount shareholders by providing effective defenses against abusive takeover tactics, such as offers for inadequate value, deals involving coercive or misleading terms, or deals which would interfere with or distract management from the implementation of Discount's adopted business strategy. In January 2001, after observing no meaningful improvement in Discount's ability to successfully implement its business strategy, Discount entered into a separation agreement with William Perkins, Discount's President and Chief Operating Officer, whereby Mr. Perkins agreed to step down from his positions with Discount, including his position as a director. Discount also engaged an executive search firm to conduct a search for a seasoned executive who could devote his or her energies to performing the roles of both chief executive officer and president. During the next several weeks, as the executive search process was proceeding, Mr. Fontaine was again contacted, informally and on an unsolicited and confidential basis, by senior representatives of both Advance and another third party, inquiring as to whether Discount might have any interest in discussing a possible business combination. As a result of these preliminary inquiries, together with the challenges and the time that was likely to be involved in implementing Discount's business strategy, Mr. Perkin's departure, the continued decline in Discount's profitability and the perception of increased competitive pressures, Mr. Fontaine consulted with each of Discount's independent directors relative to reexamining the strategic alternatives for Discount. As a result of these discussions and further evaluation with Discount's management and financial advisor as to Discount's strategic alternatives, the board decided at a special meeting of the board on February 28, 2001 that it would be appropriate to explore opportunities for the acquisition of Discount by a strategic buyer, but concluded that it was not likely to be productive to contact any financial buyers because of, among other things, the more limited ability of financial buyers to produce synergies, the debt structure required for such a transaction, the perceived lack of availability of leveraged buy-out debt, and the fact that financial buyers would not generally have in place an already proven management team in the auto parts retailing business. The board authorized Salomon Smith Barney to contact strategic buyer candidates on a confidential basis in order to better inform the board as to whether such other companies might be interested in exploring a business combination and in receiving confidential information concerning Discount and its business. Over the next several weeks, a confidential memorandum describing Discount and its operations, financial performance and prospects was prepared for distribution to potential buyers. Concurrently with the preparation of the memorandum, Discount's management, with the assistance of Salomon Smith Barney, identified five potential strategic buyers, including Advance, and Salomon Smith Barney was instructed to contact each such potential strategic buyer to ascertain its level of interest in pursuing a transaction with Discount. Four of the five contacted parties, including Advance, signed confidentiality agreements, following which they were provided with confidential information and a letter setting forth bidding requirements and a deadline of April 23, 2001 for the submission of written preliminary indications of interest in acquiring Discount. In addition, each of the parties which signed a confidentiality agreement was offered the opportunity to meet separately with members of Discount's management. 28 In April 2001, Discount's management had separate extended meetings with representatives from Advance and one other potential buyer. These two potential buyers and their respective advisors conducted preliminary due diligence. Despite positive reception at the meetings and strong indications that the other potential buyer was interested in pursuing a strategic acquisition of Discount, the other potential buyer informed Salomon Smith Barney on April 23, 2001 that, because of factors unrelated to Discount, it would not be submitting a written indication of interest. On April 23, 2001, Discount received a written indication of interest from Advance. Advance's preliminary indication of interest provided for a merger of Discount with Advance in which the holders of Discount would receive between $11 and $13 in cash for each share of Discount common stock. Mr. Fontaine informally discussed Advance's preliminary indication of interest with each of the members of the board and they each agreed that the pricing proposed by Advance was not sufficient to merit further consideration. On April 30, 2001, at the direction of Discount, Salomon Smith Barney communicated to Advance through representatives of Freeman Spogli & Co. that Advance's preliminary indication of interest had been rejected and that the pricing would need to be meaningfully in excess of $13 before Discount would be willing to further consider a possible business combination with Advance. In response, on that date, representatives of Freeman Spogli & Co. communicated to Salomon Smith Barney that Advance was willing to work towards a cash purchase price meaningfully in excess of $13 per share. Based on the communications from Freeman Spogli & Co. and further discussions among representatives of Discount, on May 4, 2001, Advance was delivered a letter outlining the terms and conditions under which Discount was willing to continue to negotiate with Advance. Between May 10, 2001 and May 31, 2001, Advance and its lenders and their respective advisors and representatives conducted further financial and legal due diligence, including data room review and additional meetings with Discount's management. In addition, based on discussions among the parties and in an effort to focus on the legal aspects and other terms of a proposed transaction, on May 18, 2001, a draft form of merger agreement prepared by Discount's legal advisors was distributed to Advance. The draft merger agreement contemplated an all cash merger consideration for all Discount shares (leaving the per share amount for negotiation), a cash payment for all outstanding options, a fully financed transaction, and customary conditions to closing. Advance management and Freeman Spogli & Co. discussed the status of the Discount discussions and the related financing discussions with the Advance Holding board at its May 23, 2001 regularly scheduled board meeting. On May 31, 2001, representatives of Advance contacted Salomon Smith Barney and verbally communicated that Advance would not be able to support an offer in excess of $13 per share in cash because the cost of obtaining the necessary financing was prohibitive. After relaying this conversation to Discount's management, Salomon Smith Barney was instructed by Discount's management, based on prior directions from Discount's board, to inform Advance that a $13 per share price would not be acceptable. On June 1, 2001, Advance inquired as to whether Discount might be receptive to a transaction involving part stock and part cash with a targeted value of $15 per share. Advance emphasized that any such alternative bid remained subject to Advance's ability to secure the necessary financing and to completion of additional due diligence by both Advance and its lending sources. Over the next several days, Discount's management reviewed the advantages and disadvantages of a part stock, part cash alternative with Discount's legal and financial advisors. Mr. Fontaine also explored this potential revised structure in informal conversations with each of the other members of Discount's board. At the same time, at Discount's request, representatives of Salomon Smith Barney sought further details from Advance concerning the part stock, part cash bid so that the proposal could be properly evaluated by Discount's board. On June 12, 2001, Advance submitted a non-binding offer letter outlining a proposed transaction with a stated value of $15 per share, comprised of a fractional share of stock of Advance with an expressed value of 29 $7.50 and cash of $7.50 for each share of Discount common stock. The new proposal contemplated a fully financed merger transaction in which Discount's stockholders would receive, in the aggregate, approximately 12.5% of the primary common shares outstanding of the combined entity. The new proposal also provided for the registration of the shares of common stock to be issued to Discount's stockholders and contemplated the listing of such shares on a recognized securities exchange or the Nasdaq National Market System. As a result of this proposed transaction, Advance would become a public company. In addition, Mr. Fontaine would become a member of the Advance board of directors. Advance emphasized in its letter that the proposal remained subject to satisfactory completion of its due diligence, negotiation of related business terms and agreements, the receipt of financing commitments and other key closing conditions. Discount's management advised Advance that same day that Discount was prepared to further consider the new proposal but, because of the stock consideration element, would need to conduct its own financial and legal due diligence with respect to Advance. Accordingly, on June 12, 2001, Discount executed and delivered a confidentiality agreement to Advance. On June 13, 2001, Advance management and representatives of Freeman Spogli & Co. met with the Chief Financial Officer of Discount in Roanoke, Virginia and with Discount's financial advisor telephonically, and Discount and its financial advisor began their due diligence review of Advance with a presentation from Advance management regarding its historical business and preliminary operating and financial plan for integrating and operating the combined company. At this time, Advance also presented to Discount and its representatives draft commitment letters for its financing of the transaction. On June 18, 2001, at a meeting of the Discount board, members of Discount's senior management and Discount's legal and financial advisors reviewed with the Discount board the overall efforts that had been made to effectuate an acquisition of Discount by a strategic buyer and the status of the ongoing discussions between Discount and Advance, including the terms and structure of Advance's current written proposal. After considering these discussions and engaging in additional deliberations, the Discount board directed management and Salomon Smith Barney to pursue further discussions with Advance focused on certain modifications to the financial terms of the proposal. The primary modifications that were sought included an increase in the aggregate percentage of ownership in the combined company that shareholders of Discount would receive pursuant to the merger, the computation of such percentage on a fully diluted basis by taking into account all outstanding options (including options issued by Advance) and a $0.25 increase in the per share cash portion of the merger consideration. Over the next week, Discount's management and financial advisor had a number of telephone conversations with representatives of Advance to further negotiate the financial terms of the proposed merger, and Advance orally communicated a revised proposal which did not provide for any increase in the per share cash portion of the merger consideration but which increased to 13% the aggregate percentage of ownership in the combined company that shareholders of Discount would receive pursuant to the merger, computed on a fully diluted basis taking into account all outstanding options of both Advance and Discount. This proposal included a combination of stock and cash for those Discount options with an exercise price below $15.00. On June 21, 2001, a call was held with the Advance Holding board to update the directors on the status of the proposed Discount transaction. On June 25, 2001, the Discount board met and was updated on developments since its June 18, 2001 meeting, including the revised financial proposal from Advance which reflected an increase in the percentage ownership in the combined entity of holders of Discount common stock and options from approximately 12.5% to 13.0% calculated on the basis of fully diluted, rather than primary, common shares outstanding of the combined entity. The Discount board responded favorably to the general outline of the proposed economic terms in Advance's latest proposal, subject to Discount's satisfactory completion of due diligence with respect to Advance and receipt of additional information to assist the board in making a determination as to whether there was a reasonable basis to conclude that the stock portion of the consideration had a value equal to or 30 greater than the $7.50 per share value of the stock portion of the consideration expressed by Advance. The board's position was communicated to representatives of Advance. During the period from June 28, 2001 to July 26, 2001, representatives of Discount and Advance, together with their advisors, continued negotiations on the various terms of the merger agreement and the related voting and option agreements. These negotiations involved numerous conference calls and discussions and an all day meeting on July 17, 2001. As part of the negotiations, because of potential negative income tax consequences to Discount's option holders, including directors, officers and other employees, if such options were to be exchanged for shares of Advance, which consequences shareholders of Discount would not experience upon the exchange, in lieu of issuing common shares for payment of in-the-money options, Discount negotiated to have Advance pay for the in-the-money options in cash. As a consequence, the aggregate cash portion of the consideration increased and, because these Discount optionees would not receive common shares of Advance, there was a corresponding reduction in the aggregate percentage ownership that Discount common stock and option holders would hold in the combined entity from approximately 13% to approximately 12.7%. This reduction in the aggregate percentage ownership impacted only option holders (who would no longer be receiving stock in exchange for their options) and did not in any way reduce the percentage interest or value that any individual shareholder would receive pursuant to the merger. During the same period, the parties also continued to conduct their legal and financial due diligence and Advance worked on finalizing its commitment letters for the financing of the transaction. On July 26, 2001, Discount convened a meeting of its board. At that meeting, Discount's legal and financial advisors reviewed with the Discount board the discussions that had occurred since the prior board meeting, reported on the status of negotiations and due diligence investigations, and reviewed the material terms of the proposed transaction and transaction documents. As part of its deliberations, the board was informed as to, among other things, the legal structure of the acquisition transaction, the amount of the cash and stock portions of the merger consideration, the anticipated income tax consequences to Discount shareholders of the merger consideration, the treatment of Discount stock options, the provisions to be contained in the voting agreement and the option agreement with Fontaine Industries, the conditions to closing, restrictions on operations of each of the companies during the pendency of the transaction, restrictions on Discount's ability to solicit and consider acquisition proposals from other parties, termination rights and break- up fees and expenses. The board provided advice and direction to Discount's management and advisors, including a direction to negotiate for further limits on Advance's ability to issue options and additional shares or to effectuate other acquisition transactions during the pendency of the transaction, for limits on Advance's right to immediately terminate the merger agreement based on a withdrawal of the board's recommendation at a time when Discount is obligated under the terms of the merger agreement to hold a shareholders' meeting to consider the merger after having received a superior proposal, and limits on how and when the termination fee and/or Advance's expenses would need to be paid as a result of a termination of the merger agreement. From July 26, 2001, through and including August 7, 2001, the parties continued negotiations on various terms in the merger agreement, the stock option agreement and the voting agreement, and continued to conduct further due diligence. On August 1, 2001, Advance Holding held a special meeting of its board to approve the Discount merger and all related transactions. The details of the merger agreement and financing commitments were reviewed in detail and the Advance Holding board voted unanimously to approve the transaction. On August 7, 2001, the Discount board met by way of telephone conference call to consider the proposed merger. At that meeting, Discount's legal and financial advisors reviewed with the board the discussions and negotiations that had occurred since the July 26, 2001 board meeting and the manner in which the material open business and legal points had been resolved. In particular, the Discount board was informed that in the revised merger agreement, Advance was limited to issuing options largely to issuances consistent with its past practices and to hire and retain senior executives or provide integration incentives, Advance was limited to issuances of stock during the pendency of the merger agreement which diluted all shareholders (including all 31 then existing Advance shareholders) on a pro rata basis, Advance relinquished its right to immediately terminate the merger agreement based on a withdrawal of the board's recommendation at a time when Discount is obligated under the terms of the merger agreement to hold a shareholders' meeting to consider the merger after having received a superior proposal, and some limits were established and clarifications made relative to how and when the termination fee and/or Advance's expenses would be paid as a result of a termination of the merger agreement. Also, at the meeting, Salomon Smith Barney delivered to the Discount board its oral opinion, which opinion was confirmed by delivery of a written opinion dated August 7, 2001, to the effect that, as of that date and based on and subject to the matters described in its opinion, the consideration to be received by the holders of Discount common stock pursuant to the merger agreement was fair, from a financial point of view, to such holders. After further deliberations and taking into consideration the material factors described below under "Discount's Reasons for the Merger," the Discount board determined that the terms of the merger were fair to, and in the best interests of, the shareholders of Discount and unanimously approved the merger agreement and the related voting and option agreements. The board also unanimously approved an amendment to Discount's stockholder rights plan in order to exempt the merger from the operation of the stockholder rights plan, and thus enable the merger to proceed. Late in the afternoon on August 7, 2001, following completion of the definitive documentation (which was in all respects materially similar to the merger agreement and related documents considered and approved earlier in the day by the Discount board) and final confirmatory due diligence by the parties, Discount, Advance Holding, Advance Auto Parts, Advance Stores and Advance Merger Sub executed and delivered the merger agreement, and Fontaine Industries, Peter J. Fontaine Revocable Trust, Peter Fontaine, Advance Holding and Advance Stores executed and delivered the voting agreement and the option agreement. Executed financing commitments from Advance's lenders were also delivered that day. Early in the evening on August 7, 2001, Advance and Discount publicly announced the proposed merger. Discount's Reasons for the Merger In reaching the determination that the merger agreement and the terms of the merger are fair to, and in the best interests of Discount and its shareholders, the Discount board consulted with Discount's management, as well as its legal and financial advisors and considered the short-term and long- term interests of Discount. Although the Discount board considered all of these factors, it did not make determinations with respect to each of the factors. Rather, the Discount board made its judgment with respect to the merger and the merger agreement based on the total mix of information available to it, and the judgments of individual board members may have been influenced to a greater or lesser degree by their individual views with respect to different factors. Positive factors considered by the Discount board of directors. In making its determinations, the board of directors considered the following factors, which the board considered to be the positive material factors in its decision to recommend approval of the merger and the merger agreement: . The fact that the merger will provide Discount shareholders with a substantial premium over $7.25, the per share closing price of Discount common stock on February 28, 2001, which was the date on which Discount's board first decided to explore opportunities with respect to a potential business combination. . The fact that the merger will offer Discount shareholders the opportunity to participate in a larger, more geographically diversified company in the auto parts industry with a strengthened management team and board of directors. . The Discount board's belief that the merger should result in a company with substantial gains from expected synergies, cost efficiencies and earnings accretion which were estimated to be approximately $30 million in the first full year of operations. 32 . The complementary industry expertise and business philosophy and family ownership roots of the two companies. . The fact that the merger will offer Discount shareholders immediate liquidity of $7.50 in cash per share while at the same time providing the opportunity to participate in the value that may be generated through the combination of the two companies' businesses. . The prospects for improved trading liquidity in the future if and when Advance pursues subsequent equity offerings of its securities. Discount's board believed that the combined company, with an expected market capitalization approaching $1 billion, should attract greater interest from investors and thus generate a larger trading volume if and when Advance pursues and completes subsequent equity offerings. . The discussions undertaken with other potential acquirors and the board's belief, based on those discussions, that no other buyer would be likely to provide a superior value to the Discount shareholders. . The Discount board's belief that the merger presents a favorable alternative, strategically and financially, to Discount's remaining an independent company. As an independent company, Discount was facing continued delays in its ability to implement its business strategy. In addition, the combined company would be of a size and would have access to resources that could be expected to enable it to more effectively compete in each of the markets in which Discount has stores. . The opinion dated August 7, 2001 of Salomon Smith Barney to the Discount board as to the fairness, from a financial point of view and as of the date of the opinion, of the merger consideration to the holders of Discount common stock, as described at page 35 under "The Merger-- Opinion of Discount's Financial Advisor." . The fact that Fontaine Industries Limited Partnership, a partnership controlled by Peter J. Fontaine, Discount's Chairman and Chief Executive Officer, and Discount's principal shareholder and beneficial owner of approximately 24% of the outstanding shares, indicated that it would enter into an agreement to vote all of its shares in favor of the merger agreement and the merger. This support of the transaction from Peter Fontaine, who has been involved in the auto parts business for over 25 years, was viewed as a strong testament to the propriety of the transaction and helped to provide confidence that the transaction, if pursued, could be consummated. . A review of the terms of the merger agreement, including the likelihood of satisfying the conditions to closing of the merger and the fact that the merger agreement permits the Discount board to receive unsolicited inquiries and proposals from, and, under certain circumstances, negotiate and give information to, third parties. Negative factors considered by the Discount board of directors. The Discount board also considered the matters described in this proxy statement and prospectus under the heading "Risk Factors" as well as the following potentially material negative factors concerning the merger: . The fact that consummation of the merger will deprive the holders of Discount common stock of the opportunity to participate in any future growth that Discount may have been able to achieve as an independent company, except as part of a much larger Advance, and that the business of Advance may not perform as well in the future as Discount may have performed as an independent company. . The fact that the "non-solicitation" provision and related provisions in the merger agreement and other ancillary agreements might discourage third parties from seeking to negotiate a superior proposal for the acquisition of Discount. . The risk that the merger would not be completed in a timely manner or at all. . The possible negative effects of the announcement of the merger upon Discount's relationships with its employees, customers, and suppliers and the possible impact that these negative effects would have upon sales and earnings. 33 . The fact that certain officers and directors of Discount have interests in the merger that are different from, and may conflict with, the interests of Discount shareholders, as more fully described under "The Merger--Interests of Discount's Officers and Directors in the Merger" beginning on page 43. . The fact that the merger is conditional upon the funding of Advance's commitments for financing, which may not be received for reasons beyond the control of Discount or Advance, in which case the merger would not be completed. . The fact that cash consideration to be received by some Discount shareholders may result in taxable income to them. . The terms in the merger agreement that provide that if Discount receives a superior acquisition proposal from another prior to the merger, in order to accept the offer Discount would be required to pay to Advance a termination fee of $9.0 million and could be liable to Advance for expense reimbursements of up to $7.0 million. The same termination fee and expense reimbursements would be payable in most cases if Discount receives another offer, the shareholders do not approve the merger, and, within 12 months thereafter, Discount is sold to someone other than Advance. . The fact that there is likely to be limited initial float and limited research sponsorship with respect to the Advance common stock for some extended period of time following the closing of the merger. . The fact that Florida law does not entitle Discount shareholders to dissenters' rights if the merger is completed. However, in the board's view, these factors were substantially outweighed by the positive factors discussed above. Based upon its consideration of all of the factors described above, the board arrived at its determination to approve and adopt the merger agreement and recommend that the shareholders of Discount approve the merger agreement. Advance's Reasons for the Merger In reaching its determination to approve the merger, the merger agreement and the reincorporation merger, the Advance board of directors consulted with Advance management, legal counsel and accountants and was advised by JP Morgan, its financial advisor in this transaction, and considered the short-term and long-term interests of Advance. In particular, the Advance board of directors considered the following material factors, among others, all of which it deemed favorable, in reaching its decision to approve the merger and the merger agreement: . Discount's leading position as a speciality retailer of automotive parts and accessories in the State of Florida. . Discount's complementary position to Advance's existing markets outside of the State of Florida. . The board's belief that the merger should result in a company with strong synergy opportunities: the potential to increase same store sales as a result of marketing, merchandising and inventory and other efficiencies; increased commercial sales opportunities; purchasing efficiencies; increased distribution system optimization; and the ability to reduce overlapping administrative expenses. . Discount's large number of owned properties and its favorable rent in many locations. . The strength and experience of Discount's field and store management teams. . The strong cultural fit of Discount and Advance. Recommendation of the Board of Directors of Discount The board of directors of Discount has determined that the merger is in the best interests of Discount and its shareholders and has unanimously approved and adopted the merger agreement. Accordingly, Discount's 34 board of directors recommends that the shareholders of Discount vote "FOR" approval and adoption of the merger agreement and the merger. Opinion of Discount's Financial Advisor Discount retained Salomon Smith Barney to act as its financial advisor in connection with the proposed transaction. In connection with its engagement, Discount requested that Salomon Smith Barney evaluate the fairness, from a financial point of view, of the merger consideration. On August 7, 2001, at a meeting of the Discount board held to evaluate the proposed transaction, Salomon Smith Barney delivered to the Discount board of directors an oral opinion, which opinion was confirmed by delivery of a written opinion dated August 7, 2001, to the effect that, as of that date and based on and subject to the matters described in its opinion, the merger consideration was fair, from a financial point of view, to the holders of Discount common stock. In arriving at its opinion, Salomon Smith Barney: . reviewed the merger agreement and related documents referred to in the merger agreement; . held discussions with senior officers, directors and other representatives and advisors of Discount and with senior officers and other representatives and advisors of Advance concerning the businesses, operations and prospects of Discount, Advance and the combined company; . examined publicly available business and financial information relating to Discount and Advance and available business and financial information relating to the combined company; . examined financial forecasts and other information and data for Discount, Advance and the combined company which were provided to or otherwise discussed with Salomon Smith Barney by the managements of Discount and Advance, including information relating to the potential strategic implications and operational benefits anticipated by the managements of Discount and Advance to result from the transaction; . reviewed the financial terms of the transaction as described in the merger agreement in relation to, among other things, current and historical market prices and trading volumes of Discount common stock, the financial condition and the historical and projected operating data of Discount, Advance and the combined company, and the capitalization of Discount, Advance and the combined company; . considered, to the extent publicly available, the financial terms of other transactions recently effected which Salomon Smith Barney considered relevant in evaluating the transaction; . analyzed financial, stock market and other publicly available information relating to the businesses of other companies whose operations Salomon Smith Barney considered relevant in evaluating those of Discount and Advance; and . conducted other analyses and examinations and considered other financial, economic and market criteria as Salomon Smith Barney deemed appropriate in arriving at its opinion. In rendering its opinion, Salomon Smith Barney assumed and relied, without independent verification, on the accuracy and completeness of all financial and other information and data publicly available or furnished to or otherwise reviewed by or discussed with it. With respect to financial forecasts and other information and data, the managements of Discount and Advance advised Salomon Smith Barney that the forecasts and other information and data were reasonably prepared on bases reflecting the best currently available estimates and judgments of the managements of Discount and Advance as to the future financial performance of Discount, Advance and the combined company and the potential strategic implications and operational benefits anticipated to result from the transaction, including the amount, timing and achievability of those potential benefits. 35 Salomon Smith Barney assumed, with Discount's consent, that the transaction would be consummated in accordance with its terms, without waiver, modification or amendment of any material term, condition or agreement. Salomon Smith Barney did not express any opinion as to what the value of the Advance common stock actually will be when issued in the transaction or the prices at which the Advance common stock will trade or otherwise be transferable at any time. Salomon Smith Barney did not make and was not provided with an independent evaluation or appraisal of the assets or liabilities, contingent or otherwise, of Discount, Advance and the combined company, and Salomon Smith Barney did not make any physical inspection of the properties or assets of Discount, Advance or the combined company. In connection with its engagement, Salomon Smith Barney was requested to solicit, and it held discussions with, third parties regarding the possible acquisition of all or a part of Discount. Salomon Smith Barney expressed no view as to, and its opinion does not address, the relative merits of the transaction as compared to any alternative business strategies that might exist for Discount or the effect of any other transaction in which Discount might engage. Salomon Smith Barney's opinion was necessarily based on information available to Salomon Smith Barney, and financial, stock market and other conditions and circumstances existing and disclosed to Salomon Smith Barney, as of the date of its opinion. Although Salomon Smith Barney evaluated the merger consideration from a financial point of view, Salomon Smith Barney was not asked to and did not recommend the specific consideration payable in the transaction, which was determined through negotiations between Discount and Advance and its affiliates. Discount imposed no other instructions or limitations on Salomon Smith Barney with respect to the investigations made or procedures followed by Salomon Smith Barney in rendering its opinion. The full text of Salomon Smith Barney's written opinion dated August 7, 2001, which describes the assumptions made, matters considered and limitations on the review undertaken, is attached to this proxy statement and prospectus as Annex B and is incorporated into this proxy statement and prospectus by reference. Salomon Smith Barney's opinion is directed to the Discount board of directors and relates only to the fairness of the merger consideration from a financial point of view, does not address any other aspect of the transaction or any related transaction and does not constitute a recommendation to any shareholder with respect to any matters relating to the proposed transaction. In preparing its opinion, Salomon Smith Barney performed a variety of financial and comparative analyses, including those described below. The summary of these analyses is not a complete description of the analyses underlying Salomon Smith Barney's opinion. The preparation of a fairness opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a fairness opinion is not readily susceptible to summary description. Accordingly, Salomon Smith Barney believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying its analyses and opinion. In its analyses, Salomon Smith Barney considered industry performance, general business, economic, market and financial conditions and other matters existing as of the date of its opinion, many of which are beyond the control of Discount and Advance. No company or business used in those analyses as a comparison is identical to Discount, Advance, the combined company or the proposed transaction, and an evaluation of those analyses is not entirely mathematical. Rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies or business segments analyzed. The estimates contained in Salomon Smith Barney's analyses, including financial projections provided by both Advance and Discount, and the valuation ranges resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by its analyses. In addition, analyses relating to the value of businesses or 36 securities do not necessarily purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, Salomon Smith Barney's analyses and estimates are inherently subject to substantial uncertainty. Salomon Smith Barney's opinion and analyses were only one of many factors considered by the Discount board of directors in its evaluation of the transaction and should not be viewed as determinative of the views of the Discount board of directors or management with respect to the merger consideration or the proposed transaction. The following is a summary of the material financial analyses performed by Salomon Smith Barney in connection with the rendering of its opinion dated August 7, 2001. The financial analyses summarized below include information presented in tabular format. In order to fully understand Salomon Smith Barney's financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Salomon Smith Barney's financial analyses. Merger Consideration Analysis In evaluating the equity component of the merger consideration, Salomon Smith Barney computed an estimated valuation range for the merger consideration by performing a trading multiples analysis and discounted cash flow analysis of the pro forma company. These analyses are more fully described below. Salomon Smith Barney then compared the implied valuation range derived for the merger consideration to the implied equity reference ranges derived for Discount on a standalone basis as more fully described below. Pro Forma Trading Multiples Analysis Using publicly available information, Salomon Smith Barney reviewed the market values and trading multiples of selected companies in the aftermarket automotive parts retail industry identified below in the selected companies analysis performed by Salomon Smith Barney as part of its financial analysis of Discount on a standalone basis. Salomon Smith Barney reviewed firm values, calculated as equity value, plus straight debt, minority interests, straight preferred stock and out-of-the-money convertible securities, less cash and investments in unconsolidated affiliates, as a multiple of calendar year 2001 estimated earnings before interest, taxes, depreciation and amortization, commonly referred to as EBITDA, and also reviewed equity values as a multiple of calendar year 2002 estimated net income. Salomon Smith Barney then applied a range of selected multiples derived from the selected companies of 7.0x to 8.0x calendar year 2001 estimated EBITDA and 15.0x to 17.0x calendar year 2002 estimated EPS to corresponding financial data of the pro forma company, based on internal estimates of the management of Advance. This analysis indicated an implied equity reference range for the pro forma company of approximately $29.93 to $40.09 per share and, based on the merger consideration of $7.50 in cash and 0.2577 of a share of Advance common stock, an estimated implied value range for the merger consideration of approximately $15.31 to $17.96 per share of Discount common stock exchanged. Pro Forma Discounted Cash Flow Analysis Salomon Smith Barney performed a discounted cash flow analysis of the pro forma company to estimate the present value of the unlevered, after-tax free cash flows that the pro forma company could generate over fiscal years 2001 through 2005, based on internal estimates of the management of Advance. Salomon Smith Barney derived an implied equity reference range for the pro forma company by applying a range of selected EBITDA terminal value multiples of 6.5x to 7.5x to the pro forma company's fiscal year 2005 estimated EBITDA. The present value of the cash flows and terminal values were calculated using discount rates ranging from 9.5% to 10.5%. This analysis indicated an implied equity reference range for the pro forma company of approximately $47.22 to $59.76 per share and, based on the merger consideration of $7.50 in cash and 0.2577 37 of a share of Advance common stock, an estimated implied value range for the merger consideration of approximately $19.82 to $23.09 per share of Discount common stock exchanged. Discount Standalone Analyses Selected Companies Analysis Using publicly available information, Salomon Smith Barney reviewed the market values and trading multiples of Discount and the following five selected publicly traded companies in the aftermarket automotive parts retail industry: . AutoZone, Inc. . O'Reilly Automotive, Inc. . CSK Auto Corporation . Genuine Parts Company . The Pep Boys--Manny, Moe & Jack All multiples were based on closing stock prices on August 3, 2001. Estimated financial data for the selected companies were based on public filings and research analysts' estimates and estimated financial data for Discount were based on internal estimates of Discount's management adjusted for the sale/leaseback transactions effectuated by Discount, which occurred on February 27, 2001. Salomon Smith Barney compared firm values of Discount and the selected companies as multiples of latest 12 months revenues and latest 12 months and estimated calendar year 2001 EBITDA. Salomon Smith Barney also compared equity values of Discount and the selected companies as a multiple of calendar years 2001 and 2002 estimated earnings per share, commonly referred to as EPS. Salomon Smith Barney then applied a range of selected multiples derived from the selected companies of 0.55x to 0.65x latest 12 months revenues, 5.5x to 6.5x latest 12 months EBITDA, 5.0x to 6.0x calendar year 2001 estimated EBITDA, 8.0x to 10.0x calendar year 2001 estimated EPS and 6.0x to 8.0x calendar year 2002 estimated EPS to corresponding financial data of Discount. This analysis indicated the following implied mean per share equity reference range for Discount, as compared to the estimated implied per share value range for the merger consideration:
IpliedmMean Per Share Equity Reference Estimated Implied Per Share Merger Range For Discount Consideration Value Range --------------------------------------- ---------------------------------- $8.94-$12.20 $15.31-$23.09
38 Precedent Transactions Analysis Using publicly available information, Salomon Smith Barney reviewed the implied transaction value multiples paid or proposed to be paid in the following 13 selected transactions in the aftermarket automotive parts, mall based and standalone retail industry: Aftermarket Automotive Parts Retailers
Target Acquiror ------ -------- .Al's and Grand Auto Supply, Inc. .CSK Auto Corporation .Chief Auto Parts Inc. .AutoZone, Inc. .Advance .Freeman Spogli & Co. Mall Based Retailers Target Acquiror ------ -------- .Sunglass Hut International, Inc. .Luxottica Group S.p.A. .Musicland Stores Corporation .Best Buy Co., Inc. .Piercing Pagoda, Inc. .Zale Corporation .Babbage's Etc. LLC .Barnes & Noble, Inc. Standalone Retailers Target Acquiror ------ -------- .Sound Advice, Inc. .Tweeter Home Entertainment Group, Inc. .PETCO Animal Supplies, Inc. .Investors Group Inc. .Funco, Inc. .Barnes & Noble Inc. .Eagle Hardware & Garden, Inc. .Lowe's Companies, Inc. .Dart Group Corporation .Richfood Holdings, Inc. .Hechinger Company .Leonard Green & Partners, LP
All multiples for the selected transactions were based on publicly available financial information. Salomon Smith Barney compared firm values in the selected transactions as multiples of latest 12 months revenue and EBITDA. Salomon Smith Barney then applied a range of selected multiples derived from the selected transactions of 0.55x to 0.70x latest 12 months revenue and 6.5x to 7.5x latest 12 months EBITDA to corresponding financial data of Discount. This analysis indicated the following implied mean per share equity reference range for Discount, as compared to the estimated implied per share value range for the merger consideration: Implied Mean Per Share Equity Reference Estimated Implied Per Share Merger Range For Discount Consideration Value Range --------------------------------------- ---------------------------------- $11.58-$16.32 $15.31-$23.09
Discounted Cash Flow Analysis Salomon Smith Barney performed a discounted cash flow analysis of Discount to estimate the present value of the stand-alone, unlevered, after-tax free cash flows that Discount could generate over fiscal years 2002 through 2005, based on internal estimates of Discount's management. Salomon Smith Barney derived an implied equity reference range for Discount by applying a range of selected EBITDA terminal value multiples of 5.5x to 6.5x to Discount's fiscal year 2005 estimated EBITDA. The present value of the cash flows and terminal values were calculated using selected discount rates ranging from 10.5% to 11.5%. This analysis indicated the following implied equity reference range for Discount, as compared to the estimated implied per share value range for the merger consideration:
Implied Mean Per Share Equity Reference Estimated Implied Per Share Merger Range For Discount Consideration Value Range --------------------------------------- ---------------------------------- $13.91-$18.31 $15.31-$23.09
39 Contribution Analysis Salomon Smith Barney reviewed the relative contributions of Discount and Advance to the latest 12 months and estimated calendar years 2001 and 2002 revenues, EBITDA and net income of the pro forma company. Estimated financial data for Discount and Advance were based on internal estimates of the managements of Discount and Advance and its affiliates. Salomon Smith Barney then compared the percentage contributions of Discount to these operational metrics to the pro forma equity ownership in the combined company of holders of Discount common stock assuming the cash portion of the merger consideration constituted 50% of the merger consideration. This analysis indicated an implied contribution reference range for Discount of between approximately 10.5% and 15.6%, with a mean contribution of approximately 12.8% and a median contribution of approximately 12.5%, as compared to the pro forma equity ownership percentage of Discount's shareholders immediately upon completion of the merger of approximately 13%. Other Factors In rendering its opinion, Salomon Smith Barney also reviewed and considered other factors, including: . historical trading prices and trading volumes for Discount common stock for the 24-month, 12-month and three-month periods ended August 3, 2001; . the relationship between movements in Discount common stock, movements in the common stock of selected companies in the aftermarket automotive parts retail industry and movements in the S&P composite index; and . Discount's recent and projected operating performance for fiscal years 2000 and 2001, EBITDA margin trends for the past three years and recent market price to earnings multiples relative to selected companies in the aftermarket automotive parts retail industry. Miscellaneous Under the terms of its engagement, Discount has agreed to pay Salomon Smith Barney for its financial advisory services upon completion of the transaction an aggregate fee based on a percentage of the total consideration, including liabilities assumed, payable in the transaction. The fee payable to Salomon Smith Barney is currently estimated to be approximately $3.0 million. Discount also has agreed to reimburse Salomon Smith Barney for reasonable travel and other expenses incurred by Salomon Smith Barney in performing its services, including the reasonable fees and expenses of its legal counsel, and to indemnify Salomon Smith Barney and related persons against liabilities, including liabilities under the federal securities laws, arising out of its engagement. In the ordinary course of business, Salomon Smith Barney and its affiliates may actively trade or hold the securities of Discount and Advance and its affiliates for their own account or for the account of customers and, accordingly, may at any time hold a long or short position in those securities. Salomon Smith Barney and its affiliates in the past have provided services to Discount and affiliates of Advance unrelated to the proposed transaction, including acting as financial advisor to Discount in connection with Discount's adoption of its stockholder rights plan for which Salomon Smith Barney received a fee of $50,000. In addition, Salomon Smith Barney and its affiliates, including Citigroup Inc. and its affiliates, may maintain relationships with Discount, Advance and their affiliates. Salomon Smith Barney is an internationally recognized investment banking firm and was selected by Discount based on its experience, expertise and familiarity with Discount and its business. Salomon Smith Barney regularly engages in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. 40 Certain Financial Projections and Forecasts Discount Projections Discount does not, as a matter of course, make public forecasts or projections as to its future financial performance. However, in connection with Discount's efforts to identify interested strategic buyers, Discount made available to Advance and its representatives certain nonpublic information regarding Discount's projected operating performance, or the Projections. The Projections are included in this proxy statement and prospectus solely because such information was furnished to Advance by Discount. The Projections were prepared early in the fourth quarter of Discount's 2001 fiscal year and were based, in part, on Discount's assumptions concerning its operating performance in its fiscal year 2001 fourth quarter. The actual operating results for such fourth quarter proved to be below the assumed performance. The Projections did not take into account Discount's May 2001 settlement of certain litigation resulting in a pre-tax net gain of $6.5 million. Additionally, the Projections were based on a variety of assumptions, including Discount remaining as an independent company engaged in, among other things, new store development activities in new and existing markets, business development activities related to establishing collaborations with third parties, and other initiatives, and it is highly likely that the contribution Discount's business will make to Advance's consolidated results will be different from Discount's performance on a standalone basis. Accordingly, Advance gave limited weight to the Projections provided by Discount in evaluating the proposed merger, in developing its models for the combined company, and in determining the amount it was willing to pay to acquire Discount. The Projections included, among other things, Discount's projections of sales, gross profit, EBITDA and net income for Discount's fiscal years 2001 through 2005. The Projections for fiscal 2001 were presented on a pro forma basis to take into account a full year of Discount's sale/leaseback transaction, which was consummated in February 2001. Set forth below is a summary of such Projections. The Projections should be read together with the financial statements of Discount that are included in this proxy statement and prospectus.
Fiscal Years Ending May, ------------------------------------ 2001 2002 2003 2004 2005 ------ ------ ------ ------ -------- (dollars in millions) Sales................................... $664.8 $725.1 $812.7 $907.6 $1,010.1 Gross profit............................ $258.2 $290.0 $328.8 $371.2 $ 413.0 EBITDA.................................. $ 62.9 $ 81.5 $ 96.7 $114.3 $ 130.3 Net income.............................. $ 13.7 $ 26.4 $ 34.7 $ 44.4 $ 53.1
The assumptions used to prepare the Projections involve judgments with respect to, among other things, future economic and competitive conditions, the availability of suitable real estate locations, continued good relations with key product vendors, and future business conditions in the automotive aftermarket parts industry, which are inherently subject to significant uncertainties and contingencies, many of which are beyond Discount's control. In addition, if the merger is not consummated, Discount may not be able to achieve the Projections. Accordingly, there can be no assurance that the assumptions made in preparing the Projections would prove accurate, and actual results may be materially greater or less than those contained in the Projections. The Projections herein should not be regarded as an indication that Discount, Advance, or any of their respective affiliates or representatives considered or consider the Projections to be a reliable prediction of future events, and the Projections should not be relied upon as such. None of Discount, Advance or any of their respective affiliates, advisors or representatives assumes any responsibility for the validity, reasonableness, accuracy or completeness of the Projections. None of Discount, Advance or any of their respective affiliates, advisors or representatives is under any obligation to or has any intention to update the Projections at any future time. The Projections were prepared solely for internal use and not with a view to public disclosure or compliance with the published guidelines of the SEC or the American Institute of Certified Public Accountants regarding projections. The Projections included in this proxy statement and prospectus have been prepared by, 41 and are the responsibility of, Discount's management. Ernst & Young LLP has neither examined nor compiled the Discount projected data and, accordingly, Ernst & Young LLP does not express an opinion or any other form of assurance with respect thereto. The Ernst & Young LLP report included in this proxy statement and prospectus relates only to the historical financial statements of Discount. The report does not extend to the Projections and should not be read to do so. Advance Pro Forma Forecast Advance does not, as a matter of course, make public forecasts or projections as to its future financial performance. However, in connection with the negotiation of the merger and the arranging of the related financing, Advance prepared and made available to Discount certain nonpublic financial information regarding Advance, which included the pro forma impact of adding Discount to its operations. On August 8, 2001, in connection with the public conference call to discuss the merger, Advance and Discount provided, using a range, a pro forma financial forecast for fiscal 2002, or the Forecast, to the public via a presentation posted on the Discount website and through a conference call/webcast and a filing with the SEC. The Forecast for Advance's fiscal year 2002 is included in this proxy statement and prospectus solely because such information was furnished to the public in a prior disclosure. The Forecast was based upon a standalone forecast for Advance for fiscal 2002, adjusted to include the addition of the Discount operations, and based on certain assumptions relating to Discount's store operations (both in Florida and outside of Florida), logistics and purchasing operations, and overhead structure. The Forecast also included the impact of the new capital structure, and various cost savings and operating synergy assumptions which Advance and Discount believe the combined company may achieve as a result of the merger, but excludes certain one-time conversion costs. The table below presents a summary of the Forecast. Fiscal 2002 Combined(a) (dollars in millions, except per share data) Sales................................................... $3,100 to $3,325 EBIT.................................................... $ 200 to $ 215 EBITDA.................................................. $ 310 to $ 325 Net Income.............................................. $ 59 to $ 67 Diluted EPS............................................. $ 1.70 to $ 1.95 Net Debt................................................ $ 960 to $ 940
-------- (a) Includes $30 million of operational synergies; excludes one-time conversion costs of approximately $50 million to $60 million to be incurred during the first two years. This Forecast was prepared during the course of Advance's due diligence on Discount and was based on a variety of assumptions, including the successful integration of Discount's operations into Advance's business, as well as, among other things, the related costs to implement the integration and to obtain the cost savings and operating synergies. The assumptions used to prepare the Forecast involve judgments with respect to, among other things, future economic and competitive conditions, the availability of suitable real estate locations, continued good relations with key product vendors, the timing of the closing of the merger and future business conditions in the automotive aftermarket parts industry, which are inherently subject to significant uncertainties and contingencies, many of which are beyond Advance's and Discount's control. In addition, if the merger is not consummated, the Forecast will no longer be relevant to Advance or Discount. There can be no assurance that the assumptions made in preparing the Forecast will prove accurate, and actual results may be materially greater or less than those contained in the Forecast. The Forecast herein should not be regarded as an indication that Advance, Discount or any of their respective affiliates, advisors or representatives considered or consider the Forecast to be a reliable prediction of future events, and the Forecast should not be relied upon as such. None of Advance, Discount, or any of their respective affiliates, advisors or representatives assumes any responsibility for the validity, reasonableness, accuracy or completeness of the Forecast. None of Advance, 42 Discount, or any of their respective affiliates, advisors or representatives is under any obligation to or has any intention to update the Forecast at any future time. The Forecast was originally prepared solely for internal use and not with a view to public disclosure and has not been prepared in compliance with the published guidelines of the SEC or the American Institute of Certified Public Accountants regarding projections. The Forecast included in this proxy statement and prospectus has been prepared by, and is the responsibility of, Advance's management. Neither Arthur Andersen LLP nor Ernst & Young LLP has examined or compiled the Forecast and, accordingly, neither Arthur Andersen LLP nor Ernst & Young LLP express an opinion or any other form of assurance with respect thereto. The Arthur Andersen LLP and Ernst & Young LLP reports included in this proxy statement and prospectus relate only to the respective historical financial statements of Advance and Discount. Their reports do not extend to the Forecast and should not be read to do so. Interests of Discount's Officers and Directors in the Merger When considering the Discount board of directors' recommendation to vote FOR the merger agreement, Discount shareholders should be aware of interests which some of Discount's officers and directors have in the merger that are different from or in addition to, and may conflict with, the interests of Discount shareholders. The Discount board of directors was aware of these interests and specifically considered them before approving and adopting the merger agreement. These interests are discussed below. Stock Options and Other Stock-Based Compensation The treatment of outstanding options held by officers and directors of Discount is in all respects equivalent to the treatment of outstanding options held by Discount's employees generally. Under the terms of all such options, the merger will have the effect of accelerating in full their vesting, including all of the options held by officers and directors of Discount. Although Discount shareholders will become entitled to receive merger consideration comprised of part stock of Advance and part cash as a result of the consummation of the merger, the officers and directors, as well as all other Discount employees holding options, will become entitled to receive all cash for the designated value of any options with an exercise price of less than $15.00 and will have any options with an exercise price of $15.00 or greater converted into equivalent options of Advance. For a description of how outstanding options to acquire Discount common stock will be treated in the merger, see "The Merger Agreement--Treatment of Discount Stock Options in the Merger" at page 53. As of the record date, Discount executive officers and directors held options to purchase Discount common stock as set forth below.
Number of Unvested Options Which Number of Shares of Discount Accelerate at the Common Stock Subject to Options Closing of the Merger -------------------------------- -------------------------------- Name of Officer or Exercise Price Exercise Price of Exercise Price Exercise Price of Director Under $15.00 $15.00 or More Under $15.00 $15.00 or More ------------------ -------------- ----------------- -------------- ----------------- Peter J. Fontaine....... -0- -0- -0- -0- William C. Perkins(1)... 100,000 -0- -0- -0- C. Michael Moore........ 90,000 46,500 90,000 39,500 Michael D. Harrah....... 5,000 43,500 5,000 28,750 Clement A. Bottino...... 5,000 73,306 5,000 24,750 David C. Viele.......... 5,000 68,356 5,000 18,500 Tom Merk................ 5,000 38,167 5,000 28,049 C. Roy Martin........... 10,000 -0- 10,000 -0- David P. Walling........ 1,000 4,000 1,000 1,500 Charles W. Webster, Jr. ................... 1,000 1,000 1,000 750 Donald Olson............ 1,000 -0- 1,000 -0-
-------- (1) As of January 17, 2001, Mr. Perkins' position as an officer and director of Discount terminated. 43 Change of Control Employment Agreements and Severance Plan Each of C. Michael Moore, Michael Harrah, Clement Bottino, David Viele, C. Roy Martin, Tom Merk and certain non-executive officers of Discount has a change of control employment agreement with Discount that provides that upon the closing of the merger each such officer is entitled to severance benefits upon a subsequent termination or constructive termination of his employment that occurs during a specified period following the merger, unless such termination is by the officer for other than good reason (as defined in the agreements) prior to one year following the change of control or is by Discount for cause. The extent of the severance benefits and the manner in which they are paid are dependent on the position and tenure of the officer (which determines the applicable employment period) and why the officer's employment was terminated. The applicable employment period for Mr. Moore is set at thirty-six months and the applicable employment period for each of the other officers is determined based on a formula which gives specified credit for the executive's position with Discount and separate credit for the executive's tenure with Discount. If termination results from a disability occurring after the closing of the merger, the officer's base salary and benefits continue through the balance of the applicable employment period. If the termination is by Discount without cause or by the officer either for good reason or after the one year anniversary of the closing of the merger or as a result of the officer's death, the officer is entitled to a lump sum payment equal to a specified or computed multiple times the sum of the officer's base salary and the highest amount of the annual incentive compensation, including annual bonus, received or deferred, by the officer for the most recent three full fiscal years immediately prior to the fiscal year in which the termination of employment occurs. In the case of termination as a result of death, the multiple is generally the number of years plus any portion remaining of the employment period at the time of death. In the case of termination by Discount without cause or by the officer either for good reason or after the one year anniversary of the closing of the merger, the multiple for Mr. Moore is three times and for each of the other officers is generally the number of years plus any portion of a year remaining of the employment period at the time of termination, with certain reductions if at least 12 months have passed since the change of control. In addition, such officers would be entitled to company- paid medical insurance benefits for one year following termination and then employee-paid medical insurance benefits for an additional eighteen months. The agreement with Mr. Moore provides for a payment, if necessary, intended to make him whole for any excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended, with respect to any payment or benefit that he may receive under such agreement or with respect to the change of control. The approximate lump sum severance payment that would be due under the Change of Control Employment Agreements for Messrs. Harrah, Bottino, Viele, Martin and Merk, if their employment were to be terminated without cause by Advance immediately after the merger would be $255,400, $358,500, $379,800, $176,800, and $247,900, respectively. The approximate lump sum severance payment that would be due under the Change of Control Employment Agreement for Mr. Moore, if his employment were to be terminated without cause by Advance immediately after the merger would be $866,800, plus any applicable "gross-up" payment required to compensate him for any excise tax imposed on him, as discussed above. In addition to the above benefits that may accrue upon termination of the officer following the closing of the merger, the change of control employment agreements provide for benefits during the officer's continued employment following the closing of the merger. These benefits include salary protections and provisions that entitle the officer to receive similar benefits as those offered to other officers, including with respect to: participation in bonus and incentive compensation plans and programs; medical, life, and other insurance benefits; vacation; reimbursement of expenses; and indemnification and director and officer liability insurance. The total cost for all severance payments and benefits that would be owed under all of these change of control employment agreements and arrangements, if each participant's employment were to be terminated without cause immediately after the merger, and any "gross-up" payment required to be made to Mr. Moore, as described above, would be approximately $13.5 million. 44 The change of control employment agreements also provide that for a period of time during the continued employment of the officer following the closing of the merger or following termination of employment of the officer, the officer (a) will not act in any manner or capacity in or for any business entity that competes with Discount, (b) will not divulge any confidential information of Discount to a third party, except for the benefit of Discount or when required by law, and (c) will not solicit or hire away any person who was an employee of Discount on the effective date of the merger. Supplemental Executive Profit Sharing Plan Each of C. Michael Moore, Michael Harrah, Clement Bottino, David Viele, Tom Merk and certain non-executive officers are participants in Discount's supplemental executive profit sharing plan. The plan provides unfunded retirement benefits. Under the terms of the plan, such unfunded benefits will become 100% vested as a result of the consummation of the merger. Separation Agreement with William C. Perkins In connection with the departure of William C. Perkins from Discount in January 2001, Mr. Perkins entered into a separation agreement dated January 17, 2001. The separation agreement provided for, among other items, continuation of Mr. Perkins' salary for a period of two years following the date of separation and the grant of 100,000 fully vested stock options with an exercise price of $7.00 per share. In the separation agreement, Mr. Perkins provided Discount with certain releases and agreed to certain confidentiality, non-competition and non-solicitation provisions. Mr. Perkins also agreed to provide consulting services to Discount for up to 20 hours per month until January 31, 2003. Under the terms of the separation agreement, upon the consummation of the merger, the remaining salary continuation payments will be accelerated and will become payable in a lump sum. The approximate lump sum that would become payable to Mr. Perkins, assuming the merger were to close in November 2001, would be $370,000. In addition, because the option exercise price of the options granted to Mr. Perkins is less than $15.00, Mr. Perkins' outstanding stock options will be converted into the right to receive a total of $800,000 upon the consummation of the merger. Board of Directors As a condition to the closing of the merger, Peter J. Fontaine must be elected to the Advance board effective as of the closing date and must continue to be elected to the Advance board until the earlier of 2004, Mr. Fontaine's resignation from the Advance board, his removal from the Advance board for cause, Mr. Fontaine's no longer having beneficial interest in at least 50% of the Advance shares he acquires beneficial ownership of in the merger, or the termination of certain voting rights of parties to the stockholders agreement among certain of the existing stockholders of Advance. In addition, the same stockholders agreement will be amended to provide Peter J. Fontaine and certain entities he controls with certain piggyback registration rights as to shares of Advance common stock received in the merger. See "Description of the Capital Stock of Advance--Stockholders Agreement" at page 142. Indemnification Discount's articles of incorporation and bylaws and indemnification agreements with its officers and directors obligate it to indemnify its directors and certain of its officers against claims brought against them in their capacities as such and any related expenses. In the merger agreement, Advance has agreed to fulfill those obligations after the merger with respect to any claims brought against the current officers and directors in respect of periods prior to or up to six years after the merger. In addition, Advance has agreed to maintain officer's and director's liability insurance for six years after the merger covering periods prior to the merger, with certain limitations. 45 Voting Agreement and Option Agreement Under the voting agreement and the option agreement, Peter J. Fontaine, who beneficially owns approximately 24% of the Discount common stock through his interest in Fontaine Industries Limited Partnership, has granted Advance Stores (a) an irrevocable proxy to vote all of the partnership's shares of Discount common stock for approval of the merger agreement and the merger, and against any competing transaction and (b) an option to purchase all, but not less than all of the partnership's shares under certain circumstances at a price per share equal to $15.00 plus 25% of the amount, if any, by which the fair market value of the per share consideration paid under an acquisition proposal (a proposal made by a third party to acquire all of the securities or assets of Discount) exceeds $15.00. Accounting Treatment The merger will be accounted for under the purchase method of accounting, with Advance treated as the acquiror. As a result, Advance will record the assets and liabilities of Discount at their estimated fair values at the closing date. The estimated total excess fair value over the purchase price will be allocated to non-current assets, primarily property and equipment. From the date of the merger, the operating results of Discount will be combined with the results of Advance for financial accounting purposes. Material U.S. Federal Income Tax Consequences of the Merger The following discussion summarizes the material United States federal income tax consequences of the merger to holders of Discount common stock who hold their Discount common stock as a capital asset within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, or the Code. Because the following discussion is a summary, it does not address all of the United States federal income tax consequences that may be relevant to particular shareholders in light of their individual circumstances or to shareholders who are subject to special rules, such as financial institutions, tax-exempt organizations, insurance companies, dealers in securities or foreign currencies, foreign holders, persons who hold such shares as a hedge against currency risk, or as part of a constructive sale or conversion transaction, or holders who acquired their shares upon the exercise of employee stock options or otherwise as compensation. Furthermore, tax consequences under state, local and foreign laws are not addressed. The following summary is not binding on the Internal Revenue Service. It is based upon the Code, laws, regulations, rulings and decisions in effect as of the date of this proxy statement and prospectus, all of which are subject to change, possibly with retroactive effect. Also, although there is substantial authority, involving analogous situations, supporting the conclusions reached in the opinion, there is no specific authority that addresses the tax consequences in a factual context that is identical in all respects to the factual context of the merger. As a result, there is a possibility, although relatively small, that the tax consequences as set forth in the following summary and in the opinion described below will not be fully realized. Holders of Discount common stock are strongly urged to consult their tax advisors as to the specific tax consequences to them of the merger, including the applicability and effect of federal, state, local and foreign income and other tax laws in their particular circumstances. Based on representations contained in representation letters provided by Discount, Advance Auto Parts, Inc. and AAP Acquisition Corporation, all of which must continue to be true and accurate in all material respects as of the closing date of the merger, and customary limitations and assumptions set forth in the opinion filed as an exhibit to the registration statement of which this proxy statement and prospectus is a part, Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis, Professional Association, counsel to Discount, has opined that (1) the merger between Discount and AAP Acquisition Corporation and the contemporaneous merger of Advance Holding Corporation and Advance Auto Parts, Inc., taken together, should be treated for U.S. federal income tax purposes as part of an exchange subject to Section 351 of the Code and (2) the material United States federal income tax consequences of the transaction to the United States holders of Discount common stock should be as follows. 46 Tax Consequences to Discount Shareholders. Subject to the discussion below concerning fractional shares, Discount shareholders will recognize gain (but not loss) measured by the lesser of (i) the excess, if any, of (x) the sum of the fair market value (on the effective date of the merger) of Advance common stock and the cash consideration over (y) the tax basis of their shares of Discount common stock and (ii) the cash consideration. Such gain, if any, will be long-term capital gain if Discount common stock was held for more than one year at the time of the consummation of the merger. A Discount shareholder who holds more than one block of Discount common stock (i.e. shares acquired at different times or prices) will determine the amount of gain recognized and loss not recognized pursuant to the merger separately with respect to each such block of Discount common stock. For this purpose, all of the cash consideration and Advance common stock received by a holder of Discount common stock will be allocated proportionately among the blocks of Discount common stock surrendered by the holder. The aggregate tax basis of the shares of Advance common stock received by Discount shareholders, including the fractional shares deemed to be received, will be the same as the aggregate tax basis of the shares of Discount common stock exchanged therefor increased by the gain recognized (as calculated above) and decreased by the cash consideration received. The holding period of the shares of Advance common stock received by Discount shareholders will include the holding period of the shares of Discount common stock surrendered therefor. Discount shareholders who receive cash with respect to fractional shares will be treated as having received such fractional shares pursuant to the merger and then as having sold those fractional shares in the market for cash. Such Discount shareholders will recognize gain or loss with respect to such fractional shares in an amount equal to the difference between the tax basis allocated to such fractional shares (as calculated above), and the cash received in respect thereof. Any such gain or loss will be capital gain or loss and will constitute long-term capital gain or loss if the holding period of such fractional shares (as determined above) exceeds one year. Completion of the merger is conditioned upon, among other things, the receipt by Discount of a tax opinion of Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis, P.A., dated as of the closing date of the merger, to the effect that the exchange of Advance common stock and cash for Discount common stock in the merger, assuming the contemporaneous merger of Advance Holding into Advance Auto Parts, Inc., should be treated as part of an exchange subject to Section 351 of the Internal Revenue Code. This opinion is in addition to the opinion in this section. This opinion will be based on updated representations made by Discount, Advance Stores, Advance Holding and Advance Auto Parts, Inc. to be delivered at the time of closing, all of which must continue to be true and accurate in all material respects as of the closing, and on customary limitations and assumptions, including that the transaction will be completed according to the terms of the merger agreement. An opinion of counsel represents counsel's best legal judgment and is not binding on the Internal Revenue Service or any court. No ruling has been or will be sought from the Internal Revenue Service as to the United States federal income tax consequences of the merger. Backup Withholding. Noncorporate holders may be subject to backup withholding at a rate of 31% on payments of cash consideration including as to cash with respect to fractional shares. Backup withholding will not apply, however, to a stockholder who furnishes a correct taxpayer identification number or certificate of foreign status and makes any other required certification or who otherwise is exempt from backup withholding. Generally, a Discount shareholder will provide such certification on Form W-9 (Request for Taxpayer Identification Number and Certification) or on the appropriate Form W- 8 (Certificate of Foreign Status). Reporting Requirements. Each Discount shareholder will be required to retain records and file with its U.S. federal income tax return a statement setting forth certain facts relating to the merger. It is also expected that such shareholders will be asked to indicate in the letter of transmittal their tax basis in the shares surrendered by them pursuant to the merger. 47 Tax Consequences to Discount. No income, gain or loss will be recognized by Discount pursuant to the merger. Tax Consequences of an Investment in Advance Common Stock. Any cash dividends that are paid in respect of the Advance common stock, to the extent paid out of Advance Auto Parts, Inc.'s current or accumulated earnings and profits, will be taxable as ordinary income. Corporate stockholders of Advance Auto Parts, Inc. generally will qualify for the intercorporate dividends- received deduction with respect to such dividends, subject to a minimum holding period and other applicable requirements. To the extent that Advance Auto Parts, Inc. does not have sufficient current or accumulated earnings and profits, all or a portion of any distribution made with respect to Advance common stock in any particular year will not qualify as dividends for United States federal income tax purposes and, as a result, will not be eligible for the dividends received deduction. A distribution in respect of the Advance common stock that does not constitute a dividend for United States federal income tax purposes will represent a non-taxable distribution to the extent of the stockholder's basis in Advance common stock (correspondingly reducing such stockholder's basis in such shares of stock) and, to the extent such distributions exceed the stockholder's basis in such stock, as capital gain. Delisting and Deregistration of Discount Common Stock Discount common stock is currently listed on the New York Stock Exchange under the symbol "DAP." Upon completion of the merger, Discount common stock will be delisted from the NYSE and deregistered under the Exchange Act. Regulatory Matters Advance and Discount must furnish information and materials to the Antitrust Division of the United States Department of Justice (known as the DOJ) and the Federal Trade Commission (known as the FTC) pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and wait a specified period of time before they can complete the merger. Advance and Discount filed pre-merger notification forms with the DOJ and the FTC on August 17, 2001, and expiration of the HSR waiting period occurred on September 18, 2001. Notwithstanding the expiration of the waiting period, at any time before or after the completion of the merger, the FTC or the Antitrust Division of the DOJ could take such action under the antitrust laws as it deems necessary or desirable to protect the public's interest. For example, they could seek to enjoin the consummation of the merger or require the divestiture of assets or businesses of Advance or Discount. State governmental officials and private parties may also bring actions under antitrust laws under certain circumstances. There can be no assurance that a challenge to the merger on antitrust grounds will not be made or if such challenge is made, that it would not be successful. Advance and Discount are not aware of any other governmental or regulatory approvals required for consummation of the merger, other than compliance with federal securities laws and applicable securities laws and "blue sky" laws of various states. Restrictions on Sales by Discount Affiliates The shares of Advance common stock that will be issued in the merger will be registered under the Securities Act and will be freely transferable under the Securities Act, except for shares of Advance common stock issued to any person deemed to be an "affiliate" of Discount at the time of the special meeting. Persons who may be deemed to be affiliates of Discount include individuals or entities that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with Discount. These entities and individuals may include some of its officers and directors, as well as principal stockholders. Any person deemed to be an affiliate of Discount at the time of the special meeting may only sell their shares of Advance common stock acquired in the merger pursuant to: . an effective registration statement under the Securities Act covering the resale of those shares; . an exemption under paragraph (d) of Rule 145 under the Securities Act; or . any other applicable exemption under the Securities Act. 48 Advance's registration statement, of which this proxy statement and prospectus forms a part, does not cover the resale of shares of Advance common stock to be received by affiliates of Discount in the merger. Financing Commitments In connection with the merger, Advance Stores has secured financing commitments to provide the funds necessary to pay the cash portion of the merger consideration to be paid to Discount shareholders and in-the-money option holders, refinance the existing senior credit facilities of Advance Stores ($285.3 million at July 14, 2001), repay Discount's senior indebtedness ($210.8 million at August 28, 2001 plus $6.3 million in debt prepayment premiums), purchase Discount's Gallman distribution facility from the lessor (for a purchase price of approximately $34 million), and pay approximately $35 million in related fees and expenses. In order to finance these obligations and its ongoing operations, Advance Stores has received a binding commitment, subject to customary conditions, for a senior secured credit facility consisting of $485 million of term loan facilities and a $160 million revolving credit facility (a portion of which can be used for the issuance of letters of credit). Upon the closing of the merger, Advance Stores will borrow the entire $485 million of the term loans and anticipates making an initial borrowing of approximately $9 million under the revolving credit facility. In addition, Advance Stores expects to have approximately $18 million in letters of credit outstanding at the closing of the merger, which will reduce availability under the revolving credit facility to approximately $133 million. The undrawn amounts under the revolving credit facility will be available for working capital and other general corporate purposes. In addition, Advance Stores completed an offering of its senior subordinated notes, which resulted in gross proceeds of approximately $186 million, before deducting commissions and expenses related to that offering. The proceeds from that offering are currently being held in escrow until the closing of the merger, at which point the escrowed funds will be released to provide a portion of the funds needed to complete merger. Senior Secured Credit Facilities Subject to the terms of a commitment letter, dated August 7, 2001, among Advance Stores and JP Morgan Securities Inc., The Chase Manhattan Bank (Chase), Credit Suisse First Boston (CSFB) and Lehman Commercial Paper Inc. (LCPI), Chase, CSFB and LCPI have agreed to provide the following senior secured credit facilities, a portion of which are expected to be syndicated to other lending institutions before the closing of the merger: . a tranche A term loan facility of $180 million; . a tranche B term loan facility of $305 million; and . a revolving credit facility of $160 million, including a letter of credit subfacility. The senior secured credit facilities will be jointly and severally guaranteed by Advance and all of Advance Stores' existing and future domestic subsidiaries (including Discount and its subsidiaries) and will be secured by substantially all of Advance Stores' assets, the assets of its existing and future domestic subsidiaries (including Discount and its subsidiaries), as well as the assets of Advance. The credit facility requires Advance Stores to meet financial ratios and benchmarks and to comply with other restrictive covenants. The tranche A term loan facility will mature on November 30, 2006 and, under the terms of the commitment letter, is specified to amortize by $11 million at the end of year one, and then in semi-annual installments aggregating $27 million in year two, $44 million in year three, and $49 million in each of years four and five. The tranche B term loan facility will mature on November 30, 2007 and, under the terms of the commitment letter, is specified to amortize in semi-annual installments of $2.5 million and a payment of $280 million on the final payment date. The revolving credit facility will mature on November 30, 2006. 49 Borrowings under the credit facilities will bear interest at varying rates based on, at Advance Stores' option: . in the case of the tranche A facility and the revolving facility, either an adjusted LIBOR rate with a floor of 3.00% or an alternative base rate, in each case, plus a margin tied to Advance's Leverage Ratio (as defined in the senior credit facilities); and . in the case of the tranche B facility, either adjusted LIBOR plus 4.00% or the alternate base rate plus 3.00%. The alternate base rate will be equal to the higher of (1) Chase's prime rate, (2) the federal funds effective rate plus 1/2 of 1% or (3) the base CD rate plus 1%. The senior secured credit facilities will include affirmative, negative and financial covenants and events of default customary for credit facilities of a size and type similar to the senior secured credit facilities. The obligations of Chase, CSFB and LCPI to provide the financing contemplated by the commitment letter are subject to, among other things: . the merger and reincorporation merger shall be consummated simultaneously with the initial borrowing under the senior credit facility; . receipt of pro forma consolidated balance sheets of Advance, which shall not be inconsistent with forecasts previously provided; . reasonable satisfaction as to the amount and nature of any environmental and employee health and safety exposures to which Discount and its subsidiaries may be subject and the plans of Advance to deal with such exposure; . the absence of litigation or administrative proceeding that would reasonably be expected to have a material adverse effect of the business, assets, operations, prospects or condition of Advance and its subsidiaries; . reasonable satisfaction with the results of Chase's examination of the inventory of Advance and its subsidiaries and the systems of Advance Stores providing for the monitoring and reporting of the inventory; . receipt of satisfactory title insurance policies, current certified surveys, evidence of zoning and other legal compliance, certificates of occupancy and other permits, legal opinions and other customary documentation; . the absence of any material adverse change in, or any material adverse condition affecting, the business, assets, operations, prospects or conditions (financial or otherwise) of Advance or Discount, together with their subsidiaries; . receipt by Advance Stores of a rating of its senior subordinated debt from Moody's Investors Service, Inc. of BB or better and a rating from Standard & Poor's Rating Service of at least B- or better, with each rating having an outlook of "stable" or better; and . other conditions customary in a facility of this type. Senior Subordinated Notes of Advance Stores In addition to borrowings under the senior secured credit facilities, Advance Stores completed an offering of its senior subordinated notes on October 31, 2001, which resulted in gross proceeds of approximately $186 million, before deducting commissions and expenses related to that offering. The proceeds from that offering are currently being held in escrow until the closing of the merger, at which point the escrowed funds will be released to provide a portion of the funds needed to complete merger. The notes are unsecured 50 obligations of Advance Stores and will mature in 2008. The indenture governing the notes contains affirmative and negative covenants applicable to Advance Stores and its subsidiaries that are customary for these types of securities. The commitment to provide the senior secured credit facility will expire if the merger is not completed by December 31, 2001. In addition, the senior subordinated notes issued by Advance Stores on October 31, 2001 are subject to redemption in the event the merger is not completed on or prior to December 31, 2001 or, if in Advance Stores' sole judgment, the merger will not be completed by December 31, 2001. In the event of such a redemption, the offering proceeds currently being held in escrow, plus additional amounts placed into the same escrow account by Advance Stores, will be used to fund the redemption. 51 THE MERGER AGREEMENT The following is a brief summary of the significant provisions of the merger agreement, a copy of which is attached to this proxy statement and prospectus as Annex A. We urge you to read the complete merger agreement for the precise terms of the merger agreement and other information that may be important to you. Structure of Merger and Certain Related Transactions At the time the merger becomes effective, a newly formed, wholly owned subsidiary of Advance Auto Parts, Inc. will merge with and into Discount, with Discount continuing as the surviving corporation. Contemporaneously with the merger, Advance Holding will reincorporate into Delaware by merging with and into Advance Auto Parts, Inc., a Delaware corporation. Immediately after the merger, Advance Auto Parts, Inc. will contribute the capital stock of Discount received in the merger to Advance Stores, and Discount will become a wholly owned subsidiary of Advance Stores. Merger Consideration Discount shareholders will receive in the merger, for each outstanding share of Discount common stock, $7.50 in cash and 0.2577 of a share of Advance common stock. All per-share consideration may be adjusted if Discount or Advance engages in any transaction that has the effect of changing the outstanding shares of Discount or Advance, such as a reclassification, recapitalization or stock split. In that case, the shares of Advance common stock to be received by Discount's shareholders will be adjusted to preserve the merger consideration provided for under the merger agreement. Advance will not issue fractional shares in the merger. As a result, the total number of shares of Advance common stock that each Discount shareholder receives in the merger will be rounded down to the nearest whole number. Each Discount shareholder will also receive a cash payment in lieu of a fractional share equal to the fractional share multiplied by $29.11. Post Closing Capitalization Following the merger, Advance Auto Parts, Inc. will have approximately 32.6 million shares of common stock outstanding. Discount shareholders will own approximately 13.2% of the outstanding common stock of Advance. The remaining approximately 86.8% of Advance's outstanding common stock will be owned by the current common shareholders of Advance Holding or their transferees as of immediately prior to the merger. The calculations contained in the preceding two paragraphs do not take into account the exercise of any additional outstanding stock options or the conversion of any convertible securities that would result in the issuance of the common equity of any of the companies involved. Effective Time of the Merger Promptly after the satisfaction or waiver of the conditions of the merger in the merger agreement, Advance will file articles of merger with the Department of State of the State of Florida. When this filing has been made, a newly formed subsidiary of Advance will be merged with and into Discount, and the separate corporate existence of the merger subsidiary will cease, and Discount will continue as the surviving corporation in the merger. Directors and Officers of Discount Immediately following the merger, the sole director of Advance's merger subsidiary (Lawrence P. Castellani) will be appointed as the sole director of Discount. Immediately following the merger, the officers 52 of Discount immediately prior to the merger will continue as the officers of Discount, specifically Peter J. Fontaine (Chief Executive Officer), C. Michael Moore (Executive Vice President--Finance, Chief Financial Officer and Secretary), Clement A. Bottino (Vice President--Human Resources), Michael D. Harrah (Vice President--Information Systems), C. Roy Martin (Vice President-- Supply Chain and Logistics), Thomas A. Merk (Vice President--Sales and Marketing), David C. Viele (Vice President--Purchasing), Joe Villavicancio (Vice President--Operations), Doug Snyder (Vice President--Operations) and Anthony Bottino (Vice President--Operations). Treatment of Discount Stock Options in the Merger At or immediately prior to the effective time of the merger, each outstanding option to purchase shares of Discount common stock with a per share exercise price of less than $15.00 per share will be cancelled and converted into the right to receive cash for each share underlying the option, whether or not then exercisable, equal to $15.00 minus the per share exercise price of the shares purchasable under the option. Each outstanding option to purchase shares of Discount common stock, whether or not then exercisable, with a per share exercise price equal to or greater than $15.00 per share at the effective time of the merger will be converted into an option to acquire, on substantially the same terms and conditions as were applicable under such fully converted option, and which shall be considered issued under Advance's 2001 Executive Stock Option Plan, the number of shares of Advance common stock determined by multiplying the number of shares of Discount common stock that were purchasable immediately prior to the effective time of the merger upon the exercise of such fully assumed option by 0.5154 (the "Option Exchange Ratio") at an exercise price per share equal to (a) the exercise price per share of Discount common stock immediately prior to the effective time of the merger under such fully converted option divided by (b) the Option Exchange Ratio; provided that with respect to a fully converted option with the same exercise price, the number of shares of Advance common stock to be represented by the fully converted option shall be computed on an aggregate basis so as to create options for whole shares of Advance common stock with any then remaining fractional share rounded up to the nearest whole share. Shortly after the effective time of the merger, Advance will file a registration statement on Form S-3 or S-8 to register the shares underlying the fully converted options. Exchange Agent; Procedures for Exchange of Certificates Advance will appoint an exchange agent to act as exchange agent for the payment of merger and option consideration upon surrender of the Discount common stock certificates and agreements for the Discount options with an exercise price of less than $15.00 per share after the merger. Once the merger is complete, Advance will deposit with the exchange agent the certificates representing Advance common stock and the aggregate cash consideration, including the cash to be provided instead of fractional shares, for issuance in exchange for Discount common stock and options converted into the right to receive cash payment. Promptly after the closing of the merger, the exchange agent will mail to each holder of Discount common stock or options converted into the right to receive a cash payment a letter of transmittal for use in the exchange and instructions explaining how to surrender certificates or option agreements to the exchange agent. Holders who surrender their certificates or option agreements to the exchange agent, together with a properly completed letter of transmittal, will receive the appropriate merger or option consideration. Holders of unexchanged stock certificates or option certificates or agreements will receive any dividends or other distributions payable by Advance after the merger only after their certificates or option certificates or agreements are surrendered. Discount shareholders and option holders should not return stock certificates or option certificates or agreements with the enclosed proxy card. No certificates or scrip representing Advance common stock will be issued upon surrender for exchange of Discount certificates. Cash will be issued instead of fractional shares of Advance common stock otherwise issuable upon surrender of those certificates equal to the fractional share multiplied by $29.11. 53 If Discount stock certificates or option certificates or agreements have been lost, stolen or destroyed, Discount shareholders or option holders will only be entitled to obtain Advance common stock and the cash consideration, or cash consideration in the case of option holders, by providing an affidavit of loss and, if required by Advance, posting a bond in an amount sufficient to protect Advance against claims related to the Discount certificates or option certificates or agreements. Representations and Warranties Representations and Warranties The merger agreement contains representations and warranties of each of Discount, Advance, Advance Holding, Advance Stores and Advance Merger Sub, many of which are qualified by a materiality threshold specified in the merger agreement, relating to: . due organization, good standing and existence; . capital structure and capital structure of subsidiaries; . corporate power and authority to execute, deliver and perform its obligations under the merger agreement; . authorization, execution, delivery, performance and enforceability of the merger agreement; . required consents, approvals, orders and authorizations of governmental entities relating to execution and delivery of the merger agreement and related matters; . absence of material conflicts and violations of organizational documents and contracts and with applicable law relating to the execution and delivery of the merger agreement and related matters; . required SEC filings, accuracy of information contained in SEC filings and financial statements filed with the SEC; . filing of tax returns and payment of taxes; . absence of any undisclosed suits, claims or judgments or injunctions or notice of any suits or claims; . disclosure of material employee benefit plans, required employee plan filings, absence of undisclosed employee benefits and absence of claims or liabilities involving employee benefit plans; . compliance with laws, no conflicts with laws and receipt of necessary governmental approvals and permits; . absence of collective bargaining agreements or threatened material labor disputes; . accuracy of information supplied for use in the registration statement, this proxy statement and prospectus and in any other regulatory filings; . absence of liabilities under environmental laws and compliance with environmental laws; . absence of any material undisclosed liabilities; . absence of undisclosed brokers' and finders' fees with respect to the merger; and . absence of undisclosed changes and conduct out of the ordinary course of business. Additional Representations and Warranties by Advance Advance, Advance Holding, Advance Stores and Advance Merger Sub made additional representations and warranties in the merger agreement relating to, among other things: . receipt of binding written commitments to obtain funds necessary to pay the merger consideration and option consideration, repay or refinance credit facilities of Advance Stores and indebtedness of Discount and pay related fees and expenses; and . absence of negotiations for the acquisition of any material interests of any other business. 54 Additional Representations and Warranties by Discount Discount made additional representations and warranties in the merger agreement relating to, among other things: . organization, good standing and existence of Discount's subsidiaries; . absence of material changes or events concerning Discount and its subsidiaries since May 29, 2001; . Discount's owned and leased real property and the condition of its real property; . Discount's material intellectual property and the absence of any material infringement claims; . Discount's material contracts and the absence of any material defaults under the contracts; . maintenance of insurance and absence of defaults and notices of cancellations or non-renewals; . termination of discussions and negotiations regarding acquisition proposals; . receipt of an opinion from Discount's financial advisor; . required actions necessary to satisfy Florida anti-takeover laws and no violation of Discount's stockholder rights agreement; . absence of undisclosed non-competition agreements; . absence of receipt of any notice of cancellation of material supplier or vendor relationships; and . absence of undisclosed arrangements or agreements with affiliates of Discount. Definition of Material Adverse Effect A material adverse effect, when used with respect to Advance or to Discount after giving effect to any benefits available in connection with the availability of any insurance, contractual reimbursement or indemnity, is defined to mean a change in or effect on the business of Advance or Discount that is or is reasonably likely to be materially adverse to the results of operations, properties, financial condition, assets or business of Advance and its subsidiaries or Discount and its subsidiaries, in each case taken as a whole with their parent. Exceptions are provided to the extent that such change or effect results from changes in general economic conditions in the countries in which Advance, Discount, or their subsidiaries operate, sell or source products or from matters generally affecting the industries in which Advance, Discount or any of their subsidiaries operate. No Solicitation Discount has agreed to terminate and to cause its subsidiaries and affiliates and their respective officers, directors, employees, investment bankers, attorneys, accountants and other advisors, to terminate activities, discussions or negotiations relating to any acquisition proposal that was ongoing at the time of the signing of the merger agreement. Discount also has agreed, except as described below, that it will not, and will not authorize or permit its subsidiaries and affiliates and their respective officers, directors, affiliates, employees, attorneys, accountants, financial advisors, independent representatives, independent agents, or any other advisors or representatives to, solicit, initiate, encourage, or take any action to facilitate (including by way of furnishing information or engaging in discussions or negotiations) any inquiries, proposals or offers that constitute an acquisition proposal or any inquiries, proposals or offers that could reasonably be expected to lead to an acquisition proposal. An "acquisition proposal" means a proposal or offer to acquire any assets, business or properties of Discount or its subsidiaries other than in the ordinary course of business or as otherwise permitted by the merger agreement, or any capital stock of Discount or its subsidiaries, whether by merger, share purchase or exchange, reorganization, recapitalization, liquidation, dissolution, consolidation, business combination, purchase of assets, tender offer, exchange offer or similar transaction, whether for cash, securities or any other consideration. 55 However, prior to the approval of the merger and merger agreement by Discount's shareholders, Discount may furnish non-public information to, and enter into discussions or negotiations with, any person that makes an unsolicited written acquisition proposal if: . after consultation with its outside legal counsel, the Discount board determines in good faith that failure to do so is necessary for the Discount board to comply with its fiduciary duties to Discount shareholders under applicable law; . the Discount board determines in good faith that the proposal is not subject to a financing contingency that is more uncertain or conditional than the financing applicable to the merger and merger agreement; . the proposal if consummated would constitute a superior proposal; and . Discount enters into a confidentiality agreement with the person making the proposal. A "superior proposal" means any bona fide unsolicited written proposal made by a third party to acquire all or substantially all the equity securities or assets of Discount, pursuant to a tender offer or exchange offer, a merger, a consolidation, a liquidation or dissolution, a recapitalization, a sale of all or substantially all of its assets or a similar transaction, (i) on terms which the board of directors of Discount determines in its good faith judgment is more favorable from a financial point of view for the holders of Discount common stock than the merger, after consultation with its outside counsel and financial advisor, taking into account all the terms and conditions of such proposal and the merger agreement (including any proposal in the form of a firm commitment by Advance to amend the terms of the merger) and (ii) that is not subject to a financing contingency that is more uncertain or conditioned than the financing contingency applicable to the merger that is contained in the financing commitments of Advance and is reasonably capable of being completed, taking into account all financial, regulatory, legal and other aspects of such proposal and the person making such proposal. The board of directors of Discount may not withdraw, modify or qualify (or propose to withdraw, modify or qualify) the Discount recommendation of the approval of the merger agreement and merger to Discount's shareholders in any manner adverse to Advance, or take any action or make any statement in connection with the Discount special meeting of shareholders inconsistent with the Discount recommendation. However, at any time prior to the Discount shareholder vote on the merger agreement and the merger, the board of directors of Discount may, in response to a superior proposal that was unsolicited and did not otherwise result from a breach of Discount's obligations to Advance under the merger agreement, withdraw, modify or qualify the Discount recommendation if the board of directors of Discount determines, in good faith, after consultation with outside counsel, that its fiduciary obligations require it to do so. For any superior proposal that Discount receives, Discount agreed to notify Advance of the identity of the entity making the proposal and the material terms of the proposal and to provide Advance with a copy of any written proposal. Additionally, Discount agreed to inform Advance of, and provide Advance with copies of, any material changes to the proposal. Discount agreed not to terminate the merger agreement nor enter into any agreement regarding a superior proposal unless Discount furnishes to Advance prior written notice of its intent to terminate the merger agreement and causes its financial and legal advisors to negotiate with Advance in an effort to adjust the terms of the merger agreement to enable Discount to proceed with the merger. If Discount notifies Advance of any superior proposal after a rating date, Advance shall have the right to call and hold a special meeting of Discount shareholders, in which event (i) Discount shall not have the right to terminate the merger agreement based on a desire to accept the superior proposal and (ii) Advance shall not have the right to terminate the merger agreement due to (x) any approval or recommendation by the board of directors of Discount of such superior proposal reasonably considered necessary as a result of such superior proposal or adoption of a resolution to such effect, (y) any withdrawal or modification or qualification of its recommendation or qualification of its approval of the merger agreement, or the merger by the board of directors of Discount in a manner adverse to the interests of Advance reasonably considered necessary as a 56 result of such superior proposal or adoption of a resolution to such effect, or (z) any failure to include in the proxy statement and prospectus the recommendation without adverse modification or qualification that the stockholders of Discount approve the merger agreement, and the merger reasonably considered necessary as a result of such superior proposal. A "rating date" means the earlier of (A) thirty (30) days after the date of the merger agreement or (B) the date on which Advance delivers to Discount copies of letters from each of Standard & Poors Rating Service and Moody's Investors Service, Inc. which confirm that, with respect to Advance Stores' senior subordinated facility, Advance Stores' senior subordinated debt, on a pro forma basis, after giving effect to the financing transactions, has been issued ratings from each of S&P and Moody's, with such ratings (1) being B- or better, in the case of S&P, and B3 or better, in the case of Moody's and (2) each having an "outlook" of stable or better. If Discount enters into an agreement with respect to a superior proposal with a third party, it has agreed to pay to Advance Stores a $9.0 million termination fee plus reimburse Advance for its expenses of up to $7.0 million. Conduct of the Business Conduct of Business by Discount Until the earlier of the termination of the merger agreement or the effective time of the merger, Discount generally agreed to: . carry on its business in the usual, regular and ordinary course in substantially the same manner as previously conducted; . pay its debts and taxes when due; . pay or perform its other obligations when due, and use commercially reasonable efforts to preserve intact its present business organization; . keep available the services of its present officers and key employees; and . preserve its relationships with customers, suppliers, distributors, and others having business dealings with it. Discount also generally agreed that it would not, without the written consent of Advance: . declare or pay any dividends on or make any other distributions in respect of any of its capital stock, or split, combine or reclassify any of its capital stock; . grant any options to acquire securities of Discount or accelerate or change the period of vesting of any outstanding Discount options or authorize cash payments in exchange for any Discount options or purchase any shares of Discount common stock; . issue, deliver or sell any shares of its capital stock or securities convertible into shares of its capital stock, or subscriptions, rights, warrants or options to acquire any such shares or other convertible securities; . acquire or agree to acquire by merging or consolidating with, or by purchasing any interest in or assets of, any business or any other business organization or division, other than in the ordinary course of business; . sell, lease, license, mortgage or otherwise encumber or otherwise dispose of any of its material properties or assets, except as required to carry on Discount's business in the usual, regular and ordinary course; . (i) increase or agree to increase the compensation payable or to become payable to its officers or employees, except for increases in salary or wages of non-officer employees in accordance with past 57 practices and increases disclosed in a schedule to the merger agreement, (ii) grant any additional severance or termination pay to, or enter into or amend any employment, retention, change of control or severance agreements or arrangements with, any employees or officers, (iii) enter into any collective bargaining agreement, (iv) establish, adopt, enter into or amend any bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance, retention, change of control or other plan, trust, fund, policy or arrangement for the benefit of any directors, officers or employees, (v) pay any bonuses to any directors, officers or employees, except for certain performance-based bonuses described in the merger agreement, or (vi) elect or appoint any new director or hire any new officer level employee, except in certain instances where such person is engaged as a replacement for a director or officer who has resigned; . amend or propose to amend the charter documents of Discount or its subsidiaries; . incur any indebtedness for borrowed money or guarantee any indebtedness of another person; . initiate, compromise, or settle any material litigation or arbitration proceeding; . enter into, or otherwise modify, amend or violate in any material respect, or terminate any Discount material contract or waive, release or assign any material rights or claims; . make or change any material tax election, settle, adopt or change any material accounting method in respect of taxes (except as required by GAAP), enter into any closing agreement, consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of any material taxes, or compromise any material tax liability or claim or amend any material tax return; . materially change its methods of accounting (except as required by GAAP); . make or commit to make any capital expenditures, except to the extent consistent with and within the limits of Discount's capital expenditures budget; . adopt, implement or amend any stockholder rights plan that could have the effect of impeding or restricting the consummation of the merger and related transactions; . open any new store or enter into or commit to enter into any lease or purchase contract related to the opening of a new store except as disclosed by Discount; . materially change the amount of any insurance coverage provided by existing insurance policies; . fail to give all notices and other information required to be given by Discount or any of its subsidiaries to the employees of Discount or any of its subsidiaries, any collective bargaining unit representing any group of employees of Discount, and any applicable governmental authority under the WARN Act, or other governmental act or regulation in connection with the transactions provided for in the merger agreement where the effect of such failure would be reasonably likely to have a material adverse effect; . revalue any of its assets, other than in the ordinary course of business, except to the extent required by GAAP; or . take, or agree in writing or otherwise to take any of the above listed actions. Conduct of Business by Advance Until the earlier of the termination of the merger agreement or the effective time of the merger, Advance generally agreed to: . carry on its business in the usual, regular and ordinary course in substantially the same manner as previously conducted; . pay its debts and taxes when due; 58 . pay or perform its respective other obligations when due; . use commercially reasonable efforts to preserve intact its present business organization; and . preserve its relationships with customers, suppliers, distributors and others having business dealings with it. Advance also generally agreed that it would not, without the written consent of Discount: . grant any options to acquire securities of Advance or accelerate or change the period of vesting of any options issued under any of the Advance option plans or authorize cash payments in exchange for any Advance options or purchase any shares of Advance common stock, subject to certain exceptions set forth in the merger agreement; . issue, deliver or sell any shares of its capital stock or securities convertible into shares of its capital stock, or subscriptions, rights, warrants or options to acquire any such shares or other convertible securities, subject to certain exceptions set forth in the merger agreement; . enter into any transaction or series of related transactions with any affiliate unless such transaction is entered into and consummated on terms that are no less favorable to Advance than are available from an unaffiliated third party and is not otherwise prohibited; . materially change its methods of accounting as in effect on April 21, 2001, except as required by GAAP; . adopt, implement or amend any stockholder rights plan that could have the effect of impeding or restricting the consummation of the merger and related transactions; . (i) amend its certificate of incorporation or bylaws in any manner that is material and adverse to Discount's stockholders, (ii) amend the terms of or reclassify, or effect a stock split or combination with respect to, any of its capital stock, distribute to stockholders any material assets or securities of Advance or any of its respective subsidiaries, or, except in connection with the financing of this transaction or as necessary to consummate another permitted acquisition, otherwise materially alter its capital structure, (iii) pay any dividend to stockholders of Advance, or (iv) adopt a plan of liquidation or dissolution or sell all or substantially all of its assets; . permit Advance to have any operations or incur any liabilities, other than liabilities arising out of the organization of the respective companies and liabilities incurred in connection with the transactions contemplated by the merger agreement; or . take, or agree in writing or otherwise to take any of the above listed actions. Meeting of Discount Shareholders; Obligations to Recommend Discount has agreed to take all actions necessary to convene a meeting of its shareholders and to consider and vote upon the approval of the merger agreement and the merger. The Discount board has agreed to recommend to its shareholders the adoption and approval of the merger agreement and the merger, subject to its fiduciary duties. The Discount board is not permitted to withdraw or modify its recommendation unless: . Discount has complied with the restrictions of solicitation in the merger agreement; . there is a pending superior proposal; and . the Discount board determines in good faith that, after consultation with its legal counsel, the action is necessary to comply with its fiduciary duties. Filings; Other Actions Advance and Discount have agreed to take all actions, to resist any private party action (unless determined by the parties that it would reasonably be likely to have a material adverse effect on the parties after the 59 merger), to make all necessary government filings, including those under federal securities laws and U.S. antitrust laws, to contest any private party order, and to use all reasonable efforts to obtain all consents and approvals required in connection with the closing of the transactions contemplated by the merger agreement. Discount has also agreed, if requested by Advance, to use its reasonable efforts to obtain any material designated consents, and Discount may not amend any material designated consents without Advance's prior written consent. If a private party action or order is reasonably likely to have a material adverse effect on the parties after the merger, each party may terminate the merger agreement. Advance shall not be required to divest any of Discount's assets or take any actions if any antitrust authorities seek an injunction to enjoin the merger. Proxy Statement; Registration Statement Advance and Discount agreed to cooperate in the preparation and filing of the proxy statement and prospectus. Expenses Whether or not the merger is consummated, all expenses incurred in connection with the merger agreement and the transactions contemplated by the merger agreement will be paid by the party incurring the expenses, except as described under the section of this proxy statement and prospectus entitled "The Merger Agreement--Termination Fees and Expenses." Certain Employee Benefit Plan Obligations of Advance For 12 months following the merger, Advance agreed to provide the employees of Discount with benefits (other than stock and stock-based benefits and the value thereof) that are in the aggregate substantially equivalent to or more favorable than the benefits provided to Discount employees immediately before the effective time of the merger by Discount, other than any changes in benefit plans required by law or in the ordinary course of business of Advance. Advance has agreed to honor all written individual employment, termination, severance, bonus, change in control, post-employment and other written compensation agreements, arrangements and plans between a Discount employee and Discount existing prior to the execution of the merger agreement and all legally imposed obligations relating to employment matters under applicable law. No employee will have the right to continued employment by Advance, Discount or any of its subsidiaries for any period of time after the closing of the merger that is not otherwise required by law or contract. To the extent that any employee of Discount or any of its subsidiaries becomes a participant in any employee benefit plan maintained by Advance or any of its subsidiaries, Advance agreed to give the Discount employees full credit for their service with Discount for the purposes of eligibility, vesting, benefit accrual and other benefits under Advance's employee benefits plans to the same extent recognized by Discount immediately prior to the closing of the merger. Cooperation and Access Between Advance and Discount Prior to the effective time of the merger, and subject to applicable law, Advance and Discount have agreed to confer on a regular basis and to provide each other notice in connection with SEC and government filings. Advance and Discount have agreed to provide designated representatives of the other party, upon reasonable notice, and subject to any relevant antitrust laws, full access within reasonable times in a manner that will not materially disrupt their business to all of their properties, officers, books, records and contracts until the closing of the merger. 60 Notification of Specified Events Advance and Discount have agreed to promptly notify each other of any notice from any person alleging their consent is required in connection with the merger, any notice from any governmental entity in connection with the merger or a party's SEC filings, or any suits pending or threatened against the party relating to the merger. Conditions to Obligation of Each Party to Complete the Merger Advance's and Discount's obligations to complete the merger are subject to the satisfaction of the following conditions, as applicable: . The holders of a majority of the shares of Discount's common stock will have duly adopted the merger agreement and the merger; . The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act will have expired or terminated (this condition has been satisfied); . All authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any governmental entity, the failure of which to file, obtain or occur is reasonably likely to have a material adverse effect, have been filed, been obtained or occurred; . No governmental entity or federal, state or foreign court of competent jurisdiction shall have issued or entered any government order or statute, rule, or regulation which has the effect of making the merger illegal or otherwise prohibiting consummation of the merger; . The registration statement, of which this proxy statement and prospectus are a part, will have been declared effective and the SEC will not have issued any stop order suspending its effectiveness, nor will it have started or threatened any proceedings for that purpose; . The Advance common stock to be issued in connection with the merger and upon exercise of the options will have been approved for listing on the NYSE or Nasdaq; . At the effective time of the merger, Advance Holding shall have merged with and into Advance Auto Parts, Inc. to complete the reincorporation merger; . Certain representations and warranties of each party set forth in the merger agreement shall be true and correct in all material respects as of the closing of the merger, and all other representations and warranties of each party will be true and correct except where the failures to be true and correct have not had and would not reasonably be expected to have a material adverse effect; . Each party will have performed in all material respects all its obligations under the merger agreement; . Each party will have received a legal opinion from the other party's legal counsel; . All material consents, authorizations, orders and approvals of, or filings or registrations with, any governmental commission, board, other governmental entity or third parties required to be made or obtained by the parties and its subsidiaries and affiliated entities in connection with the execution, delivery and performance of the merger agreement will have been obtained or made; . There shall not have occurred since the date of the merger agreement a material adverse change in the financial condition, results of operations, properties, assets, business or prospects of the other party and its subsidiaries; and . Each party shall have executed and delivered each of the other agreements and instruments to be delivered by it pursuant to the merger agreement. 61 Additional Conditions to Obligations of Advance to Complete the Merger The obligation of Advance to complete the merger is also subject to the following conditions: . Discount shall have performed a physical inventory of its salable inventory at its Lakeland, Florida distribution center, the results of which shall reflect an aggregate inventory value which does not, on a historical cost basis, result in a reduction greater than 5% of the portion of the inventory amount shown on the balance sheet included in Discount's first quarter financial statements and reflected in Discount's general ledger as of the date of Discount's first fiscal quarter 2002 financial statements, subject to adjustment as provided in the merger agreement (this condition has been satisfied); . Discount shall have entered into the specifically identified amendments to each of its Dapper Properties master leases in a manner satisfactory to Advance; and . The financial institutions who are parties to the financing commitments shall be obligated to fund because all conditions to such funding have been, or at the closing thereof will be, satisfied or waived. Additional Conditions to Obligations of Discount to Complete the Merger The obligation of Discount to complete the merger is also subject to the following conditions: . Discount will have received the written opinion of Discount's legal counsel that the merger should be treated for U.S. federal income tax purposes as part of an exchange within the meaning of Section 351 of the Internal Revenue Code; . Peter J. Fontaine shall be elected as a member of the board of directors of Advance, and Advance's stockholders agreement shall have been amended to provide Mr. Fontaine and entities he controls with certain piggy-back registration rights with respect to the shares of Advance common stock received in the merger, and to obligate Mr. Fontaine and such entities to agree, subject to certain exceptions, not to sell such shares for certain time periods following certain public offerings by Advance; and . The exchange agent for the Advance common stock shall have certified to Discount that the deposit required to be made by Advance into the exchange fund has been made or is being made immediately following the closing. Termination The merger agreement may be terminated at any time prior to the closing of the merger by mutual written consent. In addition, the merger agreement may be terminated: . by either Advance or Discount if the merger shall not have been consummated by December 31, 2001 (provided that the right to terminate is not available to any party whose breach of or failure to fulfill any of its obligations under the merger agreement has been the primary cause of, or resulted in, the failure of the merger to occur on or before December 31, 2001); . by either Advance or Discount, if a court or other governmental entity shall have issued a non-appealable final government order or taken any other non-appealable final action having the effect of permanently restraining, enjoining or otherwise prohibiting the merger or if by such party pursuant to its right to terminate because a private party action or order would have a material adverse effect; . by either Advance or Discount, if, at the Discount shareholder meeting, the requisite shareholder approval shall not have been obtained (provided that the right to terminate shall not be available to any party who is in material breach of or has materially failed to fulfill any of its material obligations under the merger agreement); . by Advance, (a) if (i) the board of directors of Discount shall have withdrawn or modified or qualified its recommendation or qualified its approval of the merger agreement or the merger in a 62 manner adverse to the interests of Advance or shall have adopted a resolution to such effect; (ii) the board of directors of Discount shall have failed to include in the proxy statement and prospectus its recommendation, without adverse modification or qualification, that the shareholders of Discount approve the merger agreement and the merger; or (iii) the board of directors of Discount shall have approved or recommended to the shareholders of Discount an acquisition proposal or a superior proposal or adopted a resolution to such effect; or (b) a tender offer or exchange offer for 50% or more of the outstanding shares of Discount common stock is commenced and the board of directors of Discount recommends that the shareholders of Discount tender their shares in such tender or exchange; . by either Advance or Discount, if there has been a material breach of any representation, warranty, covenant or agreement by the other party, which causes the conditions concerning representations and warranties or covenants of the other party not to be satisfied, and such breach shall not have been cured within 30 days following receipt by the other party of written notice of breach; . by Discount if, at any time prior to the Discount shareholder vote on the merger agreement and the merger, and after it has received a superior proposal in compliance with its obligations under the merger agreement, the board of directors of Discount determines in good faith, after consultation with outside counsel, that its fiduciary obligations require Discount to terminate the merger agreement in order to permit Discount to enter into an agreement with respect to such superior proposal; or . by Advance, if either the condition to closing regarding the physical inventory of the Lakeland, Florida distribution center, or the condition to closing regarding the amendments to the Dapper Properties master leases is not satisfied; provided that Advance's right to terminate with respect to the physical inventory condition expires 15 business days after Discount delivers the results of the physical inventory. Termination Fee and Expenses The merger agreement requires Discount to pay Advance a termination fee of $9.0 million in cash and/or Advance's expenses incurred in connection with the merger agreement up to $7.0 million if: . the merger agreement is terminated by the Discount board in order to enter into an agreement with respect to a superior proposal; or . the merger agreement is terminated by Advance as a result of (a) the Discount board (i) resolving to or having withdrawn, modified or changed in a manner adverse to Advance its approval or recommendation of the merger agreement; (ii) failing to include its recommendation regarding the merger in this proxy statement and prospectus; or (iii) approving or recommending any other acquisition proposal or superior proposal; or (b) a tender offer or exchange offer for 50% or more of Discount's shares is commenced and the Discount board recommends that Discount shareholders tender their shares; If the requisite Discount shareholder approval is not obtained and Advance has not materially breached or failed to fulfill its material obligations under the merger agreement, Discount has agreed to pay to Advance up to $2.5 million of Advance's expenses plus 50% of any such expenses over $4.0 million up to a maximum of an additional $1.0 million being paid by Discount. If prior to the Discount shareholder meeting there has been a superior proposal and, within 12 months of the Discount shareholder meeting, Discount enters into an agreement with respect to the superior proposal, then concurrently with entering into the agreement with respect to the superior proposal, Discount shall pay to Advance $9.0 million and any expenses to the extent not previously paid by Discount up to $7.0 million when aggregated with any amount that was previously paid by Discount to Advance. If prior to the Discount shareholder meeting there has been a superior proposal and, within 12 months of the Discount shareholder meeting, Discount does not enter into an agreement for the superior proposal, but 63 within such 12 month period consummates another acquisition transaction, Discount shall pay to Advance upon the closing of such acquisition transaction $9.0 million and any expenses to the extent not previously paid by Discount up to $7.0 million when aggregated with any amount that was previously paid by Discount to Advance. If prior to the Discount shareholder meeting there has been an acquisition proposal which is not a superior proposal and, within 12 months of the Discount shareholder meeting, Discount consummates an acquisition transaction, Discount shall pay to Advance upon the closing of such acquisition transaction $9.0 million and any expenses to the extent not previously paid by Discount up to $7.0 million when aggregated with any amount that was previously paid by Discount to Advance. Discount shall pay to Advance, upon the closing of the subject acquisition transaction, $9.0 million, and up to $7.0 million of Advance's expenses: if (i) there has been an acquisition proposal prior to December 31, 2001; (ii) the Discount shareholder meeting has not been held; (iii) Advance would be permitted to terminate the merger agreement because the merger is not consummated prior to December 31, 2001; (iv) either Advance or Discount terminates the merger agreement because the merger is not consummated prior to December 31, 2001; and (v) within twelve (12) months of December 31, 2001, Discount consummates an acquisition transaction with the person who made an acquisition proposal or enters into an agreement for an acquisition transaction with the person who made the acquisition proposal, which is subsequently consummated. If Advance terminates the merger agreement because of a material breach of the merger agreement by Discount, Discount shall pay Advance its expenses up to $7.0 million. If Advance terminates the merger agreement as a result of Discount's failure to satisfy the closing condition regarding the physical inventory of the Lakeland, Florida distribution center, or the closing condition relating to the amendments to the Dapper Properties master leases, Discount shall pay to Advance, in the case of termination resulting from the failure of the closing condition regarding the physical inventory, up to $1.0 million of Advance's expenses, and, in the case of a termination resulting from the failure of the closing condition regarding the amendments to the Dapper Properties master leases, up to $2.5 million of Advance's expenses, plus an additional amount equal to 50% of any such expenses over $4.0 million, up to a maximum additional amount of $1.0 million. An "acquisition transaction" means the occurrence of any of the following events: (i) the acquisition of Discount by merger, tender offer, exchange offer, consolidation or otherwise by any person or entity other than Advance; (ii) the acquisition by any person or entity other than Advance of all or a substantial portion of the assets of Discount and its subsidiaries; (iii) the acquisition by any person or entity other than Advance of 50% of more of the outstanding shares of common stock of Discount; (iv) the adoption by Discount of a plan of liquidation or the declaration or payment of an extraordinary dividend; or (v) the repurchase by Discount or any subsidiary of Discount of 50% or more of the outstanding shares of common stock of Discount. Amendments to Merger Agreement; Extension and Waiver Advance and Discount may amend the merger agreement at any time before or after the necessary approval by the shareholders of Discount; provided that, after the adoption of the merger agreement by Discount shareholders, no amendment may be made which by law requires further approval by the Discount shareholders without obtaining their approval. Discount may not amend the merger agreement, without the requisite shareholder approval, if any changes would materially adversely affect the holders of Discount common stock. At any time before the merger is completed, any party may, by written instrument signed by the waiving party, extend the time for performance of the obligations of any other party to the merger agreement, waive inaccuracies in representations and warranties of any other party contained in the merger agreement, waive compliance by any other party with any agreements in the merger agreement, or waive any condition to the 64 waiving party's obligation to complete the transactions contemplated in the merger agreement, other than those imposed by law, provided that Discount may not waive any condition if such waiver would materially adversely affect the holders of Discount common stock. Indemnification, Exculpation and Insurance Advance has agreed that all rights to indemnification, expense advancement and exculpation from liabilities for acts or omissions occurring at and/or prior to the effective time of the merger existing in favor of the current or former directors, officers, employees or agents of Discount and its subsidiaries as provided in their respective charter documents and any indemnification agreements or arrangements of Discount or any of its subsidiaries shall survive the merger and shall be assumed in all respects by and will be fulfilled and honored by Advance and guaranteed by its subsidiaries and shall continue in full force and effect, without amendment, for at least six years after the effective time of the merger; provided, that all rights to indemnification in respect of any claim asserted or made within such period shall continue until the final disposition of the claim. Advance has also agreed to pay any expenses of any indemnified person in advance of the final disposition of any action, proceeding or claim relating to any act or omission to the fullest extent permitted under applicable law upon receipt from the applicable indemnified person to whom advances are to be advanced of an undertaking to repay such advances required under applicable law. In addition, from and after the effective time of the merger, directors or officers of Discount and its subsidiaries who become directors or officers of Advance and its subsidiaries will be entitled to the same indemnity rights as are afforded to other directors and officers of Advance. Advance has agreed that for at least six years after the effective time of the merger, Advance will maintain in effect Discount's current director's and officer's liability insurance covering acts or omissions occurring at or prior to the effective time of the merger on no less favorable terms as Discount's existing director's and officer's liability insurance policy, provided that Advance will not be required to pay more than 150% of the current annual premiums paid by Discount for the insurance. 65 OTHER AGREEMENTS OR TRANSACTIONS Voting Agreement In connection with the execution of the merger agreement, Advance Holding, Advance Stores and the principal shareholder of Discount (Fontaine Industries Limited Partnership), which holds 4,021,509 shares of Discount common stock (approximately 24% of the voting power of Discount's outstanding common stock), executed a voting agreement whereby the principal shareholder agreed to: . vote its shares in favor of the merger, the merger agreement and the transactions contemplated by the merger agreement; . vote against any business combination other than the merger; and . grant, and did grant, Advance Stores an irrevocable proxy to vote its shares as required by the voting agreement; In addition, the principal shareholder further agreed not to solicit, initiate, encourage (including by way of furnishing information or assistance) or take any other action to facilitate, any inquiry or the making of any proposal which constitutes, or could reasonably be expected to lead to, any acquisition proposal or agree to or endorse any acquisition proposal, except that such agreement would not operate to keep Peter J. Fontaine from discharging his fiduciary duty as a director of Discount. The principal shareholder also agreed not to tender, sell, assign, pledge or otherwise transfer its shares of Advance common stock received in the merger for up to 180 days after the closing of the merger or 180 days after any public offering of securities by Advance under specified circumstances. The voting agreement terminates upon the earliest to occur of the closing of the transactions contemplated by the merger agreement or the date the merger agreement is terminated in accordance with its terms. Mr. Fontaine and his revocable trust are also parties to the voting agreement. As such, Mr. Fontaine and his revocable trust have agreed to cause Fontaine Industries to maintain its stock ownership of Discount pending the merger and to cause Fontaine Industries to vote in favor of the merger and the merger agreement. Except for 1,000 shares owned by Mr. Fontaine's wife and 1,000 shares owned by Mr. Fontaine's daughter, neither Mr. Fontaine nor his revocable trust has beneficial interest in any shares other than the shares owned by Fontaine Industries. There is no commitment in the voting agreement with respect to how the shares owned by Mr. Fontaine's wife and daughter are to be voted. Option Agreement Advance Holding, Advance Stores and the principal shareholder of Discount also entered into a stock option agreement pursuant to which the principal shareholder granted to Advance Stores an option to purchase all of the 4,021,509 shares of Discount common stock beneficially owned by the principal shareholder. Under the terms of the option agreement, Advance Stores has an irrevocable option to purchase all, but not less than all, of the principal shareholder's shares at any time prior to the termination of the voting agreement. The purchase price per share under the option agreement will equal the sum of a base amount of $15.00 and 25% of the amount by which the fair market value of the per share consideration paid under any superior proposal exceeds the base amount. In the event that Advance pays a price for Discount's common stock under the merger agreement with an agreed upon aggregate per share value higher than $15.00 per share, the base amount shall be increased to reflect such higher price. Advance Stores may exercise its option to purchase the principal shareholder's shares at any time prior to the termination of the voting agreement if: . any third party has (i) commenced a bona fide tender or exchange offer for any shares of Discount's common stock, the consummation of which would result in beneficial ownership by such third party (together with its affiliates) of 50% or more of the then outstanding voting equity of Discount, 66 (ii) acquired beneficial ownership of shares of Discount's common stock that, when aggregated with any shares of Discount's common stock already owned by such third party (together with its affiliates) would result in the aggregate beneficial ownership by such third party being equal to or greater than 15% or more of the then outstanding voting equity of Discount; or (iii) entered into an agreement with Discount that contemplates the acquisition by such third party (together with its affiliates) of 15% or more of the total assets of Discount or 15% or more of the outstanding voting equity of Discount; . any of the events described in section 9.1(e) of the merger agreement that would allow Advance to terminate the merger agreement has occurred; . a third party has submitted an acquisition proposal before December 31, 2001, the meeting of the shareholders of Discount to vote on the acquisition proposal has not been held, Advance would be permitted to terminate the merger agreement under section 9.1(b) thereof, and either Advance or Discount has terminated the merger agreement under section 9.1(b) thereof; or . Discount shall have terminated the merger agreement pursuant to section 9.1(g) thereof. The option agreement also provides that the principal shareholder will not sell or otherwise encumber its shares, trade or take any position, hedge or otherwise, with respect to its shares, enter into any other voting agreement with respect to its shares, deposit its shares into a voting trust, or take any action that would make any of the representations or warranties of the principal shareholder in the option agreement untrue or incorrect or have the effect of preventing or impeding the principal shareholder from performing any of its obligations under the option agreement. Advance Voting Agreement As a condition to the willingness of Discount to enter into the merger agreement, Discount has required that certain shareholders of Advance Holding enter into a voting agreement with Advance Holding. Pursuant to the Advance voting agreement, the particular Advance Holding stockholders (representing approximately 87% of the shares of Advance Holding) have agreed to vote all of the shares of Advance Holding beneficially owned by such Advance Holding stockholders in favor of the merger of Advance Holding into Advance Auto Parts, Inc. Such Advance stockholders also appointed an officer and certain directors of Advance Holding and Advance as their proxies to vote their shares in favor of the merger of Advance Holding into Advance Auto Parts, Inc. Reincorporation Merger Between Advance and Advance Holding Contemporaneously with the effective time of the Discount merger, Advance Holding will merge into Advance Auto Parts, Inc. As a result of such reincorporation merger, each issued and outstanding share of Advance Holding Class A common stock will automatically be converted into the right to receive one share of Advance common stock. The officers and directors of Advance Holding immediately prior to the reincorporation merger will continue to be the officers and directors of Advance Auto Parts, Inc. after such merger. Advance Holding and Advance Auto Parts, Inc. have agreed to engage in the reincorporation merger for the purpose of allowing the stockholders of Advance Holding and the shareholders of Discount to own stock of a corporation that is subject to the flexible and comprehensive corporate laws of the State of Delaware and to facilitate the acquisition of Discount. 67 INFORMATION CONCERNING ADVANCE Advance's Business Overview Advance conducts all of its operations through its wholly owned subsidiary, Advance Stores Company, Incorporated and its subsidiaries. As of July 14, 2001, Advance had 1,723 stores, operating under the "Advance Auto Parts" trade name in 37 states in the northeastern, southeastern and mid-western regions of the United States. In addition, Advance had 42 stores operating under the "Western Auto" trade name primarily located in Puerto Rico and the Virgin Islands. Advance is based in Roanoke, Virginia, and is the second largest specialty retailer of automotive parts, accessories and maintenance items to DIY customers in the United States, based on store count and sales. Advance is the largest or second largest specialty retailer of automotive products in the majority of the states in which it currently operates, based on store count. In addition to Advance's DIY business, Advance serves DIFM customers. Sales to DIY and DIFM customers represented approximately 85% and 15% of Advance's retail sales for the twelve months ended July 14, 2001. Advance also operates a wholesale distribution network which includes distribution services of automotive parts and accessories and other merchandise to approximately 470 independently owned dealer stores in 48 states operating under the "Western Auto" trade name. Since fiscal 1999, Advance has derived over 90% of its total revenues from the retail sale of automotive parts and accessories. For fiscal 1998 and prior (before the merger in November 1998 of Western Auto Supply Company and Advance), 100% of Advance's total revenues were derived from the retail sale of automotive parts and accessories. Advance's History Advance was formed in 1929 and operated as a retailer of general merchandise until the 1980s. In the 1980s, Advance sharpened its marketing focus to target sales of automotive parts and accessories to "do-it-yourself", or "DIY", customers and accelerated its growth strategy. From the 1980s through the present, Advance has grown significantly through new store openings, strong comparable store sales growth and strategic acquisitions. In 1996, Advance began to aggressively expand its sales to "do-it-for-me" or "DIFM" customers by implementing a commercial sales program in the retail segment. The commercial delivery program includes marketing that is specifically designed to attract DIFM customers and consists of the delivery of automotive parts and accessories to professional installers, such as independent garages, service stations and auto dealers. In April 1998, Freeman Spogli and Ripplewood Partners, L.P. acquired a majority ownership interest in Advance through a recapitalization. Freeman Spogli and Ripplewood purchased an 80% ownership interest in Advance, and Advance's management purchased a 6% ownership interest. In the recapitalization, Nicholas F. Taubman and the Arthur Taubman Trust, the existing shareholders of Advance, retained a 14% ownership interest in Advance. In November 1998, Advance completed a plan of merger to acquire Western Auto Supply Company, or Western, from Sears, Roebuck and Co., or Sears. Western operated over 600 stores under the "Parts America" and "Western Auto" trade names as well as a wholesale distribution network. As consideration for the Western merger, Advance issued 11,474,606 shares of common stock of Advance to Sears (at a then current value of $193 million) and paid Sears $185.0 million in cash. Several of the existing stockholders of Advance, including Freeman Spogli & Co., Ripplewood Partners and its affiliates and Nicholas Taubman invested an additional $70.0 million in Advance Holding to fund a portion of the cash purchase price. The remainder of the cash proceeds paid to Sears was funded through additional borrowings under Advance's credit facility. The integration of Western included converting 545 Parts America stores (net of closures) to the Advance Auto Parts store format and name, adding 39 Western Auto stores located primarily in the Virgin Islands and Puerto Rico to Advance's retail segment, and adding the wholesale segment (which consists of a distribution network supplying independent dealer stores using the Western Auto trade name). In addition, Advance 68 consolidated duplicative facilities, integrated certain administrative and support functions into its corporate headquarters, terminated or relocated certain employees and integrated the management information systems of the combined companies. On April 23, 2001, Advance completed its acquisition of the assets used in the operation of Carport Auto Parts, Inc. retail auto parts stores located throughout Alabama and Mississippi. Advance converted 30 net Carport stores to the Advance Auto Parts format by July 7, 2001. Comparable store sales growth for these stores was 23.5% during the eight weeks following completion of the conversion. Store Operations The following discussion will focus on Advance's reportable segment operations, which are further quantified in footnote 25 to Advance's financial statements for the year ended December 30, 2000. Retail Operations. Advance's domestic stores are generally located in freestanding buildings in high traffic areas with good visibility and easy access to major roadways. Advance's stores generally range in size from 5,000 to 10,000 square feet, averaging approximately 7,500 square feet, and stock between 16,000 and 21,000 stock keeping units, or SKUs. In addition, approximately 105,000 SKUs that are not stocked at the store level are available on a next day or same day basis to virtually all domestic stores through Advance's PDQ(R) network. During fiscal 2000, Advance initiated a local area warehouse concept that utilizes existing space in certain stores to ensure rapid availability of regionally specific products to all stores in a specific market. On average, a local area warehouse provides an additional 7,500 to 12,000 SKUs to stores in these markets on a same day basis. Additionally, as of July 14, 2001, Advance had approximately 1,200 of its retail stores participating in its commercial delivery program. The commercial delivery program utilizes store employees to take orders from commercial customers, consisting of professional mechanics and service technicians, and deliver the SKUs ordered in designated vehicles assigned to the participating stores. Commercial delivery sales to DIFM customers were $330 million for the twelve months ended July 14, 2001. Advance's domestic retail stores are divided into three divisions, each of which is managed by a senior vice president who are supported by regional vice presidents. Reporting to the regional vice presidents are district managers who have direct responsibility for store operations in a specific district, which typically consists of 10 to 15 stores. Depending on store size and sales volume, each store is staffed by 8 to 30 employees under the leadership of a store manager. Stores are generally open seven days a week from 8:00 a.m. to 9:00 p.m. Stores located in Puerto Rico, the Virgin Islands and California, all of which operate under the Western Auto name, comprise a fourth division of the retail segment. These stores are managed by a senior vice president who is supported by a regional vice president, six district managers, store managers and field personnel. These stores average approximately 16,000 square feet and stock approximately 21,000 SKUs consisting of automotive parts, accessories and tires, and also service vehicles. These stores are staffed with up to 60 employees, depending on store size and sales volume. The store hours are generally 7:00 a.m. to 8:00 p.m. seven days a week. 69 Advance's retail segment stores are located in the following states and territories:
Number of Number of Number of Stores as of Stores as of Stores as of Location July 14, 2001 Location July 14, 2001 Location July 14, 2001 -------- ------------- -------- ------------- -------- ------------- Alabama 90 Maine 7 Puerto Rico 39 Arkansas 20 Maryland 30 Rhode Island 3 California 1 Massachusetts 20 South Carolina 95 Colorado 15 Michigan 44 South Dakota 6 Connecticut 24 Mississippi 23 Tennessee 115 Delaware 5 Missouri 36 Texas 47 Florida 24 Nebraska 16 Vermont 2 Georgia 130 New Hampshire 4 Virgin Islands 2 Illinois 23 New Jersey 17 Virginia 125 Iowa 24 New York 96 West Virginia 61 Indiana 66 North Carolina 165 Wisconsin 16 Kansas 25 Ohio 134 Wyoming 2 Kentucky 63 Oklahoma 2 Louisiana 23 Pennsylvania 125
The following table sets forth information concerning increases in the number of Advance's stores during the past five fiscal years:
1996 1997 1998 1999 2000 ---- ---- ----- ----- ----- Beginning Stores............................ 536 649 814 1,567 1,617 New Stores(/1/)............................. 115 170 821 (/2/) 102 140 Stores Closed............................... (2) (5) (68)(/2/) (52) (28) --- --- ----- ----- ----- Ending Stores............................... 649 814 1,567 1,617 1,729
-------- (/1/) Does not include stores that opened as relocations of previously existing stores within the same general market area or substantial renovations of stores. (/2/) Includes 560 Parts America stores (net of 52 closures) acquired as part of the Western Merger in November 1998. Subsequent to 1998, Advance closed an additional 15 Western stores resulting in a net 545 stores obtained in the Western Merger. Three Advance stores were also closed during fiscal 1998 in connection with the Western Merger. Wholesale Operations. The wholesale dealer operations are managed by one senior vice president (who is also responsible for the Western Auto retail stores), a vice president, a national sales manager, an operations manager and various field and support personnel. The wholesale dealer operations consist of a network of independently owned locations, which include associate, licensee, sales center and franchise dealers. Associate, licensee and franchise stores have rights to the use of the "Western Auto" name and certain services provided by Advance. Sales centers only have the right to purchase certain products from Western. Advance and Western also provide services to the wholesale dealer network through various administrative and support functions, as specified by each independent location. Advance's wholesale operations generated approximately 4.5% of Advance's net sales for the twelve months ended July 14, 2001. Recruiting, Training and Turnover. Advance invests substantial resources in the recruiting and training of its employees. As a part of its training, Advance provides formal classroom workshops, seminars and Automotive Service Excellence certification designed to build technical, managerial and customer service skills. In addition, in 2000, Advance enhanced its human resources management capabilities by hiring an experienced senior vice president of human resources and by introducing new training programs and software systems. As a result of these initiatives, Advance's level of employee turnover decreased 12.4% when comparing employee turnover during 2000 with employee turnover for the twelve month period ended July 14, 2001. For these 70 purposes, employee turnover is measured by the ratio of the total number of employees who leave employment with Advance during the period to the average number of active employees during the same period. Purchasing and Merchandising Merchandise is selected and purchased for all stores in the retail and wholesale segments by personnel at Advance's corporate offices in Roanoke, Virginia and Kansas City, Missouri. In fiscal 2000, Advance purchased merchandise from over 200 vendors, with no single vendor accounting for 8% or more of purchases. Advance's purchasing strategy involves negotiating multi- year agreements with certain vendors. In connection with the Western merger, Advance entered into several long-term agreements that provided more favorable terms and pricing, which will continue through the current term of the agreements, generally three to five years. Advance's purchasing team is currently led by a group of six senior professionals, who have an average of over 15 years of automotive purchasing experience and over 20 years in retail. This team is skilled in sourcing products globally and maintaining high quality levels while streamlining costs associated with the handling of merchandise through the supply chain. The purchasing team has developed strong vendor relationships in the industry and is currently involved in implementing a "best-in-class" category management process to improve comparable store sales, gross margin and inventory turns. Advance's merchandising strategy is to carry a broad selection of high quality, brand name automotive parts and accessories such as Monroe, Bendix, Purolator and AC Delco, that generate customer traffic and appeal to Advance's commercial delivery customers. In addition to such branded products, Advance stocks a wide selection of high quality private label products that appeal to value conscious customers. Sales of replacement parts account for approximately 60% of Advance's sales and typically generate higher gross profit margins than maintenance items or general accessories. Advance adjusts its product mix based on a merchandising program designed to identify the optimal inventory mix at each individual store based on that store's historical and projected sales mix and regionally specific needs. Marketing and Advertising Advance has an extensive marketing and advertising program designed to communicate its merchandise offerings, product assortment, competitive prices and commitment to customer service. The program is focused on establishing Advance as the solution for a customer's automotive needs. Advance utilizes a combination of tools to reinforce its brand image, including print, promotional signage, television, radio and outdoor media, plus its proprietary in-store television network and Internet site. Advance's advertising plan is based on a monthly program built around a promotional theme and a feature product campaign. The plan is supported by print and in-store signage. Advance's television advertising is targeted on a regional basis to sports programming. Radio advertising, which is used as a supplementary medium, generally airs during peak drive times. Advance also sponsors sporting events, racing teams and other events at all levels in a grass-roots effort to impact individual communities. Warehouse and Distribution Advance currently operates six distribution centers that service Advance Auto Parts stores in the United States. Advance also operates a separate distribution center in the United States that supports the Western Auto retail stores and the wholesale dealer operations. All distribution centers are equipped with technologically advanced material handling equipment, including carousels, "pick to light" systems, radio frequency technology and automated sorting systems. Advance offers approximately 25,000 SKUs on a next day basis to substantially all of its domestic retail stores via its nine PDQ(R) warehouses. Stores place orders to these facilities through an on-line ordering system, and ordered parts are delivered to substantially all stores the next day through Advance's dedicated PDQ(R) 71 trucking fleet. In addition, Advance operates a PDQ(R) warehouse that stocks approximately 80,000 SKUs consisting of harder to find automotive parts and accessories. This facility is known as the "Master PDQ(R)" warehouse and utilizes existing PDQ(R) distribution infrastructure to provide next day service to substantially all of the Advance Auto Parts stores. During fiscal 2000, Advance embarked on a new local area warehouse distribution concept that utilizes store space to provide certain markets with an additional customized mix of approximately 7,500 to 12,000 SKUs. As of July 14, 2001, Advance operated six local area warehouse facilities. The following table sets forth certain information relating to Advance's distribution facilities:
Size Opening (Sq. Distribution Facility Date Area Served ft.) --------------------- ------- ----------- ------- Main Distribution Centers: Roanoke, Virginia................. 1988 Mid-Atlantic 440,000 Gadsden, Alabama.................. 1994 South 240,000 Jeffersonville, Ohio(1)........... 1996 Mid West 383,000 Gastonia, North Carolina(2)....... 1969 Western Auto Retail Stores, Wholesale Dealer Network 663,000 Salina, Kansas(2)................. 1971 West 441,000 Delaware, Ohio(2)................. 1972 Northeast 510,000 Thomson, Georgia.................. 1999 Southeast 383,000 PDQ(R) Warehouses: Salem, Virginia................... 1983 Mid-Atlantic 50,400 Smithfield, North Carolina........ 1991 Southeast 42,000 Jeffersonville, Ohio(3)........... 1996 Mid West 50,000 Thomson, Georgia(3)............... 1998 South, Southeast 50,000 Goodlettesville, Tennessee........ 1999 Central 41,900 Youngwood, Pennsylvania........... 1999 East 49,000 Riverside, Missouri............... 1999 West 45,000 Guilderland Center, New York...... 1999 Northeast 47,400 Temple, Texas(2)(4)............... 1999 Southwest 100,000 Master PDQ(R) Warehouse: Andersonville, Tennessee.......... 1998 All 116,000
-------- (1) This facility is scheduled to be closed completely as a distribution center by the end of 2001. (2) Advance acquired these facilities in the Western merger in November 1998. (3) This facility is located within the main distribution center. (4) Total capacity of this facility is approximately 550,000 square feet of which 100,000 is currently being used as a PDQ(R) warehouse. This facility was once also used as a distribution center. This facility is currently for sale. Management Information Systems Advance has developed a flexible technology infrastructure that supports its current and future growth strategy. The Information Technology infrastructure is comprised of software and hardware designed to integrate store, distribution and vendor services into a seamless customer service network. All stores, corporate and regional offices, and distribution centers are linked via a communications network, which is based on frame relay technology among all locations within the United States. Stores in Puerto Rico are linked to the communications network via satellite. Electronic documents transferred between Advance and the vendor expedite the ordering, receiving, and merchandise payable process. Store Based Information Systems. Advance's store based information systems, which are designed to improve the efficiency of its operations and enhance customer service, are comprised of Point-of-Sale, or POS, 72 Electronic Parts Catalog, or EPC, Store Level Inventory Management, or SLIM, and a Store Intranet, or STORENET. These systems are tightly integrated and together provide real time, comprehensive information to store and merchandising personnel, resulting in improved customer service levels and in- stock availability. Point-of-Sale. The POS system was originally installed in 1981, enhanced over the years and reengineered in 1995. This system has improved store productivity and customer service by streamlining store procedures. POS information is used to formulate pricing, marketing and merchandising strategies as well as to rapidly replenish inventory. Advance is installing a new POS system in all stores. This system is currently being installed in all new stores and a limited number of existing stores. A full conversion schedule will commence in September 2001 and is expected to be completed in the second quarter of 2002. The new POS system is designed to improve customer check-out time and decrease the time required to train new store associates. In addition, the new POS system will provide additional customer purchase and warranty history, which will be used for customer demographics analysis. Electronic Parts Catalog. The EPC system is a software system that enables Advance's sales associates to identify the application, location, and availability of over 20 million application uses for automotive parts and accessories. The EPC system enables sales associates to assist customers in parts selection and ordering based on the year, model, engine type and application needed. The EPC system displays an identified part, its inventory status and its availability through the PDQ(R) system, if the part is not available at the store. The EPC system also displays related parts for sales associates to recommend to a customer, which leads to increased average sales per customer. The integration of this system with the POS system improves customer service by reducing time spent at the cash register and fully automating the sales process between the parts counter and the POS register. Additionally, this system enables sales associates to order parts and accessories electronically from Advance's PDQ(R) system with immediate confirmation of price, availability and delivery schedule. Information about a customer's automobile can be entered into a permanent customer database that can be accessed immediately whenever the customer visits or telephones the store. In conjunction with the rollout of the new POS system, Advance is also installing a new EPC in its stores. This new catalog, which is fully integrated with the new POS system, will provide store associates with additional product information including graphics and system diagrams. Parts lookup capabilities will be improved with search engines and easier to use navigation tools. To ensure ongoing improvement of EPC information in all stores, Advance has developed a corporate based EPC data management system that allows Advance to reduce the cycle time for cataloging and delivering updated product data to stores. This system also provides the capability of cataloging non-application specific parts and additional product information such as technical bulletins, images of parts, and related diagrams of automobiles and expanded lists of related parts for the item being purchased. Store Level Inventory Management System. The store level inventory management system provides real-time inventory tracking at the store level. With the store level system, store personnel can check the quantity of on-hand inventory for any SKU, automatically process returns and defective merchandise, designate SKUs for cycle counts and track merchandise transfers. Advance is testing the effectiveness and viability of radio frequency hand held devices in approximately 200 of its retail stores that should increase inventory utilization and ensure the accuracy of inventory movements. Store Intranet. Installed in June of 1998, the STORENET system delivers product information, electronic manuals, forms, and internal communications to all store employees. Financial reports are delivered to the store managers via STORENET each accounting period. The Advance On Line Learning Center deliveries on line training programs to all employees. A tracking and reporting function provides human resources and management with an overview of training schedules and results by employee. 73 Customer Contact Center. In the first quarter of fiscal 2001, Advance established a Customer Contact Center and consolidated all support centers. New call routing software and customer service software has been installed. The implementation of the Customer Contact Center has resulted in substantial improvement in speed of call answers, reduction in calls to voice mail, and number of outbound calls required to respond to voice mail. Financial Reporting. In fiscal 2000, Advance implemented the Hyperion Financial Reporting system. The benefits resulting from this implementation include online operating statements for all levels of management. Budget planning and publication has also been improved by the implementation of this system and integration with STORENET. PeopleSoft Financials/Human Resources. In June 2001, Advance completed the installation of PeopleSoft Financial and Human Resources systems. The implementation of these systems and the best practice business processes that were developed in conjunction with the systems enable Advance to leverage current staffing levels by streamlining processes, and automating many manual processes. Logistics and Purchasing Information Systems Distribution Center Management System. The distribution management system, or DCMS, provides real-time inventory tracking through the processes of receiving, picking, shipping and replenishment at the distribution center level. The DCMS, integrated with material handling equipment, significantly reduces warehouse and distribution costs while improving efficiency. All of Advance's logistic facilities currently operate using this technology. As a result, Advance has the capacity to service over 2,500 stores from its six retail distribution centers that serve Advance stores and to support the Puerto Rico Stores and the Wholesale segment from its Gastonia distribution center. Advance is currently in the process of enhancing the DCMS and inventory systems to support service of multiple segments from the same distribution center. Replenishment Systems. The E3 Replenishment System, or E3, which was implemented in 1994, monitors the distribution center and PDQ(R) warehouse inventory levels and orders additional products when appropriate. In addition, the system tracks sales trends by SKU, allowing Advance to adjust future orders to support seasonal and demographic shifts in demand. Advance is currently in the process of enhancing this system to improve support of transfer of merchandise among distribution centers. Advance recently completed the implementation of a store level replenishment version of E3 for its Advance Auto Parts stores. Employees As of July 14, 2001, Advance employed approximately 15,100 full-time employees and 9,700 part-time employees. Approximately 85% of Advance's workforce is employed in store level operations, 11% in distribution and 4% in Advance's corporate offices in Roanoke, Virginia and Kansas City, Missouri. Advance has never experienced any labor disruption, is not a party to any collective bargaining agreements, and believes that its labor relations are good. Competition Advance competes in the automotive aftermarket parts industry, which consists of replacement parts, maintenance items and accessories, and which, according to industry estimates, generates approximately $100 billion in sales per year. Advance competes for both do-it-yourself and do-it-for-me customers. Although the number of competitors and the level of competition vary by market area, both markets are highly fragmented and generally very competitive. Advance competes primarily with national and regional retail automotive parts chains (such as AutoZone, Inc., O'Reilly Automotive, Inc. and The Pep Boys-- Manny, Moe & Jack), wholesalers or jobber stores (some of which are associated with national automotive parts distributors or associations, such as NAPA), independent operators, automobile dealers and mass merchandisers that carry automotive replacement parts, maintenance items and accessories (such as Wal- Mart Stores, Target 74 and K-Mart). Advance believes that chains of automotive parts stores, such as Advance, with multiple locations in regional markets, have competitive advantages in customer service, marketing, inventory selection, purchasing and distribution as compared to independent retailers and jobbers that are not part of a chain or associated with other retailers or jobbers. The principal competitive factors that affect Advance's business are store location, customer service and product selection, availability, quality and price. Trade Names, Service Marks and Trademarks Advance owns and has registrations for the trade names "Advance Auto Parts," "Western Auto" and "Parts America" and the trademark "PDQ(R)" with the United States Patent and Trademark Office for use in connection with the automotive parts retailing business. In addition, Advance owns and has registered a number of trademarks with respect to its private label products. Advance believes that its various trade names, service marks and trademarks are important to its merchandising strategy, but that its business is not otherwise dependent on any particular service mark, trade name or trademark. There are no infringing uses known by Advance that materially affects the use of such marks. Environmental Matters Advance is subject to various federal, state and local laws and governmental regulations relating to the operation of its business, including those governing recycling of batteries and used lubricants, and regarding ownership and operation of real property. Advance handles hazardous materials during its operations, and its customers may also use hazardous materials on Advance's properties or bring hazardous materials or used oil onto Advance's properties. Advance currently provides collection and recycling programs for spent automotive batteries and used lubricants at certain of its stores as a service to its customers pursuant to agreements with third party vendors. Pursuant to these agreements, spent batteries and used lubricants are collected by Advance employees, deposited into vendor supplied containers/pallets and stored by Advance until collected by the third party vendors for recycling or proper disposal. Persons who arrange for the disposal, treatment or other handling of hazardous or toxic substances may be liable for the costs of removal or remediation at any affected disposal, treatment or other site affected by such substances. Advance owns and leases real property. Under various environmental laws and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under, or in such property. Such laws often impose joint and several liability and may be imposed without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous or toxic substances. Certain other environmental laws and common law principles also could be used to impose liability for releases of hazardous materials into the environment or work place, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. Compliance with such laws and regulations has not had a material impact on its operations to date, but there can be no assurance that future compliance with such laws and regulations will not have a material adverse effect on Advance or its operations. Advance believes it is currently in material compliance with such laws and regulations. 75 Properties The following table sets forth certain information concerning Advance's principal facilities:
Size Nature of Primary Use Location (Sq. ft.) Occupancy ----------- -------- --------- --------- Corporate offices............ Roanoke, Virginia 49,000 Leased(1) Corporate offices............ Kansas City, Missouri 12,500 Leased Administrative offices....... Roanoke, Virginia 40,000 Leased Distribution center.......... Roanoke, Virginia 440,000 Leased(2) Distribution center.......... Gadsden, Alabama 240,000 Owned Distribution center.......... Salina, Kansas 441,000 Owned Distribution center.......... Delaware, Ohio 510,000 Owned Distribution center.......... Gastonia, North Carolina 663,000 Owned Distribution center and regional PDQ(R) warehouses.. Jeffersonville, Ohio 383,000 Owned(3) Distribution center and regional PDQ(R) warehouses.. Thomson, Georgia 383,000 Leased(4) Regional PDQ(R) Warehouse.... Temple, Texas 100,000 Owned(5) Regional PDQ(R) Warehouse.... Salem, Virginia 50,400 Leased Regional PDQ(R) Warehouse.... Smithfield, North Carolina 42,000 Leased Regional PDQ(R) Warehouse.... Goodlettesville, Tennessee 41,900 Leased Regional PDQ(R) Warehouse.... Youngwood, Pennsylvania 49,000 Leased Regional PDQ(R) Warehouse.... Riverside, Missouri 45,000 Leased Regional PDQ(R) Warehouse.... Guilderland Center, New York 47,400 Leased Master PDQ(R) Warehouse...... Andersonville, Tennessee 116,000 Leased
-------- (1) This facility is owned by Ki, L.C., a Virginia limited liability company owned by two trusts for the benefit of a child and grandchild of Nicholas F. Taubman. See "Related Party Transactions of Advance." (2) This facility is owned by Nicholas F. Taubman. See "Related Party Transactions of Advance." (3) This facility is scheduled to be closed completely as a distribution center by the end of 2001. (4) The construction of this facility was financed in fiscal 1997 by a $10.0 million industrial revenue bond issuance from the Development Authority of McDuffie County of the State of Georgia, from which Advance leases the facility. Advance has an option to purchase this facility for $10.00 at the end of five years or upon prepayment of the outstanding bonds. (5) Total capacity of this facility is approximately 550,000 square feet, of which 100,000 square feet is currently being used as a PDQ(R) warehouse. This facility was once also used as a distribution center. This facility is currently for sale. At July 14, 2001, 134 of Advance's stores were owned and 1,631 were leased. The expiration dates (including renewal options) of the store leases are summarized as follows:
Years Stores(1) ----- --------- 2001-2002...................................................... 37 2003-2007...................................................... 165 2008-2012...................................................... 317 2013-2022...................................................... 1003 2023-2032...................................................... 83 2033-2048...................................................... 26
-------- (1) Of these stores, 23 are owned by affiliates of Advance. See "Related Party Transactions of Advance." Legal Proceedings Coalition for a Level Playing Field, et. al. v. AutoZone, Inc. et. al, Case No. 00-0953 in and for the United District Court, Eastern District of New York. In February 2000, the Coalition for a Level Playing Field and 76 over one hundred independent automotive parts and accessories aftermarket warehouse distributors and jobbers filed a lawsuit in the United States District for the Eastern District of New York against various automotive retailers. In March 2000, Advance was notified that it had been named in the lawsuit. The plaintiffs claim that the defendants have knowingly induced volume discounts, rebates, slotting and other allowances, fees, free inventory, sham advertising and promotional payments, a share in the manufacturers' profits, and excessive payments for services purportedly performed for the manufacturers in violation of the Robinson-Patman Act. The complaint seeks injunctive and declaratory relief, unspecified treble damages on behalf of each of the plaintiffs, as well as attorneys' fees and costs. The defendants, including Advance, filed a motion to dismiss in late October 2000. On October 18, 2001, the court denied the motion to dismiss on all but one count. It is expected that the discovery phase of the litigation will now commence (including with respect to Advance); however, determinations as to the discovery schedule and scope remain to be determined. Advance believes these claims are without merit and intends to defend them vigorously; however, the ultimate outcome of this matter can not be ascertained at this time. In January 1999, Advance was notified by the United States Environmental Protection Agency that Western may have potential liability under the Comprehensive Environmental Response Compensation and Liability Act relating to two battery salvage and recycling sites that were in operation in the 1970s and 1980s. This matter has since been settled for an amount not material to Advance's current financial position or future results of operations. In November 1997, Joe C. Proffitt, Jr. on behalf of himself and all others in the states of Alabama, California, Georgia, Kentucky, Michigan, North Carolina, Ohio, South Carolina, Tennessee, Texas, Virginia and West Virginia who purchased batteries from Advance from November 1, 1991 to November 5, 1997 filed a class action complaint and motion of class certification against Advance in the circuit court for Jefferson County, Tennessee, alleging the sale by Advance of used, old or out-of-warranty automotive batteries as new. The complaint seeks compensatory and punitive damages. In September 2001, the court granted Advance's motion for summary judgment against the plaintiff and dismissed all claims against Advance. The court has not yet entered a formal order, and the period for appeal has not yet run. Advance believes it has no liability for such claims and intends to continue to defend them vigorously, if necessary. In addition to the above, Advance currently and from time to time is involved in litigation incidental to the conduct of its business. The damages claimed against Advance in some of these proceedings are substantial. Although the amount of liability that may result from these matters cannot be ascertained, Advance does not currently believe that, in the aggregate they will result in liabilities material to Advance's consolidated financial condition, future results of operations or cash flow. Selected Historical Consolidated Financial and Other Data of Advance Holding The following table sets forth selected historical consolidated statement of operations, balance sheet and other operating data of Advance Holding and its wholly owned subsidiaries. The selected historical consolidated financial and other data as of and for fiscal 1998, fiscal 1999 and fiscal 2000 have been derived from, and should be read together with, Advance Holding's audited consolidated financial statements and the related notes included elsewhere in this proxy statement and prospectus. The historical consolidated financial and other data as of and for 1996 and 1997 have been derived from Advance Holding's audited consolidated financial statements and the related notes, which have not been included in this proxy statement and prospectus. The historical consolidated financial and other data as of and for the twenty-eight week periods ended July 15, 2000 and July 14, 2001 have been derived from, and should be read together with, Advance Holding's unaudited consolidated financial statements and the related notes included elsewhere in this proxy statement and prospectus. In the opinion of Advance Holding's management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial position of Advance Holding, the results of its operations and cash flows have been made. The results of operations for the twenty-eight week period ended July 14, 2001 are not necessarily indicative of the operating results to be expected for the full fiscal year. The data presented below should be read in conjunction with the consolidated financial statements of Advance Holding and the notes thereto included herein, the other financial information included herein and 77 "Management's Discussion and Analysis of Financial Condition and Results of Operations of Holding." The following financial data includes certain expenses related to the integration of the Western merger and Parts America conversion incurred in fiscal 1998 and fiscal 1999 and certain private company expenses that were eliminated in the Recapitalization. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Holding" for a detailed discussion of the Recapitalization and these expenses.
Twenty-Eight Week Periods Ended Fiscal Year (unaudited) ------------------------------------------------------ ---------------------- July 15, July 14, 1996 1997 1998 1999 2000 2000 2001 -------- -------- ---------- ---------- ---------- ---------- ---------- (dollars and share amounts in thousands, except per share data) Consolidated Statement of Operations Data: Net sales............... $705,983 $848,108 $1,220,759 $2,206,945 $2,288,022 $1,235,232 $1,336,837 Cost of sales........... 437,615 524,586 766,198 1,404,113 1,392,127 759,724 796,557 -------- -------- ---------- ---------- ---------- ---------- ---------- Gross profit............ 268,368 323,522 454,561 802,832 895,895 475,508 540,280 Selling, general and administrative expenses(2)............ 228,113 280,900 400,546 780,114 800,845 422,650 470,166 Expenses associated with the Recapitalization(3).... -- -- 14,277 -- -- -- -- Expenses associated with the restructuring in conjunction with the Western merger(4)...... -- -- 6,774 -- -- -- -- Non-cash and other employee compensation(5)........ 113 195 1,135 2,483 2,261 1,425 2,195 -------- -------- ---------- ---------- ---------- ---------- ---------- Operating income........ 40,142 42,427 31,829 20,235 92,789 51,433 67,919 Interest expense........ 4,891 6,086 35,038 62,792 66,640 36,601 33,074 Other income (expense), net.................... 187 (321) 943 4,647 1,012 532 569 -------- -------- ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes........... 35,438 36,020 (2,266) (37,910) 27,161 15,364 35,414 Income tax expense (benefit).............. 14,174 14,733 (84) (12,584) 10,535 5,939 14,010 -------- -------- ---------- ---------- ---------- ---------- ---------- Income (loss) before extraordinary item..... 21,264 21,287 (2,182) (25,326) 16,626 9,425 21,404 Extraordinary item, gain on debt extinguishment, net of $1,759 income taxes.................. -- -- -- -- 2,933 -- -- -------- -------- ---------- ---------- ---------- ---------- ---------- Net income (loss)....... $ 21,264 $ 21,287 $ (2,182) $ (25,326) $ 19,559 $ 9,425 $ 21,404 ======== ======== ========== ========== ========== ========== ========== Fully diluted net income (loss) per share (unaudited)............ $ 0.87 $ 0.87 $ (0.12) $ (0.90) $ 0.68 $ 0.33 $ 0.74 ======== ======== ========== ========== ========== ========== ========== Fully diluted weighted number of common shares outstanding............ 24,287 24,288 18,606 28,269 28,611 28,510 28,760 ======== ======== ========== ========== ========== ========== ========== Other Data: EBITDA, as adjusted(6).. $ 60,236 $ 68,361 $ 92,612 $ 121,899 $ 161,876 $ 87,260 $ 107,183 Capital expenditures.... 44,264 48,864 65,790 105,017 70,566 28,031 31,048 Percentage increase in comparable store net sales(7)............... 2.1% 5.7% 7.8% 10.3% 4.4% 3.7% 6.2% Commercial delivery sales.................. 11,000 62,401 107,323 198,928 305,947 160,097 184,289 Net cash provided by (used in) operating activities............. 26,518 42,478 44,022 (20,976) 103,951 53,304 102,616 Net cash (used in) investing activities... (44,121) (48,607) (230,672) (113,824) (64,940) (25,500) (51,139) Net cash provided by (used in) financing activities............. 12,548 6,759 207,302 121,262 (43,579) (33,783) (49,866) Stores open at end of period................. 649 814 1,567 1,617 1,729 1,675 1,765 Balance Sheet Data: Net working capital(8).. $110,080 $121,140 $ 310,113 $ 355,608 $ 321,540 $ 344,911 $ 327,024 Total assets............ 394,395 461,257 1,265,355 1,348,629 1,356,360 1,350,312 1,364,314 Total net debt(9)....... 91,028 95,633 485,476 627,467 582,539 592,580 535,199 Stockholders' equity.... 122,323 143,548 159,091 133,954 156,271 146,627 179,359
78 (1) Advance's fiscal year consists of 52 or 53 weeks ending on the Saturday nearest to December 31. All fiscal years presented are 52 weeks except for fiscal 1997, which consists of 53 weeks. (2) Fiscal 1999 and fiscal 1998 amounts include certain merger integration and Parts America conversion expenses related to the Western merger that total $41,034 and $7,788, respectively. Fiscal 1997 amount includes an unusual medical claim that exceeded Advance's stop loss insurance coverage. The pre-tax amount of this claim, net of related increased insurance costs, was $882. Advance has increased its stop loss coverage effective January 1, 1998 to a level that would provide insurance coverage for a medical claim of this magnitude. In addition, amounts are included for all fiscal years for private company expenses incurred prior to the Recapitalization that relate primarily to compensation and benefits paid to Advance's chairman that were eliminated after the Recapitalization. These amounts are $2,482, $3,056 and $845 for fiscal 1996, fiscal 1997 and fiscal 1998, respectively. There are no private company expenses in the fiscal 1999, fiscal 2000 or fiscal 2001 amounts. (3) Represents expenses incurred in the Recapitalization related primarily to bonuses paid to certain employees and professional services. (4) Represents fiscal 1998 expenses primarily related to lease costs associated with the 31 Advance Auto Parts stores closed in overlapping markets in connection with the Wester merger. (5) Represents interest component of net periodic postretirement benefit cost related to Advance's unfunded post retirement benefit obligation and non- cash compensation expenses related to stock options granted to certain of Advance's employees. (6) EBITDA, as adjusted, represents operating income plus depreciation and amortization, non-cash and other employee compensation expenses and certain one-time expenses, as described below, included in operating income. EBITDA, as adjusted, is not intended to represent cash flow from operations as defined by GAAP, and should not be considered as a substitute for net income as an indicator of operating performance or as an alternative to cash flow (as measured by GAAP) as a measure of liquidity. Advance has included EBITDA, as adjusted, herein because Advance's management believes this information is useful to investors, as such measure provides additional information with respect to Advance's ability to meet its future debt service, capital expenditure and working capital requirements and, in addition, certain covenants in the indentures and credit facility are based upon an EBITDA calculation. Advance's method for calculating EBITDA, as adjusted, may differ from similarly titled measures reported by other companies. Advance's management believes certain one-time expenses, private company expenses, recapitalization expenses, non-cash and other employee compensation expenses, restructuring expenses and merger integration expenses should be eliminated from the EBITDA calculation to evaluate the operating performance of Advance, and has done so in its calculation of EBITDA, as adjusted. Advance leases substantially all of its stores. 79 The following table reflects the effect of these items:
Twenty-Eight Week Periods Ended Fiscal Year(1) (unaudited) ------------------------- ----------------- July 15, July 14, 1998 1999 2000 2000 2001 ------- -------- -------- -------- -------- (dollars in thousands) Other Data: EBITDA........................... $61,793 $ 78,382 $159,615 $85,835 $104,988 Private company expenses(a)...... 845 -- -- -- -- Recapitalization expenses(b)..... 14,277 -- -- -- -- Non-cash and other employee compensation (see note 5 above).......................... 1,135 2,483 2,261 1,425 2,195 Restructuring expenses in conjunction with the Western merger (see note 4 above)....... 6,774 -- -- -- -- Merger integration expenses(c)... 7,788 41,034 -- -- -- ------- -------- -------- ------- -------- EBITDA, as adjusted.............. $92,612 $121,899 $161,876 $87,260 $107,183 ======= ======== ======== ======= ========
-------- (a) Reflects Advance's estimate of expenses primarily related to compensation and other benefits of Advance's chairman, who prior to the Recapitalization was Advance's principal stockholder, that were eliminated after the Recapitalization. (b) Represents non-recurring management bonuses and other expenses incurred in connection with the Recapitalization. (c) Represents certain expenses related to the Western merger integration and conversion of the Parts America stores. (d) EBITDA, as adjusted, for fiscal 2000 includes a non-recurring net gain of $3.3 million. EBITDA, as adjusted, for the twenty-eight week period ended July 14, 2001 includes a non-recurring net gain of $3.2 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Advance Holding--Results of Operations-- Fiscal Year 2000 Compared to Fiscal Year 1999" and "--Twenty-Eight Weeks Ended July 14, 2001 Compared to Twenty-Eight Weeks Ended July 15, 2000." (7) Comparable store net sales is calculated based on the change in net sales starting once a store has been opened for thirteen complete accounting periods (each period represents four weeks). Relocations are included in comparable store net sales from the original date of opening. Additionally, each converted Parts America store acquired in the Western merger and subsequently converted is included in the comparable store net sales calculation after thirteen complete accounting periods following its physical conversion to an Advance Auto Parts store. Advance does not include net sales from the 42 Western Auto retail stores in its comparable store net sales calculation. (8) Net working capital represents total current assets less total current liabilities. (9) Net debt represents total debt (including current maturities and bank overdrafts) less cash and cash equivalents. 80 Management's Discussion and Analysis of Financial Condition and Results of Operations of Advance Holding The following discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated historical financial statements of Advance Holding, the unaudited pro forma consolidated financial information of Advance and Discount, and the notes to those statements that appear elsewhere in this proxy statement and prospectus. Advance Holding's fiscal year ends on the Saturday nearest December 31 of each year. Advance Holding's first quarter consists of 16 weeks, and the other three quarters consist of 12 weeks. For purposes of this Management's Discussion and Analysis, notwithstanding the meaning attributed to other references in this proxy statement and prospectus, Advance shall mean, collectively, Advance Holding, Advance Stores and their subsidiaries. General Advance conducts all of its operations through Advance's wholly owned subsidiary, Advance Stores Company, Incorporated and its subsidiaries. Advance was formed in 1929 and operated as a retailer of general merchandise until the 1980s. In the 1980's, Advance sharpened its marketing focus to target sales of automotive parts and accessories to "do-it-yourself", or "DIY", customers and accelerated its growth strategy. From the 1980's through the present, Advance has grown significantly through new store openings, strong comparable store sales growth, strategic acquisitions and the Western merger. Additionally, in 1996, Advance began to aggressively expand its sales to "do-it-for-me", or "DIFM", customers by implementing a commercial delivery program that supplies parts and accessories to third party automotive service and repair providers. As of July 14, 2001, Advance had 1,723 stores operating under the "Advance Auto Parts" trade name, in 37 states in the northeastern, southeastern and mid- western regions of the United States. In addition, Advance had 42 stores operating under the "Western Auto" trade name primarily located in Puerto Rico and the Virgin Islands. Advance is the second largest specialty retailer of automotive parts, accessories and maintenance items to DIY customers in the United States, based on store count and sales. Advance currently is the largest or second largest retailer of automotive products in the majority of the states in which it operates, based on store count. Advance's combined operations are conducted in two operating segments, retail and wholesale. The retail segment consists of the retail operations of Advance operating under the trade names "Advance Auto Parts" in the United States and "Western Auto" in Puerto Rico and the Virgin Islands. Advance also operates a wholesale distribution network which includes distribution services of automotive parts and accessories to approximately 470 independently owned dealer stores in 48 states operating under the "Western Auto" trade name. Acquisitions and Recapitalization Discount Acquisition. On August 7, 2001, Advance signed a definitive merger agreement to acquire Discount. Discount shareholders will receive $7.50 per share in cash plus 0.2577 shares of Advance common stock for each share of Discount common stock. Accordingly, upon consummation of the merger, Discount shareholders will own approximately 13% of the total shares outstanding of the combined company. At July 14, 2001, Discount had 666 stores in six states, including the leading market position in Florida, with 436 stores. On a pro forma basis, Advance would have had approximately 2,400 stores in the same 37 states in which Advance currently operates Advance Auto Parts stores, and Advance's net sales for the twelve months ended July 14, 2001 would have been $3.1 billion. Advance expects to achieve ongoing purchasing, distribution and administrative savings as a result of the merger. Purchasing savings will be derived primarily through volume discounts to be negotiated with Advance's existing vendors. In addition, Advance expects to achieve significant savings from the optimization of Advance's combined distribution systems, 81 including more efficient capacity utilization at Discount's Mississippi distribution center, as well as from the reduction of overlapping administrative functions. During 2002, Advance expects these savings to result in approximately $30 million of incremental EBITDA, excluding certain one-time integration expenses. Advance expects these one-time expenses to total approximately $53 million from the close of the merger through the end of 2003, $41 million of which Advance expects to incur in 2002. The merger will be accounted for under the purchase method of accounting. Carport Acquisition. On April 23, 2001, Advance completed its acquisition of the assets used in the operation of Carport Auto Parts, Inc. retail auto parts stores located throughout Alabama and Mississippi. Based upon store count, this makes Advance the largest retailer of automotive parts in this market. Upon the closing, of the acquisition, Advance made the decision to close 21 Carport stores not expected to meet long-term profitability objectives. The remaining 30 Carport locations were converted to the Advance Auto Parts store format by July 7, 2001. The acquisition has been accounted for under the purchase method of accounting. The purchase price of $21.5 million has been allocated to the assets acquired and the liabilities assumed, based on their fair values at the date of acquisition. This allocation resulted in the recognition of $3.2 million in goodwill. Western Auto Acquisition. On November 2, 1998, Advance acquired Western Auto Supply Company from Sears. The purchase price included the payment of 11,474,606 shares of Advance Holding common stock and $185.0 million in cash. Certain existing stockholders of Advance Holding invested an additional $70.0 million in equity to fund a portion of the cash portion of the purchase price, the remainder of which was funded through additional borrowings under Advance Stores' then existing credit facility, and cash on hand. The Western merger has been accounted for under the purchase method of accounting. Accordingly, the results of operations of Western for the periods from November 2, 1998 are included in the accompanying consolidated financial statements. The purchase price has been allocated to assets acquired and liabilities assumed based on their respective fair values. The final purchase price allocation resulted in total excess fair value over the purchase price of $4.7 million and was allocated to non-current assets, primarily property and equipment. Advance has achieved significant benefits from the combination with Western through improved product pricing and terms from vendors, consolidated advertising, distribution and corporate support efficiencies. The Western merger resulted in the addition of a net 545 Advance Auto Parts stores, 39 Western Auto stores, and the wholesale operations. Related Restructuring Costs and Integration Expenses. Following the Western merger and the Carport acquisition, Advance closed certain Advance Auto Parts stores not meeting profitability objectives. The Western merger and the Carport acquisition also resulted in restructuring reserves recorded in purchase accounting for the closure of certain stores, severance and relocation costs and other facility exit costs. As of July 14, 2001, these reserves had a remaining balance of $12.4 million. In addition, Advance also assumed certain restructuring and deferred compensation liabilities previously recorded by Western. At July 14, 2001, the total liability for the restructuring and deferred compensation plans was $2.2 million and $4.5 million, respectively, of which $1.2 million and $1.3 million, respectively, is recorded as a current liability. The classification for deferred compensation is determined by payment terms elected by plan participants, primarily former Western employees, which can be changed upon 12 months' notice. In addition, as a result of the Western acquisition, Advance recorded expenses related to the integration of the Western acquisition of approximately $7.8 million and $41.0 million in 1998 and 1999. In 1998, Advance recorded expenses of approximately $6.8 million primarily related to lease costs associated with the 31 Advance Auto Parts stores closed in connection with the Western acquisition. As part of normal operations, Advance continually monitors store performance, which results in closing certain store locations not meeting profitability objectives. During the twenty-eight weeks ended July 14, 2001 Advance closed two stores included in the fiscal 2000 restructuring activities and made the decision to close or 82 relocate 24 additional stores not meeting profitability objectives, 18 of which were closed or relocated as of July 14, 2001. Following the merger, Advance may decide to close certain Discount and Advance stores that are not expected to meet long-term profitability objectives. Recapitalization. On April 15, 1998, Advance Holding consummated its Recapitalization pursuant to a merger agreement. As part of the Recapitalization, Freeman Spogli & Co. acquired a controlling interest in Advance Stores and Advance Holding. A portion of the Advance Holding common stock and all of the preferred stock of Advance Holding was converted into the right to receive in the aggregate approximately $351 million in cash and certain stock options. Certain shares representing approximately 14% of the outstanding Class A common stock remained outstanding upon consummation of the Recapitalization. Immediately prior to the Recapitalization, Freeman Spogli & Co. purchased approximately $80.5 million of the common stock of Advance Holding, which was converted in the Recapitalization into approximately 64% of the Advance Holding's outstanding common stock, and Ripplewood Partners, L.P. and its affiliates purchased approximately $20 million of the common stock of Advance Holding, which was converted in the Recapitalization into approximately 16% of Advance Holding's outstanding common stock. In connection with the Recapitalization, management purchased approximately $8,000,000, or approximately 6%, of Advance Holding's outstanding common stock. The purchase of common stock by management resulted in stockholder subscription receivables. The notes provide for annual interest payments, at the prime rate, with the entire principal amount due on April 15, 2003. On April 15, 1998, Advance Stores entered into a credit facility that provides for (i) three senior secured term loan facilities in the aggregate amount of $250 million and (ii) a secured revolving credit facility of up to $125 million. At the closing of the Recapitalization, $125 million was borrowed under one of the term loan facilities. On April 15, 1998, Advance Stores also issued $200 million of senior subordinated notes and Advance Holding issued approximately $112 million in face amount of senior discount debentures. In connection with these transactions, Advance Stores extinguished a substantial portion of its existing notes payable and long-term debt. These transactions collectively represent the "Recapitalization." Advance Holding has accounted for the Recapitalization for financial reporting purposes as the sale of common stock, the issuance of debt, the redemption of common and preferred stock and the repayment of notes payable and long-term debt. Recent Developments For the eight weeks ended September 8, 2001 Advance's comparable store sales growth was 7.8% when compared with the same period of the prior year. In addition, Advance's net sales and EBITDA increased 9.5% and 25.7%, to $406.7 million and $39.2 million, respectively, when compared with the eight weeks ended September 9, 2000. Retail sales for this period rose approximately 11.0% to $394.5 million from $355.4 million for the same period of the prior year. The increase in retail sales was partially offset by lower sales in the wholesale segment, as Advance expected. Both the DIY and DIFM businesses showed continued sales growth. Sales for the thirty-six weeks ended September 8, 2001 were $1,743.5 million, an increase of 8.5% over $1,606.5 million for the same period of the prior year. Retail sales for this period increased 10.2% to $1,670.1 million from $1,515.7 million for the same period of the prior year. Comparable store sales increased 6.6%. EBITDA for the thirty-six weeks ended September 8, 2001 was $146.4 million, an increase of 23.6% over EBITDA of $118.4 million for the same period last year. The year-to-date results included two non-recurring items that increased EBITDA by $3.2 million. Excluding these non-recurring items, EBITDA increased 20.9% to $143.2 million for the thirty-six week, year- to-date period. Net debt at September 8, 2001 was $535.0 million, a reduction of $27.3 million from the same time last year. While sales slowed during the week of September 11th, Advance's average comparable store sales levels for the weeks following the week of September 11 have been in line with Advance's comparable store sales trends for the thirty- six weeks ended September 8, 2001. 83 Advance has recently undertaken a review of its supply chain and logistics operations, including its distribution costs and inventory stocking levels. As part of this review, Advance expects to identify a portion of its inventory that it may offer in the future only in certain store locations or regions. Advance may generate significant cash proceeds as a result of this initiative by reducing its inventory investment while continuing to maintain high levels of customer service and in-stock positions. Advance may also record a charge in connection with this initiative, related primarily to restocking costs and inventory handling charges. In addition, Advance has closed and may close additional distribution facilities and may write-down the value of these facilities in connection with its supply chain initiative. Advance expects to complete this review prior to the end of the first quarter of 2002 and would record any related charges in its consolidated statements when it identifies that such charges would be required. Results of Operations The following tables set forth certain operating data for Advance Holding expressed in dollars and as a percentage of net sales for the periods indicated.
Twenty-Eight Week Period Ended Fiscal Year (unaudited) ---------------------------------- ---------------------- July 15, July 14, 1998 1999 2000 2000 2001 ---------- ---------- ---------- ---------- ---------- (dollars in thousands) Statement of Operations Data: Net sales............... $1,220,759 $2,206,945 $2,288,022 $1,235,232 $1,336,837 Cost of sales........... 766,198 1,404,113 1,392,127 759,724 796,557 ---------- ---------- ---------- ---------- ---------- Gross profit............ 454,561 802,832 895,895 475,508 540,280 Selling, general and administrative expenses(1)............ 391,913 739,080 800,845 422,650 470,166 Expenses associated with the Recapitalization... 14,277 -- -- -- -- Expenses associated with the restructuring in conjunction with the Western merger......... 6,774 -- -- -- -- Expenses associated with merger integration..... 7,788 41,034 -- -- -- Expenses associated with private company........ 845 -- -- -- -- Non-cash and other employee compensation.. 1,135 2,483 2,261 1,425 2,195 ---------- ---------- ---------- ---------- ---------- Operating income........ 31,829 20,235 92,789 51,433 67,919 Interest expense........ (35,038) (62,792) (66,640) (36,601) (33,074) Other income, net....... 943 4,647 1,012 532 569 Income tax benefit (expense).............. 84 12,584 (10,535) (5,939) (14,010) ---------- ---------- ---------- ---------- ---------- Income (loss) before extraordinary item..... (2,182) (25,326) 16,626 9,425 21,404 Extraordinary item, gain on debt extinguishment, net of $1,759 income taxes........... -- -- 2,933 -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss)....... $ (2,182) $ (25,326) $ 19,559 $ 9,425 $ 21,404 ========== ========== ========== ========== ==========
-------- (1) Selling, general and administrative expenses are adjusted for certain non- recurring and other items. 84
Twenty-Eight Week Period Ended Fiscal Year (unaudited) --------------------- ------------------ July 15, July 14, 1998 1999 2000 2000 2001 ----- ----- ----- -------- -------- Net sales.......................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales...................... 62.8 63.6 60.8 61.5 59.6 ----- ----- ----- ----- ----- Gross profit....................... 37.2 36.4 39.2 38.5 40.4 Selling, general and administrative expenses(1)....................... 32.1 33.5 35.0 34.2 35.2 Expenses associated with the Recapitalization.................. 1.2 -- -- -- -- Expenses associated with the restructuring in conjunction with the Western merger................ 0.5 -- -- -- -- Expenses associated with merger integration....................... 0.6 1.9 -- -- -- Expenses associated with private company........................... 0.1 -- -- -- Non-cash and other employee compensation...................... 0.1 0.1 0.1 0.1 0.2 ----- ----- ----- ----- ----- Operating income................... 2.6 0.9 4.1 4.2 5.0 Interest expense................... (2.9) (2.8) (2.9) (3.0) (2.5) Other income, net.................. 0.1 0.2 0.0 0.1 0.1 Income tax benefit (expense)....... 0.0 0.6 (0.5) (0.5) (1.0) ----- ----- ----- ----- ----- Income (loss) before extraordinary item.............................. (0.2) (1.1) 0.7 0.8 1.6 Extraordinary item, gain on debt extinguishment, net of $1,759 income taxes...................... -- -- 0.1 -- -- ----- ----- ----- ----- ----- Net income (loss).................. (0.2)% (1.1)% 0.8 % 0.8 % 1.6 % ===== ===== ===== ===== =====
-------- (1) Selling, general and administrative expenses are adjusted for certain non- recurring and other items. Net Sales Net sales consist primarily of comparable store net sales, new store net sales, service net sales, net sales to the wholesale dealer network and finance charges on installment sales. Comparable store net sales is calculated based on the change in net sales starting once a store has been opened for 13 complete accounting periods (each period represents four weeks). Relocations are included in comparable store net sales from the original date of opening. Additionally, each converted Parts America store that was acquired in the Western merger and subsequently converted to an Advance Auto Parts store has been included in the comparable store net sales calculation after 13 complete accounting periods following the completion of its physical conversion to an Advance Auto Parts store. Advance currently does not include net sales from the 42 Western Auto retail stores in its comparable store net sales calculation. Cost of Sales Advance's cost of sales includes merchandise costs and warehouse and distribution expenses as well as service labor costs of Advance's Western Auto stores. Gross profit as a percentage of net sales may be affected by variations in Advance's product mix, price changes in response to competitive factors and fluctuations in merchandise costs and vendor programs. Advance seeks to avoid fluctuation in merchandise costs by entering into long-term purchasing agreements with vendors in exchange for pricing certainty, but there can be no assurance such measures will in fact mitigate the effect of fluctuations in merchandise costs on gross profits. Selling, General and Administrative Expenses Selling, general and administrative expenses are comprised of store payroll, store occupancy (including rent), net advertising expenses, other store expenses and general and administrative expenses, including salaries 85 and related benefits of corporate employees, administrative office expenses, data processing, professional expenses and other related expenses. Advance leases substantially all of its stores. Twenty-Eight Weeks Ended July 14, 2001 Compared to Twenty-Eight Weeks Ended July 15, 2000 Net sales for the twenty-eight weeks ended July 14, 2001 were $1,336.8 million, an increase of $101.6 million or 8.2% over net sales for the twenty- eight weeks ended July 15, 2000. Net sales for the retail segment increased $115.3 million or 9.9%. The net sales increase for the retail segment was due to an increase in the comparable store sales of 6.2% and contributions from new stores that were not yet included within the comparable stores sales base. The comparable sales increase of 6.2% was primarily a result of growth in both the do-it-yourself and do-it-for-me customer base, as well as the continued maturation of new stores. Comparable store sales increased 3.7% for the twenty- eight weeks ended July 15, 2000 as compared to the comparable period in fiscal 1999. Net sales for the wholesale segment decreased $13.7 million or 18.2%, reflecting the continued decline of this segment due to increased competition coupled with a decline in the number of independently owned dealer stores. The wholesale segment accounted for 4.6% of total net sales in 2001 compared to 6.1% in 2000. During the twenty-eight weeks ended July 14, 2001, Advance opened 53 new stores, relocated nine stores and closed 17 stores, bringing the total retail store count to 1,765. Advance has approximately 1,200 stores participating in its commercial delivery program, as a result of consolidating nine stores during the twenty-eight weeks ended July 14, 2001. Gross profit for the twenty-eight weeks ended July 14, 2001 was $540.3 million or 40.4% of net sales, as compared to $475.5 million or 38.5% of net sales in the twenty-eight weeks ended July 15, 2000. The increase in the gross profit percentage is reflective of an $8.3 million net gain recorded as a reduction to cost of sales during the first quarter of fiscal 2001 as a result of a vendor settlement. The increase in the gross profit percentage is also reflective of a 0.9% aggregate increase resulting from a positive shift in product mix and a decline in net sales of the lower margin Wholesale segment. Additionally, lower inventory shrinkage and our ability to leverage logistics costs primarily contributed to the remainder of the increased margin. The gross profit for the Retail segment was $532.7 million or 41.8% of net sales for the twenty-eight week period ended July 14, 2001, as compared to $467.9 million or 40.3% of net sales for the twenty-eight week period ended July 15, 2000. Selling, general and administrative expenses, before non-cash and other employee compensation, increased to $470.2 million or 35.2% of net sales for the twenty-eight week period ended July 14, 2001, from $422.7 million or 34.2% of net sales for the twenty-eight week period ended July 15, 2000. Selling, general and administrative expenses have increased due to non-recurring closed store expenses associated with the decision to close certain store locations not meeting profitability objectives and the write down of an administrative facility obtained in the Western merger totalling $5.1 million. Additionally, as a percentage of sales, the increase in selling, general and administrative expenses is attributable to the planned investment in store personnel and the continued decline in the wholesale segment, which carries lower selling, general and administrative expenses as a percentage of sales as compared to the retail segment. EBITDA (operating income plus depreciation and amortization, as adjusted for non-cash and other employee compensation), was $107.2 million in the twenty- eight week period ended July 14, 2001 or 8.0% of net sales, as compared to $87.3 million or 7.1% of net sales in the twenty-eight week period ended July 15, 2000. EBITDA is not intended to represent cash flow from operations as defined by GAAP and should not be considered as a substitute for net income as an indicator of operating performance or as an alternative to cash flow (as measured by GAAP) as a measure of liquidity. Advance's method for calculating EBITDA may differ from similarly titled measures reported by other companies. Advance's management believes certain one-time expenses, expenses associated with merger integration and non-cash and other employee compensation should be eliminated from the EBITDA calculation to evaluate the operating performance of Advance. 86 Interest expense for the twenty-eight week period ended July 14, 2001 was $33.1 million or 2.5% of net sales, as compared to $36.6 million or 3.0% of net sales for the twenty-eight week period ended July 15, 2000. The decrease in interest expense is a result of the reduction in net outstanding borrowings as well as a significant decrease in interest rates over the similar period of fiscal 2000. Income tax expense for the twenty-eight weeks ended July 14, 2001 was $14.0 million compared to $5.9 million in the twenty-eight weeks ended July 15, 2000. This increase was primarily due to an increase in income before taxes for the twenty-eight week period ended July 14, 2001 as compared to the twenty-eight week period ended July 15, 2000. As a result of the above factors, Advance recorded net income of $21.4 million for the twenty-eight week period ended July 14, 2001, as compared to $9.4 million for the twenty-eight week period ended July 15, 2000. As a percentage of sales, net income for the twenty-eight week period ended July 14, 2001 was 1.6% as compared to 0.8% for the twenty-eight week period ended July 15, 2000. Fiscal Year 2000 Compared to Fiscal Year 1999 Net sales for fiscal 2000 were $2,288.0 million, an increase of $81.1 million or 3.7% over net sales for fiscal 1999. Net sales for the retail segment increased $149.9 million or 7.5%. The net sales increase for the retail segment was due to an increase in the comparable store sales of 4.4% and contributions from new stores that were acquired or were not yet included within the comparable stores sales base. The comparable store sales increase of 4.4% was primarily a result of growth in both the do-it-yourself and do-it-for- me customer base, as well as the continued maturation of new stores and the converted Parts America stores. Net sales for the wholesale segment decreased 33.1% or $68.8 million due to a decline in the number of dealer stores serviced by Advance and lower average sales to each dealer. During fiscal 2000, Advance opened 140 new stores, relocated 10 stores and closed 28 stores, bringing the total retail segment store count to 1,728. At year end, Advance had 1,210 stores participating in commercial delivery, a result of adding 116 net stores to the program during fiscal 2000. Additionally, as of December 30, 2000, Advance supplied approximately 590 independent dealers through the wholesale dealer network and one company-owned store in California. Gross profit for fiscal 2000 was $895.9 million or 39.2% of net sales, as compared to $802.8 million or 36.4% of net sales in fiscal 1999. The increase in the gross profit percentage is a result of an increase of 180 basis points due to the realization of certain purchasing synergies, fewer product liquidations and a decline in net sales of the lower margin Wholesale segment of 33.1%. Additionally, lower inventory shrinkage of approximately 60 basis points and lower logistics costs of 30 basis points primarily contributed to the remainder of the increased margin. The higher shrinkage and logistics costs in fiscal year 1999 were related to merchandise conversions and product liquidations resulting from the Western merger. The gross profit for the Retail segment was $873.1 million or 40.6% of net sales for fiscal 2000, as compared to $784.1 million or 39.2% of net sales for fiscal 1999. During the fourth quarter of fiscal 2000, the Company recorded a gain as a reduction to cost of sales of $3.3 million related to a lawsuit against a supplier. The gain represents actual damages incurred under an interim supply agreement with the supplier, which provided for higher merchandise costs. Subsequent to December 30, 2000, the Company agreed to a cash settlement of $16.6 million from the supplier. The remainder of the cash settlement over the originally recorded gain, less higher product costs incurred under the interim supply agreement, was recognized as an $8.3 million reduction of cost of sales during the first quarter of fiscal 2001. Selling, general and administrative expenses, before integration expenses and non-cash and other employee compensation, increased to $800.8 million or 35.0% of net sales for fiscal 2000, from $739.1 or 33.5% of net sales for fiscal 1999. The increase in selling, general and administrative expenses is primarily attributable to the continued sales decline in the wholesale segment, which carries lower selling, general and administrative expenses as a percentage of sales as compared to the retail segment. Additionally, Advance has incurred higher than expected medical claims as well as higher payroll, insurance and depreciation expense, partially offset by a 87 decrease in net advertising costs, as a percentage of sales, as compared to fiscal 1999. Advance has made certain investments in personnel and labor, which it believes is critical to Advance's long-term success. Advance expects this commitment to increase the productivity of store personnel, which will positively impact store profitability and customer service. The increase in depreciation expense is primarily related to the change in an accounting estimate to reduce the depreciable lives of certain property and equipment on a prospective basis. EBITDA (operating income plus depreciation and amortization), as adjusted for non-cash and other employee compensation and integration expenses (fiscal 1999 only), was $161.9 million in fiscal 2000 or 7.1% of net sales, as compared to $121.9 million or 5.5% of net sales in fiscal 1999. Interest expense for fiscal 2000 was $66.6 million or 2.9% of net sales, as compared to $62.8 million or 2.8% of net sales fiscal 1999. The increase in interest expense was a result of an increase in interest rates over fiscal 1999 offset by a decrease in net outstanding borrowings. During fiscal 2000, Advance repurchased $30.6 million of senior subordinated notes on the open market for $25.0 million. Advance's effective income tax rate was 38.8% of pre-tax income for fiscal 2000 and 33.2% of pre-tax loss for fiscal 1999. This increase is due to Advance having pre-tax income in fiscal 2000 and pre-tax loss in fiscal 1999 and the resulting effect of permanent differences between book and tax reporting treatment on total income tax expense (benefit). Due to uncertainties related to the realization of deferred tax assets for certain net operating loss carryforwards, Advance recognized additional valuation allowances of $0.9 million during fiscal 2000. Advance recorded net income of $19.6 million on a consolidated basis for fiscal 2000, as compared to a net loss of $25.3 million for fiscal 1999. In addition to the items previously discussed, Advance also recorded an extraordinary gain related to the early extinguishment of debt of $2.9 million, net of $1.8 million provided for income taxes and $0.9 million for the write- off of associated deferred debt issuance costs. As a percentage of sales, net income for fiscal 2000 was 0.8% as compared to a net loss of 1.1% for fiscal 1999. Fiscal Year 1999 Compared to Fiscal Year 1998 Fiscal 1999 results include a full fiscal year of the operations acquired in the Western merger as compared to fiscal 1998 results, which include Western operating results from November 2, 1998. Net sales for fiscal 1999 were $2,206.9 million, an increase of $986.2 million or 80.8% over net sales for fiscal 1998. Net sales for the retail segment increased $812.8 million or 68.5%. The net sales increase for the retail segment was a result of the Western merger, opening of new stores and a 10.3% increase in comparable store sales over fiscal 1998. The comparable store sales increase was due to maturation of stores opened in 1997 and 1998, increased product availability, continued growth in the commercial sales program and the closure of Parts America and Advance Auto Parts stores in overlapping markets. Net sales for the wholesale segment increased $173.4 million due to the inclusion of the wholesale segment for all of fiscal 1999 following the Western merger in November 1998. During fiscal 1999, Advance opened 99 new stores, reopened three closed locations, relocated 13 stores and closed 52 stores in addition to the stores closed due to relocations (33 of which were Parts America and Advance Auto Parts stores in overlapping markets closed in connection with the Western merger). Also, Advance added 562 stores to commercial delivery, bringing the total to 1,094 stores. As of January 1, 2000, Advance operated 1,617 stores in 38 states, Puerto Rico and the Virgin Islands and supplied approximately 670 independent dealers through the wholesale dealer network. Gross profit for fiscal 1999 was $802.8 million or 36.4% of net sales, compared with $454.6 million or 37.2% of net sales, in fiscal 1998. The decrease in the gross profit percentage resulted largely from increased shrinkage and logistics costs of approximately 70 basis points associated with the Parts America Conversion and the liquidation of certain product lines related to the Merchandise Conversion. Additionally, the lower margins associated with the Western operations which realized a gross profit percentage of 22% as compared to 88 the Advance retail store operation's gross profit percentage of approximately 40%, contributed to the decrease in margin offset slightly by better pricing from vendors in fiscal 1999 compared to fiscal 1998, due to vendor agreements entered into as a result of the Western Merger. The better pricing will continue through the current term of these vendor agreements, generally three to five years. Selling, general and administrative expenses, before expenses associated with the Recapitalization, restructuring, merger integration, private company and non-cash and other employee compensation, increased to $739.1 million or 33.5% of net sales, in fiscal 1999 from $391.9 million or 32.1% of net sales in fiscal 1998. The increase as a percentage of sales was due primarily to increased costs realized by the retail segment related to higher store labor, an increase in advertising and costs associated with Advance's national manager's conference. EBITDA (operating income plus depreciation and amortization, as adjusted for expenses associated with the Recapitalization, merger integration, private company and non-cash and other employee compensation) was $121.9 million for fiscal 1999, or 5.5% of net sales, as compared to $92.6 million or 7.6% of net sales for fiscal 1998. Interest expense in fiscal 1999 was $62.8 million compared to $35.0 million in fiscal 1998. The increase in interest in fiscal 1999 was primarily due to the additional debt incurred in the Western merger, the increase in borrowings under Advance's revolving and delayed draw credit facilities and higher interest rates. Other income in fiscal 1999 was $4.6 million compared to $0.9 million in fiscal 1998. The increase in other income was primarily the result of the Advance Stores segment recognizing the settlement of a dispute between Advance and a vendor due to non-performance by the vendor under a supply agreement. Income tax benefit for fiscal 1999 was $12.6 million as compared to a benefit of $0.1 million in fiscal 1998, with effective tax rates of 33.2% and 3.7%, respectively. In fiscal 1999, Advance recognized federal and state net operating loss carryforwards of approximately $22.1 million. Advance believes it will utilize these through a combination of the reversal of temporary differences, projected future taxable income during the net operating loss carryforward periods and available tax planning strategies. Due to uncertainties related to the realization of deferred tax assets for certain state net operating losses, Advance recorded a valuation allowance of $0.6 million as of January 1, 2000. The amount of deferred income tax assets realizable, however, could change in the near future if estimates of future taxable income are changed. As a result of the above factors, Advance incurred a net loss of $25.3 million in fiscal 1999 as compared to a net loss of $2.2 million in fiscal 1998. As a percentage of net sales, net loss for fiscal 1999 was 1.1% as compared to a net loss of 0.2% for fiscal 1998. Liquidity and Capital Resources As a holding company, Advance Holding relies on dividends from Advance Stores as its primary source of liquidity. Advance Holding does not have, and in the future may not have, any assets other than the capital stock of Advance Stores. The ability of Advance Stores to pay cash dividends to Advance Holding when required is restricted by law and the terms of Advance Stores' debt instruments, including the credit facility and the senior subordinated notes (see below). No assurance can be made that Advance Stores will be able to pay cash dividends to Advance Holding when required to redeem the debentures. Advance Holding believes it and Advance Stores will have sufficient liquidity to fund their debt service obligations, including indebtedness incurred in connection with the Western merger, and implement its growth strategy over the next twelve months. As of July 14, 2001, Advance Holding and Advance Stores had outstanding indebtedness consisting of $90.0 million of senior discount debentures, $169.5 million of senior subordinated notes, borrowings of $285.3 million under the bank credit facility, and $10.0 million of indebtedness under the McDuffie County Development Authority Taxable Industrial Bonds. 89 The debentures accrete at a rate of 12.875%, compounded semi-annually, to an aggregate principal amount of $112.0 million by April 15, 2003. Commencing April 15, 2003, cash interest on the debentures will accrue and be payable semi-annually at a rate of 12.875% per annum. The indenture governing the debentures contains certain covenants that, among other things, limit the ability of Advance Holding and its restricted subsidiaries to incur indebtedness and issue preferred stock, repurchase stock and certain indebtedness, engage in transactions with affiliates, create or incur certain liens, pay dividends or certain other distributions, make certain investments, enter into new businesses, sell stock of restricted subsidiaries, sell assets and engage in certain mergers and consolidations. The senior subordinated notes bear interest at a rate of 10.25%, payable semi-annually, and require no principal payments until maturity. The indenture governing the senior subordinated notes contains certain covenants that limit, among other things, the ability of Advance Stores and its restricted subsidiaries to incur additional indebtedness and issue preferred stock, pay dividends or certain other distributions, issue stock of subsidiaries, make certain investments, repurchase stock and certain indebtedness, create or incur liens, engage in transactions with affiliates, enter into new businesses, sell stock of restricted subsidiaries and restrict Advance Stores from engaging in certain mergers or consolidations and asset sales. The $10.0 million principal amount of the industrial revenue bonds bears interest at a variable rate and will require no principal payments until maturity in November 2002. In addition to its operating cash flow, Advance Stores has access to a credit facility that includes a revolving credit facility with a maximum borrowing capacity (including letters of credit) of $125.0 million, of which none was borrowed, and $17.3 million was outstanding for stand-by letters of credit as of July 14, 2001. In addition, the credit facility includes (i) a Tranche B term loan that was incurred in connection with the Recapitalization, of which $104.2 million was outstanding as of July 14, 2001, (ii) a delayed draw term loan, of which $104.9 million was outstanding as of July 14, 2001, and (iii) a deferred term loan facility that was incurred in connection with the Western merger, of which $76.2 million was outstanding as of July 14, 2001. The term loan facilities, other than the Tranche B term loan, will mature in April 2004, and the Tranche B term loan will mature in October 2006. Required principal payments on the term loan facilities will be approximately $207.1 million in 2004, $60.0 million in 2005 and $12.2 million in 2006. The revolving credit facility will mature in April 2004. The interest rates under the delayed draw facilities and the revolving credit facility are determined by reference to a pricing grid that will provide for reductions in the applicable interest rate margins based on Advance Stores' trailing total debt to EBITDA ratio (as defined in the credit facility). Based upon Advance Stores' operating ratios at July 14, 2001, the margins were 1.75% for Eurodollar borrowings and 0.75% for base rate borrowings. Additionally, at July 14, 2001, the margin under the Tranche B term loan and the deferred term loan facility was 2.50% on a Eurodollar rate and 1.50% on the base rate borrowings. Borrowings under the credit facility are required to be prepaid, subject to certain exceptions, with (a) 50% of defined excess cash flow, (b) 100% of the net cash proceeds of all asset sales or other dispositions of property by Advance Stores and its subsidiaries (including certain insurance and condemnation proceeds), subject to certain exceptions (including exceptions for (i) reinvestment of certain asset sale proceeds within 270 days of such sale and (ii) certain sale-leaseback transactions), (c) 100% of the net proceeds of issuances of debt obligations of Advance Stores and its subsidiaries, and (d) 100% of the net proceeds of issuance of equity of Advance Stores and its subsidiaries. Because increases in net working capital, capital expenditures and debt repayments are deducted in calculating excess cash flow, Advance Stores does not anticipate that the prepayment obligation under the credit facility in respect thereof will have a material effect on its operating strategy. With respect to growth through acquisitions, the operation of this covenant may result in the application of cash resources for prepayments which would require Advance Stores to secure additional equity or debt financing to fund an acquisition, but while no assurance can be given, Advance Stores does not anticipate that this would have a material effect on its ability to finance acquisitions in the future. Advance Stores was required to make mandatory prepayments of $6.2 million in fiscal 2001. 90 The loans under the credit facility are secured by a first priority security interest in substantially all tangible and intangible assets of Advance Stores. Amounts available to Advance Stores under portions of the credit facility are subject to a borrowing base formula, which is based on certain percentages of Advance Stores inventories, and certain debt covenants. As of July 14, 2001, $107.7 million was available under these facilities. Advance Stores intends to use borrowings under the revolver and delayed draw term loans, as well as internally generated funds, for store expansion and funding of working capital, including funding of the restructuring program. The credit facility contains covenants restricting the ability of Advance Stores and its subsidiaries to, among others things, (i) pay dividends on any class of capital stock or make any payment to purchase, redeem, retire, acquire, cancel or terminate capital stock, (ii) prepay, redeem, retire, acquire, cancel or terminate debt, (iii) incur liens or engage in sale- leaseback transactions, (iv) make loans, investments, advances or guarantees, (v) incur additional debt (including hedging arrangements), (vi) make capital expenditures, (vii) engage in mergers, acquisitions and asset sales, (viii) engage in transactions with affiliates, (ix) enter into any agreement which restricts the ability to create liens on property or assets or the ability of subsidiaries to pay dividends or make payments on advances or loans to Advance Stores or other subsidiaries, (x) change the nature of the business conducted by Advance Stores and its subsidiaries, (xi) change the passive holding company status of Advance and (xii) amend existing debt agreements or Advance Stores or Advance's certificate of incorporation, by-laws or other organizational documents. Advance Stores is also required to comply with financial covenants in the credit facility with respect to (a) limits on annual aggregate capital expenditures, (b) a maximum leverage ratio, (c) a minimum interest coverage ratio and (d) a minimum retained cash earnings test. Advance Stores is generally prohibited from paying dividends (including to Advance Holding) except that as long as no defined event of default under the credit facility then exists, Advance Stores will be permitted to pay dividends to Advance Holding in an amount sufficient to cover the cash interest due on the Debentures commencing October 15, 2003. Advance Stores was in compliance with the above covenants under the credit facility as of July 14, 2001. Advance Stores' primary capital requirements have been the funding of its continued store expansion program, store relocations and remodels, inventory requirements, the construction and upgrading of distribution centers, the development and implementation of proprietary information systems, the Western merger and the Carport acquisition. From fiscal 1996 through fiscal 2000, Advance Stores opened 581 stores, seven new PDQ(R)s, six local area warehouses and a Master PDQ(R), completed the Western merger (adding 545 net stores), constructed two new distribution centers and expanded its Roanoke distribution center. Advance Stores has financed its growth through a combination of internally generated funds, borrowings under the credit facility and issuances of equity. Capital expenditures for fiscal year 2000 were $70.6 million as compared to $105.0 million in 1999. The capital expenditures for 1999 included conversion and integration capital expenditures related to the Western merger. In connection with the merger, Advance Stores has secured financing commitments to provide the funds necessary to pay the cash portion of the merger consideration to be paid to Discount shareholders and in-the-money option holders, refinance the existing senior credit facilities of Advance Stores ($285.3 million at July 14, 2001), repay Discount's senior indebtedness and premiums ($210.8 million at August 28, 2001 plus $6.3 million in prepayment premiums), purchase Discount's Gallman distribution facility from the lessor (for a purchase price of approximately $34 million), and pay approximately $35 million in related transaction fees and expenses. In order to finance these obligations and its ongoing operations, Advance Stores has received a binding commitment, subject to customary conditions, for a senior secured credit facility consisting of a $180 million tranche A term loan due 2006, a $305 million tranche B term facility due 2007, and a $160 million revolving credit facility (including a letter of credit subfacility). The credit facility will be jointly and severally guaranteed by Advance and all of Advance Stores' existing and future domestic subsidiaries (including Discount and its subsidiaries) and will be secured by substantially all of Advance Stores' assets, the assets of its existing and future domestic subsidiaries (including Discount and its subsidiaries), as well as the assets of Advance. Upon the closing of the merger, Advance Stores will borrow the entire $485 million of the 91 tranche A and B term loans to fund the merger and anticipates making an initial borrowing of approximately $9 million under the revolving credit facility. In addition, Advance Stores expects to have approximately $18 million in letters of credit outstanding at the closing of the merger, which will reduce availability under the revolving credit facility to approximately $133 million. The balance of the revolving credit facility will be available for working capital and other general corporate purposes. In addition, Advance Stores completed an offering of its senior subordinated notes on October 31, 2001, which resulted in gross proceeds of approximately $186 million, before deducting commissions and expenses related to the offering. The proceeds from that offering are currently being held in escrow until the closing of the merger, at which point the escrowed funds will be released to provide a portion of the funds needed to complete the merger. The notes are unsecured obligations of Advance Stores and will mature in 2008. The indenture governing the notes contains affirmative and negative covenants applicable to Advance Stores and its subsidiaries that are customary for these types of securities. Advance Stores' new Advance Auto Parts stores, if leased, require capital expenditures of approximately $120,000 per store and an inventory investment of approximately $150,000 per store, net of vendor payables. A portion of the investment in inventory is held at a distribution facility. Pre-opening expenses, consisting primarily of store set-up costs and training of new store employees, average approximately $25,000 per store and are expensed when incurred. Advance's future capital requirements will depend on the number of new stores Advance opens and the timing of those openings within a given fiscal year. Advance Stores opened 140 new stores during fiscal 2000 and anticipates opening approximately 115 to 130 new stores though internal growth or strategic acquisitions (excluding the Discount acquisition) during fiscal 2001, of which 53 have been opened or acquired as of July 14, 2001. In addition, Advance anticipates opening approximately 125 new stores through internal growth or strategic acquisitions during 2002. Advance expects its capital expenditures to be approximately $80 million in 2001 (excluding the Carport and Discount acquisitions). These amounts will relate to the new store openings, as well as to the upgrade of Advance's information systems (including Advance's new POS and EPC system), and to remodels and relocations of existing stores. In 2002, Advance anticipates that its capital expenditures will be approximately $116 million, of which approximately $31 million will involve conversion and other integration related expenditures. Historically, Advance Stores has negotiated extended payment terms from suppliers that help finance inventory growth, and Advance Stores believes that it will be able to continue financing much of its inventory growth through such extended payment terms. Advance Stores anticipates that inventory levels will continue to increase primarily as a result of new store openings. For the twenty-eight weeks ended July 14, 2001, net cash provided by operating activities was $102.6 million. Of this amount, $21.4 million was provided by net income. Depreciation and amortization provided an additional $37.1 million, amortization of deferred debt issuance costs and bond discount provided $7.6 million, and $36.5 million was provided as a result of net increase in working capital and other operating activities. Net cash used for investing activities was $51.1 million and was comprised of capital expenditures and the purchase of net assets related to the Carport acquisition. Net cash used in financing activities was $49.9 million and was comprised primarily of payments on the existing credit facilities. In fiscal 2000, net cash provided by operating activities was $104.0 million. This amount consisted of $19.6 million in net income, depreciation and amortization of $66.8 million, amortization of deferred debt issuance costs and bond discount of $13.1 million and a decrease of $4.5 million in net working capital and other operating activities. Net cash used for investing activities was $65.0 million and was comprised primarily of capital expenditures. Net cash used in financing activities was $43.6 million and was comprised primarily of net repayments of long-term debts. In fiscal 1999, net cash used in operating activities was $21.0 million. This amount consisted of a $25.3 million net loss, offset by depreciation and amortization of $58.1 million and amortization of deferred 92 debt issuance costs and bond discount of $12.2 million, and an increase of $66.0 million in net working capital and other operating activities. Net cash used for investing activities was $113.8 million and was comprised primarily of capital expenditures of $105.0 million and cash consideration of $13.0 million in the Western merger. Net cash provided by financing activities was $121.3 million and was comprised primarily of net borrowings. In fiscal 1998, net cash provided by operating activities was $44.0 million. This amount consisted of a $2.2 million net loss, offset by depreciation and amortization of $30.0 million and amortization of deferred debt issuance costs and bond discount of $7.7 million, and a decrease of $8.5 million of net working capital and other operating activities. Net cash used for investing activities was $230.7 million and was comprised primarily of capital expenditures of approximately $65.8 million and cash consideration of approximately $171.0 million in the Western merger. Net cash provided by financing activities was $207.3 million and was comprised primarily of net borrowings and issuance of equity. Seasonality Advance's business is somewhat seasonal in nature, with the highest sales occurring in the spring and summer months. In addition, Advance's business can be affected by weather conditions. While unusually heavy precipitation tends to soften sales as elective maintenance is deferred during such periods, extremely hot and cold weather tends to enhance sales by causing automotive parts to fail. Quantitative and Qualitative Disclosures About Market Risks Advance Holding currently utilizes no material derivative financial instruments that expose it to significant market risk. Advance Holding is exposed to cash flow and fair value risk due to changes in interest rates with respect to its long-term debt. While Advance Holding cannot predict the impact interest rate movements will have on its debt, exposure to rate changes is managed through the use of fixed and variable rate debt. Advance Holding's future exposure to interest rate risk decreased during the first and second quarters of fiscal year 2001 and fiscal year 2000 due to decreased interest rates and reduced variable rate debt. Advance Holding's fixed rate debt consists primarily of outstanding balances on the debentures and senior subordinated notes. Advance Holding's variable rate debt relates to borrowings under the credit facility and the industrial revenue bonds. Advance Holding's variable rate debt is primarily vulnerable to movements in the LIBOR, Prime, Federal Funds and Base CD rates. The table below presents principal cash flows and related weighted average interest rates on Advance Holding's long-term debt at July 14, 2001 by expected maturity dates. Expected maturity dates approximate contract terms. Fair values included herein have been determined based on quoted market prices. Weighted average variable rates are based on implied forward rates in the yield curve at July 14, 2001. Implied forward rates should not be considered a predictor of actual future interest rates.
Fair Fiscal Fiscal Fiscal Fiscal Fiscal Market 2001 2002 2003 2004 2005 Thereafter Total Value ------ ------- ------ -------- ------- ---------- -------- -------- (dollars in thousands) Long-term debt: Fixed rate............ $ -- $ -- $ -- $ -- $ -- $281,450 $281,450 $245,581 Weighted average interest rate........ -- -- -- -- -- 11.3% 11.3% Variable rate......... $ -- $12,000 $4,000 $207,140 $60,000 $ 12,159 $295,299 $295,299 Weighted average interest rate........ 5.9% 6.3% 7.6% 8.4% 8.7% 8.6% 6.9%
93 Recent Accounting Pronouncements In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses accounting and reporting for all business combinations and requires the use of the purchase method for business combinations. SFAS No. 141 also requires recognition of intangible assets apart from goodwill if they meet certain criteria. SFAS No. 142 establishes accounting and reporting standards for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangibles with indefinite useful lives are no longer amortized but are instead subject to at least an annual assessment for impairment by applying a fair-value based test. SFAS No. 141 applies to all business combinations initiated after June 30, 2001. SFAS No. 142 is effective for existing goodwill and intangible assets beginning on December 30, 2001. SFAS No. 142 is effective immediately for goodwill and intangibles acquired after June 30, 2001. Although Advance Holding is currently evaluating the impact of SFAS Nos. 141 and 142, management does not expect that the adoption of these statements will have a material impact on existing goodwill or intangibles. For the twenty-eight week period ended July 14, 2001, Advance Holding had amortization expense of approximately $150,000 related to existing goodwill. Such amortization will be eliminated upon adoption of SFAS No. 142. Advance Holding had no goodwill expense during the fiscal years ended December 30, 2001, January 1, 2000 and January 2, 1999. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes accounting standards for recognition and measurement of an asset retirement obligation and an associated asset retirement cost and is effective for fiscal years beginning after June 15, 2002. Advance does not expect SFAS No. 143 to have a material impact on its financial statements. 94 Principal Stockholders of Advance Holding A beneficial owner of a security includes any person who directly or indirectly has or shares voting power and/or investment power with respect to such security or has the right to obtain such voting power and/or investment power within 60 days. Except as otherwise noted, each designated beneficial owner in the table below has sole voting power with respect to the shares beneficially owned by such person. The following table sets forth certain information, as of October 25, 2001 with respect to the beneficial ownership of common stock of Advance Holding by: . each person who beneficially owns more than 5% of such shares; . each of the executive officers named in the summary compensation table and certain other executive officers; . each member of the board of directors of Advance Holding; and . all executive officers and directors of Advance Holding as a group.
Amount of Beneficial Percent of Name Ownership Class ---- ---------- ---------- Freeman Spogli & Co. LLC(1).......................... 11,022,652 39.0% John M. Roth(1).................................... -- Mark J. Doran(1)................................... -- Ronald P. Spogli(1)................................ -- WA Holding Co.(2).................................... 11,474,606 40.6% Jeffrey B. Conner(4)............................... -- Ripplewood Partners, L.P. and affiliates(3).......... 2,891,795 10.2% Timothy C. Collins(3).............................. -- William L. Salter(4)................................. 5,000 * Nicholas F. Taubman(5)............................... 1,398,632 4.1% Arthur Taubman Trust dated July 13, 1964(6).......... 1,148,633 3.2% Garnett E. Smith(8)(9)............................... 492,666 1.7% Lawrence P. Castellani(7)(8)(9)...................... 535,000 1.8% Jimmie L. Wade(8)(9)................................. 55,334 * David R. Reid(8)(9).................................. 48,667 * Paul W. Klasing(8)(9)................................ 46,334 * Eric M. Margolin..................................... 14,300 * S. Lynn Stevens(8)(9)................................ 40,000 * Jeffrey T. Gray...................................... 21,500 * Robert E. Hedrick.................................... 14,300 * All directors and officers as a group (16 individuals)........................................ 29,209,419 98.9%
-------- * Less than 1% (1) 11,022,652 shares of common stock of Advance Holding are held of record by FS Equity Partners IV, L.P., or FSEP IV. As general partner of FSEP IV, FS Capital Partners LLC has the sole power to vote and dispose of the shares owned by FSEP IV. Messrs. Doran, Roth, Spogli, Bradford M. Freeman, Todd W. Halloran, Jon D. Ralph, Charles P. Rullman, J. Frederick Simmons and William M. Wardlaw are the managing members of FS Capital Partners LLC, and Messrs. Doran, Freeman, Halloran, Ralph, Roth, Rullman, Simmons, Spogli and Wardlaw are the members of Freeman Spogli & Co. LLC, and as such may be deemed to be the beneficial owners of the shares of common stock of Advance Holding and rights to acquire common stock of Advance Holding owned by FSEP IV. Freeman Spogli & Co. and its members (footnotes continued on the following page) 95 have, in addition, sole power to vote 2,891,795 shares of common stock of Advance Holding owned of record by Ripplewood Partners, L.P. and Ripplewood Advance Auto Parts Employee Fund I L.L.C. pursuant to an irrevocable proxy delivered to Freeman Spogli & Co. under the terms of the stockholders agreement. Such irrevocable proxy will expire upon an initial public offering by Advance Holding (or by Advance Auto Parts, Inc. following the merger) (the issuance of shares in the merger will not be considered an initial public offering for this purpose). Freeman Spogli & Co. neither has shared nor sole power to dispose of shares held by Ripplewood Partners or the Ripplewood employee fund. The business address of Freeman Spogli & Co., FSEP IV, FS Capital, and Messrs. Freeman, Spogli, Wardlaw, Simmons, Roth, Rullman, Ralph, Halloran and Doran is 11100 Santa Monica Boulevard, Suite 1900, Los Angeles, California 90025. (2) 11,474,606 shares of common stock of Advance Holding are held of record by WA Holding Co., or WAH, a wholly owned subsidiary of Sears Roebuck & Co. As the sole stockholder of WAH, Sears has the sole power to vote and dispose of the shares owned by WAH. As Vice President, Business Development of Sears, Mr. Conner has the power to direct the voting of the shares of common stock of Advance Holding held by WAH, and as such may be deemed to be the beneficial owner of the shares of common stock of Advance Holding owned by WAH. The business address of WAH is 3333 Beverly Road, Hoffman Estates, Illinois 60179. (3) 2,763,110 shares of common stock of Advance Holding are held of record by Ripplewood Partners, and 128,685 shares of common stock of Advance Holding are held of record by the Ripplewood employee fund. Ripplewood Holdings, L.L.C. is the sole general partner of Ripplewood Partners and the sole managing member of the Ripplewood employee fund and, therefore, has the sole power to dispose of the shares owned by Ripplewood Partners or the Ripplewood employee fund. Until an initial public offering by Advance Holding (or by Advance Auto Parts, Inc. following the merger) pursuant to the stockholders agreement and an irrevocable proxy required by the terms thereof, Freeman Spogli & Co. has sole voting power over all of the shares of common stock of Advance Holding (or of Advance Auto Parts, Inc. following the merger) held by Ripplewood Partners and the Ripplewood employee fund. Mr. Collins is the Senior Managing Director and Chief Executive Officer of Ripplewood Holdings L.L.C. and as such may be deemed to be the beneficial owner of the shares of common stock of Advance Holding and the rights to acquire common stock of Advance Holding owned by Ripplewood Partners and the Ripplewood employee fund. The business address of Ripplewood Holdings L.L.C., Ripplewood Partners, the Ripplewood employee fund, and Mr. Collins is 1 Rockefeller Plaza, 32nd Floor, New York, New York 10020. (4) The business address of Messrs. Salter and Conner is 3333 Beverly Road, Hoffman Estates, Illinois 60179. (5) Includes 250,000 shares subject to immediately exercisable options. Mr. Taubman's business address is 5673 Airport Road, Roanoke, Virginia 24012. (6) Includes 250,000 shares subject to immediately exercisable options. The trustees of the Arthur Taubman Trust dated July 13, 1964 are Eugenia Taubman, who is the spouse of Nicholas F. Taubman, Grace W. Taubman, who is his mother, and First Premier Bank. The business address of the trust is 5673 Airport Road, Roanoke, Virginia 24012. (7) Includes an aggregate of 11,890 shares held by Mr. Castellani's children. (8) Includes 448,600 shares, which have been acquired by Messrs. Smith, Castellani, Klasing, Reid, Wade, Gray, Margolin, Stevens and Hedrick pursuant to the stock subscription plans. (9) Includes shares of common stock of Advance Holding subject to options beneficially owned by the following persons and exercisable within 60 days of October 25, 2001: Mr. Smith--242,666 options; Mr. Castellani--350,000 options; Mr. Klasing--26,334 options; Mr. Reid--28,667 options; Mr. Wade-- 30,334 options; Mr. Margolin--no options; Mr. Gray--11,333 options; Ms. Stevens--20,000 options; Mr. Hedrick--no options; and Mr. Salter--5,000 options. 96 Related Party Transactions of Advance Affiliated Leases Advance leases its Roanoke, Virginia distribution center, an office and warehouse facility, two warehouses, 20 of its stores and three former stores from Nicholas F. Taubman or members of his immediate family, and its corporate headquarters from Ki, L.C., a Virginia limited liability company owned by two trusts for the benefit of a child and a grandchild of Mr. Taubman. Rents for the affiliated leases may be slightly higher than rents for non-affiliated leases, but Advance does not believe the amount of such difference to be material. In addition, terms of the affiliated leases may be more favorable to the landlord than those contained in leases with non-affiliates. For example, the rent payable during the option term is not fixed or required to be commensurate with prevailing market rents then in effect. Instead, rent during the option term is subject to negotiation between the landlord and tenant. The leases also provide that the tenant, and not the landlord, is responsible for structural maintenance. However, in connection with the Recapitalization, certain other terms of the leases with affiliates (including provisions relating to assignment, damage by casualty and default cure periods) were amended so that they would be no less favorable to Advance than non-affiliated leases. All affiliated leases are on a triple net basis. Lease expense for affiliated leases was $2.9 million for fiscal 1998 and $3.3 million for each of fiscal 1999 and 2000. Three Western Auto stores in Puerto Rico are on the premises of Sears stores and the buildings are subleased from Sears. The rental rates were established prior to the Western merger by arm's-length negotiation between Advance and Sears, and Advance believes that the rent and terms of the subleases reflect market rates and terms at the time of the Western merger. During fiscal 1999 and 2000, Advance paid Sears approximately $681,000 and $660,000, respectively, for the use of these facilities. Stockholders Agreement Mr. Taubman and the Arthur Taubman Trust Dated July 13, 1964, Freeman Spogli & Co., Ripplewood Partners, L.P. and Ripplewood Advance Auto Parts Employee Fund I L.L.C., WAH and Advance Holding have entered into a stockholders agreement that will continue in force following the merger as to the stock and options of Advance Auto Parts, Inc. Under the stockholders agreement, Freeman Spogli & Co., the Ripplewood entities, WAH and Mr. Taubman and the Taubman Trust have the right to purchase their pro rata share of certain new issuances of securities, including capital stock, by Advance Holding (and by Advance Auto Parts, Inc. following the consummation of the merger). Prior to an initial public offering, any transfers of common stock of Advance Holding (and as to Advance common stock following consummation of the merger) are subject to rights of first refusal in favor of (i) Freeman Spogli & Co. and WAH on a pro rata basis, in the case of a transfer by Ripplewood, (ii) WAH, in the case of a transfer by Freeman Spogli & Co. and (iii) Freeman Spogli & Co., in the case of a transfer by WAH. The stockholders agreement further provides tag-along rights such that (i) upon transfers of common stock of Advance Holding (and as to Advance common stock following consummation of the merger) by Freeman Spogli & Co. (excluding transfers to affiliates), Mr. Taubman, the Taubman Trust, the Ripplewood entities and WAH will have the right to participate in such sales on a pro rata basis, (ii) upon transfers of common stock of Advance Holding (and as to Advance common stock following the merger) by WAH (excluding transfers to affiliates of WAH), Freeman Spogli & Co., Mr. Taubman, the Taubman Trust, and the Ripplewood entities will have the right to participate in such sales on a pro rata basis and (iii) upon transfers of common stock of Advance Holding (and to Advance common stock, following the merger) by the Ripplewood entities (excluding transfers to their affiliates), Freeman Spogli & Co. will have the right to participate in such sales on a pro rata basis, and if Freeman Spogli & Co. exercises such right, Mr. Taubman, the Taubman Trust, and WAH will have the right to participate in such sales on a pro rata basis. In addition, if Freeman Spogli & Co. sells all of its holdings of common stock of Advance Holding (and as to Advance common stock after consummation of the merger), Ripplewood, Mr. Taubman and the Taubman Trust will be obligated to sell all of their shares of common stock of Advance Holding (and as to Advance common stock after consummation of the merger) at the request of Freeman Spogli & Co. Without the consent of the majority of the other stockholders, Sears will not sell WAH to a third party so as to dispose of its indirect interest in Advance. 97 The stockholders agreement further provides that the parties will vote at each annual meeting of Advance Holding (and of Advance Auto Parts, Inc. following the consummation of the merger) to elect to the board of directors: the chief executive officer of Advance, three nominees of Freeman Spogli & Co., three nominees of WAH, one nominee of Ripplewood and Mr. Taubman. Certain transfers of common stock of Advance Holding (and as to Advance common stock after consummation of the merger) by either Freeman Spogli & Co. or WAH will reduce the number of directors such parties are entitled to nominate. Ripplewood has granted Freeman Spogli & Co. an irrevocable proxy to vote Ripplewood's stock in Advance Holding (and in Advance Auto Parts, Inc. following the consummation of the merger) on all matters, expiring upon an initial public offering of common stock by Advance (the issuance of common stock in the merger is not an initial public offering), but Freeman Spogli & Co. will nominate one director designated by Ripplewood. The Ripplewood director will agree to vote with the Freeman Spogli & Co. directors on all matters prior to an initial public offering of common stock by Advance. Pursuant to the stockholders agreement, without the approval of Mr. Taubman, Advance Holding (Advance following consummation of the merger) may not (i) issue any capital stock for consideration at less than fair market value, unless the capital stock is issued in a financing transaction fair to and in the best interests of Advance Holding (and of Advance following consummation of the merger), subject to certain specified exceptions, (ii) enter into any transaction with any affiliate of Freeman Spogli & Co., Ripplewood, or Sears, except on terms no less favorable to Advance Holding (Advance following consummation of the merger) than are available from an unaffiliated party, or (iii) amend the articles of incorporation or bylaws of Advance Holding (and of Advance following consummation of the merger) or the stockholders agreement in a manner which would adversely affect the rights and obligations of Mr. Taubman, subject to certain specified exceptions. At the closing of the merger, the stockholders agreement will be amended to provide for the election of Peter J. Fontaine, Discount's current Chairman and Chief Executive Officer, as a member of the board of directors of Advance and provide entities that Mr. Fontaine controls with the right to participate in certain demand registrations initiated by others and unlimited piggyback registrations with respect to the shares of Advance common stock received in the merger, and to obligate Mr. Fontaine and such entities to agree, subject to certain exceptions, not to sell such shares for certain time periods following certain public offerings by Advance. Options Granted to Mr. Taubman and the Taubman Trust In connection with the Recapitalization, Advance Holding entered into an option agreement with Mr. Taubman and the Taubman Trust and granted immediately exercisable options to purchase 250,000 shares of common stock of Advance Holding (which will be as to Advance common stock after consummation of the merger) to each of Mr. Taubman and the Taubman Trust. The options have an initial exercise price of $10.00, with the exercise price increasing by $2.00 on each anniversary of the Recapitalization. Both the exercise price and the number of shares which may be purchased pursuant to the options, are subject to certain adjustments. The options will expire if not exercised by the seventh anniversary of the Recapitalization. Shares received upon exercise of all or any part of the option by Mr. Taubman or the Taubman Trust will be subject to the stockholders agreement. Registration Rights Freeman Spogli & Co., WAH, the Ripplewood entities, Mr. Taubman and the Taubman Trust, under the stockholders agreement, have registration rights with respect to approximately 27.4 million shares of the Advance Holding common stock that they hold. Under the stockholders agreement, beginning 180 days after the consummation of an initial public offering of Advance Holding's stock, these stockholders may require Advance Holding to register for resale under the Securities Act their shares of common stock. The merger is not an initial public offering for this purpose. These registration rights include the following provisions: Demand Registration Rights. Advance Holding has granted three demand registrations to Freeman Spogli & Co. and WAH, two demand registrations to Mr. Taubman and the Taubman Trust, and one demand registration to Ripplewood. 98 Piggyback Registration Rights. All holders of shares with demand registration rights also have unlimited piggyback registration rights. Other Rights. Advance Holding granted WAH the right, beginning 180 days after the consummation of an initial public offering, to distribute its shares of common stock to stockholders of Sears, Roebuck & Co. Expenses. Advance Holding is responsible for paying all registration expenses, excluding underwriting discounts and commissions. Indemnification. Advance Holding has agreed to indemnify Freeman Spogli & Co., WAH, Ripplewood, Mr. Taubman and the Taubman Trust, and the control person of each of these against certain liabilities under the Securities Act. At the closing of the merger, the stockholders agreement will be amended to grant to Peter Fontaine, and the entities he controls, unlimited piggyback registration rights. The obligations of Advance Holding will be binding on Advance Auto Parts, Inc. after the merger. In connection with the purchase of an aggregate of $6 million principal amount of senior subordinated notes of Advance Stores by an affiliate of Mr. Taubman and an affiliate of the Taubman Trust in Advance Stores' October 31, 2001 notes offering, Advance Stores granted such affiliates one demand registration right for the filing of a shelf registration statement with respect to those notes. See "The Merger--Financing Commitments." Indemnification Agreements Advance has offered indemnification agreements to its directors since the Recapitalization. Certain Payments and Loans In connection with the Recapitalization, a portion of the shares of common stock and all of the shares of preferred stock of Advance Holding then issued and outstanding were converted into the right to receive in the aggregate approximately $351.0 million in cash and certain options to purchase shares of common stock of Advance Holding. In addition, Freeman Spogli & Co. and Ripplewood, stockholders of Advance Holding, received collectively a $5.0 million fee for arranging the financing, performing advisory and consulting services and negotiating the Recapitalization, and Freeman Spogli & Co., Ripplewood and Mr. Taubman and the Taubman Trust received collectively a $3.5 million fee for performing similar services with respect to the Western merger. In connection with the Recapitalization, certain employees of Advance Holding, including the executive officers, received an aggregate of approximately $11.5 million in bonuses, with Mr. Smith receiving $7.0 million and Messrs. Reid, Wade and Klasing and Ms. Stevens receiving $150,000 each. In September 2001 Advance loaned Garnett E. Smith, Vice Chairman of the Board, $1.3 million. This loan is evidenced by a full recourse promissory note bearing interest at prime rate, with such interest payable annually, and due in full in five years from its inception. Payment of the promissory note is secured by a stock pledge agreement that grants Advance a security interest in all shares of Advance common stock acquired by Mr. Smith under Advance's stock subscription plan. Other Transactions with Sears On November 2, 1998, Western merged into a subsidiary of Advance Stores. In the Western merger, WAH was issued 11,474,606 shares of common stock of Advance Holding, representing approximately 40.6% of the outstanding common stock of Advance Holding. In connection with the Western merger, WAH became entitled, under the stockholders agreement described above, to nominate three directors to the board of directors of Advance Holding. At December 30, 2000, Jeffrey N. Boyer, Jeffrey B. Conner and William L. Salter served on the board of directors as WAH nominees. Mr. Boyer has since resigned from the Board of Directors. 99 In connection with the Western merger, Western entered into agreements with Sears in order to continue to obtain supplies of certain products bearing trademarks owned by Sears for the wholesale segment and the service stores for three years. Pursuant to these agreements, Western purchased directly from the manufacturers approximately $9.2 million, $13.5 million and $6.0 million of these products in fiscal 2000, 1999 and fiscal 1998, respectively, and Advance believes that Sears received fees in association with such sales. The prices paid per unit for the products sold in the Western Auto stores were determined prior to the Western merger by arm's-length negotiation between Advance and Sears. In connection with the Western merger, Western entered into agreements with Sears and its affiliates whereby consumers can make retail purchases at the Western Auto retail stores and the independent dealer stores supplied by the wholesale segment using the Sears credit card and other Western private label credit cards. The Sears affiliates are paid a discount fee on each retail transaction that is competitive with the fees paid by Western and Advance to third party credit card providers such as Visa, MasterCard and American Express. Under this agreement, Western incurred approximately $405,000, $348,000 and $657,000 in discount fees in fiscal 2000, 1999 and fiscal 1998, respectively. In addition, a portion of a service store and certain Western employees were leased to Sears during fiscal 1999 and 1998, for use in Sears' administration of the credit card program. The lease payments, which aggregated approximately $2.3 million and $697,000 in fiscal 1999 and fiscal 1998, respectively, are intended to reimburse Advance for its expense in connection with the facility and the employees. The leasing arrangement was terminated prior to fiscal 2000. In connection with the Western merger, Sears provided certain services, including payroll and accounts receivable, to effect an orderly transition of Western Auto Supply Company from a subsidiary of Sears to a subsidiary of Advance Stores. As of January 1, 2000, these services were transitioned to Advance. Pursuant to this arrangement, Advance incurred $887,000 and $844,000 for services performed by Sears for Advance in fiscal 1999 and fiscal 1998, of which $844,000 was accrued at January 2, 1999. As of January 1, 2000, all amounts under this arrangement had been paid. During fiscal 1999, Advance signed an agreement with Sears Logistic Systems, an affiliate of Sears, to provide Advance with billing administration services related to certain courier firms used by Advance. Sears Logistic Systems manages the invoice processing procedure and bills Advance for the courier services provided by the outside firm plus a four percent administration fee. During fiscal 1999, Advance paid Sears Logistic Systems approximately $62,000. Under the terms of an insurance program established by a Sears subsidiary on behalf of Western prior to the Western merger, with respect to certain insurable losses where Advance may otherwise have a retention obligation or deductible under the applicable insurance policy providing coverage, Advance will be entitled to be reimbursed by Sears for its losses. No material payments were made under the insurance program in fiscal 1999 or fiscal 1998. Advance received approximately $1.5 million during fiscal 2000 for a claim processed under the insurance program. In connection with the Western merger, Sears and Advance entered into an agreement under which Advance may be given a priority position as a local supplier to up to approximately 250 Sears Auto Centers or National Tire & Battery stores that are located near Advance stores. Under this agreement, upon request from a Sears Auto Center or National Tire Store, Advance will deliver parts and charge a price negotiated at arm's-length prior to the Western merger between Advance and Sears. In addition, if the volume of activity under this agreement meets certain agreed-upon thresholds, Sears will receive rebates on its purchases. The supply arrangement was phased in by Advance and Sears during late fiscal 1998; therefore, no material purchases were made by Sears in fiscal 1998. During fiscal 2000 and 1999, Advance sold $7.5 million and $5.3 million net, respectively, of merchandise to Sears under the supply agreement. In connection with the Western merger, Sears arranged to buy from Advance certain products in bulk for its automotive centers, at cost plus a set handling fee. In fiscal 1998, Advance shipped approximately $2.1 million in products to Sears. During the first quarter of fiscal 1999, Advance made final shipments to Sears under this arrangement totaling $530,000. 100 INFORMATION CONCERNING DISCOUNT Discount's Business General Discount Auto Parts, Inc., which operates directly and through its wholly owned subsidiaries, is one of the Southeast's leading specialty retailers and suppliers of automotive replacement parts, maintenance items and accessories to both DIY consumers and DIFM consumers, or professional mechanics and service technicians, based on store count. As of August 28, 2001, Discount operated a chain of 668 Discount Auto Parts stores, with 436 stores located throughout Florida, 118 stores in Georgia, 46 stores in Louisiana, 42 stores in Mississippi, 19 stores in Alabama, and seven stores in South Carolina. As of August 28, 2001, 168 of the 668 stores provided commercial delivery service. Each Discount Auto Parts store carries an extensive line of brand name replacement "hard" parts, such as starters, alternators, brake pads, brake shoes and water pumps, for domestic and imported cars, vans and light trucks, as well as brand name maintenance items and accessories. Discount is not in the business of selling tires or performing automotive repairs or installations. Discount has achieved revenue growth in each of its five latest fiscal years. Net sales have increased to $661.7 million in fiscal 2001 from $405.2 million in fiscal 1997. However, over the same period, income from operations has fluctuated, increasing from $47.2 million in fiscal 1997 to $57.1 million in fiscal 2000, but decreasing to $42.2 million in fiscal 2001. The number of stores has increased to 666 as of the end of fiscal 2001 from 400 at the end of fiscal 1997. Discount has sought to implement clear and effective operating and growth strategies. Discount's operating strategies include building a highly knowledgeable and motivated work force, developing customers for a lifetime, attaining leading market share in each of its existing markets and utilizing advanced information systems. With respect to growth strategies, Discount has emphasized new store openings, and has sought to standardize new store formats and continually improve merchandising concepts. Effectively executing these strategies has helped Discount provide customers with superior service, value and parts selection at conveniently located, well-designed stores. The continued implementation and expansion of a commercial delivery program has also become an important part of Discount's growth strategy. In 1971, Discount was founded with a single 800 square foot store in Winter Haven, Florida by Herman Fontaine, his son, Denis L. Fontaine, and other members of the Fontaine family. Since Discount's inception, members of the Fontaine family, including Herman Fontaine, Denis L. Fontaine and Peter J. Fontaine, managed Discount and played key roles in formulating and carrying out its business strategies. Herman Fontaine served as President from 1972 until 1978 and as the Chairman of the Board from 1972 until 1986, at which time he became Chairman Emeritus. Although he no longer serves as an executive officer or director, Discount continues to have the benefit of Herman Fontaine's advice and counsel. Denis L. Fontaine assumed the roles of Chief Executive Officer and President in 1978 and held such positions until his death in June 1994. Peter J. Fontaine, who has been with Discount for over 26 years and previously served as Chief Operating Officer, was elected as President and Chief Executive Officer in 1994 and continues to hold the position of Chief Executive Officer. William C. Perkins, who had been with Discount for over 16 years and served as Chief Financial Officer from 1992 to 1996, assumed the position of Chief Operating Officer in 1994 and President on February 1, 1997, holding such positions until he left Discount in January 2001. Operating Strategies Building the Team Guided by the principle "First build the team, then the team will build the business," Discount has made a commitment to building and retaining employees who are highly motivated and knowledgeable team players. Discount provides extensive formal and on-the-job team-building and training programs that focus on providing superior customer service, automotive parts knowledge, selling skills, store operational procedures and personal 101 development. Financial incentives and stock ownership are also an important element of Discount's team building focus. As a result of this employee-focused strategy, Discount believes it has one of the highest rates of sales per employee in its industry. In addition, management believes that Discount has one of the lowest employee turnover rates in the industry. The low employee turnover rate tends to lead to superior customer service and product knowledge, which are considered to be key factors in attracting customers in the DIY and DIFM automotive industry. The CEO, Peter Fontaine, has built a dedicated and knowledgeable management team. The management team has significant experience in all aspects of Discount's operations. There are 59 members in the senior management team, including 39 Division Managers. These team members have an average of 13 years of experience with Discount. The team is profit-oriented and growth-minded and has a solid understanding of the automotive aftermarket industry based on their many years of experience. Developing Customers for a Lifetime Discount believes that the attributes most valued by DIY consumers are superior customer service, convenient and accessible neighborhood locations, broad product selection and competitive everyday low prices. In an effort to develop DIY customers for a lifetime, Discount is committed to developing, maintaining and improving these key value drivers. Superior Customer Service Customer service has enabled Discount to develop a loyal customer base and become a market leader. Customer service is enhanced by in-store computerized catalogs to assist in the selection of parts, liberal return policies, and lifetime warranties on certain parts. Most stores also offer free testing of starters, alternators, and batteries, battery charging, installation assistance for batteries and windshield wipers, and the use of specialty tools for do-it- yourself installation. Discount's special order program is designed with the goal of assuring the broadest availability of its merchandise at each of Discount's stores. The special order program provides Discount on-line accesses to numerous third party warehouse distributors with which Discount has relationships. If merchandise is unavailable at a particular store or one of Discount's express warehouses, Company team members can order an item on-line and generally have it available for the customer within 24 hours. Discount's stores are open seven days a week, 363 days per year, typically from 8 a.m. to 9 p.m. with some higher volume stores having extended hours in order to better serve the DIY customer. Convenient and Accessible Neighborhood Locations Locating stores at sites that are convenient and accessible to its customers is an essential part of Discount's customer service philosophy. Discount believes that over 50% of its customers view convenience and accessibility as the number one driver in choosing an automotive parts store. Given this customer priority, one of Discount's strategies has been to cluster stores in neighborhood locations in order to offer its customers increased convenience and accessibility. Discount's strategy is generally to draw customers from a 1.5 to 2 mile radius while many of its competitors attempt to draw customers from a larger radius. Management believes Discount's relatively low cost structure gives it the ability to profitably operate stores in close proximity, thereby offering customers more convenience than most of its competitors. In addition, Discount attempts to build new stores in locations that are easily accessible from a number of major roadways. Broad Product Selection Discount offers a wide selection of automotive replacement parts, maintenance items and accessories designed to cover a broad range of specific vehicle applications. Depending on the store format and including 102 the inventory at the Parts Express warehouses, a typical Discount Auto Parts store generally carries between approximately 14,000 and 42,000 SKU's. Discount's operating strategy emphasizes automotive replacement hard parts. Over the past several years, in order to support this strategy, Discount has generally continued to substantially increase the number of replacement hard parts carried in its stores. Replacement hard parts sold at Discount's stores include brake shoes, brake pads, belts, hoses, starters, alternators, batteries, shock absorbers, struts, CV half shafts, carburetors, transmission parts, clutches, electronic components, suspension, chassis and engine parts. Discount also offers complete engines that are stocked at Parts Express warehouses and its Lakeland, Florida distribution center. Other products include maintenance items, such as oil, antifreeze, brake and power steering fluids, engine additives, car paints, protectants and waxes; and accessories, such as floor mats, seat covers and car stereos and speakers. One of Discount's strategies is to carry a wide selection of different automotive replacement parts as opposed to having multiple brand names and SKUs for any one part. As a result, Discount believes that its product selection satisfies a broader range of DIY demands with fewer SKUs than the product selection of its competitors. Discount emphasizes brand names and other high quality products among broad product lines. Price Leadership Discount utilizes an everyday low price strategy with prices that are generally at or below those of its competitors in the market area served by each store. Discount's depot stores generally offer even lower pricing than its mini-depot stores. Along with everyday low prices, Discount often runs special promotional pricing on selected products. Discount's name "Discount Auto Parts" reinforces Discount's pricing strategy. Discount promotes both its name and its pricing strategy through newspaper, direct mail, radio and television advertisements, and through in-store promotional signage and displays. Most of Discount's stores have a freestanding highly visible pole or marquee sign promoting special prices and customer service programs. In an effort to offer the lowest price to its customers, Discount continually seeks to reduce the purchasing and distribution costs of its merchandise. Discount achieves such cost reductions by working with its vendors to secure product cost savings and other benefits, making volume purchases, achieving efficiencies in its distribution system, and achieving higher productivity at the store level. Discount believes its ability to control costs, and thereby maintain price leadership, is a key advantage over its competitors. In March 2000, Discount engaged the firm of Cap Gemini Ernst & Young to assist it in a comprehensive supply chain review. The review, which included evaluation of ways to lower distribution costs, reduce total inventory, improve inventory turns and improve overall gross margins, was completed in the fourth quarter of fiscal 2001. Discount has begun to implement and continues its implementation of certain recommendations that developed from this review. Leading the DIY Market Discount's goal is to be the leading DIY specialty retailer of automotive parts and accessories in each of its existing markets and prospective markets. Discount believes its ability to achieve market leadership is dependent upon successful implementation of its operating strategies and careful selection of new markets and store sites. Discount believes that market leadership provides higher consumer name recognition and economies of scale in purchasing, distribution, advertising, marketing and management. Discount is the largest DIY specialty retailer of automotive parts and accessories in Florida. As of August 28, 2001, 436 (65%) of Discount's 668 stores were located in Florida. The demographics within Florida are favorable for continued growth. In particular, Florida ranks third in the nation in the total number of registered cars and light trucks, is the fourth most populous state and continues to be one of the fastest growing states in the U.S. 103 Discount believes the strength of its market position in Florida has provided a competitive advantage and a solid foundation for further expansion into nearby southeastern states including Georgia, Alabama, South Carolina, Mississippi and Louisiana. These states provide many of the same favorable conditions and opportunities that exist in Florida. Utilizing Advanced Information Systems In order to maintain its competitive position, Discount emphasizes and continually invests in advanced distribution and information systems. As a result of continually updating these systems with state-of-the-art equipment, management believes Discount has some of the most advanced integrated distribution and point-of-sale capabilities in its industry. These systems provide many benefits, including lower distribution and operating costs, improved in-stock positions at its stores and enhanced customer service. In addition, over the past two fiscal years, Discount made several enhancements to its existing systems and introduced new technology. In fiscal 2001, the primary system changes and enhancements included the introduction of state-of-the-art warehouse systems technology at the new Mississippi distribution center, implementation of new distribution center inventory replenishment software and improvements to Discount's inventory management systems. In fiscal 2000, the software utilized for the commercial delivery program was enhanced to better serve the commercial component of the business and Discount implemented a Data Warehouse. The Data Warehouse provides information on customer transactions and inventory levels and facilitates better management of customer service and inventory levels. Also, during fiscal 2000, Discount invested in radio frequency ("RF") technology in its stores. The RF technology enables the stores to have real time knowledge of their inventory levels through the re-order and cycle count processes. Discount plans to continue to upgrade its systems through the integration of additional related specialized software over the next several years. All of these changes are designed to provide enhanced customer service and improve supply chain efficiencies. Distribution Discount's Lakeland, Florida distribution system has one of the most advanced inventory management information systems in the industry. The system utilizes computer-aided, laser scanning and wireless technology, which interfaces with Discount's management information and point-of-sale systems. The system features computer aided ordering and inventory management, having the capability to monitor inventory levels and determine store by store product needs. Discount has a warehouse management system in Lakeland referred to as the Wizard system ("Wizard"). Wizard provides support for the improvement of Discount's efficiency regarding shipment of merchandise. The system utilizes wireless hand held bar code scanning terminals which operate in a real time environment and which are integrated with a racking and flow system featuring conveyers and computerized sorting devices. These integrated systems enable Discount's team members to efficiently pick, assemble and palletize merchandise for shipment to individual stores. All product movement, including receiving, put-away, restock, cycle counting, picking and shipping, is monitored and tracked by Wizard. Discount's new distribution center located in Gallman, Mississippi utilizes an array of new technologies designed to increase efficiency by the increased use of automation. New technologies such as the gantry robotic palletizer, carousel picking system, and pick-to-light technology are being used at the Gallman facility. As with the Lakeland facility, radio frequency hand held units are also used at the Gallman facility. The new equipment technology is driven by a new warehouse management system (Exceed 2000 and Succeed Warehouse Optimizer) purchased from EXE Technologies. The software technology in turn interfaces with Discount's host systems at its corporate headquarters. Stores typically place orders electronically each week with Discount's two distribution centers. These orders are generally delivered within 48 hours of receipt by Discount's fleet of trucks and trailers. Discount's main distribution center, which also houses its headquarters and administrative offices, is located in Lakeland, Florida, on property owned by Discount. The total facilities (including parking areas) 104 currently occupy the majority of a 31.5 acre tract. The facilities front Interstate 4, the east-west interstate highway that cuts across central Florida. Discount's distribution center is comprised of approximately 600,000 square feet and is capable of serving approximately 700 stores. Discount opened its second distribution center in May 2001. The second distribution center, which is located in Gallman, Mississippi, comprises approximately 400,000 square feet and is capable of supporting approximately 450 stores. The Gallman, Mississippi distribution facility, which cost approximately $43 million to construct and equip, was financed in large part through a $34 million lease arrangement established in May 2000. Discount commenced operations in the new distribution facilities in May 2001 and began making the lease payments under the lease arrangement in June 2001. Store Operations Discount has point-of-sale computer terminals at all of its stores, which communicate interactively with Discount's distribution and management systems. These terminals decrease transaction times, reduce register lines and eliminate labor time previously spent in price labeling of merchandise. In addition, point-of-sale terminals perform valuable functions for management. Since these terminals capture sales information at the time of the transaction, management can generate real time sales reports that assist in-store and Company-wide planning. The point-of-sale system also has an automated suggested reordering function that is designed to help increase store level in-stock positions. The automation of the re-order process is believed to have decreased the time and labor required for store inventory management. During fiscal 1999, Discount completed the implementation of a new perpetual inventory system for its stores. This system allows Discount to better manage specific store level inventories based on the customers buying patterns for a particular store location. Growth Strategies Continuing New Store Openings Discount's new store opening plans have been impacted by Discount's pending transaction with Advance Auto Parts. The merger agreement with Advance Auto Parts imposes limits on new store openings while that agreement is in effect. Although Discount had plans to add approximately 20 to 40 stores during fiscal 2002, Discount will open no more than seven new stores prior to the anticipated closing of the merger in November or December 2001. If the merger were not to close, Discount anticipates that it would add between 12 and 20 new stores in fiscal 2002. Discount's new stores are planned to utilize Discount's standardized store formats, with efforts to constantly make adjustments to these standardized store formats in an effort to improve merchandising concepts. In the last five fiscal years, Discount has opened an average of 70 stores per year, with slower new store growth in fiscal 2001, during which Discount opened 31 new stores. Discount also closed eight stores during fiscal 2001. In certain Florida markets, Discount has opened stores in close geographic proximity to other Discount Auto Parts stores. This operating strategy is designed to help Discount establish a competitive position in each of Discount's markets as well as to support its strategy of providing the customer with shopping convenience. Although the new stores tend to attract sales that would otherwise have been made in other Discount Auto Parts stores, management believes that the negative impact on comparable store sales is often substantially offset by Discount's ability to leverage costs such as advertising and store management expenses. Discount believes that in the long term, the increased growth in the Florida population, as well as Discount's continued implementation of its commercial delivery program, will provide even greater justification for most of the stores that are in close proximity. 105 The following table sets forth information concerning increases in the number of Discount Auto Parts stores during the past five fiscal years and the anticipated increase for fiscal 2001:
Planned 1997 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- ------- Beginning Stores.......................... 314 400 452 558 643 666 New Stores(1)............................. 86 53 106(2) 85 31 12-20 Stores Closed............................. -- 1 -- -- 8 -- --- --- --- --- --- ------- Ending Stores............................. 400 452 558 643 666 678-686 === === === === === =======
-------- (1) Does not include stores that opened as relocations of previously existing stores within the same general market area or substantial renovations of stores. (2) Includes the 26 stores acquired as part of the September 1998 acquisition of Rose Auto Parts. When opening a new store, Discount generally seeks high visibility sites in high traffic locations (often on corners). Prior to entering new markets, Discount performs extensive research with emphasis on population, demographics, vehicle profile and number and strength of competitive stores. Discount generally seeks to open new stores within or contiguous to existing market areas and attempts to cluster development in new urban and suburban markets in a relatively short period of time in order to achieve economies of scale in management, advertising and distribution costs. Discount also evaluates the potential first year sales return on investment when determining specific store site locations. Store Formats and Express Warehouses Discount has developed three types of retail store formats: the mini-depot store, the full service store and the depot store format. These standardized formats have tended to lower new store operating costs through increased efficiency and consistency in the selection, acquisition, design and opening of new stores. As a result, Discount is modeling new stores according to the standardized formats and also using appropriate elements of one of these three store formats to remodel existing stores. Since the initiation of the standardized formats, Discount has converted the product selection at all of the existing stores to either the mini-depot, full service or depot formats. Under the standardized store formats, a mini-depot store has approximately 6,800 selling square feet and carries an average of approximately 14,000 SKUs. A typical full service store has generally the same footprint as a mini-depot format store, but offers a wider selection of parts because it also provides commercial delivery service. On average, the full service store carries 17,500 SKUs. The typical depot store has approximately 11,000 square feet, offers greater product selection and carries an average of approximately 21,000 SKUs. The following table indicates certain information about the 668 Discount Auto Parts stores in operation as of August 28, 2001:
Total Average Stock Number Square Average Total Store Format Keeping Units of Stores Footage Square Footage ------------ ------------- --------- --------- -------------- Mini-depot.................. 14,000 475 3,220,000 6,779 Full Service................ 17,500 150(1) 1,075,000 7,167 Depot....................... 21,000 43 471,000 10,953 --- --------- Total..................... 668 4,766,000 === =========
-------- (1) Currently, Discount provides its commercial delivery program from 168 stores. Of that number, 150 are operated from full service format stores and 18 are operated from depot format stores. 106 In 1998, in an effort to provide support for product availability at its stores and to help facilitate the roll-out of its commercial delivery program, Discount developed an "express" warehouse concept and opened its first Parts Express warehouse in Orlando, Florida in excess space of an existing depot. As of August 28, 2001, Discount had 10 Parts Express locations in operation. The Parts Express warehouses are located in Orlando, Tampa, Miami, Fort Myers, Jacksonville, West Palm Beach, Tallahassee, Atlanta, Mobile and Kenner, Louisiana. Each Parts Express warehouse currently stocks approximately 42,000 SKU's and occupies approximately 10,000 square feet. The objective of establishing Parts Express warehouses is to provide inventory support to mini-depot and depot stores within the same geographic market of the respective Parts Express warehouse, as well as to support Discount's commercial delivery program. Parts Express warehouses have been utilizing excess space in identified depot stores in most locations, while some have been designed as stand-alone facilities. Depot stores are targeted for major metropolitan markets where such stores can serve densely populated market areas. Depot stores are also utilized as support locations for nearby mini-depot stores in a hub-and-spoke fashion and, along with the Parts Express warehouse, offer van delivery for inventory transfers to other Discount Auto Parts stores. Discount's merchandising staff also utilizes depot stores to test new products in an effort to help maximize the success of new SKU additions at mini-depot stores. Continuing to Improve Merchandising One of Discount's growth strategies is to improve its merchandising concepts, primarily by broadening product selection and emphasizing the sale of replacement hard parts which generally provide higher gross profit margins. Discount is also using its plan-o-grams program (which is focused on improving merchandise presentation and in-stock positions) and the in-store point-of-sale system to improve merchandising. The point-of-sale system helps Discount maintain proper inventory levels and provide real-time sales information. The interface of the new plan-o-grams with Discount's point-of-sale systems provide a more sophisticated means of inventory control and management. These systems are designed to enhance overall sales and gross margins in each individual store. During fiscal 1999, Discount implemented a new perpetual inventory system at its stores. Discount has been able to collect enhanced information from the perpetual inventory system, enabling Discount to better determine proper individual store merchandise and inventory levels. These enhancements, coupled with the implementation of the Parts Express store format in selected metropolitan markets, are in the process of being fine-tuned in an effort to improve Discount's overall inventory turnover. Although each Discount Auto Parts store carries the same basic product lines, each Division Manager, with input from individual store managers, has certain limited abilities to adapt product mix based on the specific needs of the market area served by the stores. Commercial Market Business Discount began the roll-out of a commercial delivery service in the third quarter of fiscal 1998. Under Discount's commercial delivery service program, which operates under the name "Pro2Call", commercial customers (such as auto service centers, commercial mechanics, garages and the like) are able to establish commercial accounts and purchase and receive automotive parts. The automotive parts are either delivered or are available for pick up at nearby Discount Auto Parts stores. As of August 28, 2001, 168 of Discount's store locations provided commercial delivery service. Discount's entry into the commercial delivery market has required total capital expenditures of approximately $17 million, which includes the funding of losses incurred by the program to date. In addition, the commercial delivery program requires Discount to extend trade credit to certain of the commercial account customers in the ordinary course of business. The extension of such trade credit increases the capital requirements associated with the program and exposes Discount to credit risk from uncollectible accounts. 107 Discount has established systems designed to manage and control such credit risk. The amount of capital that is needed for extension of trade credit will be dependent in large part upon the success of the commercial delivery service roll-out and how quickly the commercial business develops. In addition, Discount is also utilizing small trucks to achieve its delivery of parts to commercial customers. These vehicles are currently being leased as part of a master fleet leasing arrangement. Additional vehicles will be needed in the future as commercial-designated stores are opened and as sales volume increases warrant. Discount believes the commercial delivery business is important to its long- term success, as it will further allow for the leveraging of fixed and certain variable store expenses. Although the commercial delivery program incurred operating losses through the third quarter of fiscal 2001, the program began to provide small positive operating contributions during the fourth quarter of fiscal 2001. Because this is a relatively new aspect of the auto parts supply business for Discount, there are risks associated with Discount's entry into this new aspect of the business and there can be no assurance that the commercial delivery service business will be able to continue to provide and expand upon its recent positive operating contributions or whether Discount will experience any financial or other challenges in managing and controlling the credit risk. Store Operations Store Design and Visual Merchandising Discount seeks to design and build stores with a strong visual impact. Discount's stores are generally freestanding buildings situated in highly visible locations and are designed to provide easy access and ample parking. Discount utilizes colorful exterior signage which displays the "Discount Auto Parts" name and advertises current product specials. Stores are attractive and brightly-lit. They have signage and special displays to aid customers in locating merchandise and promoting products. The majority of the selling space contains shelves for automotive replacement parts, maintenance items, and accessories, with selected merchandise featured at the ends of the aisles, at the cash register areas, and in other high traffic areas. All stores have a hard parts counter staffed by knowledgeable, customer-service oriented team members. All of the stores have computerized parts catalogs located at the hard parts counter that provide parts information based on the make, model, and year of an automobile. Discount believes that continually improving and upgrading the appearance of its stores increases sales per store. As market conditions warrant, Discount relocates or substantially renovates existing stores. Stores are relocated primarily to secure improved site locations and to expand store size. In addition, some stores are increased in size in connection with renovations. Discount considers a store to have been substantially renovated when it has spent more than $70,000 on store improvements other than for ordinary course of business maintenance and upkeep expenses. Store Team Members A typical mini-depot format store employs 8 to 10 team members, a typical full service format store employs 10 to 13 team members and a typical depot format store employs 15 to 20 team members. Each store employs a manager, one or two assistant managers, a team leader and additional full and part-time team members. Stores offering commercial delivery also employ 2 to 3 drivers. A store manager's incentive compensation is based upon the performance of his or her store vis-a-vis the average Company store. Store managers are reviewed quarterly and evaluated based on sales levels, gross margins and operating margin. This review and compensation program attempts to align the goals of Discount's store managers with those of senior management (i.e., primarily based on achieving established sales goals for their store, controlling store general and administrative expenses, controlling inventory shrinkage expense and team member retention). Discount supervises store operations primarily through three Vice Presidents of Store Operations and 39 Division Managers, each of whom supervises between 14 and 21 stores. The three Vice Presidents of Store Operations currently report to the Chief Executive Officer. 108 Purchasing, merchandising, advertising, accounting, cash management and other store support functions are provided by Discount's corporate headquarters. Discount believes that relieving store managers of primary responsibility for these functions allows them more time to focus on customer service and the execution of Discount's in-store merchandising and marketing strategies. Dimensions of Excellence Reviews Discount prides itself on continuous store improvement and an overall high level of customer service. In an effort to achieve these standards, Discount conducts "dimensions of excellence" reviews of each of its stores twice each year in order to evaluate the stores' operations. Each dimensions of excellence review encompasses a comprehensive set of store characteristics and performance criteria. The dimensions of excellence teams are made up of store managers from other districts selected based on their success as managers and their depth of experience, and members of senior management from Discount's headquarters. In addition, every store is generally visited every other week by a division manager. All of these review programs help insure Discount's stores are being maintained in accordance with Discount's standards of excellence. Purchasing and Distribution Merchandise is generally selected and purchased for all stores at Discount's headquarters. Approximately 98% of Discount's merchandise is shipped by vendors to Discount's distribution centers located in Lakeland, Florida and Gallman, Mississippi. Deliveries are usually made to individual stores on a weekly basis by Discount's fleet of trucks and trailers. In fiscal 2001, Discount purchased products from over 250 suppliers. During fiscal 2001, Discount's ten largest suppliers accounted for approximately 39% of Discount's purchases but no single supplier accounted for more than 8% of total purchases. During fiscal 2000 and 1999, Discount's ten largest suppliers accounted for approximately 40% and 41%, respectively, of Discount's total inventory purchases. Discount believes its relationships with its suppliers are good. Discount also believes alternative sources of supply exist (and in some cases such relationships are maintained on a smaller scale), at similar cost and on similar terms, for substantially all types of products sold. In order to offer the lowest prices to its customers, Discount continually seeks to reduce purchase and distribution costs of its merchandise. Discount achieves cost reductions by working with vendors to secure product savings and other benefits, making volume purchases, and achieving efficiencies in its distribution system and higher productivity at the store level. Advertising and Promotion Discount uses various methods to promote its products, including newspaper, direct mail, radio, television, in-store banners, displays and promotions. Discount also uses sales incentives and price-based promotions to advertise its products. In addition, Discount believes that DIY customers are also strongly influenced by "word-of-mouth" recommendations from satisfied customers. Discount also works closely with its suppliers in order to promote its products. Discount views its suppliers as an important element of the advertising and operating process. The suppliers provide certain benefits to Discount, such as volume discounts, rebates, credits, return allowances, cooperative advertising and signage assistance programs. The suppliers also provide product knowledge and training and education that assist Discount's team members in providing excellent customer service. Competition Both the retail and commercial delivery automotive parts aftermarket are highly competitive. Automotive products similar or identical to those available at Discount's stores are generally available from a variety of different competitors in the communities served by Discount Auto Parts stores. The number of competitors and the level of competition faced by Discount Auto Parts stores vary by market area. The principal competitive 109 factors which affect Discount's business are store location, customer service, product selection, product quality, timeliness of commercial deliveries and price. In the state of Florida, Discount operates the largest specialty retail chain offering automotive replacement parts, maintenance items and accessories to the DIY consumer. Discount competes in its various markets with a number of local, regional and national automotive retail chains including Auto Zone, Pep Boys, and Advance Auto Parts. To a lesser extent, Discount's stores also compete with automotive wholesalers or jobbers such as NAPA, Big A and Steego and, mass merchandisers such as Wal-Mart, Target and Kmart. In the commercial delivery program, Discount competes with many of those same companies. Although Discount believes that it competes effectively in its various markets, certain of its competitors, or their parent organizations, are larger in terms of sales volume, have access to greater capital and management resources, or have been operating longer in particular market areas. Team Members As of August 28, 2001, Discount employed approximately 6,200 team members, of which approximately 5,000 were full-time team members. Approximately 87% of Discount's team members are employed in stores or in direct field supervision, while 13% work in the distribution center, and/or corporate and support functions. Discount has no collective bargaining agreements covering any of its team members and has never experienced any material labor disruption. Trademarks Discount believes that its name, distinctive lettering and eye-catching stores are important to its operating strategy. In addition, as Discount continues to expand its commercial delivery business, Discount is establishing value in its Pro2Call service mark, which is the name under which the commercial delivery business operates. Although Discount develops and owns other trademarks, service marks and copyrights, Discount does not believe that its business is otherwise substantially dependent on any particular trademark, service mark, copyright or patent. Furthermore, Discount is not aware of any infringing uses or any assertion of infringing uses in any of its current market areas with respect to these intellectual property rights, that, in the opinion of Discount, could materially affect Discount's uses of its material marks and trade dress described above. Discount's Properties Distribution Center and Headquarters Discount's main distribution center, which also houses its headquarters and administrative offices, is located in Lakeland, Florida on property owned by Discount. The total facilities (including parking areas) currently occupy the majority of a 31.5 acre tract. The facilities front Interstate 4, the east-west interstate highway that cuts across central Florida. Discount's main distribution center was expanded in 1996, which doubled its size. As a result of this expansion, there is essentially no additional useable area on its headquarters site for further expansion of the facility. However, the expanded distribution center comprises approximately 600,000 square feet and is capable of serving approximately 700 stores. The expanded distribution center also provides service to Discount's Parts Express warehouses, and is utilized to support the commercial delivery program. In the fourth quarter of fiscal 2001, Discount completed the construction of a second distribution center in Gallman, Mississippi. The second distribution center is approximately 400,000 square feet and has the capacity to support up to approximately 450 stores. The new distribution center began shipping to a limited number of stores and has continued to transition selected stores from the Lakeland distribution center to the new distribution center. As of August 28, 2001, 160 stores were being serviced from the Mississippi distribution center. The second distribution center is being leased under a $34 million lease agreement, which was established in May 2000. The lease covers the land, buildings and certain integrated operating equipment, such 110 as conveyor systems. Additional rolling stock, computer equipment and other personal property utilized in the new distribution center has been leased under other leasing arrangements or has been acquired and financed through Discount's existing revolving line of credit. Discount Auto Parts Stores Discount has historically owned the majority of its store locations in order to maximize real estate flexibility and control operating costs. Recently, however, Discount effectuated a sale/leaseback of 101 stores. As a consequence, as of August 28, 2001, Discount owned 482 or 72% of its locations and leased 186 or 28% of its locations. The average cost of a new mini-depot format store is approximately $800,000, including $660,000 for the land, building, and soft costs and $140,000 for furniture, fixtures and equipment. Certain of the stores in which Discount has an ownership interest are affected by senior secured note credit facilities and mortgages on which the total unpaid principal balance as of August 28, 2001 was approximately $2.4 million. During fiscal 2001, Discount retired one of the two senior secured note facilities. The remaining secured note facility provides for interest at a fixed rate of 9.8%, payable quarterly, with a principal payment of $1.2 million due on May 31 each year. Excluding stores under the sale/leaseback arrangement, the majority of Discount's other store leases provide for the payment of a fixed rent, plus increases to cover ad valorem taxes, insurance and maintenance costs. The leases are generally for a term of five years, with Discount having the right to renew for one or more additional five-year terms. The sale/leaseback transaction was completed on February 27, 2001. Under the terms of the sale/ leaseback, Discount sold 101 properties, including land, buildings, and improvements, for approximately $62.2 million. The stores were leased back from the purchaser under non-cancelable operating leases with lease terms of 22.5 years each. The sale of the properties generated a gain for financial reporting purposes, net of expenses incurred, of $6.0 million, which gain has been deferred and is being amortized over the lease term. Net rent expense during the first five years of the lease term will be approximately $6.4 million annually, with increases periodically thereafter. Legal Proceedings Coalition for a Level Playing Field, et. al. v. AutoZone, Inc. et. al, Case No. 00-0953 in and for the United District Court, Eastern District of New York. In February 2000, the Coalition for a Level Playing Field and over one hundred independent automotive parts and accessories aftermarket warehouse distributors and jobbers filed a lawsuit in the United States District for the Eastern District of New York against Discount and other retailers. The plaintiffs claim that the defendants have knowingly induced volume discounts, rebates, slotting and other allowances, fees, free inventory, sham advertising and promotional payments, a share in the manufacturers' profits, and excessive payments for services purportedly performed for the manufacturers in violation of the Robinson-Patman Act. The complaint seeks injunctive and declaratory relief, unspecified treble damages on behalf of each of the plaintiffs, as well as attorneys' fees and costs. The defendants, including Discount, filed a motion to dismiss in late October 2000. On October 18, 2001, the court denied the motion to dismiss on all but one count. It is expected that the discovery phase of the litigation will now commence (including with respect to Discount); however, determinations as to the discovery schedule and scope remain to be determined. Discount believes the claims to be without merit and intends to vigorously defend the action. As previously reported, Discount had been engaged in litigation with its insurance carrier pursuant to which Discount was seeking recovery under its insurance policy of certain amounts incurred by Discount in connection with the previously reported and settled Airgas, Inc. litigation. Discount settled this litigation in May 2001. Discount is not a party to any other legal proceedings, other than various claims and lawsuits arising in the normal course of Discount's business. Discount does not believe that such claims and lawsuits, individually or in the aggregate, will have a material adverse effect on its financial condition or results of operations. 111 Selected Historical Consolidated Financial and Other Data of Discount The following table sets forth selected consolidated statement of operations, balance sheet and other operating data of Discount. The selected historical consolidated financial and other data as of and for fiscal 1999, fiscal 2000 and fiscal 2001 have been derived from, and should be read together with, Discount's audited consolidated financial statements and the related notes included elsewhere in this proxy statement and prospectus. The selected historical consolidated financial and other data as of and for fiscal 1997 and fiscal 1998 have been derived from Discount's audited consolidated financial statements and the related notes, which have not been included in this proxy statement and prospectus. The selected historical consolidated financial and other data as of and for the thirteen weeks ended August 29, 2000 and August 28, 2001 have been derived from, and should be read together with, Discount's unaudited consolidated financial statements and the related notes included elsewhere herein. In the opinion of Discount's management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of Discount's financial position and the results of Discount's operations and cash flows have been made. The results of operations for the thirteen weeks ended August 28, 2001 are not necessarily indicative of the operating results to be expected for the full fiscal year. The data presented below should be read in conjunction with the consolidated financial statements of Discount and the notes thereto included herein, the other financial information included herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Discount."
Thirteen Weeks Ended Fiscal Year Ended (Unaudited) ------------------------------------------------ --------------------- June 3, June 2, June 1, May 30, May 29, August 29, August 28, 1997(1) 1998 1999 2000 2001 2000 2001 -------- -------- -------- -------- -------- ---------- ---------- (In thousands, except per share data and Selected Operating Data) Income Statement Data Net sales.............. $405,186 $447,491 $511,483 $598,258 $661,717 $167,074 $173,381 Cost of sales, including distribution costs................. 256,646 271,404 302,843 356,783 404,199 103,150 104,189 -------- -------- -------- -------- -------- -------- -------- Gross profit........... 148,540 176,087 208,640 241,475 257,518 63,924 69,192 Selling, general and administrative expenses.............. 101,336 124,125 152,777 184,371 215,353 52,850 56,830 Merger related expenses.............. -- -- -- -- -- -- 943 -------- -------- -------- -------- -------- -------- -------- Income from operations............ 47,204 51,962 55,863 57,104 42,165 11,074 11,419 Litigation settlement(2)......... (20,545) -- -- -- -- -- -- Other income, net...... 187 2,434 817 2,770 6,957 85 100 Interest expense....... (6,125) (10,203) (12,856) (18,079) (21,634) (5,583) (3,318) -------- -------- -------- -------- -------- -------- -------- Income before income taxes and cumulative effect of change in accounting principle ...................... 20,721 44,193 43,824 41,795 27,488 5,576 8,201 Income taxes........... 7,980 17,013 16,766 15,506 9,880 2,007 2,950 -------- -------- -------- -------- -------- -------- -------- Income before cumulative effect of change in accounting principle ............ 12,741 27,180 27,058 26,289 17,608 3,569 5,251 Cumulative effect of change in accounting principle, net of income tax benefit.... -- -- (8,245) -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income............. $ 12,741 $ 27,180 $ 18,813 $ 26,289 $ 17,608 $ 3,569 $ 5,251 -------- -------- -------- -------- -------- -------- -------- Net income (loss) per basic share from: Income before cumulative effect of change in accounting principle ........... $ 0.77 $ 1.64 $ 1.63 $ 1.57 $ 1.05 $ 0.21 $ 0.31 Cumulative effect of change in accounting principle............ -- -- (0.50) -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income(3).......... $ 0.77 $ 1.64 $ 1.13 $ 1.57 $ 1.05 $ 0.21 $ 0.31 ======== ======== ======== ======== ======== ======== ======== Net income (loss) per diluted share from: Income before cumulative effect of change in accounting principle ........... $ 0.77 $ 1.63 $ 1.61 $ 1.57 $ 1.05 $ 0.21 $ 0.31 Cumulative effect of change in accounting principle............ -- -- (0.49) -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income............. $ 0.77 $ 1.63 $ 1.12 $ 1.57 $ 1.05 $ 0.21 $ 0.31 ======== ======== ======== ======== ======== ======== ======== Average common shares outstanding........... 16,581 16,604 16,650 16,695 16,703 16,695 16,708 Dilutive effect of stock options......... 73 111 153 30 4 -- 156 -------- -------- -------- -------- -------- -------- -------- Average common shares outstanding--assuming dilution.............. 16,654 16,715 16,803 16,725 16,707 16,695 16,864 ======== ======== ======== ======== ======== ======== ========
112
Thirteen Weeks Ended Fiscal Year Ended (Unaudited) ------------------------------------------------- --------------------- June 3, June 2, June 1, May 30, May 29, August 29, August 28, 1997(1) 1998 1999 2000 2001 2000 2001 -------- -------- -------- -------- -------- ---------- ---------- (In thousands, except per share data and Selected Operating Data) Selected Operating Data Number of stores at period end............. 400 452 558 643 666 653 668 Stores with commercial delivery program (end of period)............. -- 14 122 172 168 171 168 Commercial delivery sales(4)............... $ -- $ 78 $ 6,884 $ 25,503 $ 44,089 $ 10,128 $ 11,856 Total store square footage at period end (in thousands)......... 2,934 3,295 4,006 4,584 4,750 4,652 4,766 Average net sales per store (in thousands)(5)(6)....... $ 1,024 $ 1,050 $ 1,013 $ 996 $ 1,011 -- -- Average net sales per square foot(5)(6)...... $ 151 $ 144 $ 140 $ 139 $ 142 -- -- Percentage increase (decrease) in comparable store net sales(6)(7)............ (0.8)% 7.8% 0.6% 3.3% 4.0% 6.5% 2.1% Team members............ 3,677 4,350 5,586 6,390 6,460 6,576 6,225 Balance Sheet Data Inventories............. $151,644 $172,027 $209,028 $253,113 $242,718 $248,789 $243,053 Working capital(8)...... 80,573 105,662 128,939 153,769 143,850 183,820 166,245 Property and equipment, net.................... 265,589 314,519 374,577 419,282 384,513 423,721 384,463 Total assets............ 443,066 511,735 620,314 704,709 655,929 699,315 657,053 Long-term debt, excluding current maturities............. 114,117 160,695 224,800 264,600 192,900 295,713 209,608 Stockholders' equity.... 229,061 256,885 276,766 303,204 320,862 306,773 326,324
-------- (1) Fiscal year 1997 consisted of 53 weeks; all other years reported consisted of 52 weeks. (2) Represents total costs, including related legal expenses, associated with the settlement of a complaint filed by Airgas, Inc. and certain of its affiliates in February 1997 against several defendants, including Discount and one of its employees. The complaint alleged improper commercial sales of refrigerant R-12 (freon) by the defendants. (3) Net income for 1999 includes an after-tax charge of $8.2 million related to a change in the method of accounting for store inventories from the first- in, first-out retail inventory method to the weighted average cost method. This change was reflected as of the beginning of 1999. Net income for the thirteen weeks ended August 28, 2001 includes an after-tax extraordinary loss of $603 resulting from expenses incurred in connection with the merger. (4) Commercial delivery sales represents net sales from Discount's Pro2Call commercial delivery program. (5) Average net sales per store and average net sales per square foot are based on the average of beginning and ending number of stores and store square footage for the respective period. For fiscal 1997, average net sales per store and average net sales per square foot have been adjusted to exclude the effect of the fifty-third week. (6) The amounts shown for fiscal 1997 exclude bulk commercial sales of air conditioning products, such as freon. If these commercial sales of freon were to have been included, the average net sales per store, average net sales per square foot and the increase in comparable store sales for fiscal 1997 would have been $1,115,000, $231 and 9.7%, respectively. (7) Comparable store sales growth is calculated based on the change in net sales of all stores opened as of the beginning of the preceding fiscal year. Net stores become part of the comparable store base on the first day of their second full fiscal year in operation. (8) Working capital represents total current assets less total current liabilities. 113 Management's Discussion and Analysis of Financial Condition and Results of Operations of Discount The following discussion and analysis of Discount's financial condition and results of operations should be read in conjunction with the consolidated historical financial statements of Discount, the notes thereto and other data and information appearing elsewhere in this proxy statement and prospectus. Discount's fiscal year consists of 52 or 53 weeks ending on the Tuesday closest to May 31st of each year. The years ended May 29, 2001, May 30, 2000 and June 1, 1999 consisted of 52 weeks. Discount's fiscal quarters ended August 29, 2000 and August 28, 2001 consisted of thirteen weeks each. Results of Operations The following table sets forth, for the periods presented, the income statement data and the percentage of Discount's net sales represented by each line presented:
Thirteen Weeks Ended Fiscal Year Ended (Unaudited) ------------------------------------------------- ------------------------------------- June 1, 1999 May 30, 2000 May 29, 2001 August 29, 2000 August 28, 2001 --------------- --------------- --------------- ------------------ ------------------ (Dollars in thousands) Net sales............... $511,483 100.0% $598,258 100.0% $661,717 100.0% $ 167,074 100.0% $ 173,381 100.0% Cost of sales, including distribution costs..... 302,843 59.2 356,783 59.6 404,199 61.1 103,150 61.7 104,189 60.1 -------- ----- -------- ----- -------- ----- --------- ------ --------- ------ Gross profit........... 208,640 40.8 241,475 40.4 257,518 38.9 63,924 38.3 69,192 39.9 Selling, general and administrative expenses............... 152,777 29.9 184,371 30.8 215,353 32.5 52,850 31.6 56,830 32.8 Merger related expenses............... -- -- -- -- -- -- -- -- 943 0.6 -------- ----- -------- ----- -------- ----- --------- ------ --------- ------ Income from operations............ 55,863 10.9 57,104 9.6 42,165 6.4 11,074 6.7 11,419 6.5 Other income, net....... 817 0.2 2,770 0.5 6,957 1.1 85 0.1 100 0.1 Interest expense........ (12,856) (2.5) (18,079) (3.1) (21,634) (3.3) (5,583) (3.3) (3,318) (1.9) -------- ----- -------- ----- -------- ----- --------- ------ --------- ------ Income before income taxes and cumulative effect of change in accounting principle .. 43,824 8.6 41,795 7.0 27,488 4.2 5,576 3.3 8,201 4.7 Income taxes............ 16,766 3.3 15,506 2.6 9,880 1.5 2,007 1.2 2,950 1.7 -------- ----- -------- ----- -------- ----- --------- ------ --------- ------ Income before cumulative effect of change in accounting principle .. 27,058 5.3 26,289 4.4 17,608 2.7 3,569 2.1 5,251 3.0 Cumulative effect of change in accounting principle, net of income tax benefit..... (8,245) (1.6) -- -- -- -- -- -- -- -- -------- ----- -------- ----- -------- ----- --------- ------ --------- ------ Net income............. $ 18,813 3.7% $ 26,289 4.4% $ 17,608 2.7% $ 3,569 2.1% $ 5,251 3.0% ======== ===== ======== ===== ======== ===== ========= ====== ========= ======
Thirteen Weeks Ended August 28, 2001 Compared to Thirteen Weeks Ended August 29, 2000 Net sales for the first quarter of fiscal 2002 increased 3.8% to $173.4 million, as compared to $167.1 million for the first quarter a year earlier. Comparable store sales increased 2.1% for the first quarter of fiscal 2002 as compared to the first quarter of fiscal 2001. Such comparable store sales growth was generated on a relatively equal basis from DIY and commercial sales. The balance of the increase in total sales for the first quarter was attributable to sales from new stores opened since the beginning of fiscal 2001. At August 28, 2001, Discount had 668 stores in operation, compared with 666 stores at May 29, 2001 and 653 stores at August 29, 2000. 114 Gross profit for the first quarter of fiscal 2002 increased 8.2% to $69.2 million as compared to $63.9 million for the first quarter of fiscal 2001. As a percentage of sales, gross profit was 39.9% for the first quarter of fiscal 2002 as compared to 38.3% for the first quarter of fiscal 2001. Gross profit for the first quarter of fiscal 2002 was positively impacted by Discount's supply chain initiatives implemented in the latter half of fiscal 2001 and lower inventory shrinkage expense. These positive impacts were offset in part by lower overall vendor incentives primarily stemming from the reduced number of store openings and additional operating expenses associated with Discount's second distribution center which became operational in the fourth quarter of fiscal 2001. Selling, general and administrative expenses increased as a percentage of sales from 31.6% in the first quarter of fiscal 2001 to 32.8% in the first quarter of fiscal 2002. The increase in these expenses as a percentage of sales for the first quarter was primarily the result of (1) rent under the February 2001 sale/leaseback of 101 of Discount's store locations exceeding the historical cost depreciation expense associated with such store locations prior to the sale/leaseback and (2) increased health and workers' compensation insurance costs. As a result of the merger, Discount incurred expenses of $943,000 in the first quarter of fiscal 2002. Additional expenses are expected to be incurred during the second quarter of fiscal 2002. Such additional expenses, inclusive of the fees and expenses payable to Discount's financial advisor, lawyers and accountants, are estimated to be $3.2 million in the aggregate. Income from operations for the first quarter of fiscal 2002 increased 3.1% to $11.4 million as compared to $11.1 million for the first quarter of fiscal 2001. Excluding the effects of the excess of rent expense over the related depreciation expense related to the stores sold under the sale/leaseback transaction and the rent expense related to Discount's second distribution center, both of which did not exist in the first quarter of fiscal 2001 and merger related expenses, operating income for the first quarter of fiscal 2002 would have increased 28%. Interest expense for the first quarter of fiscal 2002 decreased 40.6% to $3.3 million as compared to $5.6 million for the first quarter of fiscal 2001. The decrease was due to overall lower borrowings for the first quarter of fiscal 2002, which resulted primarily from the paydown in debt with the proceeds of the February 2001 sale/leaseback closing, and overall lower interest rates on Discount's variable rate debt. Discount's effective tax rate for both the first quarter of fiscal 2002 and the first quarter of fiscal 2001 was 36.0%. Taking into account all of the above described factors, Discount's net income for the first quarter of fiscal 2002 increased 47.1% to $5.3 million from $3.6 million for the first quarter of fiscal 2001. Fiscal 2001 Compared to Fiscal 2000 Net sales for the fifty-two week period ended May 29, 2001 increased 10.6% to $661.7 million, from $598.3 million a year earlier. Comparable store sales increased 4.0% for fiscal 2001 as compared to fiscal 2000. Comparable store sales results include sales from Discount's commercial delivery program. The balance of the increase in total sales for fiscal 2001 was attributable to sales from new stores opened since the beginning of fiscal 2000. At May 29, 2001, Discount had 666 stores in operation compared to 643 at the end of fiscal 2000. Gross profit for the fifty-two week period ended May 29, 2001 was $257.5 million, or 38.9% of net sales, compared with $241.5 million, or 40.4% for fiscal 2000. The reduction in the gross margin percentage for fiscal 2001 was primarily due to overall lower vendor incentives, higher inventory shrinkage expense, expenses 115 associated with the opening of the second distribution center and margin pressure in commodity categories such as oil. Overall vendor incentives were down due to a lesser number of net new stores opened in fiscal 2001 (23) versus in fiscal 2000 (85). During fiscal 2001, Discount began several supply chain initiatives that were directed, for the most part, at improving overall gross margins and inventory performance. During the fourth quarter of fiscal 2001, Discount began to see improvement in overall gross margins as compared to preceding quarters in fiscal 2001. Management expects to see continuing gross margin improvements in fiscal year 2002. Selling, general and administrative expenses for fiscal 2001 increased 16.8% over such expenses for fiscal 2000, and increased as a percentage of net sales from 30.8% in fiscal 2000 to 32.5% in fiscal 2001. The increase was primarily due to lower than anticipated retail sales, which resulted in a reduced ability to leverage certain store related expenses, the slower ramp up of stores opened in newer markets and the net additional rent resulting from the February 2001 sale/leaseback of 101 properties. As a result of the above factors, income from operations for fiscal 2001 was $42.2 million as compared to $57.1 million for fiscal 2000. Operating margins for fiscal 2001 were 6.4% as compared to 9.6% for fiscal 2000. During May 2001, Discount settled a claim related to recovery of amounts previously paid out by Discount in connection with a separate litigation matter that was concluded in August 1997. The 1997 litigation stemmed from the sale and distribution of freon. The net gain of $6.5 million resulting from the recovery achieved in the May 2001 settlement has been included in other income. Interest expense for fiscal 2001 increased 19.7% to $21.6 million as compared to $18.1 million for fiscal 2000. The increase was the result of increased borrowings in the first half of the fiscal year primarily associated with new store growth and overall higher interest rates on Discount's variable rate debt. Discount's effective tax rate for fiscal 2001 was 35.9% as compared to 37.1% in fiscal 2000. The reduction in the effective tax rate for fiscal 2001 is primarily the result of state tax planning and restructuring initiatives, which were implemented as of the end of the second quarter of fiscal 2000. As a result of the above factors, net income for fiscal 2001 was $17.6 million, or $1.05 per diluted share as compared to $26.3 million, or $1.57 per diluted share for fiscal 2000. Fiscal 2000 Compared to Fiscal 1999 Net sales for the fifty-two week period ended May 30, 2000 increased 17.0% to $598.3 million, from $511.5 million a year earlier. Comparable store sales increased 3.3% for fiscal 2000 as compared to fiscal 1999. Comparable store sales results include sales from Discount's commercial delivery program. The balance of the increase in total sales for fiscal 2000 was attributable to sales from new stores opened since the beginning of fiscal 1999. At May 30, 2000, Discount had 643 stores in operation compared to 558 at the end of fiscal 1999. Gross profit for the fifty-two week period ended May 30, 2000 was $241.5 million, or 40.4% of net sales, compared with $208.6 million, or 40.8% for fiscal 1999. The reduction in the gross margin percentage for fiscal 2000 was primarily due to higher product distribution costs. The comparison to fiscal 1999 was also impacted by the inclusion of additional vendor incentives in 1999 resulting from the September 1998 purchase of the Rose Automotive stores. Selling, general and administrative expenses for fiscal 2000 increased 20.7% over such expenses for fiscal 1999, and increased as a percentage of net sales from 29.9% in fiscal 1999 to 30.8% in fiscal 2000. The increase was primarily due to the expenses incurred related to the continued implementation and expansion of Discount's commercial delivery program for fiscal 2000 as compared to fiscal 1999, as well as a loss, during 116 December and January, of Discount's ability to leverage certain expenses during those periods as a result of lower than anticipated sales. Income from operations for fiscal 2000 was $57.1 million as compared to $55.9 million for fiscal 1999. Operating margins for fiscal 2000 were 9.6% as compared to 10.9% for fiscal 1999. Operating income and the resulting operating margin for fiscal 2000 were negatively impacted by the implementation and expansion of Discount's commercial delivery program. For both fiscal 2000 and fiscal 1999 Discount incurred an estimated operating loss from the commercial delivery program of approximately $4.7 million each year. Excluding the estimated operating loss impact of the commercial delivery program, the operating margin for fiscal 2000 and fiscal 1999 would have been approximately 10.3% and 11.9%, respectively. Other income primarily includes gains and losses on real estate disposals. The variance between years primarily reflects the overall change in level of activity between years. Interest expense for fiscal 2000 increased 40.6% to $18.1 million as compared to $12.9 million for fiscal 1999. The increase was the result of increased borrowings primarily associated with new store growth and overall higher interest rates. Discount's effective tax rate for fiscal 2000 was 37.1% as compared to 38.3% in fiscal 1999. The reduction in the effective tax rate for fiscal 2000 is primarily the result of state tax planning and restructuring initiatives, which were implemented as of the end of the second quarter of fiscal 2000. Income before the cumulative effect of an accounting change for fiscal 2000 was $26.3 million or $1.57 per diluted share as compared to $27.1 million or $1.61 per diluted share for fiscal 1999. During the fourth quarter of fiscal 1999, Discount implemented a change in its method of accounting for store inventories from the first-in, first-out method calculated using a form of the retail inventory method to the weighted average cost method. Discount made this change in connection with new computerized store-level perpetual inventory systems installed throughout fiscal 1999. As a result of the change in accounting method, Discount reported a non-cash, fiscal 1999 after tax charge of $8.2 million, or $0.49 per diluted share which was reflected as of the beginning of the year and which represented the beginning 1999 fiscal year impact of the change in accounting method. As a result of the above factors, net income for fiscal 2000 was $26.3 million, or $1.57 per diluted share as compared to $18.8 million, or $1.12 per diluted share for fiscal 1999. Liquidity and Capital Resources For the thirteen weeks ended August 28, 2001, net cash of $14.2 million was used in Discount's operations versus $27.5 million used by Discount's operations for the comparable thirteen week period of fiscal 2001. During both of the thirteen week periods, this net use of cash was due primarily to a reduction in trade accounts payable resulting from the repayment of normal year end extensions of credit terms. The reduction of cash used in the fiscal 2002 first quarter versus the fiscal 2001 first quarter primarily related to the timing of vendor payments. Net cash provided by operating activities was $51.9 million in fiscal 2001, $28.0 million in fiscal 2000, and $23.8 million in fiscal 1999. The increase in fiscal 2001 over fiscal 2000 was primarily due to a decrease in inventories which was offset in part by a decrease in net income and accounts payable. The reduction in inventories for the fiscal 2001 period primarily reflects results of Discount's supply chain initiatives geared toward better overall inventory management. Such efforts have included Discount's redistribution of excess quantities of inventory among its stores rather than making additional purchases from vendors. During fiscal 2001, Discount reduced overall inventory levels by $10.4 million compared to adding $44.1 million in fiscal 2000. This process also resulted in lower accounts payable at the end of fiscal 2001 versus the end of fiscal 117 2000. The increase in fiscal 2000 over fiscal 1999 was primarily due to a decrease in prepaid expenses and other current assets resulting from the improved timing of collecting vendor program receivables, higher net income and increased depreciation and amortization offset in part by a decrease in the amount of inventory growth funded by vendor payables. Capital expenditures for the thirteen weeks ended August 28, 2001 were $6.3 million. The majority of the capital expenditures related to the 4 new stores opened during that period plus stores opened near the end of fiscal 2001. Capital expenditures for fiscal 2001 were $43.1 million as compared to $69.3 million in fiscal 2000 and $81.0 million in fiscal 1999. Capital expenditures have fluctuated over the periods primarily based on new store openings in the respective periods. Capital expenditures for fiscal 2001 primarily related to the 31 new stores opened. Capital expenditures for fiscal 2000 primarily related to the 85 new stores opened. Capital expenditures for fiscal 1999 also included costs associated with the completion of the expansion of Discount's Lakeland, Florida distribution center and additional office space. On February 27, 2001, Discount completed a sale/leaseback transaction. Under the terms of the transaction, Discount sold 101 properties, including land, buildings, and improvements, for a net price of approximately $62.2 million. The stores were leased back from the purchaser under non-cancelable operating leases with lease terms of 22.5 years each. The sale of the properties generated a gain for financial reporting purposes, net of expenses incurred, of $6.0 million, which gain has been deferred and is being amortized over the lease term. Net rent expense during the first five years of the lease term will be approximately $6.4 million annually, with increases periodically thereafter. Proceeds from the transaction were used to reduce outstanding borrowings under Discount's Revolving Credit Facility. During May 2001, Discount settled a claim related to recovery of amounts previously paid out by Discount in connection with a separate litigation matter that was concluded in August 1997. The 1997 litigation stemmed from the sale and distribution of freon. The proceeds from the settlement were collected in May and the resulting net gain of $6.5 million from the settlement has been included in other income in Discount's fiscal 2001 income statement. In May 2000, Discount broke ground on a second distribution center in Gallman, Mississippi. The second distribution center is approximately 400,000 square feet and will be able to support approximately 450 stores. As of May 29, 2001, 157 stores are being serviced by that facility. The second distribution center is being leased under a $34 million operating lease agreement, which was put into effect in May 2000. The lease covers the land, buildings and certain integrated operating equipment, such as conveyor systems. Additional rolling stock, computer equipment, software, and other personal property with a total cost of approximately $9.0 million was funded through other lease arrangements or through Discount's existing revolving line of credit. Discount also continued the roll-out of its commercial delivery service, which began in the third quarter of fiscal 1998. Discount's commercial delivery service consists of a program whereby commercial customers (such as auto service centers, commercial mechanics, garages and the like) establish commercial accounts with Discount and order automotive parts from Discount, with such parts being delivered by Discount or picked up by the customer from nearby Discount Auto Parts stores. The commercial delivery program requires Discount to extend trade credit to certain of the commercial account customers as part of the ordinary course of business. The extension of such trade credit increases the capital requirements associated with the roll-out of the program and exposes Discount to credit risk from uncollectible accounts. Discount has established systems to manage and control such credit risk. The amount of capital that is needed to cover extension of trade credit will be dependent in large part upon the success of the commercial delivery service roll-out and how quickly the commercial business develops. To date, the commercial delivery program has incurred operating losses of approximately $10.8 million, which have been funded by Discount's retail operations and its revolving line of 118 credit. However, during the fourth quarter of fiscal 2001 the commercial delivery program achieved profitability. On August 7, 2001, Discount entered into a definitive agreement with Advance Holding Corporation, Advance Auto Parts, Inc., Advance Stores Company, Incorporated and AAP Acquisition Corporation (collectively, "Advance") under which Discount would be acquired by Advance in a merger transaction. Under the terms of the pending merger transaction with Advance, Discount is subject to limits on the amount of its capital expenditures through the date of closing. Accordingly, Discount only expects to open approximately seven new stores prior to the anticipated closing of the merger in November or December 2001. If the merger does not close, Discount would need to modify its capital expenditure plans for the remainder of fiscal 2002. Consistent with its historical practice, Discount expects to finance most of its new store growth through unsecured lines of credit and medium and longer- term mortgage financing provided by banks and other institutional lenders, and through cash flow from operations. As of August 28, 2001, Discount had $106.6 million of additional availability under its existing financing agreements. Discount is exposed to changes in interest rates, primarily from its revolving credit agreement. Discount also has long-term debt that bears a fixed rate. As to the fixed rate debt, there is a risk that market rates will decline and the required payments will exceed those based on current market rates on the long-term debt. Discount believes that the expected cash flows from operations, available bank borrowings and trade credit, will be sufficient to fund the capital and liquidity needs of Discount for the next two to three years. However, if and when the pending merger transaction closes, the outstanding balance of Discount's revolving credit facility and certain senior indebtedness of Discount would be refinanced through borrowings by Advance, and, thereafter, Discount would need to look to Advance's sources of capital to fund Discount's capital and liquidity needs. See "The Merger--Financing Commitments" at Page 49. Inflation and Seasonality Discount does not believe its operations have been materially affected by inflation. Discount has been successful, in many cases, in reducing the effects of merchandise cost increases principally by taking advantage of vendor incentive programs, economies of scale resulting from increased volumes or purchases, and selective forward buying. Although sales have historically been somewhat higher in Discount's fourth quarter (March through May), Discount does not consider its business to be seasonal. Quantitative and Qualitative Disclosures about Market Risk Discount's market risk is limited to fluctuations in interest rates as it pertains to Discount's borrowings under its credit facilities. Discount pays interest on borrowings at the LIBOR rate plus an applicable margin ranging from 0.625% to 1.90% based on Discount's debt-to-capitalization ratio. If the interest rates on Discount's borrowings averaged 100 basis points more in fiscal 2002 than they did in fiscal 2001, Discount's interest expense would increase and income before income taxes would decrease by approximately $1.65 million. This amount is determined solely by considering the impact of the hypothetical change in the interest rate on Discount's borrowing cost without consideration for other factors such as actions management might take to mitigate its exposure to interest rate changes. 119 Principal Shareholders of Discount The following table sets forth, as of October 25, 2001, the number of shares of Discount's Common Stock beneficially owned by: . each person known to Discount as having beneficial ownership of more than 5% of Discount's Common Stock together with such person's address, . each of Discount's directors and nominees to become a director, . each named executive officer as defined under applicable Securities and Exchange Commission rules, and . all directors and executive officers as a group.
Amount and Name of Beneficial Owner Nature of Beneficial Percent of or Number in Group Ownership(1) Class ------------------------ -------------------- ---------- Fontaine Industries Limited Partnership...... 4,021,509(2) 24.1% 3305 W. Spring Mountain Road #60 Las Vegas, Nevada 89012 Glenden Enterprises Limited Partnership...... 2,975,914(3) 17.8% 3305 W. Spring Mountain Road #60 Las Vegas, Nevada 89012 Peter J. Fontaine............................ 4,023,509(4) 24.1% c/o Discount Auto Parts, Inc. 4900 Frontage Road South Lakeland, Florida 33815 Glenda A. Fontaine Marital Trust under Agreement dated July 8, 1993................ 2,975,914(5) 17.8% c/o Discount Auto Parts, Inc. 4900 Frontage Road South Lakeland, Florida 33815 Advance Holding Corporation.................. 4,021,509(6) 24.1% Advance Stores Company, Incorporated 5673 Airport Road Roanoke, Virginia 24012 William C. Perkins........................... 102,872(7) * C. Michael Moore............................. 8,725(8) * Michael D. Harrah............................ 14,925(9) * Clement A. Bottino........................... 49,663(10) * David C. Viele............................... 49,991(11) * David P. Walling............................. 8,790(12) * Charles W. Webster, Jr. ..................... 1,467(13) * Donald W. Olson.............................. -0- -0- NewSouth Capital Management, Inc. ........... 1,318,824(14) 7.9% 1000 Ridgeway Loop Rd. Suite 233 Memphis, TN 38120 Dimensional Fund Advisors, Inc. ............. 1,333,800(15) 8.0% 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 All Directors and Executive Officers as a Group (10 persons).......................... 4,167,675 24.7%
120 * Less than one percent (1) Beneficial ownership of shares, as determined in accordance with applicable Securities and Exchange Commission rules, includes shares as to which a person has or shares voting power and/or investment power. Except as otherwise indicated, all shares are held of record with sole voting and investment power. (2) Fontaine Industries Limited Partnership ("Industries L.P.") is a Nevada Limited Partnership. A revocable trust established by Peter J. Fontaine and under which Mr. Fontaine is the trustee, is the sole general partner and is one of two limited partners of Industries L.P., owning an aggregate of 99% of the partnership interests. Peter J. Fontaine is a limited partner and owns the remaining 1% of the partnership interests. In connection with the agreement and plan of merger dated as of August 7, 2001 by and among Discount, Advance Holding, Advance, Advance Stores, and Advance Merger Sub, Industries L.P. entered into (i) an irrevocable proxy and voting agreement with Advance Holding and Advance Stores, dated as of August 7, 2001 (pursuant to the irrevocable proxy and voting agreement, Industries L.P. has agreed to vote all of the shares that it beneficially owns in favor of the merger, the merger agreement and the transactions contemplated thereby and appointed Advance Stores as its proxy to vote the shares) and (ii) a stock option agreement with Advance Holding and Advance Stores, dated as of August 7, 2001 (pursuant to which Industries L.P. granted Advance Stores an option to purchase all of the shares, exercisable under certain specified conditions, as set forth in the stock option agreement). (3) Glenden Enterprises Limited Partnership ("Enterprises L.P.") is a Nevada Limited Partnership. The Glenda A. Fontaine Marital Trust (the "Glenda Fontaine Trust"), of which Merritt A. Gardner is the trustee, is the sole general partner and a limited partner of Enterprises L.P., owning an aggregate of 81.5% of the partnership interests. Certain trusts established for the benefit of the children of Denis L. Fontaine (the "Children's Trusts"), of which Merritt A. Gardner is also the trustee, are limited partners of Enterprises L.P. and in such capacity own the remaining 18.5% of the partnership interests. (4) Peter J. Fontaine does not directly own any shares. Beneficial ownership by Mr. Fontaine reflects (i) 4,021,509 shares owned by Industries L.P., (ii) 1,000 shares owned by Mr. Fontaine's wife and (iii) 1,000 shares owned by Mr. Fontaine's daughter. See Note (2) above. (5) The Glenda Fontaine Trust does not directly own any shares. Beneficial ownership by the Glenda Fontaine Trust reflects shares owned by Enterprises L.P. See Note (3) above. (6) This information is derived from a Schedule 13D dated August 16, 2001, filed by Advance Holding and Advance Stores. In connection with the agreement and plan of merger dated as of August 7, 2001 by and among Discount, Advance Holding, Advance, Advance Stores and Advance Merger Sub, Industries L.P. entered into (i) an irrevocable proxy and voting agreement with Advance Holding and Advance Stores, dated as of August 7, 2001 (pursuant to the irrevocable proxy and voting agreement, Industries L.P. has agreed to vote all of the shares that it beneficially owns in favor of the merger, the merger agreement and the transactions contemplated thereby and appointed Advance as its proxy to vote the shares) and (ii) a stock option agreement with Advance Holding and Advance Stores, dated as of August 7, 2001 (pursuant to which Industries L.P. granted Advance Stores an option to purchase all of the shares, exercisable under certain specified conditions, as set forth in the stock option agreement). As a result of the irrevocable proxy and voting agreement and the stock option agreement, each of Advance Holding and Advance Stores is shown in the Schedule 13D to have beneficial ownership of, and shared voting and dispositive power with respect to, the shares owned by Industries L.P. See Note (2) above. Neither Advance Holding nor Advance Stores directly owns any shares. Beneficial ownership by Advance Stores reflects shares owned by Industries L.P. See Note (2) above. (7) The number of shares shown includes 100,000 shares deemed to be beneficially owned by Mr. Perkins by virtue of certain stock options that are currently exercisable. (8) The number of shares shown includes 7,125 shares deemed to be beneficially owned by Mr. Moore by virtue of certain stock options that are currently exercisable or become exercisable within 60 days. (footnotes continued on the following page) 121 (9) The number of shares shown includes 14,875 shares deemed to be beneficially owned by Mr. Harrah by virtue of certain stock options that are currently exercisable or become exercisable within 60 days. (10) The number of shares shown includes 48,681 shares deemed to be beneficially owned by Mr. Bottino by virtue of certain stock options that are currently exercisable or become exercisable within 60 days. Also includes 91 shares held by Mr. Bottino's wife. (11) The number of shares shown includes 49,981 shares deemed to be beneficially owned by Mr. Viele by virtue of certain stock options that are currently exercisable or become exercisable within 60 days. (12) The number of shares shown includes 3,500 shares deemed to be beneficially owned by Mr. Walling by virtue of certain stock options that are currently exercisable or become exercisable within 60 days. Also includes 245 shares owned by Mr. Walling's wife. (13) The number of shares shown includes 750 shares deemed to be beneficially owned by Mr. Webster by virtue of certain stock options that are currently exercisable or become exercisable within 60 days. Also includes 5 shares held by Mr. Webster as custodian for one of his two sons, and 12 shares held by Mr. Webster as custodian for his other son. (14) This information is derived from a Schedule 13G dated September 7, 2001, filed by NewSouth Capital Management, Inc. ("NewSouth"). NewSouth is shown to have sole voting and dispositive power with respect to all 1,318,824 shares. (15) This information is derived from a Schedule 13G dated February 2, 2001, filed by Dimensional Fund Advisors, Inc. ("Dimensional"). All 1,333,800 shares are shown to be owned by certain entities for which Dimensional serves as investment adviser with sole power to direct investments and/or sole power to vote the securities. None of the entities alone holds shares representing more than 5% of the outstanding common stock of Discount. For purposes of the reporting requirements of the Securities Exchange Act of 1934, Dimensional is deemed to be a beneficial owner of such securities; however, Dimensional expressly disclaims that it is, in fact, the beneficial owner of such securities. Agreement and Plan of Merger--Potential Changes in Control If the merger contemplated by the agreement and plan of merger is consummated, Advance and its affiliates will control Discount. Upon consummation of the Discount merger and pursuant to the terms of the agreement and plan of merger, each share of Discount's common stock will be exchanged for $7.50 in cash and 0.2577 shares of common stock of Advance. In connection with entering into the agreement and plan of merger, Industries L.P. entered into (1) a voting agreement pursuant to which it agreed to vote any shares of Discount's common stock that it owns in favor of the merger and the agreement and plan of merger, agreed to refrain from voting in favor of any other proposals to sell Discount and granted to Advance Stores a proxy to vote such shares, and (2) a stock option agreement pursuant to which it granted to Advance Stores an option to purchase the shares of Discount common stock held by Fontaine Industries under certain circumstances. Related Party Transactions of Discount As of October 10, 1992, Discount and Herman and Marie Fontaine ("Mr. and Mrs. Fontaine"), entered into a Wage Agreement (the "Agreement") that provides that from October 10, 1992 and continuing as long as Mr. and Mrs. Fontaine are both living and are continuing to provide the services required under the Agreement, Discount will pay to Mr. and Mrs. Fontaine, collectively, $140,000.00 per year. Upon the death of either Herman or Marie Fontaine, Discount was required to continue to pay the survivor $140,000.00 per year provided the survivor continues to provide the services required under the Agreement. Herman Fontaine is one of the founders of Discount and is currently Chairman Emeritus of Discount. Mr. and Mrs. Fontaine are the parents of Denis L. Fontaine and Peter J. Fontaine. In fiscal 2001, Discount paid Mr. Fontaine a total of $140,000, in accordance with the Agreement. Mrs. Fontaine died in January 2000 and Mr. Fontaine has continued to receive payments under the Agreement. 122 Discount leases two of its store locations under separate one year leases from a Florida partnership which was established by Denis L. Fontaine and Peter J. Fontaine and the current partners of which are Peter J. Fontaine and the Glenda A. Fontaine Marital Trust, which was formed after Denis L. Fontaine's death in June 1994 (the "Marital Trust"). The leases provide for fixed monthly rental, pass through of all expenses to Discount, including taxes, repairs and insurance and one year renewal terms. During fiscal 2001, one of the leases was not renewed, but lease payments in the amount of $34,980 were dispersed prior to the end of the lease. As in the past, the remaining lease has been renewed from year to year and it is anticipated that such renewals will continue. Lease payments under the second and ongoing lease was $57,240 in fiscal 2001. The lease is believed to be at or below fair market value. During fiscal 2001, Discount chartered on a regular basis an airplane from PF Flyers, Inc., a Florida corporation that owns and operates an airplane charter service and all of the common stock of which is beneficially owned by Peter J. Fontaine. The payments made during fiscal 2001 by Discount to PF Flyers, Inc., aggregated approximately $105,833. The rates charged to Discount by PF Flyers, Inc., for the chartering services are believed to be at or below fair market value. 123 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The following pro forma consolidated financial data (the "Pro Forma Financial Data") has been prepared by Advance's management by applying pro forma adjustments to the historical consolidated financial statements of Advance Holding and Discount and the notes thereto included elsewhere in this proxy statement and prospectus. The pro forma adjustments, which are based upon available information and upon certain assumptions that Advance's management believes are reasonable, are described in the accompanying notes. The unaudited pro forma balance sheet as of July 14, 2001 was prepared as if the merger and related financing had occurred on such date. The unaudited pro forma consolidated statements of operations combine the Advance Holding consolidated statements of operations for the fiscal year ended December 30, 2000 (comprising fifty-two weeks), for the twelve months ended July 14, 2001 (comprising fifty-two weeks) and for the six month period ended July 14, 2001 (comprising twenty-eight weeks) with the Discount unaudited consolidated income statements for the twelve-month period ended November 28, 2000 (comprising fifty-two weeks), for the twelve-month period ended August 28, 2001 (comprising fifty-two weeks) and for the six month period ended August 28, 2001 (comprising twenty-six weeks), respectively, to reflect the proposed merger of Discount and Advance and the related financing as if such transactions had been consummated and was effective as of January 2, 2000. As a result of combining the financial results for the above-mentioned periods, Discount's financial results for the 13-week quarter ended February 27, 2001 have been omitted from the Pro Forma Financial Data. Discount's sales and net income for the quarter ended February 27, 2001 were $159.5 million and $2.3 million, respectively. Advance's fiscal year ends on the Saturday closest to December 31 of each year, while Discount's fiscal year ends on the Tuesday closest to May 31 of each year. Accordingly, for purposes of the pro forma consolidated statements of operations, comparable annual and six month period results for the respective companies have been combined in order to provide comparable results for the periods presented. The merger will be accounted for under the purchase method of accounting. The unaudited pro forma consolidated balance sheet as of July 14, 2001 reflects a pro forma allocation of purchase price for the merger to the tangible and intangible assets and liabilities acquired. The final allocation of such purchase price, and the resulting depreciation and amortization expense, will differ from the estimates contained herein due to the final allocation being based on (a) the actual amounts of assets and liabilities on the closing date, (b) final purchase price adjustments, including reserves that may be recognized for possible exit costs, and (c) the final determination of values of property and equipment and intangible and other assets. The actual allocation of the purchase price, and the resulting effect on income from operations may differ significantly from the pro forma amounts included herein. The financial effects to Advance of the merger as presented in the pro forma consolidated financial data are not necessarily indicative of Advance's consolidated financial position or results of operations which would have been obtained had the merger actually occurred on the dates described above, nor are they necessarily indicative of the results of future operations. The pro forma consolidated financial data should be read in conjunction with the notes thereto, which are an integral part thereof, the consolidated historical financial statements of Advance Holding and Discount and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for Advance Holding and Discount which are included elsewhere in this proxy statement and prospectus. Advance expects to achieve ongoing purchasing, distribution and administrative savings as a result of the merger. During 2002, Advance expects these savings to result in approximately $30 million of incremental EBITDA, excluding certain one-time merger expenses. Advance expects these one-time expenses to total approximately $53 million from the closing of the merger through the end of 2003, $41 million of which Advance expects to incur in 2002. Neither the incremental EBITDA nor the one-time merger expenses have been reflected in the Pro Forma Financial Data. See "Certain Financial Projections and Forecasts" at page 41. The Forecast is subject to the qualifications described in that section and the special note regarding forward-looking statements at page 23. 124 Unaudited Pro Forma Consolidated Statements of Operations (amounts in thousands, except per share data)
Twelve Months Ended July 14, 2001 ----------------------------------------------- Advance Holding Discount Total Historical Historical Adjustments Pro Forma ---------- ---------- ----------- ---------- Net Sales.................... $2,389,627 $668,024 $ -- $3,057,651 Cost of Sales................ 1,428,960 405,238 -- 1,834,198 ---------- -------- ------- ---------- Gross Profit................. 960,667 262,786 -- 1,223,453 Selling, general and administrative expenses..... 851,392 220,276 (4,431)(1) 1,067,237 ---------- -------- ------- ---------- Income from operations....... 109,275 42,510 4,431 156,216 Total interest expense....... (63,113) (19,369) (12,399)(2) (94,881) Other income, net............ 1,049 6,972 -- 8,021 ---------- -------- ------- ---------- Income before provision for income taxes................ 47,211 30,113 (7,968) 69,355 Provision for income taxes... (18,606) (10,823) 3,188 (3) (26,241) ---------- -------- ------- ---------- Net income from continuing operations.................. $ 28,605 $ 19,290 $(4,780) $ 43,114 ========== ======== ======= ========== Earnings per share from continuing operations Basic...................... $ 1.01 $ 1.15 $ 1.32 Diluted.................... 1.00 1.15 1.30 ========== ======== ========== Weighted average common shares outstanding Basic...................... 28,290 16,704 32,590 Diluted.................... 28,746 16,746 33,045 ========== ======== ==========
Fiscal Year Ended December 30, 2000 ----------------------------------------------- Advance Holding Discount Total Historical Historical Adjustments Pro Forma ---------- ---------- ----------- ---------- Net Sales.................... $2,288,022 $640,014 $ -- $2,928,036 Cost of Sales................ 1,392,127 388,225 -- 1,780,352 ---------- -------- ------- ---------- Gross Profit................. 895,895 251,789 -- 1,147,684 Selling, general and administrative expenses..... 803,106 202,401 (4,510)(1) 1,000,997 ---------- -------- ------- ---------- Income from operations....... 92,789 49,388 4,510 146,687 Total interest expense....... (66,640) (21,812) (7,081)(2) (95,533) Other income, net............ 1,012 2,079 -- 3,091 ---------- -------- ------- ---------- Income before provision for income taxes................ 27,161 29,655 (2,571) 54,245 Provision for income taxes... (10,535) (10,882) 1,029 (3) (20,388) ---------- -------- ------- ---------- Net income from continuing operations.................. $ 16,626 $ 18,773 $(1,542) $ 33,857 ========== ======== ======= ========== Earnings per share from continuing operations Basic...................... $ 0.59 $ 1.12 $ 1.04 Diluted.................... 0.58 1.12 1.03 ========== ======== ========== Weighted average common shares outstanding Basic...................... 28,296 16,698 32,596 Diluted.................... 28,611 16,698 32,911 ========== ======== ==========
See Notes to Unaudited Pro Forma Consolidated Statements of Operations 125 Unaudited Pro Forma Consolidated Statements of Operations (amount in thousands, except per share data)
Six Months Ended July 14, 2001 ----------------------------------------------- Advance Holding Discount Total Historical Historical Adjustments Pro Forma ---------- ---------- ----------- ---------- Net Sales.................... $1,336,837 $347,597 $ -- $1,684,434 Cost of Sales................ 796,557 209,769 -- 1,006,326 ---------- -------- ------- ---------- Gross Profit................. 540,280 137,828 -- 678,108 Selling, general and administrative expenses..... 472,361 114,153 (2,323)(1) 584,191 ---------- -------- ------- ---------- Income from operations....... 67,919 23,675 2,323 93,917 Total interest expense....... (33,074) (7,474) (10,458)(2) (51,006) Other income, net............ 569 6,741 -- 7,310 ---------- -------- ------- ---------- Income before provision for income taxes................ 35,414 22,942 (8,135) 50,221 Provision for income taxes... (14,010) (8,242) 3,254 (3) (18,998) ---------- -------- ------- ---------- Net income from continuing operations.................. $ 21,404 $ 14,700 $(4,881) $ 31,223 ========== ======== ======= ========== Earnings per share from continuing operations Basic...................... $ 0.76 $ 0.88 $ 0.96 Diluted.................... 0.74 0.88 0.94 ========== ======== ========== Weighted average common shares outstanding Basic...................... 28,285 16,707 32,585 Diluted.................... 28,760 16,792 33,060 ========== ======== ==========
See Notes to Unaudited Pro Forma Consolidated Statements of Operations 126 Notes to Unaudited Consolidated Pro Forma Statements of Operations (dollars in thousands)
Twelve Months Fiscal Year Six Months Ended Ended Ended July 14, December 30, July 14, 2001 2000 2001 ------------- ------------ ---------- (1)Reflects the following: Reduction in depreciation as a result of pro forma purchase price allocation based on an average useful lives of 14 years(a)........................... $ (3,974) $ (3,974) $ (2,140) Less: Amortization of debt issuance costs and goodwill included in selling, general and administrative expenses in historical statement of operations of Discount................ (618) (536) (344) Elimination of amortization of deferred gain on sale leaseback................ 161 -- 161 -------- -------- -------- Net decrease in selling, general and administrative expenses............. $ (4,431) $ (4,510) $ (2,323) ======== ======== ======== (2) Gives effect to the increase in estimated interest expense from the use of borrowings to finance the merger: Commitment fees on unused borrowings related to the revolving credit facility............................. $ (1,274) $ (1,274) $ (686) Interest related to the tranche A term loan facility........................ (11,700) (11,700) (6,300) Interest related to the tranche B term loan facility........................ (21,350) (21,350) (11,496) Interest related to the new senior subordinated notes................... (20,500) (20,500) (11,038) Amortization of original issuance discount related to the New Senior Subordinated Notes amortized over 6 years................................ (1,540) (1,540) (830) Amortization of debt issuance costs related to the New Credit Facility and the New Senior Subordinated Notes amortized over 6 years............... (3,725) (3,725) (2,006) Less: Interest expense and amortization of debt issuance costs in historical statement of operations related to debt extinguished in connection with the merger........................... 47,690 53,008 21,898 -------- -------- -------- Net increase in interest expense..... $(12,399) $ (7,081) $(10,458) ======== ======== ========
-------- (a) Advance has not yet completed valuations of the fair values of Discount's tangible and intangible assets. Advance believes that Discount has intangible assets related to trade names, trade dress, customer contracts and related customer relationships that may ultimately be assigned fair market value in the final purchase price allocation, however, the amounts to be assigned to these intangible assets cannot be estimated currently. Accordingly, the net decrease to book value of property and equipment and intangible assets that results from the purchase price allocation has been allocated in its entirety to property and equipment for purposes of this pro forma presentation and depreciated based on an assumed average useful life of 14 years. The allocation of the net decrease to book value of property and equipment and intangible assets may differ significantly from the pro forma allocation and, as a result, the final related reduction in depreciation expense and increase to amortization expense for intangible assets may differ significantly from the pro forma presentation. (b) Reflects pro forma interest expenses calculated assuming (i) a LIBOR rate of 3.0% plus a spread of 3.5% and 4.0% for the tranche A and tranche B portions of the New Credit Facility, respectively, (ii) a yield to maturity of 11.875% on the New Senior Subordinated Notes, which includes a cash interest component based on a coupon rate of 10 1/4%, and (iii) commitment fees on unused borrowings on the New Credit Facility using a rate of 0.5% per annum. The interest rates on the New Credit Facility are variable. A change in the rates of 1/8 of 1% on these borrowings would change the pro forma interest expense for the fiscal year ended December 30, 2000 and the Twelve Months Ended July 14, 2001 by $618 and for the Six Months Ended July 14, 2001 by $333. (3) Estimated tax effects of the pro forma adjustments at a statutory rate of approximately 40%. 127 Unaudited Pro Forma Consolidated Balance Sheet
Advance Holding Discount Historical Historical July 14, August 28, Total 2001 2001 Adjustments Pro Forma ---------- ---------- ----------- ---------- (dollars in thousands) Assets Current Assets: Cash and cash equivalents(11)............. $ 19,620 $ 6,372 $ (19,807)(1) $ 6,185 Receivables, net............. 90,401 -- -- 90,401 Inventories.................. 788,773 243,053 (20,049)(2) 1,011,777 Other current assets......... 18,878 18,734 17,903(10) 55,515 ---------- -------- --------- ---------- Total Current Assets....... 917,672 268,159 (21,953) 1,163,878 Property and equipment, net.... 400,973 384,463 (22,404)(3) 763,032 Assets held for sale........... 23,640 -- -- 23,640 Other assets, net.............. 22,029 4,431 11,187(4) 37,647 ---------- -------- --------- ---------- Total Assets............... $1,364,314 $657,053 $ (33,170) $1,988,197 ========== ======== ========= ========== Liabilities and Stockholders' Equity Current Liabilities: Current portion of long-term debt........................ $ -- $ 1,200 $ (1,200)(5) $ -- Accounts payable............. 401,039 75,609 -- 476,648 Accrued expenses............. 138,839 23,092 9,900(6) 171,831 Other current liabilities.... 50,770 2,013 (1,342)(9) 51,441 ---------- -------- --------- ---------- Total Current Liabilities.. 590,648 101,914 7,358 699,920 Long-term debt................. 554,819 209,608 185,093(5) 949,520 Other long-term liabilities.... 39,488 19,207 6,937(7) 65,632 Stockholders' equity........... 179,359 326,324 (232,558)(8) 273,125 ---------- -------- --------- ---------- Total Liabilities and Stockholders' Equity...... $1,364,314 $657,053 $ (33,170) $1,988,197 ========== ======== ========= ==========
See Notes to Unaudited Pro Forma Consolidated Balance Sheet 128 Notes to Unaudited Pro Forma Consolidated Balance Sheet (dollars in thousands, except per share data) The Unaudited Pro Forma Consolidated Balance Sheet reflects the merger as if it occurred as of July 14, 2001 (actual amounts may differ significantly from the pro forma amounts estimated below). (1) Reflects increases and decreases in cash resulting from the pro forma adjustments: Cash increases: Proceeds from the issuance of the following: (See note (5) below) Revolving credit facility......................................... $ 9,400 Tranche A term loan facility...................................... 180,000 Tranche B term loan facility...................................... 305,000 New senior subordinated notes..................................... 185,600 --------- Total cash inflows.............................................. 680,000 --------- Cash decreases: Cash portion of purchase price for acquisition (a)................ (128,400) Repayment of Discount's existing long-term debt (b)............... (217,108) Repayment of Advance senior debt under existing deferred term loan, delayed draw, revolving credit and Tranche B facilities (See note (5) below)............................................. (285,299) Purchase of Discount's Gallman distribution facility from the lessor........................................................... (34,000) Estimated debt issuance costs (See note (4) below)................ (22,350) Estimated stock issuance costs (See note (8) below)............... (6,325) Estimated acquisition related costs (See note (2) below).......... (6,325) --------- Total cash outflows............................................. (699,807) --------- Net impact on cash (See note (11) below).......................... $ (19,807) =========
-------- (a) Amount includes $125,300 to purchase approximately 16,700,000 shares of Discount's common stock at $7.50 per share and $3,100 to purchase outstanding "in the money" options to acquire Discount common stock. (b) Amount includes $210,808 to retire long-term debt outstanding and $6,300 in debt prepayment penalties. 129 (2) The merger will be accounted for as a purchase in accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations." The purchase price is being allocated first to the tangible assets and liabilities of Discount based upon preliminary estimates of their fair market values, assuming the merger had occurred on July 14, 2001, with the excess of the estimated fair market value of the net assets acquired over the purchase price allocated on a pro rata basis to reduce property and equipment and intangible assets for pro forma purposes, as follows: Components of purchase price: Cash to Discount shareholders (see note (1) above)................. $ 128,400 Advance common stock to Discount shareholders (4,305,000 shares valued at $24.60 per share)(a).................................... 105,913 Prepayment penalties associated with the extinguishment of Discount's existing long-term debt (see note (1) above)........... 6,300 Accrual for Advance's obligation to purchase continuing insurance coverage for Discount's directors and officers for pre-merger time periods as required by the Merger Agreement (see note (6) below).. 700 Fair value of outstanding options to purchase 1,152,684 shares of Discount common stock that will be converted to options to purchase 594,045 shares of Advance common stock, valued at $1.92 per option (b).................................................... 1,141 Estimated acquisition related costs................................ 6,325 --------- Total purchase price............................................. 248,779 -------- (a) Assumes a $13.84 per share value for Discount common stock (inclusive of $7.50 in cash) based on the historical trading value of Discount's common stock on and around the announcement date of the merger. (b) The fair value of the options to purchase shares of Advance common stock was determined using the Black-Scholes option-pricing model with the following assumptions: (i) risk-free interest rate of 3.92%; (ii) an expected life of two years; (iii) a volatility factor of .40; (iv) a fair value of Advance's common stock of $24.60 and (v) expected dividend yield of zero. Derivation of book value: Historical book value of Discount's net assets................... (326,324) Adjustments to recognize (assets) liabilities in purchase accounting: Reserve for severance payments related to change in control agreements.................................................... 13,500 Purchase accounting adjustment to conform Discount's accrual for self-insured liabilities, based on an estimated case-by- case basis and amounts incurred but not reported to Advance's policy of utilizing actuarially developed accruals for such liabilities (See note (6) below).............................. 1,000 Purchase accounting adjustment to increase Discount's warranty accrual on pre-acquisition sales of certain Discount merchandise to conform with Advance's merchandise return policies (See note (6) below)................................. 3,000 Purchase accounting adjustment to accrue for the settlement of certain consulting agreements as required by the merger agreement (See note (6) below)................................ 1,500 Deferred tax impact of pro forma adjustments (See note (9) below)........................................................ (16,608) Adjustments to reflect fair market value of net assets acquired: Elimination of net book value of goodwill and deferred financing costs acquired (See note (4) below)................. 4,200 Elimination of deferred gain related to a sale-leaseback transaction previously consummated by Discount (See note (7) below)........................................................ (5,900) Decrease in book value of receivables to the amount required given Advance's historical acquisition receivables collection experience ($400) and inventory ($20,049) arising primarily due to Advance management's plans for disposal at sales prices less than book value.......................................... 20,449 --------- Net decrease to book value of property and equipment and intangible assets........................................... $ (56,404) =========
The foregoing pro forma purchase price allocation is based on available information and certain assumptions that Advance believes are reasonable. Advance is currently evaluating certain exit costs that may be incurred in connection with the merger and may establish additional reserves, not reflected in the 130 accompanying pro forma consolidated financial data, at closing based on the results of its evaluation. Any reserves established will result in a pro rata increase in property and equipment, resulting in additional provisions for depreciation expense. The final purchase price allocation will be based on the outcome of the matter referred to above, final determination of the fair values of the tangible and intangible assets acquired at the date of the merger as determined by appraisal or other methods, and actual amounts of assets and liabilities on the closing date. The final purchase price allocation may differ significantly from the pro forma allocation. (3) Reflects the following: Purchase of Discount's Gallman distribution facility from the lessor (See note (1) above)....................................... $ 34,000 Purchase accounting adjustment (See note (2) above) (a)............ (56,404) -------- $(22,404) ========
-------- (a) Advance has not yet completed valuations of the fair values of Discount's tangible and intangible assets. Advance believes that Discount has intangible assets related to trade names, trade dress, customer contracts and related customer relationships that may ultimately be assigned fair market values in the final purchase price allocation, however, the amounts to be assigned to these intangible assets cannot be estimated currently. Accordingly, the net decrease to book value of property and equipment and intangible assets determined in (1) above has been allocated in its entirety to property and equipment for purposes of this pro forma presentation. The final allocation of the net decrease to book value of property and equipment and intangible assets may differ significantly from the pro forma allocation. (4) Reflects the following (a): Purchase accounting adjustment (See note (2) above)................. $(4,200) Estimated deferred debt issuance costs (See note (1) above)......... 22,350 Elimination of deferred debt issuance costs related to Advance's debt that was refinanced (See note (8) below)............................................... (6,963) ------- $11,187 =======
-------- (a) See note (a) to note (3) above. (5) Reflects the following: Proceeds from the issuance of long-term debt under the New Credit Facility and the New Senior Subordinated Notes (See note (1) above)............................................................ $680,000 Repayment of Discount's existing debt: Current portion of long-term debt................................ (1,200) Long-term debt................................................... (209,608) Repayment of Advance senior debt under existing deferred term loan, delayed draw, revolving credit and Tranche B facilities (See note (i) above)........................................................ (285,299) -------- Subtotal......................................................... $183,893 Current portion of Discount's long-term debt repaid................ 1,200 -------- $185,093 ========
(6) Reflects the following: Current portion of the purchase accounting adjustment to accrue for severance payments related to change in control agreements (See note (2) above)........................................................... $3,700 Purchase accounting adjustment to conform Discount's accrual for self- insured liabilities, based on an estimated case-by-case basis and amounts incurred but not reported to Advance's policy of utilizing actuarially developed accruals for such liabilities (See note (2) above)............................................................... 1,000 Purchase accounting adjustment to increase Discount's warranty accrual to reflect Advance's expanded return policy on pre-acquisition sales of certain Discount merchandise (See note (2) above)...................................................... 3,000 Purchase accounting adjustment to accrue for the settlement of certain consulting agreements as required by the merger agreement (See note (2) above)........................................................... 1,500 Accrual for Advance's obligation to purchase continuing insurance coverage for Discount's directors and officers (see note (2) above).. 700 ------ $9,900 ======
131 (7) Reflects the following: Long-term portion of the purchase accounting adjustment to reserve for severance payments related to change in control agreements (See note (2) above).................................................... $ 9,800 Deferred tax impact of pro forma adjustments (See note (9) below)... 3,037 Elimination of deferred gain related to a sale-leaseback transaction previously consummated by Discount (See note (2) above)............ (5,900) ------- $ 6,937 =======
(8) Reflects the following: Issuance of 4,305,000 shares of Advance common stock valued at $24.60 per share to Discount shareholders (See note (2) above)... $ 105,913 Estimated stock issuance costs (See note (1) above)............... (6,325) Fair value of outstanding options to purchase 1,152,684 shares of Discount common stock that will be converted to options to purchase 594,045 shares of Advance common stock, valued at $1.92 per option (See note (2) above).................................. 1,141 Elimination of historical Discount stockholders' equity (See note (2) above)....................................................... (326,324) Elimination of deferred debt issuance costs related to Advance's debt that was refinanced (See note (4) above).................... (6,963) --------- $(232,558) =========
(9) Advance anticipates that the merger will be accounted for as a tax-free transaction resulting in the tax bases of assets and liabilities being carried over from Discount. Components of the net pro forma change in deferred taxes related to changes in amounts allocated to assets and liabilities for financial reporting purposes and other purchase accounting adjustments: Current deferred tax asset......................................... $ 18,303 Reclassification of current deferred tax liability to current deferred tax asset................................................ 1,342 Noncurrent deferred tax liability.................................. (3,037) -------- $ 16,608 ========
(10) Reflects the following: Current deferred tax impact of pro forma adjustments (See note (9) above)............................................................. $18,303 Decrease in book value of receivables to the amount required given Advance's historical acquisition receivables collection experience (see note (2) above)............................................... (400) ------- $17,903 =======
132 MARKET FOR ADVANCE'S AND DISCOUNT'S COMMON STOCK AND DIVIDENDS There is no established public trading market for Advance common stock. Advance Holding stockholders will become holders of Advance common stock as a result of the reincorporation merger on a one share for one share basis. As of October 25, 2001, there were approximately 60 holders of record of common stock of Advance Holding. Advance intends to apply for listing of its shares of common stock on the New York Stock Exchange in connection with the consummation of the merger. Advance Holding has not paid cash dividends to its shareholders since the Recapitalization, and neither Advance nor Advance Holding intends to pay cash dividends in the foreseeable future. In fiscal 1998, prior to the Recapitalization, Advance Holding paid a dividend to its shareholders of approximately $15.0 million. Discount's common stock is currently traded on the New York Stock Exchange under the ticker symbol "DAP." The approximate number of record holders of Discount's common stock at October 25, 2001 was 734. High and low stock prices for the last two fiscal years were:
Fiscal 2002 Fiscal 2001 Fiscal 2000 ------------- ------------ ------------- High Low High Low High Low ------ ------ ------ ----- ------ ------ Qtr 1............................. $15.25 $10.35 $11.00 $7.88 $24.50 $18.94 Qtr 2............................. -- -- 9.25 5.19 19.13 11.00 Qtr 3............................. -- -- 7.75 4.88 20.81 10.13 Qtr 4............................. -- -- 14.20 6.60 12.38 8.50
Since its initial public offering in August 1992, Discount has not paid any cash dividends. Discount does not intend to pay any cash dividends for the foreseeable future and intends to retain earnings, if any, for the future operation and expansion of Discount's business. Discount's existing credit facilities contain restrictions on the payment of cash dividends on Discount's common stock. At August 28, 2001, approximately $48.1 million of Discount's retained earnings were available for dividend distribution. 133 MANAGEMENT OF ADVANCE AFTER THE MERGER Directors and Executive Officers of Advance After the Merger The following table provides information about those persons who are expected to be the directors and executive officers of Advance upon the closing of the merger. With the exception of Mr. Fontaine, such persons are serving as the directors and executive officers of Advance Holding as of the date of this Proxy and Prospectus:
Name Age(1) Position ---- ------ -------- Nicholas F. Taubman..... 66 Chairman of the Board and Director Garnett E. Smith........ 61 Vice Chairman of the Board and Director Lawrence P. Castellani.. 56 Chief Executive Officer and Director Jimmie L. Wade.......... 47 President and Chief Financial Officer David R. Reid........... 39 Executive Vice President and Chief Operating Officer Paul W. Klasing......... 42 Executive Vice President, Merchandising and Marketing Eric M. Margolin........ 48 Senior Vice President, General Counsel and Secretary Jeffrey T. Gray......... 36 Senior Vice President, Controller, Assistant Secretary Robert E. Hedrick....... 54 Senior Vice President, Human Resources and Benefits Senior Vice President and Chief Information S. Lynn Stevens......... 52 Officer John M. Roth............ 43 Director Mark J. Doran........... 37 Director Ronald P. Spogli........ 53 Director Timothy C. Collins...... 45 Director William L. Salter....... 58 Director Jeffrey B. Conner....... 42 Director Peter J. Fontaine(2).... 47 Director
-------- (1) As of October 10, 2001. (2) To be elected as a member of the board of directors of Advance and Advance Stores upon the closing of the merger. Mr. Taubman, Chairman of the Board of Advance, Advance Holding and Advance Stores, joined Advance Stores in 1956. Mr. Taubman has served as Chairman of Advance Stores since January 1985 and as Chief Executive Officer of Advance Stores from January 1985 to July 1997. From 1969 to 1984, Mr. Taubman served as President of Advance Stores. In addition, Mr. Taubman has served as Chairman of Advance Holding since May 1992, the year it was formed, as Chief Executive Officer of Advance Holding from May 1992 to March 1998, and as Secretary and Treasurer of Advance Holding from May 1992 to February 1998. Mr. Smith, Vice Chairman of the Board of Advance, Advance Holding and Advance Stores, joined Advance Stores in November 1959. Mr. Smith was named Vice Chairman of the Board of Advance Holding and Advance Stores in January 2000. Prior to that Mr. Smith served as President and Chief Operating Officer of Advance Stores from January 1985 until July 1997, at which time he became Chief Executive Officer. Mr. Smith has also served in numerous other positions including Executive Vice President and General Manager, Vice President of Purchasing, Buyer and Store Manager. In addition, Mr. Smith has served as President of Advance Holding from May 1992 to October 1999, as Chief Operating Officer of Advance Holding from May 1992 to March 1998, and as Chief Executive Officer of Advance Holding and Advance Stores from March 1998 to January 2000. 134 Mr. Castellani, Chief Executive Officer and Director of Advance, Advance Holding and Advance Stores, joined Advance Stores in February 2000 and is responsible for overall management and operations of Advance Stores. Prior to joining Advance Stores, Mr. Castellani was President and Chief Executive Officer of Ahold Support Services in Latin America (a division of Royal Ahold) from 1998 to 2000 and Chief Executive Officer of Tops Friendly Markets from 1991 to 1998. Mr. Wade, President and Chief Financial Officer of Advance, Advance Holding and Advance Stores, joined Advance Stores in February 1994. Mr. Wade was named President in October 1999 and Chief Financial Officer, and Secretary in March 2000. Mr. Wade is responsible for finance, logistics, information technology, legal and real estate. From 1987 to 1993, Mr. Wade was Vice President, Finance and Operations, for S.H. Heironimus, and from 1979 to 1987, he was Vice President of Finance for American Motor Inns. Mr. Wade is a certified public accountant. Mr. Reid, Executive Vice President and Chief Operating Officer of Advance, Advance Holding and Advance Stores, joined Advance Stores in October 1984 and has held his current position since October 1999. Mr. Reid is responsible for all retail operations and commercial sales. From March 1999 to October 1999, Mr. Reid served as the Chief Executive Officer of Western. Immediately prior to assuming this position, Mr. Reid was Senior Vice President with responsibility for real estate and store support. Mr. Reid has been a Vice President, Store Support for Advance Stores and has also served in various training and store operations positions as Store Manager, Revenue and Division Manager. Mr. Klasing, Executive Vice President, Merchandising and Marketing of Advance, Advance Holding and Advance Stores, joined Advance Stores in April 1995 and has held his current position since October 1999. Mr. Klasing is responsible for merchandising, marketing, and retail pricing. From 1981 to 1992, Mr. Klasing worked for Kragen Auto Parts (now CSK Automotive) and from 1992 to 1995 for Montgomery Ward/Auto Express in various positions. Mr. Margolin, Senior Vice President, General Counsel & Secretary of Advance, Advance Holding and Advance Stores, joined Advance Stores in April 2001. Mr. Margolin is responsible for legal, corporate secretarial affairs and real estate. From 1993 to 2000, Mr. Margolin was Vice President, General Counsel and Secretary of Tire Kingdom, Inc. (now TBC Corporation) and from 1985 to 1993 was general counsel for several companies in the apparel manufacturing and retailing field. Mr. Margolin is a member of the New York State Bar. Mr. Gray, Senior Vice President, Controller and Assistant Secretary of Advance, Advance Holding and Advance Stores, joined Advance Stores in March 1994 and has held his current position since April 2000. Mr. Gray is responsible for accounting, treasury, budgeting, financial analysis and risk management. From 1994 to 2000, Mr. Gray held several positions within Advance Stores, most recently as Vice President of Inventory Management. From 1993 to 1994, Mr. Gray served as controller of Hollins University, and from 1987 to 1993, Mr. Gray was employed by KPMG LLP. Mr. Gray is a certified public accountant. Mr. Hedrick, Senior Vice President, Human Resources of Advance, Advance Holding and Advance Stores, joined Advance Stores in May 2001. Mr. Hedrick is responsible for employee relations, organizational development, compensation, benefits and payroll. Mr. Hedrick was previously Vice President, Human Resources for Foodbrands America from 1997 to 2001, and before that held various positions in Human Resources over a 20 year period with Sara Lee Corporation. Ms. Stevens, Senior Vice President and Chief Information Officer of Advance, Advance Holding and Advance Stores, joined Advance in July 1979. Ms. Stevens was named Senior Vice President and CIO in July 1997. Ms. Stevens is responsible for all technology infrastructure, systems architecture, software, data security, and communications networks. From 1979 until 1997, Ms. Stevens held several positions within Advance, most recently as Vice President of Systems Development. Mr. Roth, Director of Advance, Advance Holding and Advance Stores, became a member of the board of directors in April 1998. Mr. Roth joined Freeman Spogli & Co. in March 1988 and became a principal in March 1993. Mr. Roth is also a director of AFC Enterprises, Inc. and Galyan's Trading Company, Inc. 135 Mr. Doran, Director of Advance, Advance Holding and Advance Stores, became a member of the board of directors April 1998. Mr. Doran joined Freeman Spogli & Co. in 1988 and became a principal in January 1998. Mr. Doran is also a director of Century Maintenance Supply, Inc. Mr. Spogli, Director of Advance, Advance Holding and Advance Stores, became a member of the board of directors in August 2001. He was previously a director of Advance Holding and Advance Stores from the April 1998 recapitalization until the closing of the Western Merger in November 1998. Mr. Spogli is a principal of Freeman Spogli & Co. which he co-founded in 1983. Mr. Spogli also serves as a member of the board of directors of Hudson Respiratory Care, Inc., Century Maintenance Supply, Inc., AFC Enterprises, Inc., and Galyan's Trading Company, Inc. Mr. Collins, Director of Advance, Advance Holding and Advance Stores, became a member of the board of directors in April 1998. Mr. Collins is Senior Managing Director and Chief Executive Officer of Ripplewood Holdings L.L.C., a private investment firm formed by him in October 1995, and is co-head of RHJ Industrial Partners, an affiliate of Ripplewood Holdings L.L.C. From February 1990 to October 1995, Mr. Collins was a Senior Managing Director of the New York office of Onex Corporation, an Ontario corporation listed on the Toronto and Montreal Stock Exchanges. Mr. Collins is also a director of WRC Media, Inc., The Strong Schaefer Value Fund, and Western Multiplex Corporation. Mr. Salter, Director of Advance, Advance Holding and Advance Stores, became a member of the board of directors in April 1999. Mr. Salter is the retired President of the Specialty Retail Division of Sears. From 1995 to 1999, Mr. Salter served as President of the Home Stores and Hard Lines division of Sears, and from 1993 to 1995 as the Vice President and General Manager of the Home Appliances and Electronics Division of Sears. Mr. Conner, Director of Advance, Advance Holding and Advance Stores, became a member of the board of directors in December 2000. Mr. Conner has served as Vice President of Business Development for Sears since May 2000. From 1998 to 2000, Mr. Conner served as Vice President of Stores for Sears Tire Group. Mr. Conner joined Sears in 1987 and held a number of strategic and operational positions before becoming Vice President of Operations for Sears Tire Group in 1997. Mr. Fontaine will become a member of the board of directors of Advance and Advance Stores upon consummation after the merger with Discount. Mr. Fontaine currently is Chairman and Chief Executive Officer of Discount. Mr. Fontaine has been with Discount since 1975, serving since 1978 in various managerial and executive capacities. Mr. Fontaine was elected Secretary and Treasurer of Discount in 1979, Executive Vice President--Operations of Discount in 1992, Chief Operating Officer of Discount in 1993 and President, Chief Executive Officer and Chairman of the Board of Discount in July 1994. Effective February 1, 1997, Mr. Fontaine stepped down from his position as President of Discount but continued in his positions of Chief Executive Officer and Chairman of the Board of Discount. Directors of Advance are elected annually and hold office until the next annual meeting of stockholders or until their successors are duly elected and qualified. Executive officers are elected by, and serve at the discretion of, the board of directors of Advance. Advance Stores has entered into employment agreements with certain of its executive officers. 136 Executive Compensation The following table sets forth information with respect to compensation earned by the Chief Executive Officer, the four other most highly compensated executives serving as officers at the end of the last completed fiscal year and two additional executives, who served as officers during the fiscal year and would have been included in the top four if serving as such at the end of the fiscal year. Summary Compensation Table
Long Term Compensation Annual Compensation Awards -------------------------------------- ------------ Securities Name and Principal Fiscal Other Annual Underlying All Other Position Year Salary Bonus(1) Compensation(3) Options/SARs Compensation(4) ------------------ ------ -------- ---------- --------------- ------------ --------------- Lawrence P. Castellani.. 2000 $542,308 $ 75,000 $ -- 1,050,000 $ -- Chief Executive Officer 1999 -- 3,272,700(2) -- -- -- 1998 -- -- -- -- -- Jimmie L. Wade.......... 2000 $265,865 $ 128,502 $ -- 30,000 $6,336 President and Chief 1999 174,421 158,026 -- 34,500 6,080 Financial Officer 1998 108,537 221,887 -- 25,000 6,665 David R. Reid........... 2000 $250,000 $ 84,923 $ -- 25,000 $6,379 Executive Vice President 1999 198,808 156,625 -- 34,500 6,080 and Chief Operating 1998 108,131 207,794 -- 25,000 5,320 Officer Paul W. Klasing......... 2000 $184,128 $ 80,605 $ -- 18,000 $6,298 Executive Vice President, 1999 151,031 139,359 -- 34,500 6,080 Merchandise and 1998 140,000 231,382 -- 25,000 6,589 Marketing S. Lynn Stevens......... 2000 $172,782 $ 61,243 $ -- 10,000 $6,302 Senior Vice President and 1999 164,665 127,850 -- 8,000 6,080 Chief Information Officer 1998 150,800 234,232 -- 25,000 6,982 Garnett E. Smith(5)..... 2000 $280,758 $ 38,288 $ -- 55,000 $6,000 Vice Chairman and former 1999 507,965 290,000 -- 417,500 8,000 Chief Executive Officer 1998 457,600 7,871,826 -- 362,500 8,000 J. O'Neil Leftwich(6)... 2000 $203,291 $ 23,000 $ -- -- $6,326 Former Senior Vice 1999 188,092 141,125 -- 86,500 6,080 President and Chief 1998 164,415 827,920 -- 72,500 6,932 Financial Officer, Secretary and Treasurer
-------- (1) In connection with the Recapitalization, an aggregate of $11.5 million in extraordinary bonuses were paid to senior employees in April 1998. (2) Reflects a signing bonus accrued on January 1, 2000 in connection with Mr. Castellani's retention as CEO. Approximately $1.9 million of the bonus was used to purchase restricted stock in Advance Holding. (3) While certain officers received perquisites, such perquisites do not exceed the lesser of $50,000 or 10% of each officer's respective salary and bonus. (4) Consists of matching contributions made by Advance Stores under Advance Stores' 401(k) savings plan. (5) In January 2000, Mr. Smith became Vice Chairman of the Board of Advance Holding and Advance Stores. (6) Mr. Leftwich's employment with Advance Stores terminated as of December 30, 2000. 137 Executive Employment Contracts Mr. Castellani was appointed Chief Executive Officer and began employment with Advance Stores on February 1, 2000, at which time he signed an employment and non-competition agreement. Mr. Castellani signed an irrevocable acceptance letter with Advance Stores in December 1999 that obligated Advance Stores to pay Mr. Castellani a signing bonus of $3.3 million. The signing bonus of $3.3 million was accrued at January 1, 2000 and was paid in the first quarter of fiscal 2000. Approximately $1.9 million of the bonus was used to purchase shares of Advance Holding common stock pursuant to a restricted stock agreement, which limits the sale or transfer of rights to the stock during the term of the contract. This portion of the bonus was deferred and is being amortized over the two-year term of the contract. Mr. Castellani's employment contract has an initial term of two years, and renews automatically each year thereafter unless terminated by Advance Stores or Mr. Castellani. The contract provides for a base salary of $600,000, subject to annual increases at the discretion of the board of directors, and an annual cash bonus based on Advance Stores' achievement of performance targets established by the board of directors. In the event Mr. Castellani is terminated without cause, or terminates his employment for "good reason" as defined in the employment agreement, he will receive salary through the later of the end of the term of employment or one year from the effective date of termination, less any amounts earned in other employment. Mr. Castellani has agreed not to compete with Advance Stores, to preserve its confidential information, not to recruit or employ employees of Advance Stores to or in other businesses, and not to solicit customers or suppliers for competitors. On April 15, 1998, Mr. Smith entered into an employment and non-competition agreement with Advance Stores and it was amended effective April 2001. In January 2000, Mr. Smith was named Vice Chairman of Advance Holding and Advance Stores. The agreement has a term of one year, renewing automatically each year thereafter unless terminated by Advance Stores or Mr. Smith. The agreement provides for a base salary of $200,000, effective April 1, 2000, and is subject to annual increases at the discretion of the board of directors. Additionally, Mr. Smith may earn annual cash bonuses based on Advance Stores' achievement of performance targets established by the board of directors. The bonus to be paid upon achievement of targets will be consistent in amount with the bonuses paid to Mr. Smith by Advance Stores historically. In the event Mr. Smith is terminated without cause, or terminates his employment for "good reason" as defined in the employment agreement, he will receive salary through the later of the end of the term of employment or one year from the effective date of termination, less any amounts earned in other employment. Mr. Smith has agreed not to compete with Advance Stores, to preserve its confidential information, not to recruit or employ employees of Advance Stores to or in other businesses, and not to solicit customers or suppliers of Advance Stores for competitors. On April 15, 1998, Messrs. Reid, Wade, Klasing and Ms. Stevens entered into employment agreements with Advance Stores. Such agreements contain severance provisions that provide for one year of base salary upon termination of employment, unless the termination is due to death, disability or retirement, by Advance Stores for "cause" (as defined in the agreements) or by the employee other than for "good reason" (as defined in the agreements), less any amounts earned in other employment. The agreements extend from year-to-year unless terminated by either Advance Stores or the employee. Other provisions require Advance Stores to pay bonuses earned by the employee upon Advance Stores' achievement of earnings targets established by the board of directors, and an agreement by the employee not to compete with Advance Stores, to preserve its confidential information, not to recruit or employ employees of Advance Stores to or in other businesses, and not to solicit customers or suppliers of Advance Stores for competitors. Consulting Agreement On April 15, 1998, Mr. Taubman entered into a consulting and non-competition agreement with Advance Holding and Advance Stores, and it was amended effective April 2001. The agreement requires Advance Holding or Advance Stores to pay consulting fees in an amount of $300,000 per annum, plus an annual bonus of at least $300,000 based upon the achievement of targeted performance goals established by the board of directors. In fiscal 2000, 1999 and 1998, Mr. Taubman earned $320,000, $400,000 and $708,222 respectively, 138 pursuant to the consulting agreement. The agreement extends from year to year unless terminated by either Advance Stores or Mr. Taubman. Mr. Taubman has agreed not to compete with Advance Stores, to preserve its confidential information, not to recruit or employ employees of Advance Stores to or in other businesses, and not to solicit customers or suppliers for competitors. Pursuant to the consulting agreement, Advance Holding and Mr. Taubman have entered into an indemnity agreement whereby Advance Holding will indemnify Mr. Taubman for actions taken as an officer or director of or consultant to Advance Holding or Advance Stores to the fullest extent permitted by law. The amount of time Mr. Taubman must devote to his consultation duties declines throughout the term of the agreement. Advance Stores has entered into indemnification agreements similar to that with Mr. Taubman with five of its other directors. Compensation of Directors Directors of Advance Holding receive no compensation as directors. Directors are reimbursed for their reasonable expenses in attending meetings and performing duties as directors. Stock Subscription Plans Advance Holding has adopted stock subscription plans pursuant to which certain directors, officers and key employees have purchased 751,050 shares, net of cancellations, of the outstanding Advance Holding common stock at the same price as Freeman Spogli & Co.'s purchase of its shares in the Recapitalization, or fair market value at the time of purchase. Approximately $3.2 million of the purchase price for such shares has been paid by delivery of full recourse promissory notes bearing interest at the prime rate and due five years from their inception, secured by all of the stock each such individual owns in Advance Holding. As of July 14, 2001, $2.7 million under these notes remained outstanding. Mr. Smith purchased 250,000 shares for cash and did not deliver a promissory note. Messrs. Wade, Reid, Klasing, Gray, Margolin and Hedrick and Ms. Stevens purchased 25,000 shares, 20,000 shares, 20,000 shares, 10,000 shares, 14,300 shares, 14,300 shares and 20,000 shares respectively. For these individuals, $75,000, $115,000, $110,000, $50,000, $150,000, $150,000 and $100,000 of their purchase price, respectively, was financed through the delivery of promissory notes on the terms described above. As of July 14, 2001, the outstanding principal balance on the promissory notes was $115,000, $110,000, $40,000, $150,000, $150,000 and $100,000 for each of Messrs. Reid, Klasing, Gray, Margolin and Hedrick and Ms. Stevens, respectively. Mr. Castellani entered into a stock subscription agreement under the stock subscription plan in fiscal 2000, pursuant to which he purchased 75,000 shares of Advance Holding common stock. $900,000 of Mr. Castellani's purchase price was financed through the delivery to Advance Stores of a promissory note. As of July 14, 2001, the outstanding balance of the promissory note was $600,000. The agreements entered into in connection with the stock subscription plans provide for restrictions on transferability, and acquired shares are subject to a right of first refusal and a repurchase right at stated prices in favor of Advance Holding and co-sale rights in favor of the executive if Freeman Spogli & Co. sells its shares to a third party. The agreements also include an obligation to sell the shares at the request of Freeman Spogli & Co. These rights (but not the restrictions on transferability) will terminate upon an initial public offering by Advance Holding of Advance Holding common stock, (or an initial public offering by Advance Auto Parts, Inc. of Advance common stock following completion of the merger) as further defined in agreements entered into under the stock subscription plans. The merger is not an initial public offering for this purpose. Advance Auto Parts, Inc. has adopted identical stock subscription plans, and the rights and obligations under the agreements and notes with Advance Holding will be assumed by Advance Auto Parts, Inc. Stock Option Plans Advance Holding has adopted stock option plans. As of October 25, 2001, Advance Holding has granted a total of 2,522,375 shares under the option plans, net of cancellations. Each option plan participant has entered into an option agreement with Advance Holding. The option plans and each outstanding option thereunder are subject to termination in the event of a change in control of Advance Holding or other extraordinary corporate transactions, as more fully described in the option plans. In addition, all options granted pursuant to the option 139 plans will terminate 90 days after termination of employment (unless termination was for cause, in which event an option will terminate immediately) or 180 days in the event of termination due to death or disability. Shares received upon exercise of options are subject to both a right of first refusal and a repurchase right at stated prices in favor of Advance Holding, and co- sale rights in favor of the optionee. These rights will terminate upon an initial public offering by Advance Holding (or by Advance Auto Parts, Inc. following completion of the merger) of its common stock, as further defined in the option agreements. The issuance of shares in the merger is not an initial public offering. Shares received upon exercise of options, as well as all outstanding options, are also subject to obligations to sell at the request of Freeman Spogli & Co. All options will terminate on the seventh anniversary of the option agreement under which they were granted if not exercised prior thereto. Three different types of options may be granted pursuant to the option plans. Fixed price service options generally vest over a three-year period in three equal annual installments beginning one year from the date of grant. Performance options are earned in installments based upon satisfaction of certain performance targets for the four-year period ending in fiscal 2001. Variable price service options vest in equal annual installments over a two- year period beginning in 2000, and have an exercise price that increases over time. Advance will be adopting option plans nearly identical to those currently in use by Advance Holding. Advance's 2001 executive stock option plan will provide the committee administering the plan discretion to grant options which terminate on the tenth anniversary of the date of the option agreement under which such options were granted, and to grant options (primarily for purposes of the substitute options to be granted to holders of Discount's out-of-the- money options, as discussed below) without the restrictions regarding transferability, rights of first refusal, mandatory sale restrictions and other restrictive provisions. As a result of the merger, the existing stock option agreements of Advance Holding and the rights and obligations thereunder will be assumed by Advance. Under the terms of the merger agreement, holders of Discount's out-of-the-money options will receive an option to purchase Advance common stock, preserving the same economic terms. Further, Advance will be obligated to memorialize these substitute options in an agreement no more restrictive, from the perspective of the option holder, than the option agreement between Discount and the holder. Therefore, such options will not contain the same provisions regarding termination or restrictions on transferability, rights of first refusal, mandatory sale restrictions and other restrictive provisions as the current options issued by Advance Holding. These substitute options will terminate on the tenth anniversary of the date of the option agreement between Discount and the holder. Option Grants The following table sets forth information concerning options granted in fiscal 2000 to each of the named executive officers.
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Individual Grants Term Fixed Price Options ------------------------------------------------- -------------------------------- Number of % of Total Securities Options/SARs Underlying Granted to Exercise or Options/SARs Employees in Base Price Expiration Name Granted # Fiscal Year ($/Sh)(1) Date 0%(2) 5%($)(3) 10%($)(3) ---- ------------ ------------ ----------- ---------- ------------------- ------------ Lawrence P. Castellani.. 350,000(4) 26.2 $16.82 2/1/07 -- $ 2,396,600 $ 5,585,098 Lawrence P. Castellani.. 350,000(4) 26.2 20.00 2/1/07 -- 1,283,600 4,472,098 Lawrence P. Castellani.. 350,000(4) 26.2 25.00 2/1/07 -- -- 2,722,098 Jimmie L. Wade.......... 30,000(5) 2.2 16.82 4/14/07 -- 205,423 478,723 David R. Reid........... 25,000(6) 1.9 16.82 4/14/07 -- 171,186 398,936 Paul W. Klasing......... 18,000(7) 1.3 16.82 4/14/07 -- 123,254 287,324 Garnett E. Smith........ 18,000(8) 1.3 16.82 4/14/07 -- 123,254 287,324 S. Lynn Stevens......... 10,000(9) 0.7 16.82 4/14/07 -- 68,474 159,574
-------- (1) Represents the fair market value of the underlying shares of common stock at the time of the grant as determined by Advance's board of directors. (2) Unless the stock price increases, which will benefit all stockholders commensurately, an option holder will realize no gain. 140 (3) Represents the value of the shares of common stock issuable upon the exercise of the option, assuming the stated rates of price appreciation for seven years, compounded annually, with the aggregate exercise price deducted from the final appreciated value. The 5% and 10% rates are established by the SEC as examples only and are not intended to forecast future appreciation in the common stock price. (4) Represents 350,000 fixed price service options. (5) Represents 30,000 fixed price service options. (6) Represents 25,000 fixed price service options. (7) Represents 18,000 fixed price service options. (8) Represents 18,000 fixed price service options. (9) Represents 10,000 fixed price service options. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values The following table sets forth information with respect to the executive officers concerning option exercises for fiscal 2000 and exercisable and unexercisable options held as of December 30, 2000.
Number of Underlying Value of In-the-Money Options at Options at December 30, Shares December 30, 2000 2000 ($)(1)(2) Acquired on Value ------------------------- ------------------------- Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable ---- ------------ ------------ ----------- ------------- ----------- ------------- Lawrence P. Castellani.. -- -- -- 1,050,000 $ -- $1,813,000 Jimmie L. Wade.......... -- -- 10,667 53,833 95,737 344,373 David R. Reid........... -- -- 10,677 48,833 95,737 323,473 Paul W. Klasing......... -- -- 10,677 41,833 95,737 294,213 Garnett E. Smith........ -- -- 124,583 310,917 1,245,381 3,047,258 S. Lynn Stevens......... -- -- 10,167 32,833 93,647 256,593
-------- (1) There is no established public trading market for the Advance common stock. Advance believes that the fair market value of the Advance Holding common stock was $21.00 per share as of December 30, 2000. (2) Values for "in-the-money" outstanding options represent the positive spread between the respective exercise prices of the outstanding options and the fair market value underlying the Advance common stock of $21.00 as described in note (1). Compensation Committee Interlocks and Insider Participation The compensation committee of the board of directors determines the compensation of the executive officers. During fiscal 2000, Messrs. Roth, Salter and Smith served on the compensation committee. Mr. Smith also served as an officer of Advance during fiscal 2000. 141 DESCRIPTION OF THE CAPITAL STOCK OF ADVANCE Advance's authorized capital stock consists of 100,000,000 shares of common stock, par value $.0001 per share, and 10,000,000 shares of preferred stock, par value $.01 per share. As of October 25, 2001, on a pro forma basis assuming completion of the one- for-one exchange contemplated by the reincorporation merger agreement, there were 28,321,150 shares of Advance common stock outstanding, which were held by 60 shareholders of record. Approximately 4,305,000 additional shares of Advance common stock will be issued in the Discount merger by Advance to holders of Discount common stock and as a result approximately 32,626,150 shares of Advance common stock will be outstanding following the Discount merger. The following description of Advance's capital stock is not complete and is subject to and qualified in its entirety by Advance's certificate of incorporation and bylaws, which are included as exhibits to the registration statement filed by Advance with the SEC and which is publicly available, and by the provisions of applicable Delaware law. Common Stock Holders of shares of common stock are entitled to one vote for each share held of record on all matters on which stockholders are entitled or permitted to vote. The certificate of incorporation and bylaws of Advance provide that, except as otherwise provided by law, the affirmative vote of a majority of the shares entitled to vote, present in person or represented by proxy at a meeting at which a quorum is present, shall be the act of the stockholders. Delaware law requires the affirmative vote of a majority of the outstanding shares entitled to vote thereon to authorize certain extraordinary actions, such as mergers, consolidations, dissolutions of the corporation or an amendment to the certificate of incorporation of the corporation. Advance's certificate of incorporation does not provide for cumulative voting and, therefore, under Delaware law, there is no cumulative voting for the election of directors. Upon a liquidation, Advance's creditors and any holders of preferred stock with preferential liquidation rights will be paid before any distribution to holders of Advance's common stock. The holders of Advance's common stock would be entitled to receive a pro rata amount per share of any excess distribution. Holders of common stock have no preemptive or subscription rights. There are no conversion rights, redemption rights, sinking fund provisions or fixed dividend rights with respect to the common stock. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued upon completion of the merger will be fully paid and nonassessable. Preferred Stock Advance's certificate of incorporation empowers Advance's board of directors to issue up to 10,000,000 shares of preferred stock from time to time in one or more series. The board also may fix the designation, privileges, preferences and rights and the qualifications, limitations and restrictions of those shares, including dividend rights, conversion rights, voting rights, redemption rights, terms of sinking funds, liquidation preferences and the number of shares constituting any series or the designation of the series. Terms selected could decrease the amount of earnings and assets available for distribution to holders of common stock or adversely affect the rights and powers, including voting rights, of the holders of the common stock without any further vote or action by the shareholders. The rights of holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred shares that may be issued by Advance in the future. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of the common stock and may adversely affect the voting and other rights of the holders of common stock. Although Advance has no present intention to issue any shares of preferred stock, any issuance could have the effect of making it more difficult for a third party to acquire a majority of Advance's outstanding voting stock. Stockholders Agreement Mr. Taubman and the Arthur Taubman Trust Dated July 13, 1964, Freeman Spogli & Co., Ripplewood Partners, L.P. and Ripplewood Advance Auto Parts Employee Fund I L.L.C., WAH and Advance Holding have 142 entered into a stockholders agreement that will continue in force following the merger as to the stock and options of Advance Auto Parts, Inc. Under the stockholders agreement, Freeman Spogli & Co., the Ripplewood entities, WAH and Mr. Taubman and the Taubman Trust have the right to purchase their pro rata share of certain new issuances of securities, including capital stock, by Advance Holding (and by Advance Auto Parts, Inc. following the consummation of the Discount merger). Prior to an initial public offering, any transfers of common stock of Advance Holding (and as to Advance common stock following consummation of the Discount merger) by signatories to the stockholders agreement (other than Peter Fontaine and his affiliates) are subject to rights of first refusal in favor of (i) Freeman Spogli & Co. and WAH on a pro rata basis, in the case of a transfer by Ripplewood, (ii) WAH, in the case of a transfer by Freeman Spogli & Co. and (iii) Freeman Spogli & Co., in the case of a transfer by WAH. The stockholders agreement further provides tag-along rights such that (i) upon transfers of common stock of Advance Holding (and as to Advance common stock following consummation of the Discount merger) by Freeman Spogli & Co. (excluding transfers to affiliates), Mr. Taubman, the Taubman Trust, the Ripplewood entities and WAH will have the right to participate in such sales on a pro rata basis, (ii) upon transfers of common stock of Advance Holding (and as to Advance common stock following the merger) by WAH (excluding transfers to affiliates of WAH), Freeman Spogli & Co., Mr. Taubman, the Taubman Trust, and the Ripplewood entities will have the right to participate in such sales on a pro rata basis and (iii) upon transfers of common stock of Advance Holding (and to Advance common stock, following the merger) by the Ripplewood entities (excluding transfers to their affiliates), Freeman Spogli & Co. will have the right to participate in such sales on a pro rata basis, and if Freeman Spogli & Co. exercises such right, Mr. Taubman, the Taubman Trust, and WAH will have the right to participate in such sales on a pro rata basis. In addition, if Freeman Spogli & Co. sells all of its holdings of common stock of Advance Holding (and as to Advance common stock after consummation of the merger), Ripplewood, Mr. Taubman and the Taubman Trust will be obligated to sell all of their shares of common stock of Advance Holding (and as to Advance common stock after consummation of the merger) at the request of Freeman Spogli & Co. Without the consent of the majority of the other stockholders, Sears will not sell WAH to a third party so as to dispose of its indirect interest in Advance. The stockholders agreement further provides that the parties will vote at each annual meeting of Advance Holding (and of Advance Auto Parts, Inc. following consummation of the merger) to elect to the board of directors Mr. Taubman, the chief executive officer of Advance, three nominees of Freeman Spogli & Co., three nominees of WAH and one nominee of Ripplewood. Certain transfers of common stock of Advance Holding (and as to Advance common stock after consummation of the merger) by either Freeman Spogli & Co. or WAH will reduce the number of directors such parties are entitled to nominate. Ripplewood has granted Freeman Spogli & Co. an irrevocable proxy to vote Ripplewood's stock in Advance Holding (and of Advance Auto Parts, Inc. following consummation of the merger) on all matters, expiring upon an initial public offering of common stock by Advance (the issuance of common stock in the merger is not an initial public offering), but Freeman Spogli & Co. will nominate one director designated by Ripplewood. The Ripplewood director will agree to vote with the Freeman Spogli & Co. directors on all matters prior to an initial public offering of common stock by Advance. The merger will not constitute an initial public offering for this purpose. Pursuant to the stockholders agreement, without the approval of Mr. Taubman, Advance Holding (Advance Auto Parts, Inc. following consummation of the merger) may not (i) issue any capital stock for consideration at less than fair market value, unless the capital stock is issued in a financing transaction fair to and in the best interests of Advance Holding (Advance Auto Parts, Inc. following consummation of the merger), subject to certain specified exceptions, (ii) enter into any transaction with any affiliate of Freeman Spogli & Co., Ripplewood, or Sears, except on terms no less favorable to Advance Holding (Advance Auto Parts, Inc. following consummation of the merger) than are available from an unaffiliated party, or (iii) amend the articles of incorporation or bylaws of Advance Holding (Advance Auto Parts, Inc. following consummation of the merger) or the stockholders agreement in a manner which would adversely affect the rights and obligations of Mr. Taubman, subject to certain specified exceptions. At the closing of the merger, Peter Fontaine, together with entities controlled by him, will become a party to the stockholders agreement. In addition, as a condition to consummation of the merger, at the closing, Mr. Fontaine will be elected to the board of directors of Advance Auto Parts, Inc. Thereafter, the parties to the 143 stockholders agreement will be obligated to vote for Mr. Fontaine's election to the Advance Auto Parts, Inc. board until the earlier of 2004, Mr. Fontaine's resignation from the Advance Auto Parts, Inc. board, his removal from the Advance Auto Parts, Inc. board for cause, Mr. Fontaine's no longer having beneficial interest in at least 50% of the Advance Auto Parts, Inc. shares as to which he acquires beneficial ownership in the merger, or the termination of the voting rights of the other parties to the stockholders agreement. Registration Rights of Stockholders Freeman Spogli & Co., WAH, the Ripplewood entities, Mr. Taubman and the Taubman Trust, under the stockholders agreement, have registration rights with respect to approximately 27,436,318 shares of common stock that they hold. Under the stockholders agreement, beginning 180 days after the consummation of an initial public offering of Advance's stock, these stockholders may require Advance to register for resale under the Securities Act their shares of common stock. The merger is not an initial public offering for this purpose. These registration rights include the following provisions: Demand Registration Rights. Advance has granted three demand registrations to Freeman Spogli & Co. and WAH, two demand registrations to Mr. Taubman and the Taubman Trust, and one demand registration to Ripplewood. Piggyback Registration Rights. All holders of shares with demand registration rights also have unlimited piggyback registration rights. Other Rights. Advance granted WAH the right, beginning 180 days after the consummation of an initial public offering, to distribute its shares of common stock to stockholders of Sears, Roebuck & Co. Expenses. Advance is responsible for paying all registration expenses, excluding underwriting discounts and commissions. Indemnification. Advance has agreed to indemnify Freeman Spogli & Co., WAH, Ripplewood, Mr. Taubman and the Taubman Trust, and the control person of each of these against certain liabilities under the Securities Act. At the closing of the merger, the stockholders agreement will be amended to grant to Peter Fontaine, and the entities he controls, unlimited piggyback registration rights. Potential Anti-takeover Effect of Delaware Law, Advance's Certificate of Incorporation and Bylaws Advance is governed by the provisions of Section 203 of the Delaware General Corporation Law, which is an anti-takeover law. Section 203 generally prevents any "interested shareholder" (15% or more stockholder in a public company) from entering into any merger or business combination for three years following the time at which such stockholder crossed the 15% threshold, unless: . the board of directors approved the transaction before the stockholder reached the 15% ownership threshold; . the stockholder crossed the 15% threshold in a transaction in which it acquired at least 85% of Advance's stock (excluding for purposes of determining the number of shares outstanding those shares owned (i) by persons who are directors and are also officers and (ii) employee stock plans in which the participants do not have the right to determine confidentially whether shares held subject to the plans will be tendered in the tender or exchange offer); or 144 . the business combination or merger is approved by the board of directors and authorized at an annual or special meeting of stockholders (and not by written consent) by two-thirds of the holders of the outstanding common stock not owned by the interested stockholder. Section 203 prevents unwelcome bidders from completing a merger unless the board and/or the non-interested stockholders consent. Provisions of Advance's certificate of incorporation and bylaws providing that only the board of directors, the Chairman of the board of directors or the chief executive officer may call special meetings of stockholders, and prohibiting stockholder action by written consent, may have the effect of making it more difficult for a third party to acquire control of Advance, or of discouraging a third party from attempting to acquire control of Advance. Amendment of these provisions requires the affirmative vote of holders of 66 2/3% of the outstanding Advance capital stock. In addition, Advance's certificate of incorporation allows Advance's board of directors to issue up to 10,000,000 shares of preferred stock that could have when issued voting rights or preferences that could impede the success of any hostile takeover, or delay a change in control or change in Advance's management. Listing Advance has filed an application for quotation of its common stock on the New York Stock Exchange under the trading symbol AAP. Transfer Agent and Registrar The transfer agent and registrar for Advance's common stock is Mellon Investor Services LLC. The transfer agent's address is One Mellon Center, 500 Grant Street, Suite 2122, Pittsburgh, PA 15258-0001 and telephone number is (412) 236-8173. Lock-Up Agreements Effective upon the closing of the merger, Peter J. Fontaine and entities controlled by him will be bound not to sell their shares of Advance common stock received in the merger, or enter into a contract or hedge transaction having the economic consequences of a sale, for a period of 180 days after the merger. Further, after completion of any underwritten public offering by Advance, so long as Mr. Fontaine is serving as a director or officer of Advance he and the Fontaine entities will also be restricted from selling Advance common stock for up to 180 days thereafter depending on the lock-up period applicable to Mr. Taubman. Under the stockholders agreement, Advance, as successor to Advance Holding, has the right to obtain similar lock-up agreements from its principal stockholders, though the duration for certain stockholders may be shorter in certain instances. In addition, provisions of stock subscription agreements and stock option agreements entered into between Advance Holding and Advance will have the effect of prohibiting certain executive officers of Advance from selling shares acquired under the agreements into the public market for various periods of time following the merger. Rule 144 In general, under Rule 144, a person, including each of Advance's "affiliates," who has beneficially owned "restricted securities" for at least one year, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of: . 1% of the then outstanding shares of the common stock, approximately 326,261 shares immediately after the completion of the merger, or . the average weekly trading volume in Advance's common stock during the four calendar weeks preceding the filing of a notice of the sale with the SEC. 145 Sales pursuant to Rule 144 are subject to requirements relating to manner of sale, notice and availability of current public information about us. Under Rule 144(k), a holder of "restricted securities" who is not an affiliate of Advance and who has beneficially owned his or her shares for at least two years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. Rule 701 In general, and subject to lock-up agreements, any of Advance's employees, consultants or advisors, other than affiliates, who has purchased shares from Advance under its stock purchase plans or option plans or other written agreements in accordance with Rule 701 of the Securities Act, will be eligible to resell their shares under Rule 144 after satisfying the one year holding period. Registration of Shares Under Stock Option Plans Advance intends to file a registration statement on Form S-8 covering all of the shares of common stock issuable or reserved for issuance under Advance's stock option plans, including the substitute options granted to certain of Discount's option holders in accordance with the terms of the merger agreement, as soon as practicable following the date of the effective time of the merger. When issued, these shares will be freely tradeable in the public market, subject to Rule 144 volume limitations applicable to affiliates and lock-up agreements. 146 COMPARISON OF RIGHTS BETWEEN DISCOUNT SHAREHOLDERS AND ADVANCE STOCKHOLDERS The following table compares in summary form a number of the provisions of Discount's articles of incorporation and bylaws with the provisions of Advance's certificate of incorporation and bylaws, as well as various provisions of Florida and Delaware corporate law. The summary table is not a complete description of all of the differences between Discount's articles of incorporation and bylaws and the Advance's certificate of incorporation and bylaws, nor is it a complete description of the differences between the corporate laws of the two states.
Item Discount Advance ---- -------- ------- Authorized shares 50,000,000 common stock, 100,000,000 common stock, 5,000,000 preferred. 10,000,000 preferred. Directors . number Currently 4, with the Currently 9, with the exact number to exact number to be be between 9 and 14. between 3 and 9. . term Three years. Classified One year. board serving staggered three year terms. . cumulative voting One vote per share of One vote per share of common stock. common stock. . filling of vacancies By majority of the By majority of the directors then in office, directors. although less than a quorum. . removal without cause By majority vote of By majority vote of stockholders present in shareholders, with or person or represented by proxy at a meeting without cause, at any of stockholders at which a quorum is present, annual or special with or without cause. meeting of shareholders. Preemptive rights No preemptive rights Board of directors has the authority to unless specifically determine all preferences of preferred provided in terms of stock including preemptive rights. preferred stock. Stockholder proposals Need to satisfy certain Need to satisfy certain timing and timing and information information requirements. requirements. Special meetings of May be called by a May be called by the board of stockholders majority of the board of directors, the chairman of the board or directors, the chairman the chief executive officer. of the board, the president or shareholders together holding at least 25% of the outstanding shares if certain notice requirements are met by the shareholders. Stockholder action without Shareholder action may None. Any action by the stockholders a meeting be taken without a must be taken at a duly called annual or meeting if the action is special meeting. taken by the shareholders representing the minimum number required to approve the transaction at a meeting and if such consent is delivered to a company's secretary within 60 days of receipt of the earliest dated consent. Notice of the action must be given to those shareholders who did not consent to the action within 10 days of approval of the action.
147
Item Discount Advance ---- -------- ------- Limitations on liability Directors and officers Directors and officers not liable for monetary not liable except for damages for breaches of fiduciary duties (1) a violation of except for (1) breach of duty of loyalty, criminal law, unless the (2) acts or omissions not in good faith or director had reasonable which involve intentional misconduct or a cause to believe his knowing violation of the law, conduct was lawful or (3) unlawful payment of dividends or had no reasonable cause unlawful stock repurchases, or to believe his conduct (4) transactions involving improper was unlawful, (2) a personal benefit. transaction from which the director derived an improper personal benefit, (3) a circumstance for which a director is liable for an unlawful distribution, (4) in a derivative action or an action by a shareholder, a circumstance which constitutes conscious disregard for the best interests of the corporation or willful misconduct, or (5) in a proceeding other than a derivative action or an action by a shareholder, a circumstance which constitutes recklessness or an act or omission which was committed in bad faith or with malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety or property. Indemnification Indemnification of Indemnification of directors, officers, directors and officers employees and agents to the fullest to the fullest extent extent permitted by Delaware law. permitted by Florida law. Transactions with Florida law contains an Delaware law restricts transactions interested stockholders "affiliated with a 15% or more stockholder for a transactions" statute period of three years after reaching the which provides that 15% threshold, subject to certain exceptions. certain transactions involving a corporation and a shareholder owning 10% or more of the corporation's outstanding voting shares, an "interested shareholder," must generally be approved by the affirmative vote of the holders of 66 2/3% of the disinterested shareholders. Limitation of voting Florida has a control Delaware has no similar provision. rights share acquisition statute which can have the effect of limiting the voting rights of stockholders who hold 20% or more of the voting stock.
Significant provisions of Advance's certificate and bylaws and Discount's articles and bylaws, and certain differences between such charter documents are discussed below. Although it is impracticable to compare all of the aspects in which Florida law and Delaware law differ, the following is a summary of certain significant differences between the provisions of these laws. 148 The following discussion is not intended to be a complete statement of the differences affecting the rights of stockholders, but rather summarizes material differences and certain important similarities. Board of Directors. Advance's bylaws provide that the board of directors of Advance shall consist of between 9 and 14 persons, the exact number of which shall be determined by resolution of the board of directors. Advance's board is set at 10 directors and one position is currently vacant. Following the merger, the then current directors of Advance will continue to serve as directors of Advance and Peter J. Fontaine, the Chief Executive Officer of Discount, will become a director of Advance. If the vacancy is filled prior to the closing then the number of directors which constitutes the board shall be increased to 11 to accommodate Mr. Fontaine's position on the Board. Cumulative Voting. Under Florida law and Delaware law, cumulative voting is permitted if provided for in a company's articles of incorporation or certificate of incorporation. Both the certificate of incorporation of Advance and the articles of incorporation of Discount do not provide for cumulative voting. There is therefore no cumulative voting. Board Vacancies. Delaware law provides that, unless otherwise provided in a corporation's certificate of incorporation or bylaws, vacancies and newly created directorships may be filled by the affirmative vote of a majority of the directors then in office or a sole remaining director, even though less than a quorum. However, Delaware law also provides that if at the time of filling any vacancy or newly created directorship the directors then in office constitute less than a majority of the corporation's whole board of directors, as constituted prior to any such increase, then, upon application by shareholders representing at least 10% of outstanding shares entitled to vote for such directors, the Delaware Court of Chancery may order a shareholder election of directors to be held. Advance's bylaws follow the provisions of Delaware law. Florida law provides that, unless the articles of incorporation provide otherwise, vacancies arising on the board of directors may be filled by the affirmative vote of a majority of the remaining directors, even if no quorum remains, or by the shareholders. Where a vacancy will be known to occur at some point in the future, it may be filled in advance, although the new director will not take office until the vacancy actually occurs. The Discount bylaws follow the provisions of Florida law. Removal of Directors. Both Discount's and Advance's bylaws provide that a director or the entire board of directors may be removed with or without cause by the affirmative vote of a majority of the shares of capital stock then outstanding and entitled to vote in an election of directors. Preemptive Rights. Discount's articles provide that shareholders do not have any preemptive rights for any shares of common stock or other securities of Discount unless specifically provided in the terms of the preferred stock. As a result, if Discount was to issue any new shares or new class of stock, or securities convertible into any such stock, existing stockholders would not be entitled, as a matter of right, to subscribe for or purchase the new shares or securities unless Discount elected to provide such opportunity. Advance's certificate is silent on preemptive rights and therefore the holders of capital stock of Advance do not have preemptive rights. Special Meetings of Stockholders. Discount's bylaws provide that a special meeting of the shareholders may be called by a majority of the board of directors, the chairman of the board, the president or stockholders together holding at least 25% of the outstanding shares if the stockholders sign, date and deliver to the secretary of Discount one or more written demands for the meeting describing the purpose or purposes for which it is to be held. Advance's certificate of incorporation and bylaws provide that special meetings of stockholders may only be called by the board of directors, the chairman of the board of directors or by the chief executive officer of Advance. Advance's certificate of incorporation and bylaws do not allow stockholders to call a special meeting. Stockholder Action Without a Meeting. Both Florida and Delaware law provide that any action required or permitted to be taken at an annual or special meeting of stockholders may be taken by written consent of the 149 stockholders without a meeting if taken by the minimum number of votes that would be necessary to take the action at a meeting at which all shares entitled to vote thereon were present, unless otherwise provided in its certificate of incorporation. Discount's certificate further provides that the approved written consent must be delivered to the secretary of Discount within 60 days of the action and that notice that such stockholder action was taken must be delivered to all stockholders within 10 days of approval if the action was not taken by all stockholders. Advance's certificate prohibits action by the stockholders without a meeting. Limitations on Director and Officer Liability; Indemnification. Advance's certificate of incorporation and Discount's articles of incorporation both contain a provision that eliminates or limits a director's personal liability for monetary damages for breaches of fiduciary duties to the fullest extent permitted by Delaware law and Florida law, respectively. Delaware law allows the corporation to adopt a provision in its certificate of incorporation which provides that a director (and any other person who pursuant to the certificate of incorporation and in accordance with Delaware law exercises or performs powers or duties conferred or imposed by the board) of Advance shall not be liable for monetary damages for breach of his or her fiduciary duty as a director, but that a director would be liable for: . any breach of the director's duty of loyalty to Advance or its stockholders; . acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law; . under Section 174 of the Delaware General Corporation Law which imposes liability on directors for unlawful payment of dividends or unlawful stock repurchases; or . any transaction from which the director derived an improper personal benefit. Advance's certificate contains such a provision limiting the liability of Advance's directors. To the extent a present or former director or officer is successful on the merits or otherwise in the defense of certain actions, suits or proceedings, the corporation is required by Delaware law to indemnify such individual for reasonable expenses incurred thereby. The bylaws of Advance require Advance to pay expenses incurred in defending the proceedings specified above in advance of their final disposition, provided that the advancement of expenses to a director or officer shall be made only if such person undertakes to repay all amounts so advanced if it is ultimately determined that such person is not entitled to be indemnified. Delaware law permits a corporation to enter into separate indemnification agreements with directors and officers to provide additional indemnification to the fullest extent permitted by law. Advance Holding has made indemnification agreements available to every director and Advance would enter into substantially similar agreements with its directors upon completion of the merger. Florida law and Discount's bylaws permit a corporation to indemnify officers, directors, employees and agents against liability for actions taken in good faith and in a manner they reasonably believed to be in, or not opposed to, the best interests of the corporation, and with respect to any criminal action, which they had no reasonable cause to believe was unlawful. Florida law provides that a corporation may advance reasonable expenses of defense: . to a director or officer upon receipt of an undertaking to reimburse the corporation if indemnification is ultimately determined not to be appropriate; and . to other employees and agents upon such terms and conditions as the board deems appropriate. The corporation must reimburse a successful defendant for expenses, including attorneys' fees, actually and reasonably incurred. 150 Indemnification and advancement of expenses under Discount's bylaws are not exclusive, and Discount may further indemnify or advance expenses to any such parties under any agreement, vote of directors or shareholders or otherwise, unless the person indemnified: . has acted in violation of criminal law and had reasonable cause to believe that his conduct was unlawful; . derived an improper personal benefit; or . displayed willful misconduct or conscious disregard for the best interests of Discount. Florida law provides that a director is not personally liable for monetary damages to the corporation or any other person for any statement, vote, decision, or failure to act, regarding corporate management or policy unless the director breached or failed to perform his duties as a director and such breach or failure constitutes: . a violation of criminal law, unless the director had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful; . a transaction from which the director derived an improper personal benefit; . a circumstance for which a director is liable for an unlawful distribution; . in a derivative action or an action by a shareholder, constitutes conscious disregard for the best interests of the corporation or willful misconduct; or . in a proceeding other than a derivative action or an action by a shareholder, constitutes recklessness or an act or omission which was committed in bad faith or with malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety or property. Payments of Dividends. Florida law permits a corporation's board to make distributions to its shareholders unless, after giving effect to such distribution, the corporation would be unable to pay its debts as they become due in the usual course of business, or would be left with total assets that are less than the sum of its total liabilities plus its obligations upon dissolution to satisfy preferred shareholders whose preferential rights are superior to those receiving the distribution. Under Florida law, a corporation's redemption of its own common stock is deemed a distribution. Under Delaware law, upon resolution of the corporation's board of directors, dividends may be declared and paid out of capital surplus, or, in case there is no capital surplus, out of the corporation's net profits for the fiscal year in which the dividend is declared and/or the net profits from the preceding fiscal year. The distribution of dividends is not permitted by a Delaware corporation in the event the capital of such corporation shall have diminished by depreciation of property or losses to an amount less than the aggregate amount of the capital represented by issued and outstanding stock having a preference upon distribution of assets. The board of directors of Advance has no intention of paying dividends on the common stock in the foreseeable future. Advance is party to indentures for the outstanding 12.875% debentures of Advance Holding and 10.25% senior subordinated notes of Advance Stores, each of which contain certain covenants that limit the ability of Advance and subsidiaries to pay dividends. Advance Stores' current senior debt facility likewise prohibits payment of dividends by Advance Holding. The proposed financing arrangements to be entered into on connection with the merger would likewise prohibit payment of dividends by Advance. Restrictions on Business Combinations with Principal Stockholders; Anti- takeover Statutes. Delaware law and Florida law regulate transactions with interested stockholders after they become interested stockholders. Under Delaware law, a Delaware corporation (or any direct or indirect majority owned subsidiary of the corporation) is prohibited from engaging in: . mergers or consolidations; . sales, leases, exchanges, mortgages, pledges, transfers or other dispositions of assets having an aggregate market value equal to 10% or more of either the aggregate market value of all assets of the 151 corporation determined on a consolidated basis or the aggregate market value of all outstanding stock of the corporation; and . issuances of stock and other transactions ("business combinations"), in each case with a person or group that owns 15% or more of the voting stock of the corporation (an "interested stockholder"), for a period of three years after the interested stockholder crosses the 15% threshold. These restrictions on transactions involving an interested stockholder do not apply in certain circumstances, including those transactions in which: . prior to an interested stockholder owning 15% or more of the voting stock, the board of directors approved the business combination or the transaction that resulted in the person or group becoming an interested stockholder; . upon consummation of a transaction that resulted in a person or group becoming an interested stockholder, the person or group owned at least 85% of the voting stock other than stock owned by inside directors and certain employee stock plans; or . after the person or group became an interested stockholder, the board of directors and at least two-thirds of the voting stock other than stock owned by the interested stockholder approved the business combination. A Delaware corporation may exempt itself from the requirements of the statute in its certificate of incorporation, although Advance has not done so. In addition, the statute does not apply to corporations whose stock is: . not listed on a national securities exchange; . not authorized for quotation on the Nasdaq Stock Market; or . held of record by 2,000 or less stockholders. Florida law contains an "affiliated transactions" statute which provides that certain transactions involving a corporation and a shareholder owning 10% or more of the corporation's outstanding voting shares, an "interested shareholder," must generally be approved by the affirmative vote of the holders of 66% of the disinterested shareholders. The transactions covered by the statute include, with certain exceptions, mergers and consolidations to which the corporation and the interested shareholder are parties. Under the Florida law, a 66% vote is not required in any of the following circumstances: . the transaction was approved by a majority of the corporation's disinterested directors; . the corporation did not have more than 300 shareholders of record at any time during the preceding three years; . the interested shareholder has been the beneficial owner of at least 80% of the corporation's outstanding voting shares for the past five years; . the interested shareholder is the beneficial owner of at least 90% of the corporation's outstanding voting shares, exclusive of those acquired in a transaction not approved by a majority of disinterested directors; and . the consideration received by each shareholder in connection with the transaction satisfies the "fair price" provisions of the statute. This statute applies to any Florida corporation unless the original articles of incorporation or an amendment to the articles of incorporation or bylaws contain a provision expressly electing not to be governed by this statute, or an amendment to the articles of incorporation expressly electing not to be governed by the "affiliated transactions" statute or bylaws is approved by the affirmative vote of a majority of disinterested 152 shareholders, but is not effective until 18 months after approval. Neither Discount's articles of incorporation nor its bylaws contain such a provision. Florida law also contains a "control share acquisition" statute which provides that a person who acquires shares in an issuing public corporation in excess of certain specified thresholds, pursuant to Section 607.0902, will generally not have any voting rights with respect to such shares, unless the voting rights are approved by a majority of the disinterested shareholders. This statute does not apply to acquisitions of shares of a corporation if, prior to the pertinent acquisition of shares, the corporation's articles of incorporation or bylaws provide that the corporation shall not be governed by the statute. Under Florida law, a corporation is permitted to adopt a provision in its articles of incorporation or bylaws providing for the redemption by the corporation of such acquired shares in certain circumstances. Unless otherwise provided in the corporation's articles of incorporation or bylaws prior to the pertinent acquisition of shares, and in the event that such shares are accorded full voting rights by the shareholders of the corporation and the acquiring shareholder acquires a majority of the voting power of the corporation, all shareholders who did not vote in favor of according voting rights to such acquired shares are entitled to dissenters' rights to receive fair value of their shares. Amendment of the Present Bylaws and New Bylaws. Discount's bylaws and Advance's certificate of incorporation provide for amendment of their respective bylaws by the board of directors or otherwise as provided by Florida law and Delaware law, respectively. Amendment of the Certificate and Articles. Advance's certificate of incorporation provides that no amendment, addition, alteration, change or repeal to certain sections of the certificate of incorporation pertaining to shareholder written consent and indemnification shall be made unless it is approved by the holders of at least 66 2/3% of the outstanding shares entitled to vote generally in an election of directors, as well as such additional vote the preferred stock as may be required by law or by the provisions of any series thereof. Notwithstanding the preceding sentence, any amendment to the certificate of incorporation recommended for adoption by the board of directors shall, to the extent Delaware law requires stockholder approval of such amendment, require the affirmative vote of a majority of the outstanding shares entitled to vote generally in an election of directors, as well as such additional vote of the preferred stock as may be required by law or by the provisions of any series thereof. Discount's articles of incorporation provide that no amendment, alteration, charge or repeal to certain of the articles of incorporation regarding directors, stockholder meetings and amendments to these articles of incorporation may be made without the approval of 66% of the outstanding shares of common stock. 153 LEGAL MATTERS The validity of the common stock offered under this prospectus will be passed upon for Advance by Riordan & McKinzie, a Professional Law Corporation, Los Angeles, California. Principals and employees of Riordan & McKinzie are partners in partnerships that are limited partners of Freeman Spogli & Co. investment funds that own an approximately 40% equity interest in Advance. Certain tax matters raised in connection with this offering will be passed upon for Discount by Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis, P.A. Tampa, Florida. EXPERTS The consolidated financial statements of Advance Holding Corporation as of December 30, 2000 and January 1, 2000, and for each of the three years in the period ended December 30, 2000 included in this proxy statement and prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto and are included herein in reliance upon the authority of said firm as experts in giving said report. Ernst & Young LLP, independent certified public accountants, have audited the consolidated financial statements of Discount Auto Parts, Inc. for the years ended May 29, 2001 and May 30, 2000, and for each of the three years in the period ended May 29, 2001, as set forth in their report. The consolidated financial statements of Discount Auto Parts, Inc. have been included in the proxy statement and prospectus on Form S-4 in reliance upon Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION ABOUT ADVANCE AND DISCOUNT Advance Holding and Advance Stores file annual, quarterly and special reports and other information with the SEC. Discount files annual, quarterly and special reports, proxy statements and other information with the SEC. Advance has filed with the SEC a registration statement on Form S-4 under the Securities Act with respect to the Advance common stock. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. For further information with respect to Advance and Discount and Advance's common stock, Advance and Discount refer you to the registration statement and the exhibits and schedules filed as a part of the registration statement and the other reports and filings referenced above. Each statement in this proxy statement and prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. You may read and copy any document Advance, Advance Holding, Advance Stores or Discount has filed or may in the future file at the SEC's public reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC at http://www.sec.gov. Upon completion of this offering, Advance will become subject to the information and periodic reporting requirements of the Exchange Act and will file periodic reports and other information, including proxy statements, with the SEC. These periodic reports and other information are and will be available for inspection and copying at the SEC's public reference rooms and the web site of the SEC referred to above. In this proxy statement and prospectus, the information regarding Advance was provided by Advance and the information regarding Discount was provided by Discount. 154 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES ADVANCE AUTO PARTS, INC. Under the terms of the proposed merger, Discount Auto Parts, Inc. will merge with a subsidiary of Advance Auto Parts, Inc. and continue as the surviving corporation and wholly owned subsidiary of Advance Auto Parts, Inc. Immediately after the merger, Advance Auto Parts, Inc. will contribute the common stock of Discount Auto Parts, Inc. received in the merger to Advance Stores Company, Incorporated, a company that will have become a wholly owned subsidiary of Advance Auto Parts, Inc. as a result of a simultaneous merger of Advance Holding Corporation, the current parent company of Advance Stores Company, Incorporated, into Advance Auto Parts, Inc. Advance Auto Parts, Inc. was formed in August 2001 and has no separate operations. Accordingly, financial statements for Advance Auto Parts, Inc. have not been included in this filing.
Page ---- Report of Independent Public Accountants................................. F-2 Audited Consolidated Financial Statements of Advance Holding Corporation and Subsidiaries for the three years ended December 30, 2000, January 1, 2000, and January 2, 1999: Consolidated Balance Sheets............................................. F-3 Consolidated Statements of Operations................................... F-4 Consolidated Statements of Changes in Stockholders' Equity.............. F-5 Consolidated Statements of Cash Flows................................... F-6 Notes to Consolidated Financial Statements.............................. F-8 Schedule I--Condensed Financial Information of the Registrant............ F-34 Schedule II--Valuation and Qualifying Accounts........................... F-40 Unaudited Condensed Consolidated Financial Statements for the Twenty- Eight Week Periods Ended July 14, 2001 and July 15, 2000: Condensed Consolidated Balance Sheets................................... F-41 Condensed Consolidated Statements of Operations......................... F-42 Condensed Consolidated Statements of Cash Flows......................... F-43 Notes to the Condensed Consolidated Financial Statements................ F-44 DISCOUNT AUTO PARTS, INC Audited Consolidated Financial Statements of Discount Auto Parts, Inc. and Subsidiaries for three years ended June 1, 1999, May 30, 2000 and May 29, 2001 Report of Independent Certified Public Accountants...................... F-50 Consolidated Balance Sheets............................................. F-51 Consolidated Statements of Income....................................... F-52 Consolidated Statements of Stockholders' Equity......................... F-53 Consolidated Statements of Cash Flows................................... F-54 Notes to Consolidated Financial Statements.............................. F-55 Unaudited Condensed Consolidated Financial Statements of Discount Auto Parts, Inc. and Subsidiaries for the Thirteen Week Periods Ended August 28, 2001 and August 29, 2000 Condensed Consolidated Balance Sheets................................... F-64 Condensed Consolidated Statements of Income............................. F-65 Condensed Consolidated Statements of Cash Flows......................... F-66 Notes to Condensed Consolidated Financial Statements.................... F-67
F-1 Report of Independent Public Accountants To the Board of Directors and Stockholders of Advance Holding Corporation: We have audited the accompanying consolidated balance sheets of Advance Holding Corporation (a Virginia company) and subsidiaries (the Company), as of December 30, 2000, and January 1, 2000, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Advance Holding Corporation and subsidiaries as of December 30, 2000, and January 1, 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2000, in conformity with accounting principles generally accepted in the United States. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index to financial statements and schedules are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. The schedules have been subjected to the auditing procedures applied in the audits of basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Greensboro, North Carolina, March 2, 2001 (except with respect to the matters discussed in Note 19, as to which the date is August 7, 2001). F-2 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 30, 2000 and January 1, 2000 (Dollars in thousands, except per share data)
December January 1, 30, 2000 2000 ASSETS ---------- ---------- Current assets: Cash and cash equivalents.............................. $ 18,009 $ 22,577 Receivables, net....................................... 80,578 100,323 Inventories............................................ 788,914 749,447 Other current assets................................... 10,274 12,025 ---------- ---------- Total current assets............................... 897,775 884,372 Property and equipment, net............................ 410,960 402,476 Assets held for sale................................... 25,077 29,694 Other assets, net...................................... 22,548 32,087 ---------- ---------- $1,356,360 $1,348,629 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdrafts........................................ $ 13,599 $ 11,715 Current portion of long-term debt...................... 7,028 3,665 Accounts payable....................................... 387,852 341,188 Accrued expenses....................................... 124,962 146,024 Other current liabilities.............................. 42,794 26,172 ---------- ---------- Total current liabilities.......................... 576,235 528,764 ---------- ---------- Long-term debt......................................... 579,921 634,664 ---------- ---------- Other long-term liabilities............................ 43,933 51,247 ---------- ---------- Commitments and contingencies Stockholders' equity: Preferred stock, 8% noncumulative, nonvoting, $10 par value, redeemable by the Company at par; liquidation value at par; 100,000 shares authorized; no shares issued or outstanding................................. -- -- Common stock, Class A, voting, $.01 par value; 62,500,000 shares authorized; 28,288,550 and 28,144,050 issued and outstanding..................... 283 281 Common stock, Class B, nonvoting, $.01 par value, 21,875,000 shares authorized; no shares issued or outstanding........................................... -- -- Additional paid-in capital............................. 372,169 369,399 Other.................................................. 396 69 Accumulated deficit.................................... (216,577) (235,795) ---------- ---------- Total stockholders' equity......................... 156,271 133,954 ---------- ---------- $1,356,360 $1,348,629 ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-3 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data)
2000 1999 1998 ---------- ---------- ---------- Net sales................................. $2,288,022 $2,206,945 $1,220,759 Cost of sales, including purchasing and warehousing costs........................ 1,392,127 1,404,113 766,198 ---------- ---------- ---------- Gross profit.......................... 895,895 802,832 454,561 Selling, general and administrative expenses................................. 803,106 782,597 401,681 Expenses associated with Recapitalization......................... -- -- 14,277 Expenses associated with restructuring in conjunction with the Western Merger...... -- -- 6,774 ---------- ---------- ---------- Operating income...................... 92,789 20,235 31,829 Other (expense) income Interest expense........................ (66,640) (62,792) (35,038) Other, net.............................. 1,012 4,647 943 ---------- ---------- ---------- Total other expense, net.............. (65,628) (58,145) (34,095) ---------- ---------- ---------- Income (loss) before provision (benefit) for income taxes and extraordinary item.. 27,161 (37,910) (2,266) Provision (benefit) for income taxes...... 10,535 (12,584) (84) ---------- ---------- ---------- Income (loss) before extraordinary item... 16,626 (25,326) (2,182) Extraordinary item, gain on debt extinguishment, net of $1,759 income taxes.................................... 2,933 -- -- ---------- ---------- ---------- Net income (loss)......................... $ 19,559 $ (25,326) $ (2,182) ========== ========== ========== Net income (loss) per basic share from: Income (loss) before extraordinary item................................... $ 0.59 $ (0.90) $ (0.12) Extraordinary item, gain on debt extinguishment......................... 0.10 -- -- ---------- ---------- ---------- $ 0.69 $ (0.90) $ (0.12) ---------- ---------- ---------- Net income (loss) per diluted share from: Income (loss) before extraordinary item................................... $ 0.58 $ (0.90) $ (0.12) Extraordinary item, gain on debt extinguishment......................... 0.10 -- -- ---------- ---------- ---------- $ 0.68 $ (0.90) $ (0.12) ========== ========== ========== Average common shares outstanding......... 28,295,873 28,269,431 18,606,048 Dilutive effect of stock options.......... 314,995 -- -- ---------- ---------- ---------- Average common shares outstanding-- assuming dilution........................ 28,610,868 28,269,431 18,606,048 ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-4 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For The Years Ended December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data)
Preferred Class A Class B Retained Stock Common Stock Common Stock Additional Earnings Total --------------- ------------------ ------------------- Paid-in (Accumulated Stockholders' Shares Amount Shares Amount Shares Amount Capital Other Deficit) Equity ------- ------ ---------- ------ ----------- ------ ---------- ------ ------------ ------------- Balance, January 3, 1998.......... 77,300 $773 2,412,500 $ 19 21,875,000 $175 $ -- $ -- $ 142,581 $143,548 Change in par value of stock... -- -- -- 5 -- 44 -- -- (49) -- Redemption of stock............ (77,300) (773) (662,500) (7) (21,875,000) (219) -- 300 (350,301) (351,000) Issuance of Class A common stock associated with the Recapitalization, net of issuance costs of $775.... -- -- 10,853,800 109 -- -- 107,654 -- -- 107,763 Issuance of Class A common stock associated with Western Merger, net of issuance costs of $575.... -- -- 15,636,318 156 -- -- 262,272 -- -- 262,428 Other............. -- -- 21,782 1 380 (1,832) -- (1,451) Net loss.......... -- -- -- -- -- -- -- -- (2,182) (2,182) Preferred dividend, 0.80 per share........ -- -- -- -- -- -- -- -- (15) (15) ------- ---- ---------- ---- ----------- ---- -------- ------ --------- -------- Balance, January 2, 1999.......... -- -- 28,261,900 283 -- -- 370,306 (1,532) (209,966) 159,091 Other............. (117,850) (2) (907) 1,601 (503) 189 Net loss.......... -- -- -- -- -- -- -- -- (25,326) (25,326) ------- ---- ---------- ---- ----------- ---- -------- ------ --------- -------- Balance, January 1, 2000.......... -- -- 28,144,050 281 -- -- 369,399 69 (235,795) 133,954 Other............. -- -- 144,500 2 -- -- 2,770 327 (341) 2,758 Net income........ -- -- -- -- -- -- -- -- 19,559 19,559 ------- ---- ---------- ---- ----------- ---- -------- ------ --------- -------- Balance, December 30, 2000......... -- $-- 28,288,550 $283 -- $-- $372,169 $ 396 $(216,577) $156,271 ========== ==== =========== ==== ======== ====== ========= ========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 30, 2000, January 1, 2000, and January 2, 1999 (dollars in thousands)
2000 1999 1998 --------- --------- --------- Cash flows from operating activities: Net income (loss)............................. $ 19,559 $ (25,326) $ (2,182) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............... 66,826 58,147 29,964 Amortization of stock option compensation... 729 1,082 695 Amortization of deferred debt issuance costs...................................... 3,276 3,478 2,070 Amortization of bond discount............... 9,853 8,700 5,645 Amortization of interest on capital lease obligation................................. 42 201 -- Extraordinary gain on extinguishment of debt, net of tax........................... (2,933) -- -- Net losses on sales of property and equipment.................................. 885 119 150 Impairment of asset held for sale........... 856 -- -- Sales of marketable securities.............. -- -- 2,025 Provision (benefit) for deferred income taxes...................................... 683 (12,650) (5,348) Restructuring charge........................ -- -- 6,774 Net decrease (increase) in: Receivables, net........................... 19,676 (8,128) 4,295 Inventories................................ (39,467) (23,090) (99,653) Other assets............................... 14,921 (4,817) (297) Net increase (decrease) in: Accounts payable........................... 46,664 (5,721) 55,329 Accrued expenses........................... (29,540) (21,958) 35,718 Other liabilities.......................... (8,079) 8,987 8,837 --------- --------- --------- Net cash provided by (used in) operating activities.............................. 103,951 (20,976) 44,022 --------- --------- --------- Cash flows from investing activities: Purchases of property and equipment........... (70,566) (105,017) (65,790) Proceeds from sales of property and equipment and assets held for sale..................... 5,626 3,130 6,073 Western Merger, net of cash acquired.......... -- (13,028) (170,955) Other......................................... -- 1,091 -- --------- --------- --------- Net cash used in investing activities.... (64,940) (113,824) (230,672) --------- --------- --------- Cash flows from financing activities: Increase (decrease) in bank overdrafts........ 1,884 (8,688) 13,434 Net borrowings (repayments) under notes payable...................................... 784 -- (2,959) Proceeds from issuance of long-term debt...... -- -- 11,500 Principal payments of long-term debt.......... -- -- (102,667) Early extinguishment of debt.................. (24,990) -- -- Borrowings under credit facilities............ 278,100 465,000 485,017 Payments on credit facilities................. (306,100) (339,500) -- Payment of debt issuance costs................ -- (972) (23,374) Proceeds from issuance of Class A common stock, net of repurchases.................... 1,602 423 -- Proceeds from issuance of Class A common stock--Recapitalization...................... -- -- 105,148 Payment for redemption of preferred and common stock--Recapitalization...................... -- -- (351,000) Proceeds from issuance of Class A common stock--Western Merger........................ -- -- 69,806 Other......................................... 5,141 4,999 2,397 --------- --------- --------- Net cash (used in) provided by financing activities.............................. (43,579) 121,262 207,302 --------- --------- --------- Net (decrease) increase in cash and cash equivalents.................................. (4,568) (13,538) 20,652 Cash and cash equivalents, beginning of year.. 22,577 36,115 15,463 --------- --------- --------- Cash and cash equivalents, end of year........ $ 18,009 $ 22,577 $ 36,115 ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands)
2000 1999 1998 ------- ------- ------- Supplemental cash flow information: Interest paid....................................... $51,831 $46,264 $23,639 Income tax refunds (payments), net.................. 6,175 (3,792) (3,129) Noncash transactions: Conversion of capital lease obligation.............. 3,509 -- -- Accrued purchases of property and equipment......... 9,299 543 -- Net issuances of common stock under stockholder subscription receivable plan....................... 538 1,316 -- Loans receivable related to issuance of common stock.............................................. 402 344 2,527 Appreciation of cancelled shares under stockholder subscription receivable plan....................... 341 -- -- Debt issuance and acquisition costs accrued at January 2, 1999.................................... -- -- 3,734 Stock options issued for redemption of stock........ -- -- 300 Issuance of common stock--Western Merger............ -- -- 193,003 Accrued Credit Card Liability--Western Merger....... -- -- 10,000 Obligations under capital lease..................... -- 3,266 -- ======= ======= =======
The accompanying notes to consolidated financial statements are an integral part of these statements. F-7 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) 1. Description of Business: Advance Holding Corporation and its Subsidiaries (the "Company") maintain two operating segments within the United States, Puerto Rico and the Virgin Islands. The Retail segment operates 1,728 retail stores under the "Advance Auto Parts" and "Western Auto" trade names. The Advance Auto Parts stores offer automotive replacement parts, accessories and maintenance items throughout the Eastern and Midwest portions of the United States. The Western Auto stores, located in Puerto Rico and the Virgin Islands, included in the Retail segment offer home and garden merchandise in addition to automotive parts, accessories and service. The Wholesale segment consists of the wholesale operations, including distribution services to approximately 590 independent dealers located throughout the United States, and one Company-owned store in California all operating under the "Western Auto" trade name. 2. Summary of Significant Accounting Policies: Accounting Period The Company's fiscal year ends on the Saturday nearest the end of December. Principles of Consolidation The consolidated financial statements include the accounts of Advance Holding Corporation and its wholly owned subsidiaries. The Company also participates in a joint venture in which it has less than a 50% ownership. The investment in the joint venture is accounted for by the equity method. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash, Cash Equivalents and Bank Overdrafts Cash and cash equivalents consist of cash in banks and money market funds. Bank overdrafts include net outstanding checks not yet presented to a bank for settlement. Allowances The Company receives cooperative advertising allowances, rebates and various other incentives from vendors that are recorded as a reduction of cost of sales or selling, general and administrative expenses when earned. Cooperative advertising revenue is earned as advertising expenditures are incurred. Rebates and other incentives are earned based on purchases. Amounts received or receivable from vendors that are not yet earned are reflected as deferred revenue in the accompanying consolidated balance sheets. Management's estimate of the portion of deferred revenue that will be realized within one year of the balance sheet date has been included in other current liabilities in the accompanying consolidated balance sheets. Total deferred revenue is $26,994 and $25,015 at December 30, 2000 and January 1, 2000, respectively. F-8 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) Preopening Expenses Preopening expenses, which consist primarily of payroll and occupancy costs, are expensed as incurred. Advertising Costs The Company expenses advertising costs as incurred. Advertising expense incurred was approximately $53,658, $65,524, and $35,972 in fiscal 2000, 1999 and 1998, respectively. Warranty Costs The Company's vendors are primarily responsible for warranty claims. Warranty costs relating to merchandise and services sold under warranty, which are not covered by vendors' warranties are estimated based on the Company's historical experience and are recorded in the period the product is sold. Revenue Recognition The Company recognizes merchandise revenue at the point of sale to a retail customer and point of shipment to a wholesale customer, while service revenue is recognized upon performance of service. The majority of sales are made for cash; however, the Company extends credit to certain commercial customers through a third-party provider of private label credit cards. Receivables under the private label credit card program are transferred to the third-party provider on a limited recourse basis. The Company provides an allowance for doubtful accounts on receivables sold with recourse based upon factors related to credit risk of specific customers, historical trends and other information. Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," provides that this arrangement be accounted for as a secured borrowing. Receivables under the private label credit card and the related payable to the third-party provider were $15,666 and $10,525 at December 30, 2000 and January 1, 2000, respectively. Per Share Information Basic income per share information has been determined by dividing the respective net income amounts by the weighted average number of shares of common stock outstanding during the periods. Diluted income per share information also considers the additional dilutive effect for stock options. The number of outstanding stock options considered antidilutive for either part or all of the fiscal year and not included in the calculation of diluted net income (loss) per share for the fiscal years ended December 30, 2000, January 1, 2000, and January 2, 1999, were 1,565,500, 230,000 and 1,001,665, respectively. These antidilutive stock options were outstanding at the end of each fiscal year. Change in Accounting Estimate In July of fiscal 2000, the Company adopted a change in an accounting estimate to reduce the depreciable lives of certain property and equipment on a prospective basis. The effect on operations for fiscal 2000 was to increase depreciation expense by $2,458. The Company expects to discontinue the operations of the affected assets by the third quarter of fiscal 2001, at which time they will be fully depreciated under the reduced useful lives. F-9 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. It requires companies to recognize all derivatives as either assets or liabilities in their statement of financial position and measure those instruments at fair value. In September 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133," which delayed the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Derivative Instruments and Certain Hedging Activities--an Amendment of SFAS No. 133," which amended the accounting and reporting standards for certain risks related to normal purchases and sales, interest and foreign currency transactions addressed by SFAS No. 133. The Company adopted SFAS No. 133 on December 31, 2000 with no material impact on its financial position or the results of its operations. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing Financial Assets and Extinguishment of Liabilities". This statement replaces SFAS No. 125, but carries over most of the provisions of SFAS No. 125 without reconsideration. The Company implemented SFAS No. 140 during the first quarter of fiscal 2001. The implementation had no impact on the Company's financial position or results of operations. In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses accounting and reporting for all business combinations and requires the use of the purchase method for business combinations. SFAS No. 141 also requires recognition of intangible assets apart from goodwill if they meet certain criteria. SFAS No. 142 establishes accounting and reporting standards for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangibles with indefinite useful lives are no longer amortized but are instead subject to at least an annual assessment for impairment by applying a fair-value based test. SFAS No. 141 applies to all business combinations initiated after June 30, 2001. SFAS No. 142 is effective for existing goodwill and intangible assets beginning on December 31, 2001. SFAS No. 142 is effective immediately for goodwill and intangibles acquired after June 30, 2001. Although the Company is currently evaluating the impact of SFAS Nos. 141 and 142, management does not expect that the adoption of these statements will have a material impact on existing goodwill or intangibles. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes accounting standards for recognition and measurement of an asset retirement obligation and an associated asset retirement cost and is effective for fiscal years beginning after June 15, 2002. The Company does not expect SFAS No. 143 to have a material impact on its financial statements. Reclassifications Certain items in the fiscal 1999 and fiscal 1998 financial statements have been reclassified to conform with the fiscal 2000 presentation. F-10 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) 3. Restructuring Charges: The Company's restructuring activities relate to the ongoing analysis of the profitability of store locations and the settlement of restructuring activities undertaken and assumed as a result of the Western Merger (see Note 16). The Company recognizes a provision for future obligations at the time a decision is made to close a facility, primarily store locations. The provision for closed facilities includes the present value of the remaining lease obligations, reduced by the present value of estimated revenues from subleases, and management's estimate of future costs of insurance, property tax and common area maintenance. The Company uses discount rates ranging from 6.5% to 7.7%. From time to time these estimates require revision that affect the amount of the recorded liability. The effect of these changes in estimates is netted with new provisions and included in selling, general and administrative expenses on the accompanying consolidated statements of operations. During fiscal 2000, the Company closed five stores included in the fiscal 1999 restructuring activities and made the decision to close or relocate 25 additional stores not meeting profitability objectives, of which 20 have been closed as of December 30, 2000. A reconciliation of activity with respect to these restructuring accruals is as follows:
Other Severance Exit Costs --------- ---------- Restructuring reserves assumed in Western Merger...... $1,092 $ 8,569 Restructuring provision for Advance store exit costs in conjunction with the Western Merger............... -- 6,774 Reserves utilized..................................... (410) (570) ------ ------- Balance, January 2, 1999.............................. $ 682 $14,773 New provisions........................................ -- 1,307 Change in estimates................................... -- (1,249) Reserves utilized..................................... (664) (4,868) ------ ------- Balance, January 1, 2000.............................. $ 18 $ 9,963 New provisions........................................ -- 1,768 Change in estimates................................... -- (95) Reserves utilized..................................... (18) (4,848) ------ ------- Balance, December 30, 2000............................ $ -- $ 6,788 ====== =======
Other exit cost liabilities will be settled over the remaining terms of the underlying lease agreements. As a result of the Western Merger, the Company established restructuring reserves in connection with the decision to close certain Parts America stores, to relocate certain Western administrative functions, to exit certain facility leases and to terminate certain employees of Western. As of December 30, 2000, all employees have been terminated and all leased stores have been closed. F-11 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) A reconciliation of activity with respect to these restructuring accruals is as follows:
Other Exit Severance Relocation Costs --------- ---------- ---------- Recognized as liabilities assumed in purchase accounting and included in purchase price allocation.................. $ 8,000 $ 970 $14,384 Reserves utilized........................... (262) (132) (652) ------- ----- ------- Balance at January 2, 1999.................. $ 7,738 $ 838 $13,732 Purchase accounting adjustments............. 3,630 (137) (1,833) Reserves utilized........................... (7,858) (701) (4,074) ------- ----- ------- Balance at January 1, 2000.................. $ 3,510 $ -- $ 7,825 Purchase accounting adjustments............. -- -- (1,261) Reserves utilized........................... (3,510) -- (2,767) ------- ----- ------- Balance at December 30, 2000................ $ -- $ -- $ 3,797 ======= ===== =======
Other exit cost liabilities will be settled over the remaining terms of the underlying lease agreements. 4. Receivables: Receivables consist of the following:
December 30, January 1, 2000 2000 ------------ ---------- Trade: Wholesale........................................ $12,202 $ 22,221 Retail........................................... 15,666 10,525 Vendor........................................... 36,260 50,208 Installment (Note 18)............................ 14,197 13,616 Related parties.................................. 3,540 6,647 Employees........................................ 607 552 Other............................................ 3,127 3,481 ------- -------- Total receivables.................................. 85,599 107,250 Less: Allowance for doubtful accounts.............. (5,021) (6,927) ------- -------- Receivables, net................................... $80,578 $100,323 ======= ========
F-12 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) 5. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out ("LIFO") method for approximately 90% and 89% of inventories at December 30, 2000 and January 1, 2000, respectively, and the first-in, first-out ("FIFO") method for remaining inventories. The Company capitalizes certain purchasing and warehousing costs into inventory. Purchasing and warehousing costs included in inventory, at FIFO, at December 30, 2000 and January 1, 2000, were $56,305 and $49,252, respectively. Inventories consist of the following:
December 30, January 1, 2000 2000 ------------ ---------- Inventories at FIFO................................ $779,376 $735,762 Adjustments to state inventories at LIFO........... 9,538 13,685 -------- -------- Inventories at LIFO................................ $788,914 $749,447 ======== ========
Replacement cost approximated FIFO cost at December 30, 2000 and January 1, 2000. 6. Property and Equipment: Property and equipment are stated at cost, less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged directly to expense when incurred; major improvements are capitalized. When items are sold or retired, the related cost and accumulated depreciation are removed from the accounts, with any gain or loss reflected in the consolidated statements of operations. Depreciation of land improvements, buildings, furniture, fixtures and equipment, and vehicles is provided over the estimated useful lives, which range from 2 to 40 years, of the respective assets using the straight-line method. Amortization of building and leasehold improvements is provided over the shorter of the estimated useful lives of the respective assets or the term of the lease using the straight-line method. Property and equipment consists of the following:
Estimated December 30, January 1, Useful Lives 2000 2000 ------------ ------------ ---------- Land and land improvements............ 0-10 years $ 40,371 $ 40,927 Buildings............................. 40 years 79,109 70,788 Building and leasehold improvements... 10-40 years 84,658 76,605 Furniture, fixtures and equipment..... 3-12 years 357,642 331,238 Vehicles.............................. 2-10 years 30,506 27,555 Other................................. 10,571 2,010 --------- --------- 602,857 549,123 Less--Accumulated depreciation and amortization......................... (191,897) (146,647) --------- --------- Property and equipment, net........... $ 410,960 $ 402,476 ========= =========
Effective January 3, 1999, the Company adopted the American Institute of Certified Public Accountant's Statement of Position ("SOP") 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use". The SOP requires companies to capitalize certain expenditures related to development of or obtaining computer software for internal use. The adoption of the SOP resulted in the Company capitalizing approximately $9,400 and $561 in costs incurred during fiscal 2000 and fiscal 1999, respectively. F-13 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) 7. Assets Held for Sale The Company applies SFAS No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of," which requires that long-lived assets and certain identifiable intangible assets to be disposed of be reported at the lower of the carrying amount or the fair market value less selling costs. As of December 30, 2000 and January 1, 2000, the Company's assets held for sale primarily consist of real property acquired in the Western Merger and held in the Wholesale Segment of $25,077 and $29,694, respectively. The Company expects to dispose of this property during fiscal 2001. During fiscal 2000, the Company recorded an impairment of the value assigned to a property held in the Wholesale segment. This facility consisted of excess space not required by the Company's current needs, therefore, leading to the Company's decision to dispose. The impairment charge of $856, included in selling, general and administrative expenses, reduced the carrying value of the property to approximately $8,000. 8. Other Assets: As of December 30, 2000 and January 1, 2000, other assets include deferred debt issuance costs of $14,843 and $18,886, respectively (net of accumulated amortization of $8,232 and $5,261, respectively), relating to the Recapitalization (Note 15) and the Western Merger (Note 16). Such costs are being amortized over the term of the related debt (6 years to 11 years). Other assets also include the non-current portion of deferred income tax assets (Note 13). 9. Accrued Expenses: Accrued expenses consist of the following:
December 30, January 1, 2000 2000 ------------ ---------- Payroll and related benefits....................... $ 25,507 $ 32,682 Restructuring...................................... 3,772 8,238 Warranty........................................... 18,962 19,780 Other.............................................. 76,721 85,324 -------- -------- Total accrued expenses............................. $124,962 $146,024 ======== ======== 10. Other Long-Term Liabilities: Other long-term liabilities consist of the following: December 30, January 1, 2000 2000 ------------ ---------- Other employee benefits............................ $ 24,625 $ 26,587 Restructuring...................................... 6,813 13,078 Other.............................................. 12,495 11,582 -------- -------- Total other long-term liabilities.................. $ 43,933 $ 51,247 ======== ========
F-14 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) 11. Long-term Debt: Long-term debt consists of the following:
December 30, January 2000 1, 2000 ------------ -------- Senior Debt: Deferred term loan at variable interest rates (9.25% at December 30, 2000), due April 2004.................... $ 90,000 $ 90,000 Delayed draw facilities at variable interest rates, (8.47% at December 30, 2000), due April 2004.......... 94,000 70,000 Revolving facility at variable interest rates (8.50% at December 30, 2000), due April 2004.................... 15,000 66,000 Tranche B facility at variable interest rates (9.19% at December 30, 2000), due April 2006.................... 123,500 124,500 McDuffie County Authority taxable industrial development revenue bonds, issued December 31,1997, interest due monthly at an adjustable rate established by the Remarketing Agent (6.90% at December 30, 2000), principal due on November 1, 2002..................... 10,000 10,000 Capital lease obligation............................... -- 3,467 Other.................................................. 784 -- Subordinated debt: Subordinated notes payable, interest due semi-annually at 10.25%, due April 2008............................. 169,450 200,000 Discount debentures, interest at 12.875%, due April 2009, face amount of $112,000 less unamortized discount of $27,785 and $37,638 at December 30, 2000 and January 1, 2000, respectively (subordinate to substantialy all other liabilities)................... 84,215 74,362 -------- -------- Total long-term debt................................... 586,949 638,329 Less: Current portion of long-term debt................ (7,028) (3,665) -------- -------- Long-term debt, excluding current portion.............. $579,921 $634,664 ======== ========
Senior Debt: The deferred term loan, delayed draw facilities, revolving facility and Tranche B facility ("Credit Facility") are with a syndicate of banks. The Credit Facility provides for the Company to borrow up to $462,500 in the form of senior secured credit facilities, consisting of (i) $90,000 senior secured deferred term loan, (ii) $49,000 senior secured delayed draw term loan facility (the "Delayed Draw Facility I"), (iii) $75,000 senior secured delayed draw term loan facility (the "Delayed Draw Facility II") and, together with the Delayed Draw Facility I, (the "Delayed Draw Facilities"), (iv) a $123,500 Tranche B senior secured term loan facility (the "Tranche B Facility"), and (v) a $125,000 senior secured revolving credit facility (the "Revolving Facility"). The Revolving Facility has a letter of credit sub-limit of $25,000, of which $11,910 was outstanding for stand-by letters of credit as of December 30, 2000. Amounts available under the revolver, delayed draw term and deferred term loans are subject to a borrowing base formula, which is based on certain percentages of the Company's inventories and certain debt covenants. As of December 30, 2000, $118,300 was available under these facilities. Borrowings under the Credit Facility are required to be prepaid, subject to certain exceptions, with (a) 50% of the Excess Cash Flow (as defined), (b) the net cash proceeds of all asset sales or other dispositions F-15 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) of property (as defined), (c) the net proceeds of issuances of debt obligations and (d) the net proceeds of issuance of equity securities. Excess Cash Flow is defined as the excess of (A) the sum of Advance Stores Company, Incorporated's ("Stores"), a wholly owned subsidiary, (i) consolidated net income (excluding certain gains and losses and restricted payments made to its parent), (ii) depreciation, amortization and other noncash charges, (iii) any decrease in Net Working Capital (as defined), (iv) increases in the deferred revenues, and (v) proceeds of certain indebtedness incurred, less (B) the sum of (a) any noncash gains, (b) any increases in Net Working Capital, (c) decreases in consolidated deferred revenues, (d) capital expenditures and (e) repayments of indebtedness (subject to certain exceptions). The Company was not required to make an Excess Cash Flow prepayment for fiscal 1999 but will make a $6,244 mandatory prepayment for fiscal 2000 in fiscal 2001. The interest rates under the delayed draw facilities and the revolver are determined by reference to a pricing grid that provides for reductions in the applicable interest rate margins based on the Company's trailing total debt to EBITDA ratio (as defined in the Credit Facility). Based upon the Company's operating ratios at December 30, 2000, the margins were 1.75% and 0.75% for Eurodollar and base rate borrowings, respectively. Additionally, at December 30, 2000, the margin under the Tranche B term loan and the deferred term loan facility was 2.50% on a Eurodollar rate and 1.50% on the base rate borrowings. A commitment fee of 0.50% per annum is charged on the unused portion of the Credit Facility. The Credit Facility is secured by all assets of the Company and contains covenants restricting the ability of the Company and its subsidiaries to, among others, (i) declare dividends or redeem or repurchase capital stock, (ii) make loans and investments and (iii) engage in transactions with affiliates or the Company to change its passive holding company status. The Company is required to comply with financial covenants with respect to (a) a maximum leverage ratio, (b) a minimum interest coverage ratio, (c) a minimum retained cash earnings test and (d) maximum limits on capital expenditures. On December 31, 1997, the Company entered into an agreement with McDuffie County Authority under which bond proceeds of $10,000 were issued to construct a distribution center. Proceeds of the bond offering were fully expended during fiscal 1999. These industrial development revenue bonds currently bear interest at a variable rate, with a one-time option to convert to a fixed rate, and are secured by a letter of credit. Subordinated Debt: The $169,450 Senior Subordinated Notes (the "Notes") are unsecured and are subordinate in right of payment to all existing and future Senior Debt. The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after April 15, 2003. In addition, at any time prior to April 15, 2001, the Company may redeem up to 35% of the initially outstanding aggregate principal amount of the Notes at a redemption price equal to 110.25% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, thereon to the date of redemption, with the net proceeds of one or more equity offerings; provided that, in each case, at least 65% of the initially outstanding aggregate principal amount of the Notes remains outstanding immediately after the occurrence of any such redemption; and provided further, that such redemption shall occur within 90 days of the date of the closing of such equity offering. Upon the occurrence of a change of control, each holder of the Notes will have the right to require the Company to repurchase all or any part of such holder's Notes at an offering price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and liquidated damages, if any, thereon to the date of purchase. F-16 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) The Notes contain various non-financial restrictive covenants that limit, among other things, the ability of the Company and its subsidiaries to issue preferred stock, repurchase stock and incur certain indebtedness, engage in transactions with affiliates, pay dividends or certain other distributions, make certain investments and sell stock of subsidiaries. During fiscal 2000, the Company repurchased on the open market $30,550 face value of Notes at a price ranging from 81.5 to 82.5 percent of their face value. Accordingly, the Company recorded a gain related to the extinguishment of this debt of $2,933, net of $1,759 provided for income taxes and $868 for the write off of the associated deferred debt issuance costs. The Senior Discount Debentures (the "Debentures") accrue at a rate of 12.875%, compounded semi-annually, to an aggregate principal amount of $112,000 by April 15, 2003. Cash interest will not accrue on the Debentures prior to April 15, 2003. Commencing April 15, 2003, cash interest on the Debentures will accrue and be payable, at a rate of 12.875% per annum, semi-annually in arrears on each April 15 and October 15. As of December 30, 2000, the Debentures have been accreted by $24,198 with corresponding interest expense of $9,853, $8,700 and $5,645 recognized for the years ended December 30, 2000, January 1, 2000 and January 2, 1999, respectively. The Debentures are redeemable at the option of the Company, in whole or in part, at any time on or after April 15, 2003. In addition, at any time prior to April 15, 2001 the Company may, at its option, redeem up to 35% of the aggregate principal amount at maturity of the Debentures originally issued at a redemption price equal to 112.875% of the accreted value thereof, plus liquidated damages, if any, with the net cash proceeds of one or more equity offerings; provided that at least 65% of the original aggregate principal amount at maturity of the Debentures will remain outstanding immediately following each such redemption. Upon the occurrence of a change of control, each holder of the Debentures will have the right to require the Company to purchase the Debentures at a price in cash equal to 101% of the accreted value thereof plus liquidated damages, if any, thereon in the case of any such purchase prior to April 15, 2003, or 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, thereon to the date of purchase in the case of any such purchase on or after April 15, 2003. As the Company may not have any significant assets other than capital stock of Stores (which is pledged to secure the Company's obligations under the Credit Facility), the Company's ability to purchase all or any part of the Debentures upon the occurrence of a change in control will be dependent upon the receipt of dividends or other distributions from Stores or its subsidiaries. The Credit Facility and the Senior Subordinated Notes have certain restrictions for Stores with respect to paying dividends and making any other distributions. The Debentures are subordinated to substantially all of the Company's other liabilities. The Debentures contain certain non-financial restrictive covenants that are similar to the covenants contained in the Notes. As of December 30, 2000, the Company was in compliance with the covenants of the Credit Facility, the Notes and Debentures. Substantially all of the net assets of the Company's subsidiaries are restricted at December 30, 2000. F-17 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) The aggregate future annual maturities of long-term debt, net of the unamortized discount related to the Debentures, are as follows: 2001............................................................ $ 7,028 2002............................................................ 14,000 2003............................................................ 4,000 2004............................................................ 219,668 2005............................................................ 60,000 Thereafter...................................................... 282,253 -------- $586,949 ========
12. Stockholder Subscription Receivables: As a result of the Recapitalization (See Note 15) the Company established a stock subscription plan which allows certain directors, officers and key employees of the Company to purchase shares of Class A common stock. The plan requires that the purchase price of the stock equal the fair market value at the time of the purchase and allows fifty percent of the purchase price be executed through the delivery of a full recourse promissory note. The notes provide for annual interest payments, at the prime rate, with the entire principal amount due in five years. As of December 30, 2000 and January 1, 2000, outstanding stockholder subscription receivables were $2,364 and $2,008, respectively, and are included as a reduction to Stockholders' equity in the accompanying consolidated balance sheets. 13. Income Taxes: Provision (benefit) for income taxes for fiscal 2000, fiscal 1999 and fiscal 1998 consists of the following:
Current Deferred Total ------- -------- -------- 2000-- Federal....................................... $ 8,005 $ 976 $ 8,981 State......................................... 1,847 (293) 1,554 ------- -------- -------- $ 9,852 $ 683 $ 10,535 ======= ======== ======== 1999-- Federal....................................... $(1,913) $ (6,535) $ (8,448) State......................................... 1,979 (6,115) (4,136) ------- -------- -------- $ 66 $(12,650) $(12,584) ======= ======== ======== 1998-- Federal....................................... $ 3,845 $ (4,528) $ (683) State......................................... 1,419 (820) 599 ------- -------- -------- $ 5,264 $ (5,348) $ (84) ======= ======== ========
F-18 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) The provision (benefit) for income taxes differed from the amount computed by applying the federal statutory income tax rate due to:
2000 1999 1998 ------- -------- ----- Pre-tax income (loss) at statutory U.S. federal income tax rate................................ $ 9,507 $(13,269) $(793) State income taxes, net of federal income tax benefit........................................ 896 (2,688) 389 Non-deductible interest & other expenses........ 1,010 1,125 609 Changes in certain tax accounting methods....... -- -- (366) Valuation allowance............................. 914 596 -- Puerto Rico dividend withholding tax............ -- 150 120 Other, net...................................... (1,792) 1,502 (43) ------- -------- ----- $10,535 $(12,584) $ (84) ======= ======== =====
Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period-end, based on enacted tax laws and statutory income tax rates applicable to the periods in which the differences are expected to affect taxable income. Deferred income taxes reflect the net income tax effect of temporary differences between the bases of assets and liabilities for financial reporting purposes and for income tax reporting purposes. Net deferred income tax balances are comprised of the following:
December 30, January 1, 2000 2000 ------------ ---------- Deferred income tax assets........................... $57,378 $65,572 Deferred income tax liabilities...................... (62,121) (54,731) ------- ------- Net deferred income tax (liabilities) assets......... $(4,743) $10,841 ======= =======
Net deferred income tax assets of $8,792 were recorded in the purchase price allocation of Western. The Company incurred financial reporting and tax losses in 1999 primarily due to integration and interest costs incurred as a result of the Western Merger and the Recapitalization (See Notes 15 and 16). As of December 30, 2000, the Company has cumulative net deferred income tax liabilities of $4,743. The gross deferred income tax assets include federal and state net operating loss carryforwards ("NOLs") of approximately $16,931. These NOLs may be used to reduce future taxable income and expire periodically through fiscal year 2020. The Company believes it will realize these tax benefits through a combination of the reversal of temporary differences, projected future taxable income during the NOL carryforward periods and available tax planning strategies. Due to uncertainties related to the realization of certain deferred tax assets for NOLs in various jurisdictions, the Company recorded a valuation allowance of $1,510 as of December 30, 2000 and $596 as of January 1, 2000. The amount of deferred income tax assets realizable, however, could change in the near future if estimates of future taxable income are changed. F-19 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) Temporary differences which give rise to significant deferred income tax assets (liabilities) are as follows:
December 30, January 1, 2000 2000 ------------ ---------- Current deferred income taxes-- Inventory valuation differences.................. $(36,051) $(30,708) Accrued medical and workers compensation......... 2,319 2,462 Accrued expenses not currently deductible for tax............................................. 16,391 26,778 Net operating loss carryforwards................. 7,124 4,000 -------- -------- Total current deferred income taxes............ $(10,217) $ 2,532 ======== ======== Long-term deferred income taxes-- Property and equipment........................... $(24,571) $(24,023) Postretirement benefit obligation................ 8,254 8,580 Amortization of bond discount.................... 8,184 4,861 Net operating loss carryforwards................. 9,807 18,140 Minimum tax credit carryforward (no expiration).. 6,809 -- Valuation allowance.............................. (1,510) (596) Other, net....................................... (1,499) 1,347 -------- -------- Total long-term deferred income taxes.......... $ 5,474 $ 8,309 ======== ========
The Company currently has four years that are open to audit by the Internal Revenue Service. In addition, various state and foreign income tax returns for several years are open to audit. In management's opinion, adequate reserves have been established and any amounts assessed will not have a material effect on the Company's financial position or results of operations. F-20 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) 14. Lease Commitments: The Company leases store locations, distribution centers, office space, equipment and vehicles under lease arrangements, some of which are with related parties. At December 30, 2000, future minimum lease payments due under non-cancelable operating leases are as follows:
Related ----------------------------- Other(a) Parties(a) Total --------- ---------- -------- 2001......................................... $ 115,631 $ 3,688 $119,319 2002......................................... 107,908 3,688 111,596 2003......................................... 97,119 3,496 100,615 2004......................................... 84,711 2,536 87,247 2005......................................... 76,686 2,239 78,925 Thereafter................................... 228,300 2,211 230,511 --------- ------- -------- $ 710,355 $17,858 $728,213 ========= ======= ========
-------- (a) The Other and Related Parties columns include stores closed as a result of the Company's restructuring plans (See Note 3). At December 30, 2000, future minimum sub-lease income to be received under non-cancelable operating leases is $10,152. Net rent expense for fiscal 2000, fiscal 1999 and fiscal 1998 was as follows:
2000 1999 1998 --------- -------- ------- Minimum facility rentals..................... $ 112,768 $103,807 $63,787 Contingent facility rentals.................. 1,391 2,086 718 Equipment rentals............................ 1,875 3,831 1,804 Vehicle rentals.............................. 6,709 4,281 2,391 --------- -------- ------- 122,743 114,005 68,700 Less: Sub-lease income....................... (1,747) (1,085) (426) --------- -------- ------- $ 120,996 $112,920 $68,274 ========= ======== =======
Contingent facility rentals are determined on the basis of a percentage of sales in excess of stipulated minimums for certain store facilities. Most of the leases provide that the Company pay taxes, maintenance, insurance and certain other expenses applicable to the leased premises and include options to renew. Certain leases contain rent escalation clauses, which are recorded on a straight-line basis. Management expects that, in the normal course of business, leases that expire will be renewed or replaced by other leases. Rental payments to related parties of approximately $3,921 in fiscal 2000, $3,998 in fiscal 1999 and $2,984 in fiscal 1998 are included in net rent expense. F-21 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) 15. Recapitalization: On April 15, 1998, the Company consummated its recapitalization pursuant to an Agreement and Plan of Merger dated March 4, 1998 (the "Merger Agreement"). In connection with the Merger Agreement, the Company's Board of Directors authorized a 12,500 to 1 split of the common stock and a change in the par value of the common stock from $100 to $.01 per share. Pursuant to the Merger Agreement, AHC Corporation ("AHC"), a corporation controlled by an investment fund organized by Freeman Spogli & Co. Incorporated ("FS&Co."), merged into the Company (the "Merger"), with the Company as the surviving corporation. In the Merger, a portion of the common stock and all of the preferred stock of the Company were converted into the right to receive in the aggregate approximately $351,000 in cash and certain stock options (See Note 23). Certain shares representing approximately 14% of the outstanding Class A common stock remained outstanding upon consummation of the Merger. Immediately prior to the Merger, FS&Co. purchased approximately $80,500 of the common stock of AHC which was converted in the Merger into approximately 64% of the Company's outstanding common stock and Ripplewood Partners, L.P. and its affiliates ("Ripplewood") purchased approximately $20,000 of the common stock of AHC which was converted in the Merger into approximately 16% of the Company's outstanding common stock. In connection with the Merger, management purchased approximately $8,000, or approximately 6%, of the Company's outstanding common stock, a portion of which resulted in stockholder subscription receivables. The Merger, the retirement of certain notes payable and long-term debt, borrowings under the Credit Facility, the issuance of the Debentures and the issuance of the Notes collectively represent the "Recapitalization". The Company has accounted for the Recapitalization for financial reporting purposes as the sale of common stock, the issuance of debt, the redemption of common and preferred stock and the repayment of notes payable and long-term debt. 16. Western Merger: On November 2, 1998, the Company consummated a Plan of Merger (the "Western Merger") with Sears, Roebuck and Co. ("Sears"), to acquire Western (Western Auto Supply Company), for $175,000 in cash and 11,474,606 shares of the Company's common stock. Additionally, the Company agreed to share losses incurred by Sears as a result of the sale, or as a result of continuing the private label credit card programs up to a maximum of $10,000 ("Credit Card Liability"). The Company recorded the $10,000, which was paid in fiscal 1999, as additional purchase price. In connection with the transaction, the Company sold 4,161,712 shares of common stock to certain stockholders for $70,000 and the Company borrowed $90,000 under a new deferred term loan facility. The remainder of the $175,000 was funded through cash on hand. As of the transaction date, Sears owned approximately 40.6% of the Company's issued and outstanding common stock. The Western Merger has been accounted for under the purchase method of accounting. Accordingly, the results of operations of Western for the periods from November 2, 1998 are included in the accompanying consolidated financial statements. The purchase price has been allocated to assets acquired and liabilities assumed based on their respective fair values. The final purchase price allocation resulted in total excess fair value over the purchase price of $4,667 and was allocated to non-current assets, primarily property and equipment. F-22 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) 17. Stockholders' Agreement: A former owner of the Company and a trust established for the founder of the Company (the "Continuing Stockholders"), FS&Co., Ripplewood, WA Holding Co. ("WAH"), a subsidiary of Sears, and the Company have entered into a Stockholders' Agreement (the "Stockholders' Agreement"). Under the Stockholders' Agreement, FS&Co., Ripplewood, the Continuing Stockholders and WAH have the right to purchase their pro rata share of certain new issuances of common stock as well as the right to participate pro rata in any sale of common stock by a stockholder. Sales of common stock by the Continuing Stockholders and Ripplewood are subject to a right of first offer in favor of FS&Co. and WAH, in the case of the Continuing Stockholders through April 2001. The Stockholders' Agreement provides Ripplewood and the Continuing Stockholders with tag-along rights in the event of sales by FS&Co. or WAH. If FS&Co. sells all of its common stock, Ripplewood and the Continuing Stockholders will be obligated to sell all of their shares of common stock at the request of FS&Co. The Stockholders' Agreement further provides that FS&Co., WAH, Ripplewood and the Continuing Stockholders will have defined levels of representation on the Board of Directors. Ripplewood has granted FS&Co. an irrevocable proxy to vote Ripplewood's common stock on all matters, expiring upon an initial public offering. Pursuant to the Stockholders' Agreement, the current Chairman of the Board has certain approval rights with respect to major corporate transactions. 18. Installment Sales Program: A subsidiary of the Company maintains an in-house finance program, which offers financing to retail customers. Finance charges of $3,063, $2,662 and $376 on the installment sales program are included in net sales in the accompanying consolidated statements of operations for the years ended December 30, 2000, January 1, 2000 and January 2, 1999, respectively. The cost of administering the installment sales program is included in selling, general and administrative expenses as a cost of operations. 19. Subsequent Events: On August 7, 2001, the Company signed a definitive agreement to acquire Discount Auto Parts, Inc. (Discount) in a merger transaction. Discount shareholders will receive $7.50 per share in cash plus 0.2577 shares of common stock in the combined company for each share of Discount common stock. Accordingly, upon consummation of the merger, Discount shareholders will own approximately 13% of the total shares outstanding of the combined company. The Company will file a registration statement covering the shares issued to Discount shareholders, and, through this offering, become a public company renamed Advance Auto Parts, Inc. Discount operates approximately 667 retail auto parts stores in Florida, Georgia, South Carolina, Alabama, Louisiana and Mississippi. The merger, subject to certain regulatory filings and approvals, will be accounted for under the purchase method of accounting in accordance with SFAS No. 141, "Business Combinations." On July 27, 2001, the Company made the decision to close a duplicative distribution facility located in Jeffersonville, Ohio. This 382,000 square foot owned facility opened in 1996 and served stores operating in the retail segment throughout the Mid-west portion of the United States. The Company has operated two distribution facilities in overlapping markets since the Western Merger, in which the Company assumed the operation of a Western distribution facility in Ohio. The decision to close this facility allows the Company to utilize the operating resource requirements more productively in other areas of the business. The Company does not anticipate closure of this facility and the severing of certain of its employees to materially impact its financial position or future results of operations. F-23 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) On April 23, 2001, the Company completed its acquisition of Carport Auto Parts, Inc. ("Carport"). The acquisition included a net 30 retail stores located in Alabama and Mississippi, and substantially all of the assets used in Carport's operations. The acquisition has been accounted for under the purchase method of accounting during the second quarter of fiscal 2001. The purchase price of $21,533 was allocated during the second quarter of fiscal 2001to the asset and the liabilities assumed based on their fair values at the date of acquisition. This allocation resulted in the recognition of $3,239 in goodwill. The Company received notification from Sears during the first quarter of fiscal 2001 that certain environmental matters of Western existing as of the merger date and fully indemnified by Sears, have been settled. Accordingly, the Company reversed $2,500 of the previously recorded $3,750 receivable due from Sears and reduced the corresponding environmental liability (see Note 20). 20. Contingencies: In the case of all known contingencies, the Company accrues for an obligation when it is probable and the amount is reasonably estimable. As facts concerning contingencies become known to the Company, the Company reassesses its position both with respect to gain contingencies and accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change include tax and legal matters, which are subject to change as events evolve and as additional information becomes available during the administrative and litigation process. In October 2000, a vendor repudiated a long-term purchase agreement entered into with the Company in January 2000. The Company filed suit against the vendor in November of fiscal 2000. While legal remedies were being pursued, an interim agreement was entered into to ensure the continuous supply of products. In its suit, the Company attempted to recover monetary damages for the increased costs charged by the vendor under the interim agreement, the increased costs to acquire product from other sources, plus any consequential damages. Based on consultation with the Company's legal counsel, management believed the purchase agreement was entered into in good faith and it was highly probable that the Company would prevail in its suit. Therefore, the Company recorded a gain of $3,300, which represented actual damages incurred through December 30, 2000, as a reduction of cost of sales in the accompanying statements of operations. Related income taxes and legal fees of $1,300 were also recorded in the accompanying consolidated statement of operations for the year ended December 30, 2000. On March 23, 2001, the Company agreed to a cash settlement of $16,600 from the vendor. The remainder of the cash settlement over the originally recorded gain, less higher product costs incurred under the interim supply agreement, related legal expenses and taxes, was recognized as a net gain of $8,300 during first quarter of fiscal 2001. In March 2000, the Company was notified it has been named in a lawsuit filed on behalf of independent retailers and jobbers against the Company and others for various claims under the Robinson-Patman Act. The suit is in preliminary stages. The Company believes these claims are without merit and intends to defend them vigorously; however, the ultimate outcome of this matter can not be ascertained at this time. In January 1999, the Company was notified by the United States Environmental Protection Agency ("EPA") that Western Auto may have potential liability under the Comprehensive Environmental Response Compensation and Liability Act relating to two battery salvage and recycling sites that were in operation in the 1970's and 1980's. The EPA has indicated the total cleanup for this site will be approximately $1,600. F-24 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) Management is continuing their investigation of the EPA notification. An estimate of the range of liability is not reasonably possible until technical studies are sufficiently completed and the amount of potential indemnification from Sears, if any, is further investigated. The ultimate exposure will also depend upon the participation of other parties named in the notification who are believed to share in responsibility. The Company believes the claim could be settled for an amount not material to the Company's financial position or results of operations. Sears has agreed to indemnify the Company for certain litigation and environmental matters of Western that existed as of the Western Merger date. The Company has recorded a receivable from Sears of approximately $2,685, which is included in the fair value of Western's assets (Note 16), relating to certain environmental matters that had been accrued by Western as of the Western Merger date. As of the Western Merger date, Sears has agreed to partially indemnify the Company for up to 5 years for certain additional environmental matters that may arise relating to the period prior to the Western Merger. The Company's maximum exposure during the indemnification period for certain matters covered in the Western Merger agreement is $3,750. In November 1997 a plaintiff, on behalf of himself and others similarly situated, filed a class action complaint and motion of class certification against the Company in the circuit court for Jefferson County, Tennessee, alleging misconduct in the sale of automobile batteries. The complaint seeks compensatory and punitive damages. The Company believes it has no liability for such claims and intends to defend them vigorously. In addition, three lawsuits were filed against the Company on July 28, 1998, for wrongful death relating to an automobile accident involving an employee of the Company. The Company believes the financial exposure is covered by insurance. The Company is also involved in various other claims and lawsuits arising in the normal course of business. The damages claimed against the Company in some of these proceedings are substantial. Although the final outcome of these legal matters cannot be determined, based on the facts presently known, it is management's opinion that the final outcome of such claims and lawsuits will not have a material adverse effect on the Company's financial position or results of operations. The Company has certain periods open to examination by taxing authorities in various states for sales and use tax. In management's opinion, adequate reserves have been established and any amounts assessed will not have a material effect on the Company's financial position or results of operations. The Company is self-insured with respect to workers' compensation and health care claims for eligible active employees. The Company maintains certain levels of stop-loss insurance coverage for these claims through an independent insurance provider. The cost of workers' compensation and general health care claims is accrued based on actual claims reported plus an estimate for claims incurred but not reported. These estimates are based on historical information along with certain assumptions about future events, and are subject to change as additional information comes available. The Company has entered into employment agreements with certain employees that provide severance pay benefits under certain circumstances after a change in control of the Company or upon termination by the Company. The maximum contingent liability under these employment agreements is approximately $4,740 and $4,400 at December 30, 2000 and January 1, 2000, respectively. F-25 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) 21. Related-party Transactions: Rents for related-party leases may be slightly higher than rents for non- affiliated leases, and certain terms of the related-party leases are more favorable to the landlord than those contained in leases with non-affiliates (See Note 14). Under the terms of a shared services agreement, Sears provided certain services to the Company, including payroll and payable processing for Western, among other services through the third quarter of fiscal year 1999. The Company and Sears have entered into agreements that provide for the Western stores to continue to purchase and carry certain Sears branded products during periods defined in the agreements. The Company is also a first-call supplier of certain automotive products to certain Sears Automotive Group stores. In connection with the Western Merger, Sears arranged to buy from the Company certain products in bulk for its automotive centers through January 1999. These amounts are included in net sales to Sears in the following table. The following table presents the related party transactions with Sears for fiscal 2000, 1999 and 1998 and as of December 30, 2000 and January 1, 2000:
Years Ended ---------------------------------- December 30, January 1, January 2, 2000 2000 1999 ------------ ---------- ---------- Net sales to Sears...................... $7,487 $5,326 $2,124 Shared services revenue................. -- 2,286 697 Shared services expenses................ -- 887 844 Credit card fees expense................ 405 348 657 ====== ====== ====== December 30, January 1, 2000 2000 ------------ ---------- Receivables from Sears.................. $3,160 $6,625 Payable to Sears........................ 1,321 4,304 ====== ======
22. Benefit Plans: 401(k) Plan The Company maintains a defined contribution employee benefit plan, which covers substantially all employees after one year of service. The plan allows for employee salary deferrals, which are matched at the Company's discretion. Company contributions were $5,245 in fiscal 2000, $4,756 in fiscal 1999, and $2,634 in fiscal 1998. The Company also maintains a profit sharing plan covering Western employees that was frozen prior to the Western Merger on November 2, 1998 (Note 16). This plan covered all full-time employees who had completed one year of service and had attained the age of 21 on the first day of each month. All employees covered under this plan were included in the Company's plan on January 1, 1999. F-26 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) Deferred Compensation The Company maintains an unfunded deferred compensation plan established for certain key employees of Western prior to the Western Merger (Note 16). The Company assumed the plan liability of $15,253 through the Western Merger. The plan was frozen at the date of the Western Merger. As of December 30, 2000 and January 1, 2000, $5,359 and $8,504, respectively was accrued related to the plan. Postretirement Plan The Company provides certain health care and life insurance benefits for eligible retired employees. Employees retiring from the Company with 20 consecutive years of service after age 40 are eligible for these benefits, subject to deductibles, co-payment provisions and other limitations. The estimated cost of retiree health and life insurance benefits is recognized over the years that the employees render service as required by SFAS No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions." The initial accumulated liability, measured as of January 1, 1995, the date the Company adopted SFAS No. 106, is being recognized over a 20-year amortization period. In connection with the Western Merger, the Company assumed Western's benefit obligation under its postretirement health care plan. This plan was merged into the Company's plan effective July 1, 1999. The Company maintains the existing plan and the assumed plan covering Western employees. Financial information related to the plans was determined by the Company's independent actuaries as of December 30, 2000 and January 1, 2000. The following provides a reconciliation of the benefit obligation and the funded status of the plan:
2000 1999 -------- -------- Change in benefit obligation: Benefit obligation at beginning of the year........... $ 22,095 $ 23,559 Service cost.......................................... 451 336 Interest cost......................................... 1,532 1,401 Benefits paid......................................... (2,826) (1,843) Actuarial loss (gain)................................. 830 (1,358) -------- -------- Benefit obligation at end of the year................. 22,082 22,095 Change in plan assets: Fair value of plan assets at beginning of the year.... -- -- Employer contributions................................ 2,826 1,843 Benefits paid......................................... (2,826) (1,843) -------- -------- Fair value of plan assets at end of year.............. -- -- Reconciliation of funded status: Funded status......................................... (22,082) (22,095) Unrecognized transition obligation.................... 810 868 Unrecognized actuarial loss (gain).................... 530 (300) -------- -------- Accrued postretirement benefit cost..................... $(20,742) $(21,527) ======== ========
F-27 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) Net periodic postretirement benefit cost is as follows:
2000 1999 1998 ------ ------ ---- Service cost............................................. $ 451 $ 336 $240 Interest cost............................................ 1,532 1,401 440 Amortization of the transition obligation................ 58 58 58 Amortization of recognized net losses.................... -- 43 60 ------ ------ ---- $2,041 $1,838 $798 ====== ====== ====
The postretirement benefit obligation was computed using an assumed discount rate of 7.5% and 6.5% in 2000 and 1999, respectively. The health care cost trend rate was assumed to be 9.0% for 2000, 8.5% for 2001, 8.0% for 2002, 7.5% for 2003, 7.0% for 2004, 6.5% for 2005, and 5.0% to 6.0% for 2006 and thereafter. If the health care cost were increased 1% for all future years the accumulated postretirement benefit obligation would have increased by $1,496 as of December 30, 2000. The effect of this change on the combined service and interest cost would have been an increase of $130 for 2000. If the health care cost were decreased 1% for all future years the accumulated postretirement benefit obligation would have decreased by $1,308 as of December 30, 2000. The effect of this change on the combined service and interest cost would have been a decrease of $113 for 2000. The Company reserves the right to change or terminate the benefits at any time. The Company also continues to evaluate ways in which it can better manage these benefits and control costs. Any changes in the plan or revisions to assumptions that affect the amount of expected future benefits may have a significant impact on the amount of the reported obligation and annual expense. 23. Stock Options: The Company maintains a senior executive stock option plan and an executive stock option plan (the "Option Plans") for key employees of the Company. The Option Plans provide for the granting of non-qualified stock options. All options will terminate on the seventh anniversary of the grant date. Shares authorized for grant under the senior executive and the executive stock option plans are 1,650,000 and 1,240,000, respectively, at December 30, 2000. Three different types of options are granted pursuant to the Option Plans. Fixed Price Service Options vest over a three-year period in three equal installments beginning on the first anniversary of the grant date. Performance Options are earned in installments based upon satisfaction of certain performance targets for the four-year period ending in fiscal 2001. Variable Price Service Options vest in equal annual installments over a two-year period beginning in 1999, and have an exercise price that increases over time. As a result of the Recapitalization certain continuing stockholders received stock options to purchase up to 500,000 shares of common stock. The stock options are fully vested, nonforfeitable and provide for a $10 per share exercise price, increasing $2.00 per share annually, through the expiration date of April 2005. The Company retained a reputable firm with expertise in valuing stock options to determine the fair value of these options as of April 15, 1998 (the "valuation date"). Based on their analysis, the fair value of the options was approximately $300 in the aggregate. The value of the options as of the valuation date has been reflected as additional consideration for the shares of common stock repurchased in the Recapitalization. F-28 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) Total option activity was as follows:
2000 1999 1998 ------------------------- ------------------------ ------------------------ Weighted- Weighted- Weighted- Number of Average Number of Average Number of Average Shares Exercise Price Shares Exercise Price Shares Exercise Price --------- -------------- --------- -------------- --------- -------------- Fixed Price Service Options Outstanding at beginning of year................ 296,655 $14.79 104,580 $10.00 -- $ -- Granted................. 1,335,500 19.80 230,000 16.82 104,580 10.00 Exercised............... -- -- -- -- -- -- Forfeited............... (22,500) 14.55 (37,925) 13.90 -- -- --------- ------ ------- ------ ------- ------ Outstanding at end of year................... 1,609,655 $18.95 296,655 $14.79 104,580 $10.00 ========= ====== ======= ====== ======= ====== Variable Price Service Options Outstanding at beginning of year................ 329,235 $15.00 397,085 $15.00 -- $ -- Granted................. -- -- -- -- 397,085 15.00 Exercised............... -- -- -- -- -- -- Forfeited............... (32,500) 15.00 (67,850) 15.00 -- -- --------- ------ ------- ------ ------- ------ Outstanding at end of year................... 296,735 $15.00 329,235 $15.00 397,085 $15.00 ========= ====== ======= ====== ======= ====== Performance Options Outstanding at beginning of year................ 329,235 $10.00 397,085 $10.00 -- $ -- Granted................. -- -- -- -- 397,085 10.00 Exercised............... -- -- -- -- -- -- Forfeited............... (32,500) 10.00 (67,850) 10.00 -- -- --------- ------ ------- ------ ------- ------ Outstanding at end of year................... 296,735 $10.00 329,235 $10.00 397,085 $10.00 ========= ====== ======= ====== ======= ====== Other Options Outstanding at beginning of year................ 500,000 $12.00 500,000 $10.00 -- $ -- Granted................. -- -- -- -- 500,000 10.00 Exercised............... -- -- -- -- -- -- Forfeited............... -- -- -- -- -- -- --------- ------ ------- ------ ------- ------ Outstanding at end of year................... 500,000 $14.00 500,000 $12.00 500,000 $10.00 ========= ====== ======= ====== ======= ======
As of December 30, 2000, 118,270 of the Fixed Price Service Options, 148,368 of the variable options and 500,000 of the other options were exercisable. Only the 500,000 of other options and 29,385 of the fixed options were exercisable at January 1, 2000. The exercise price for the above options range from $10.00 per share to $16.82 per share. The remaining weighted-average contractual life of all options, excluding 1,050,000 of the options granted in fiscal 2000, is five years. The 1,050,000 options have a weighted-average contractual life of six years and five months for which none of the options are exercisable as of December 30, 2000. F-29 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) The exercise price for each option grant during the fiscal years ended 1998 and 1999 equaled the fair market value of the underlying stock on the grant date as determined by the board of directors. The weighted-average fair value for the grants during fiscal 1998 and 1999 was $1.06 and $2.05, respectively. During fiscal 2000, options were granted at an exercise price of $16.82, which equaled the fair market value, and $20.00 and $25.00, which exceeded the fair market value. The weighted-average fair value of options granted at $16.82 was $1.44. The options granted at $20.00 and $25.00 had no fair value on the grant date. As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company accounts for its employee stock options using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the market price of the Company's common stock at the measurement date over the exercise price. Accordingly, the Company did not recognize compensation expense on the issuance of its Fixed Price Service Options because the exercise price equaled the fair market value of the underlying stock on the grant date. The fair market value of the stock as of December 30, 2000 and January 1, 2000, as determined by the Board of Directors, was $21.00 and $16.82, respectively. The excess of the fair market value per share over the exercise price per share for the Performance Options and Variable Price Service Options is recorded as outstanding stock options and unamortized stock option compensation and is included in other stockholders' equity. At December 30, 2000, outstanding stock options and unamortized stock option compensation was $3,948 and $1,488, respectively. This compensation is amortized to expense over the vesting periods. Compensation expense related to these options of $729, $1,082 and $695 is included in selling, general and administrative expenses in the accompanying consolidated statements of operations for the fiscal year ended December 30, 2000, January 1, 2000 and January 2, 1999, respectively. The following information is presented as if the Company elected to account for compensation cost related to the stock options using the fair value method as prescribed by SFAS No. 123:
2000 1999 1998 ------- -------- ------- Net income (loss): As reported....................................... $19,559 ($25,326) ($2,182) Pro-forma......................................... 19,674 (24,842) (1,700) ======= ======== =======
For the above information, the fair value of each option granted in fiscal 2000 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions: (i) risk-free interest rate of 4.47% and 4.57%; (ii) weighted-average expected life of options of two and three years and (iii) expected dividend yield of zero. As permitted by SFAS No. 123 for companies with non-public equity securities, the Company used the assumption of zero volatility in valuing their options. For the above information, the fair value of each option granted in fiscal 1999 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions: (i) risk-free interest rate of 5.19% and 5.27%; (ii) weighted-average expected life of options of two and three years and (iii) expected dividend yield of zero. As permitted by SFAS No. 123 for companies with non-public equity securities, the Company used the assumption of zero volatility in valuing their options. For the above information, the fair value of each option granted in fiscal 1998 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions: (i) risk-free interest rate of 5.61%, 5.62% and 5.65%; (ii) weighted-average expected life of options of two, three and four years and F-30 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) (iii) expected dividend yield of zero. As permitted by SFAS No. 123 for companies with non-public equity securities, the Company used the assumption of zero volatility in valuing their options. 24. Fair Value of Financial Instruments: The carrying amount of cash and cash equivalents, receivables, bank overdrafts, accounts payable, borrowings secured by receivables and current portion of long-term debt approximates fair value because of the short maturity of those instruments. The carrying amount for variable rate long-term debt approximates fair value for similar issues available to the Company. The fair value of all fixed rate long-term debt was determined based on current market prices, which approximated $163,473 and $222,640 at December 30, 2000 and January 1, 2000, respectively. 25. Segment and Related Information: During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". This statement requires entities to report financial and descriptive information related to segments within the organization. The Company has the following operating segments: Holding, Retail and Wholesale. Holding has no operations but holds certain assets and liabilities. Retail consists of the retail operations of the Company, operating under the trade name "Advance Auto Parts" in the United States and "Western Auto" in Puerto Rico and the Virgin Islands. Wholesale consists of the wholesale operations, including distribution services to independent dealers, franchisees and one Company-owned store in California all operating under the "Western Auto" trade name. The California store location generates approximately 13% of the total Wholesale segment revenues. The financial information for fiscal 1999 and 1998 has been restated to reflect the operating segments described above. Prior to January 1, 2000, management received and used financial information at the Advance Stores and consolidated Western levels. The Advance Stores segment consisted of the "Advance Auto Parts" retail locations and the Western segment consisted of the "Western Auto" retail locations and wholesale operations described above. The accounting policies of the reportable segments are the same as those of the Company. F-31 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data)
Advance Holding Retail Wholesale(b) Eliminations Totals ------- ---------- ------------ ------------ ---------- 2000 Net sales(a)............ $ -- $2,148,904 $139,118 $ -- $2,288,022 Gross profit............ -- 873,119 22,776 -- 895,895 Operating income........ -- 87,600 5,189 -- 92,789 Net interest (expense) income................. (9,871) (49,976) (5,849) -- (65,696) (Loss) income before (benefit) provision for income taxes and extraordinary item(c).. (9,871) 37,345 (313) -- 27,161 Extraordinary item, gain on debt extinguishment, net of $1,759 income taxes.................. -- 2,933 -- -- 2,933 Segment assets(c)....... 10,556 1,293,208 56,088 (3,492) 1,356,360 Depreciation and amortization........... 66,513 313 -- 66,826 Capital expenditures.... -- 70,492 74 -- 70,566 1999(d) Net sales(a)............ $ -- $1,999,002 $207,943 $ -- $2,206,945 Gross profit............ -- 784,147 18,685 -- 802,832 Operating income (loss)................. -- 24,588 (4,353) -- 20,235 Net interest (expense) income................. (8,717) (50,789) (2,654) -- (62,160) Loss before benefit for income taxes(c)........ (8,717) (26,200) (2,993) -- (37,910) Segment assets(c)....... 13,036 1,250,654 94,298 (9,359) 1,348,629 Depreciation and amortization........... -- 53,280 4,867 -- 58,147 Capital expenditures.... -- 96,989 8,028 -- 105,017 1998(d) Net sales(a)............ $ -- $1,186,167 $ 34,592 $ -- $1,220,759 Gross profit............ -- 452,817 1,744 -- 454,561 Operating (loss) income................. (564) 41,228 (8,818) (17) 31,829 Net interest (expense) income................. (6,252) (28,310) 416 1,068 (33,078) (Loss) income before (benefit) provision for income taxes(c)........ (6,825) 11,901 (8,402) 1,060 (2,266) Segment assets(c)....... 6,749 1,150,592 110,924 (2,910) 1,265,355 Depreciation and amortization........... -- 29,208 756 -- 29,964 Capital expenditures.... -- 64,131 1,659 -- 65,790
-------- (a) For fiscal years 2000, 1999, and 1998, total net sales include approximately $356,000, $245,000 and $130,000, respectively, related to revenues derived from commercial sales. (b) During fiscal 1999, certain assets, liabilities and the corresponding activity related to the Parts America store operations and a distribution center were transferred to the Retail segment through a dividend to Retail. Additionally, throughout fiscal 2000, the Company transferred certain assets to the Retail segment related to the Western Auto retail operations in Puerto Rico and the Virgin Islands. (c) Excludes investment in and equity in net earnings or losses of subsidiaries. (d) Fiscal 1999 and 1998 results of operations do not reflect the allocation of certain shared expenses to the Wholesale segment. During fiscal 2000, Management adopted a method for allocating shared expenses. F-32 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 30, 2000, January 1, 2000, and January 2, 1999 (Dollars in thousands, except per share data) 26. Quarterly Financial Data (Unaudited): The following table summarizes quarterly financial data for fiscal years 2000 and 1999:
First Second Third Fourth -------- -------- -------- -------- 2000 Net sales............................... $677,582 $557,650 $552,138 $500,652 Gross profit............................ 258,975 216,533 223,903 196,484 Operating income........................ 19,184 32,249 30,111 11,245 Net (loss) income....................... (956) 10,381 12,440 (2,306) Basic net (loss) income per common share.................................. (0.03) 0.37 0.44 (0.08) Diluted net (loss) income per common share.................................. (0.03) 0.36 0.44 (0.08) 1999 Net sales............................... $670,453 $542,320 $522,846 $471,326 Gross profit............................ 226,361 196,526 199,637 180,308 Operating (loss) income................. (17,002) 14,096 14,860 8,281 Net (loss) income....................... (24,942) 2,067 191 (2,642) Basic net (loss) income per common share.................................. (0.88) 0.07 0.01 (0.09) Diluted net (loss) income per common share.................................. (0.88) 0.07 0.01 (0.09)
F-33 ADVANCE HOLDING CORPORATION SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT December 30, 2000 and January 1, 2000 Condensed Parent Company Balance Sheets (dollars in thousands, except per share data)
December 30, January 2000 1, 2000 ------------ --------- ASSETS ------ Cash and cash equivalents.............................. $ 178 $ 467 Merchandise and other receivables...................... 214 203 Refundable income taxes................................ -- 5,252 Investment in subsidiary............................... 231,371 202,528 Deferred income taxes.................................. 8,185 4,911 Other assets........................................... 1,979 2,203 --------- --------- Total assets....................................... $ 241,927 $ 215,564 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Accrued expenses....................................... $ 838 $ 716 Long-term debt......................................... 84,215 74,362 Other long-term liabilities............................ -- 620 Intercompany liabilities............................... 603 5,912 --------- --------- Total liabilities.................................. 85,656 81,610 Stockholders' equity Preferred stock, 8% noncumulative, nonvoting, $10 par value, redeemable by the Company at par; liquidation value at par; 100,000 shares authorized; no shares issued or outstanding............................... -- -- Common stock, Class A, voting, $.01 par value; 62,500,000 shares authorized; 28,288,550 and 28,144,050 issued and outstanding................... 283 281 Common stock, Class B, nonvoting; $.01 par value, 21,875,000 shares authorized; no shares issued or outstanding......................................... -- -- Additional paid-in capital........................... 372,169 369,399 Other................................................ 396 69 Accumulated deficit.................................. (216,577) (235,795) --------- --------- Total stockholders' equity......................... 156,271 133,954 --------- --------- Total liabilities and stockholders' equity......... $ 241,927 $ 215,564 ========= =========
The accompanying notes to condensed parent company financial statements are an integral part of these balance sheets. F-34 ADVANCE HOLDING CORPORATION SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT Condensed Parent Company Statements of Operations (dollars in thousands, except per share data)
For the Years Ended ------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Selling, general and administrative expenses.............................. $ -- $ -- $ (564) Interest expense....................... (10,121) (8,948) (7,436) Interest income........................ 250 231 1,184 Other, net............................. -- -- (9) Equity in earnings of subsidiaries..... 26,104 (19,565) 2,322 Income tax benefit..................... 3,326 2,956 2,321 ----------- ----------- ----------- Net income (loss)...................... $ 19,559 $ (25,326) $ (2,182) =========== =========== =========== Net income (loss) per basic share...... $ 0.69 $ (0.90) $ (0.12) Net income (loss) per diluted share.... $ 0.68 $ (0.90) $ (0.12) =========== =========== =========== Average common shares outstanding...... 28,295,873 28,269,431 18,606,048 Dilutive effect of stock options....... 314,995 -- -- ----------- ----------- ----------- Average common shares outstanding-- assuming dilution..................... 28,610,868 28,269,431 18,606,048 =========== =========== ===========
The accompanying notes to condensed parent company financial statements are an integral part of these balance sheets. F-35 ADVANCE HOLDING CORPORATION SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT Condensed Parent Company Statements of Cash Flows (dollars in thousands)
For the Years Ended --------------------------- 2000 1999 1998 ------- -------- -------- Cash flows from operating activities: Net income (loss).............................. $19,559 $(25,326) $ (2,182) Adjustments to reconcile net income (loss) to net cash provided by operations: Amortization of deferred debt issuance costs... 224 248 179 Amortization of bond discount.................. 9,853 8,700 5,645 Benefit for deferred income taxes.............. (3,326) (2,994) (1,894) Equity in earnings of subsidiary............... (26,104) 19,565 (2,322) Net decrease (increase) in: Other assets.................................. 5,225 (59) 3,647 Other liabilities............................. 40 1,154 (303) ------- -------- -------- Net cash provided by operating activities... 5,471 1,288 2,770 ------- -------- -------- Cash flows from investing activities: Change in net intercompany with subsidiaries... (5,309) (2,944) 49,799 Purchase of Advance Stores Class A Common Stock......................................... (2,053) -- -- Distributions from subsidiaries................ -- -- 242,023 Capital contributions.......................... -- -- (10,259) Purchase of stores common stock--Western Merger........................................ -- -- (263,000) ------- -------- -------- Net cash (used in) provided by investing activities................................. (7,362) (2,944) 18,563 ------- -------- -------- Cash flows from financing activities: Repayments of long-term debt................... -- -- 184,616 Borrowings under new credit facilities......... -- -- (218,725) Payment of debt issuance costs................. -- (42) (2,587) Proceeds from issuance of Class A Common Stock......................................... 1,602 423 368,045 Redemption of preferred and common stock....... -- -- (351,000) Payment of preferred dividend.................. -- -- (15) ------- -------- -------- Net cash provided by (used in) financing activities................................. 1,602 381 (19,666) ------- -------- -------- Net (decrease) increase in cash and cash equivalents..................................... (289) (1,275) 1,667 Cash and cash equivalents, beginning of year..... 467 1,742 75 ------- -------- -------- Cash and cash equivalents, end of year........... $ 178 $ 467 $ 1,742 ======= ======== ======== Supplemental cash flow information: Interest paid.................................. $ -- $ -- $ 1,848 Income taxes paid, net of refunds received..... -- 939 2,272 Noncash transactions: Net issuances of common stock under stockholder subscription receivable plan.................. 538 1,316 -- Loans receivable related to issuance of common stock......................................... 402 344 2,527 Appreciation of cancelled shares under stockholder subscription receivable plan...... 341 -- -- Debt issuance and acquisition costs accrued at January 1, 2000............................... -- -- 137 Stock options issued for redemption of stock... -- -- 300 Issuance of common stock--Western Merger....... -- -- 193,003 Equity method impact of outstanding stock options....................................... (729) (1,082) (695)
The accompanying notes to condensed parent company financial statements are an integral part of these balance sheets. F-36 ADVANCE HOLDING CORPORATION SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT Notes to Condensed Parent Company Statements December 30, 2000 and January 1, 2000 (dollars in thousands, except per share data) 1. Presentation These condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although management believes that the disclosures made are adequate to make the information presented not misleading. 2. Organization Advance Holding Corporation (the "Company") is a holding company which was the 100% shareholder of Advance Stores Company, Incorporated ("Stores") and certain other subsidiaries during the periods presented. During fiscal 1998, the other subsidiaries of the Company were liquidated, leaving Stores as the only operating subsidiary of the Company. The parent/subsidiary relationship between the Company and its subsidiaries includes certain related party transactions. These transactions consist primarily of interest on intercompany advances, dividends, capital contributions and allocations of certain costs. Deferred income taxes have not been provided for financial reporting and tax basis differences on the undistributed earnings of the subsidiaries. 3. Recapitalization On April 15, 1998, the Company consummated its recapitalization pursuant to an Agreement and Plan of Merger dated March 4, 1998 (the "Merger Agreement"). In connection with the Merger, the Company's Board of Directors authorized a 12,500 to 1 split of the common stock and a change in the par value of the common stock from $100 to $.01 per share. The effects of the 12,500 to 1 stock split have been retroactively applied to all common share information for all periods presented in these financial statements. Pursuant to the Merger Agreement, AHC Corporation ("AHC"), a corporation controlled by an investment fund organized by Freeman Spogli & Co. Incorporated ("FS&Co."), merged into the Company (the "Merger"), with the Company as the surviving corporation. In the Merger, a portion of the common stock and all of the preferred stock of the Company were converted into the right to receive in the aggregate approximately $351,000 in cash and certain stock options (see below). Certain shares representing approximately 14% of the outstanding Class A common stock remained outstanding upon consummation of the Merger. Immediately prior to the Merger, FS&Co. purchased approximately $80,500 of the common stock of AHC which was converted in the Merger into approximately 64% of the Company's outstanding common stock and Ripplewood Partners, L.P. and its affiliates (Ripplewood) purchased approximately $20,000 of the common stock of AHC which was converted in the Merger into approximately 16% of the Company's outstanding common stock. In connection with the Merger, management purchased approximately $8,000, or approximately 6%, of the Company's outstanding common stock. The purchase of common stock by management resulted in stockholder subscription receivables. The notes provide for annual interest payments, at the prime rate, with the entire principal amount due in five years. On April 15, 1998, the Company entered into a Credit Facility that provides for (i) three senior secured term loan facilities in the aggregate amount of $250,000 and (ii) a secured revolving credit facility of up to $125,000. At the closing of the Merger, $125,000 was borrowed under one of the term loan facilities. On April 15, 1998, the Company also issued $200,000 of senior subordinated notes and approximately $112,000 of F-37 ADVANCE HOLDING CORPORATION SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT Notes to Condensed Parent Company Statements December 30, 2000 and January 1, 2000 (dollars in thousands, except per share data) senior discount debentures (see Note 4). In connection with these transactions, the Company extinguished a substantial portion of its existing notes payable and long-term debt. The merger, the retirement of debt, borrowings under the Credit Facility, the issuance of the senior discount debentures and the issuance of the senior subordinated notes collectively represent the "Recapitalization". The Company has accounted for the Recapitalization for financial reporting purposes as the sale of common stock, the issuance of debt, the redemption of common and preferred stock and the repayment of notes payable and long-term debt. The stock options received by the existing stockholders are for 500,000 shares of common stock. The stock options are fully vested, nonforfeitable and provide for a $10 per share exercise price, increasing $2.00 per share annually, through the expiration date of April 2005. The Company retained a reputable firm with expertise in valuing stock options to determine the fair value of these options as of April 15, 1998 (the valuation date). Based on their analysis, the fair value of the options is approximately $300 in the aggregate. The value of the options has been reflected as additional consideration for the shares of common stock repurchased in the Recapitalization. Concurrent with the Recapitalization, the Company incurred $3,404 of costs and expenses. Of these costs, $2,629 were capitalized as debt issuance costs and $775 has been recorded as a reduction of proceeds from the sale of common stock. In connection with the Recapitalization, FS&Co. and an affiliate of Ripplewood collectively received $5,000 in fees for negotiating the Recapitalization, advisory and consulting services, arranging financing and raising equity funding. 4. Long-term Debt Long-term debt at December 30, 2000 consists of senior discount debentures (the "Debentures") issued during fiscal 1998 in connection with the Recapitalization. The Debentures were issued at a discount and accrue at a rate of 12.875%, compounded semi-annually, to an aggregate principal amount of $112,000 by April 15, 2003. Cash interest will not accrue on the Debentures prior to April 15, 2003. Commencing April 15, 2003, cash interest on the Debentures will accrue and be payable, at a rate of 12.875% per annum, semi- annually in arrears on each April 15 and October 15. As of December 30, 2000 and January 1, 2000, the Debentures have been accreted by $24,198 and $14,345 with corresponding interest expense of $9,853, $8,700 and $5,645 recognized for the years ended December 30, 2000, January 1, 2000 and January 2, 1999, respectively. The Debentures are redeemable at the option of the Company, in whole or in part, at any time on or after April 15, 2003. In addition, at any time prior to April 15, 2001 the Company may, at its option, redeem up to 35% of the aggregate principal amount at maturity of the Debentures originally issued at a redemption price equal to 112.875% of the accreted value thereof, plus liquidated damages, if any, with the net cash proceeds of one or more equity offerings; provided that at least 65% of the original aggregate principal amount at maturity of the Debentures will remain outstanding immediately following each such redemption. Upon the occurrence of a change of control (as defined), each holder of the Debentures will have the right to require the Company to purchase the Debentures at a price in cash equal to 101% of the accreted value thereof plus liquidated damages, if any, thereon in the case of any such purchase prior to April 15, 2003, or F-38 ADVANCE HOLDING CORPORATION SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT Notes to Condensed Parent Company Statements December 30, 2000 and January 1, 2000 (dollars in thousands, except per share data) 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, thereon to the date of purchase in the case of any such purchase on or after April 15, 2003. The Company may not have any significant assets other than capital stock of the Stores (which is pledged to secure the Company's obligations under the Credit Facility). As a result, the Company's ability to purchase all or any part of the Debentures will be dependent upon the receipt of dividends or other distributions from Stores or its subsidiaries. The Credit Facility and the Senior Subordinated Notes have certain restrictions for Stores with respect to paying dividends and making any other distributions. The Debentures are subordinated to all of the Company's other liabilities. The Debentures contain certain non-financial restrictive covenants that are similar to the covenants contained in the notes. Substantially all of the net assets of the Company's subsidiaries are restricted at December 30, 2000. 5. See Notes to Consolidated Financial Statements for Additional Disclosures F-39 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (dollars in thousands)
Balance at Balance at Beginning Charges to End of of Period Expenses Deductions Other Period ---------- ---------- ---------- ------- ---------- Allowance for doubtful accounts receivable: January 2, 1999....... $ 575 $1,193 $ (582)(2) $ 2,594(1) $ 3,780 January 1, 2000....... 3,780 3,901 (754)(2) -- 6,927 December 30, 2000..... 6,927 2,152 (4,058)(2) -- 5,021 -------- (1) Allowance for doubtful accounts receivable assumed in the Western Merger. (2) Accounts written off during the period. Restructuring reserves: January 2, 1999....... $ -- $6,774 $ (2,026)(2) $33,015(1) $37,763 January 1, 2000....... 37,763 58 (18,165)(2) 1,660(1) 21,316 December 30, 2000..... 21,316 1,673 (11,143)(2) (1,261)(3) 10,585
-------- (1) Restructuring reserves assumed and established in the Western Merger. (2) Represents amounts paid for restructuring charges. (3) Reductions to reserves assumed and established in the Western Merger that exceeded the ultimate cost expended by the Company. F-40 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS July 14, 2001 and December 30, 2000 (dollars in thousands, except per share data)
July 14, December 30, 2001 2000 ASSETS ----------- ------------ (unaudited) Current assets: Cash and cash equivalents............................. $ 19,620 $ 18,009 Receivables, net...................................... 90,401 80,578 Inventories........................................... 788,773 788,914 Other current assets.................................. 18,878 10,274 ---------- ---------- Total current assets.............................. 917,672 897,775 Property and equipment, net of accumulated depreciation of $210,776 and $191,897................ 400,973 410,960 Assets held for sale.................................. 23,640 25,077 Other assets, net..................................... 22,029 22,548 ---------- ---------- $1,364,314 $1,356,360 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdrafts....................................... $ -- $ 13,599 Current portion of long-term debt..................... -- 9,985 Accounts payable...................................... 401,039 387,852 Accrued expenses...................................... 138,839 124,962 Other current liabilities............................. 50,770 42,794 ---------- ---------- Total current liabilities......................... 590,648 579,192 ---------- ---------- Long-term debt........................................ 554,819 576,964 ---------- ---------- Other long-term liabilities........................... 39,488 43,933 ---------- ---------- Commitments and contingencies Stockholders' equity: Preferred stock, 8% noncumulative, nonvoting, $10 par value, redeemable by the Company at par; liquidation value at par; 100,000 shares authorized; no shares issued or outstanding................................ -- -- Common stock, Class A, voting, $.01 par value, 62,500,000 shares authorized; 28,321,150 and 28,288,550 issued and outstanding.................... 283 283 Common stock, Class B, nonvoting, $.01 par value, 21,875,000 shares authorized; no shares issued or outstanding.......................................... -- -- Additional paid-in capital............................ 372,970 372,169 Other................................................. 1,396 396 Accumulated deficit................................... (195,290) (216,577) ---------- ---------- Total stockholders' equity........................ 179,359 156,271 ---------- ---------- $1,364,314 $1,356,360 ========== ==========
The accompanying notes to the condensed consolidated financial statements are an integral part of these balance sheets. F-41 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For The Twenty-eight Week Periods Ended July 14, 2001 and July 15, 2000 (Dollars in thousands, except per share data) (Unaudited)
Twenty-eight Week Periods Ended ---------------------- July 14, July 15, 2001 2000 ---------- ---------- Net sales.............................................. $1,336,837 $1,235,232 Cost of sales, including purchasing and warehousing costs............................................... 796,557 759,724 ---------- ---------- Gross profit......................................... 540,280 475,508 Selling, general and administrative expenses......... 472,361 424,075 ---------- ---------- Operating income..................................... 67,919 51,433 ---------- ---------- Other (expense) income: Interest expense..................................... (33,074) (36,601) Other................................................ 569 532 ---------- ---------- Total other expense, net........................... (32,505) (36,069) ---------- ---------- Income before provision for income taxes............... 35,414 15,364 Provision for income taxes............................. (14,010) (5,939) ---------- ---------- Net income............................................. $ 21,404 $ 9,425 ========== ========== Net income per basic share............................. $ 0.76 $ 0.33 ========== ========== Net income per diluted share........................... $ 0.74 $ 0.33 ========== ========== Average common shares outstanding...................... 28,284,636 28,295,150 Dilutive effect of stock options....................... 475,424 214,727 ---------- ---------- Average common shares outstanding--assuming dilution... 28,760,060 28,509,877 ========== ==========
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements. F-42 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For The Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000 (Dollars in thousands) (Unaudited)
Twenty-Eight Week Periods Ended -------------------- July 14, July 15, 2001 2000 --------- --------- Cash flows from operating activities: Net income.............................................. $ 21,404 $ 9,425 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 37,069 34,402 Amortization of stock option compensation.............. 1,342 600 Amortization of deferred debt issuance costs........... 1,717 1,750 Amortization of bond discount.......................... 5,855 5,173 Amortization of interest on capital lease obligation... ---- 42 Losses on sales of property and equipment, net......... 806 215 Impairment of assets held for sale..................... 1,600 -- Provision for deferred income taxes.................... 8,422 5,452 Net (increase) decrease in: Receivables, net....................................... (8,915) 1,706 Inventories............................................ 17,351 (17,551) Other assets........................................... (8,952) (6,298) Net increase (decrease) in: Accounts payable....................................... 13,187 33,285 Accrued expenses....................................... 17,172 (17,308) Other liabilities...................................... (5,442) 2,411 --------- --------- Net cash provided by operating activities............ 102,616 53,304 --------- --------- Cash flows from investing activities: Purchases of property and equipment..................... (31,048) (28,031) Acquisition, net of cash acquired....................... (21,472) -- Proceeds from sales of property and equipment........... 1,381 2,531 --------- --------- Net cash used in investing activities.................. (51,139) (25,500) --------- --------- Cash flows from financing activities: Decrease in bank overdrafts............................. (13,599) (2,885) (Payment) borrowing of note payable..................... (784) 2,313 Borrowings under credit facilities...................... 171,400 191,200 Payments on credit facilities........................... (208,601) (233,200) (Repurchases of) proceeds from Class A common stock under the stockholder subscription plan................ (790) 2,650 Other................................................... 2,508 6,139 --------- --------- Net cash used in financing activities.................. (49,866) (33,783) --------- --------- Net increase (decrease) in cash and cash equivalents.... 1,611 (5,979) Cash and cash equivalents, beginning of period.......... 18,009 22,577 --------- --------- Cash and cash equivalents, end of period................ $ 19,620 $ 16,598 ========= ========= Supplemental cash flow information: Interest paid.......................................... $ 23,271 $ 28,040 Income taxes paid, net of refunds received............. 1,241 321 Non-cash transactions: Accrued purchases of property and equipment............ 4,717 2,460 Equity transactions under the stockholder subscription and employee stock option plans....................... 864 703 Conversion of capital lease obligation................. -- 3,509 ========= =========
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements. F-43 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000 (Dollars in thousands) 1. Basis of Presentation: The accompanying condensed consolidated financial statements include the accounts of Advance Holding Corporation and its wholly owned subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of July 14, 2001, the condensed consolidated statements of operations for the twenty-eight week periods ended July 14, 2001 and July 15, 2000 and the condensed consolidated statements of cash flows for the twenty-eight week periods ended July 14, 2001 and July 15, 2000, have been prepared by the Company and have not been audited. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial position of the Company, the results of its operations and cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's consolidated financial statements for the fiscal year ended December 30, 2000. The results of operations for the twenty-eight week period are not necessarily indicative of the operating results to be expected for the full fiscal year. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. It requires companies to recognize all derivatives as either assets or liabilities in their statement of financial position and measure those instruments at fair value. In September 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133," which delayed the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Derivative Instruments and Certain Hedging--an Amendment of SFAS No. 133," which amended the accounting and reporting standards for certain risks related to normal purchases and sales, interest and foreign currency transactions addressed by SFAS No. 133. The Company adopted SFAS No. 133 on December 31, 2000 with no material impact on its financial position or the results of its operations. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing Financial Assets and Extinguishment of Liabilities". This statement replaces SFAS No. 125, but carries over most of the provisions of SFAS No. 125 without reconsideration. The Company implemented SFAS No. 140 during the first quarter of fiscal 2001. The implementation had no impact on the Company's financial position or the results of its operations. In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 addresses accounting and reporting for all business combinations and requires the use of the purchase method for business combinations. SFAS No. 141 also requires recognition of intangible assets apart from goodwill if they meet certain criteria. SFAS No. 142 establishes accounting and reporting standards for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and F-44 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000 (Dollars in thousands) intangibles with indefinite useful lives are no longer amortized but are instead subject to at least an annual assessment for impairment by applying a fair-value based test. SFAS No. 141 applies to all business combinations initiated after June 30, 2001. SFAS No. 142 is effective for existing goodwill and intangible assets beginning on December 31, 2001. SFAS No. 142 is effective immediately for goodwill and intangibles acquired after June 30, 2001. Although the Company is currently evaluating the impact of SFAS Nos. 141 and 142, management does not expect that the adoption of these statements will have a material impact on existing goodwill or intangibles. For the twenty-eight week period ended July 14, 2001, the Company had amortization expense of approximately $150 related to existing goodwill. Such amortization will be eliminated upon adoption of SFAS No. 142. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 establishes accounting standards for recognition and measurement of an asset retirement obligation and an associated asset retirement cost and is effective for fiscal years beginning after June 15, 2002. The Company does not expect SFAS No. 143 to have a material impact on its financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Per Share Information The Company presents basic and diluted income per share in accordance with the Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Basic income per share is computed as net income divided by the weighted- average number of common shares outstanding for the period. Diluted income per share reflects the potential dilution that could occur from common shares issuable through stock-based compensation including stock options. Reclassifications Certain 2000 amounts have been reclassified to conform with their 2001 presentation. F-45 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000 (Dollars in thousands) 2. Accounts Receivable: Receivables consist of the following:
July 14, December 30, 2001 2000 -------- ------------ (unaudited) Trade: Wholesale............................................. $12,253 $12,202 Retail................................................ 18,174 15,666 Vendor................................................ 46,141 36,260 Installment........................................... 14,897 14,197 Related parties....................................... 785 3,540 Employees............................................. 901 607 Other................................................. 2,841 3,127 ------- ------- Total receivables..................................... 95,992 85,599 Less--Allowance for doubtful accounts................. (5,591) (5,021) ------- ------- Receivables, net...................................... $90,401 $80,578 ======= =======
3. Inventories: Inventories are stated at the lower of cost or market using the last-in, first-out (LIFO) method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management's estimates of expected fiscal year-end inventory levels and costs. The Company capitalizes certain purchasing and warehousing costs into inventory. Purchasing and warehousing costs included in inventory at July 14, 2001 and December 30, 2000 were $56,561 and $56,305, respectively. Inventories consist of the following:
July 14, December 30, 2001 2000 ----------- ------------ (unaudited) Inventories at FIFO................................. $776,704 $779,376 Adjustments to state inventories at LIFO............ 12,069 9,538 -------- -------- Inventories at LIFO................................. $788,773 $788,914 ======== ========
4. Restructuring Liabilities: The Company's restructuring activities relate to the ongoing analysis of the profitability of store locations and the settlement of restructuring activities undertaken as a result of the fiscal 1998 merger with Western Auto Supply Company ("Western") ("Western Merger"). Additionally, the Company assumed a portion of the pre-acquisition reserves related to the restructuring activities of the recently acquired Carport Auto Parts, Inc. (the "Carport Acquisition") (See Note 5). Expenses associated with restructuring are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. During the first and second quarters of fiscal 2001, the Company closed two stores included in the fiscal 2000 restructuring activities and made the decision to close or relocate 24 additional stores not meeting profitability objectives, of which 18 had been closed or relocated as of July 14, 2001. As of July 14, 2001, this liability represents the current value required for certain facility exit costs, which will be settled over the remaining terms of the underlying lease agreements. F-46 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000 (Dollars in thousands) A reconciliation of activity with respect to these restructuring accruals is as follows:
Other Exit Costs ----------- (unaudited) Balance, December 30, 2000..................................... $6,788 New provisions................................................. 3,275 Change in estimates............................................ 179 Reserves utilized.............................................. (2,469) ------ Balance, July 14, 2001......................................... $7,773 ======
As a result of the Western Merger, the Company established restructuring reserves in connection with the decision to close certain Parts America stores, to relocate certain Western administrative functions, to exit certain facility leases and to terminate certain employees of Western. Additionally, the Carport Acquisition resulted in restructuring reserves for closing 21 acquired stores not expected to meet long-term profitability objectives and the termination of certain administrative employees of the acquired company. As of July 14, 2001, the other exit costs represent the current value required for certain facility exit costs, which will be settled over the remaining terms of the underlying lease agreements. A reconciliation of activity with respect to these restructuring accruals is as follows:
Other Exit Severance Costs --------- ---------- (unaudited) Balance, December 30, 2000.............................. $ -- $ 3,797 Purchase accounting adjustments......................... 837 1,715 Reserves utilized....................................... (705) (1,015) ----- ------- Balance, July 14, 2001.................................. $ 132 $ 4,497 ===== =======
5. Carport Acquisition: On April 23, 2001, the Company completed its acquisition of Carport Auto Parts, Inc. ("Carport"). The acquisition included a net 30 retail stores located in Alabama and Mississippi, and substantially all of the assets used in Carport's operations. The acquisition has been accounted for under the purchase method of accounting and, accordingly, Carport's results of operations have been included in the Company's statement of operations since the acquisition date. The purchase price of $21,533, has been allocated to the assets acquired and the liabilities assumed based on their fair values at the date of acquisition. This allocation resulted in the recognition of $3,239 in goodwill. 6. Assets Held for Sale: During the first quarter of fiscal 2001, the Company recorded an impairment charge of $1,600 reducing the carrying value of a facility included in assets held for sale to $6,000. The facility, which is held in the Wholesale segment, consists of excess space not required for the Company's current needs. F-47 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000 (Dollars in thousands) 7. Related Parties: The following table presents the related party transactions with Sears, Roebuck & Co. ("Sears") included in the condensed consolidated statements of operations for the twenty-eight week periods ended July 14, 2001 and July 15, 2000 and the condensed consolidated balance sheets as of July 14, 2001 and December 30, 2000:
Twenty-Eight Week Periods Ended ----------------------- July 14, July 15, 2001 2000 ----------- ----------- (unaudited) (unaudited) Net sales to Sears................................... $3,879 $3,976 Credit card fees expense............................. 194 228 Receivables from Sears............................... 702 3,160 Payables to Sears.................................... 1,220 1,321
8. Segment and Related Information: The Company has the following operating segments: Holding, Retail and Wholesale. Holding has no operations but holds certain assets and liabilities. Retail consists of the retail operations of the Company, operating under the trade names "Advance Auto Parts" and "Western Auto" in the United States and "Western Auto" in Puerto Rico and the Virgin Islands. Wholesale consists of the wholesale operations, including distribution services to independent dealers and franchisees all operating under the "Western Auto" trade name. During the first quarter of fiscal 2001, the Company realigned its retail operations to include the Company-owned store operating under the "Western Auto" trade name in California, which was previously included in the Wholesale segment. Therefore, the following segment disclosures for the twenty-eight weeks ended July 15, 2000 have been restated to reflect this new structure. The accounting policies of the consolidated company have been consistently applied to the reportable segments listed below.
Twenty-Eight Week Period Ended ----------------------------------------------------- Advance July 14, 2001 Holding Retail Wholesale Eliminations Totals ------------- ------- ---------- --------- ------------ ---------- (unaudited) Net sales............... $ -- $1,275,582 $61,255 $ -- $1,336,837 (Loss) income before benefit (provision) for income taxes........... (5,908) 43,230 (1,908) -- 35,414 Segment assets(a)....... 12,670 1,325,165 43,696 (17,217) 1,364,314 Twenty-Eight Week Period Ended ----------------------------------------------------- Advance July 15, 2000 Holding Retail Wholesale Eliminations Totals ------------- ------- ---------- --------- ------------ ---------- (unaudited) Net sales............... $ -- $1,160,310 $74,922 $ -- $1,235,232 (Loss) income before benefit (provision) for income taxes........... (5,149) 23,591 (3,078) -- 15,364 Segment assets(a)....... 15,648 1,294,571 64,112 (24,018) 1,350,313
-------- (a) Excludes investment in and equity in net earnings or losses of subsidiaries. F-48 ADVANCE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000 (Dollars in thousands) 9. Contingencies: During the first quarter of fiscal 2001, the Company recorded a net gain of $8,300 as a result of a settlement reached with a vendor, in which the vendor repudiated a long-term supply agreement. This gain was recognized as a reduction to cost of sales in the accompanying statement of operations. The Company received notification from Sears during the first quarter of fiscal 2001 that certain environmental matters of Western existing as of the merger date and fully indemnified by Sears, have been settled. Accordingly, the Company reversed a $2,500 receivable due from Sears and reduced the corresponding environmental liability. 10. Subsequent Events: On August 7, 2001, the Company signed a definitive agreement to acquire Discount Auto Parts, Inc. ("Discount") in a merger transaction. Discount shareholders will receive $7.50 per share in cash plus 0.2577 shares of common stock in the combined company for each share of Discount common stock. Accordingly, upon consummation of the merger, Discount shareholders will own approximately 13% of the total shares outstanding of the combined company. The Company will file a registration statement covering the shares issued to Discount shareholders, and, through this offering, become a public company renamed Advance Auto Parts, Inc. Discount operates approximately 667 retail auto parts stores in Florida, Georgia, South Carolina, Alabama, Louisiana and Mississippi. The merger, subject to certain regulatory filings and approvals, will be accounted for under the purchase method of accounting in accordance with SFAS No. 141, "Business Combinations." On July 27, 2001, the Company made the decision to close a duplicative distribution facility located in Jeffersonville, Ohio. This 382,000 square foot owned facility opened in 1996 and served stores operating in the retail segment throughout the Mid-west portion of the United States. The Company has operated two distribution facilities in overlapping markets since the Western Merger, in which the Company assumed the operation of a Western distribution facility in Ohio. The decision to close this facility allows the Company to utilize the operating resource requirements more productively in other areas of the business. The Company does not anticipate closure of this facility and the severing of certain of its employees to materially impact its financial position or future results of operations. F-49 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Discount Auto Parts, Inc. We have audited the accompanying consolidated balance sheets of Discount Auto Parts, Inc. as of May 29, 2001 and May 30, 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended May 29, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Discount Auto Parts, Inc. at May 29, 2001 and May 30, 2000 and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 29, 2001, in conformity with accounting principles generally accepted in the United States. As discussed in Note 2 to the financial statements, during fiscal 1999 the Company changed its method of accounting for inventories. /s/ Ernst & Young LLP Tampa, Florida June 29, 2001 F-50 DISCOUNT AUTO PARTS, INC. CONSOLIDATED BALANCE SHEETS
May 30 May 29 2000 2001 --------- --------- (In thousands) ASSETS ------ Current assets: Cash................................................... $ 12,612 $ 9,669 Inventories............................................ 253,113 242,718 Prepaid expenses and other current assets.............. 13,986 14,391 Deferred income taxes.................................. 469 -- --------- --------- Total current assets................................. 280,180 266,778 Property and equipment................................... 524,053 507,255 Less allowances for depreciation and amortization........ (104,771) (122,742) --------- --------- 419,282 384,513 Other assets............................................. 5,247 4,638 --------- --------- Total assets......................................... $ 704,709 $ 655,929 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Trade accounts payable................................. $ 100,804 $ 96,442 Accrued salaries, wages and benefits................... 8,804 8,649 Other current liabilities.............................. 14,403 16,637 Current maturities of long-term debt................... 2,400 1,200 --------- --------- Total current liabilities............................ 126,411 122,928 Deferred gain on sale/leaseback.......................... -- 5,966 Deferred income taxes.................................... 10,494 13,273 Long-term debt........................................... 264,600 192,900 Stockholders' equity: Preferred stock, $.01 par value, 5,000 shares authorized, none issued or outstanding................ -- -- Common Stock, $.01 par value, 50,000 shares authorized, 16,700 and 16,708 shares issued and outstanding at May 30, 2000 and May 29, 2001, respectively............... 167 167 Additional paid-in capital............................. 142,379 142,429 Retained earnings...................................... 160,658 178,266 --------- --------- Total stockholders' equity........................... 303,204 320,862 --------- --------- Total liabilities and stockholders' equity........... $ 704,709 $ 655,929 ========= =========
See accompanying notes. F-51 DISCOUNT AUTO PARTS, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)
Fiscal Year Ended ---------------------------- June 1 May 30 May 29 1999 2000 2001 -------- -------- -------- Net sales....................................... $511,483 $598,258 $661,717 Cost of sales, including distribution costs..... 302,843 356,783 404,199 -------- -------- -------- Gross profit................................ 208,640 241,475 257,518 Selling, general and administrative expenses.... 152,777 184,371 215,353 -------- -------- -------- Income from operations.......................... 55,863 57,104 42,165 Other income, net............................... 817 2,770 6,957 Interest expense................................ (12,856) (18,079) (21,634) -------- -------- -------- Income before income taxes and cumulative effect of change in accounting principle.............. 43,824 41,795 27,488 Income taxes.................................... 16,766 15,506 9,880 -------- -------- -------- Income before cumulative effect of change in accounting principle........................... 27,058 26,289 17,608 Cumulative effect of change in accounting principle, net of income tax benefit........... (8,245) -- -- -------- -------- -------- Net income.................................. $ 18,813 $ 26,289 $ 17,608 ======== ======== ======== Net income per basic share from: Income before cumulative effect of change in accounting principle......................... $ 1.63 $ 1.57 $ 1.05 Cumulative effect of change in accounting principle.................................... (0.50) -- -- -------- -------- -------- Net income.................................. $ 1.13 $ 1.57 $ 1.05 ======== ======== ======== Net income per diluted share from: Income before cumulative effect of change in accounting principle......................... $ 1.61 $ 1.57 $ 1.05 Cumulative effect of change in accounting principle.................................... (0.49) -- -- -------- -------- -------- Net income.................................. $ 1.12 $ 1.57 $ 1.05 ======== ======== ======== Average common shares outstanding............... 16,650 16,695 16,703 Dilutive effect of stock options................ 153 30 4 -------- -------- -------- Average common shares outstanding-assuming dilution................................... 16,803 16,725 16,707 ======== ======== ========
See accompanying notes. F-52 DISCOUNT AUTO PARTS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Preferred ------------- Paid-In Retained Stock Shares Amount Capital Earnings Total --------- ------ ------ ---------- -------- -------- Balance at June 2, 1998... -- 16,630 $166 $141,163 $115,556 $256,885 Stock issued under stock purchase and stock option plans........... -- 60 1 1,067 -- 1,068 Net income.............. -- -- -- -- 18,813 18,813 --- ------ ---- -------- -------- -------- Balance at June 1, 1999... -- 16,690 167 142,230 134,369 276,766 Stock issued under stock purchase and stock option plans........... -- 10 -- 149 -- 149 Net income.............. -- -- -- -- 26,289 26,289 --- ------ ---- -------- -------- -------- Balance at May 30, 2000... -- 16,700 167 142,379 160,658 303,204 Stock issued under stock purchase and stock option plans........... -- 8 -- 50 -- 50 Net income.............. -- -- -- -- 17,608 17,608 --- ------ ---- -------- -------- -------- Balance at May 29, 2001... -- 16,708 $167 $142,429 $178,266 $320,862 === ====== ==== ======== ======== ========
See accompanying notes. F-53 DISCOUNT AUTO PARTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended ----------------------------- June 1 May 30 May 29 1999 2000 2001 -------- -------- --------- (In thousands) Operating activities Net income..................................... $ 18,813 $ 26,289 $ 17,608 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................ 18,555 22,441 23,498 Cumulative effect of change in accounting principle................................... 8,245 -- -- Deferred income tax (benefit) expense........ (1,489) 5,344 5,262 Gain on disposals of property and equipment.. (594) (2,565) (89) Changes in operating assets and liabilities: (Increase) decrease in inventories......... (37,840) (44,085) 10,395 (Increase) decrease in prepaid expenses and other current assets...................... (2,706) 6,377 (405) Increase in other assets................... (112) (534) (47) Increase (decrease) in trade accounts payable................................... 20,784 12,937 (4,362) Increase (decrease) in accrued salaries, wages and benefits........................ 691 796 (155) Decrease (increase) in other current liabilities............................... (504) 1,021 220 -------- -------- --------- Net cash provided by operating activities.............................. 23,843 28,021 51,925 Investing activities Net proceeds from sales of property and equipment..................................... 3,904 5,104 1,304 Purchases of property and equipment............ (80,964) (69,257) (43,053) Business acquisition........................... (8,225) -- -- Net proceeds from sales/leaseback.............. -- -- 59,731 -------- -------- --------- Net cash (used in) provided by investing activities.............................. (85,285) (64,153) 17,982 Financing activities Proceeds from short-term borrowings and long- term debt..................................... 105,359 92,344 92,829 Payments of short-term borrowings and long-term debt.......................................... (41,254) (52,544) (165,729) Proceeds from issuances of common stock........ 1,068 149 50 -------- -------- --------- Net cash provided by (used in) financing activities.............................. 65,173 39,949 (72,850) Net increase (decrease) in cash................ 3,731 3,817 (2,943) Cash at beginning of year...................... 5,064 8,795 12,612 -------- -------- --------- Cash at end of year...................... $ 8,795 $ 12,612 $ 9,669 ======== ======== =========
See accompanying notes. F-54 DISCOUNT AUTO PARTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Business Discount Auto Parts, Inc. is one of the Southeast's leading specialty retailers and suppliers of automotive replacement parts, maintenance items and accessories to both do-it-yourself ("DIY") consumers and professional mechanics and service technicians. As of June 1, 1999, May 30, 2000, and May 29, 2001, the Company operated a chain of 558, 643, and 666 stores, respectively. As of May 29, 2001, 438 of the stores were located in Florida, 114 were located in Georgia, 46 in Louisiana, 42 in Mississippi, 19 in Alabama, and 7 in South Carolina. Fiscal Year End The Company's fiscal year consists of 52 or 53 weeks ending on the Tuesday closest to May 31. The years ended June 1, 1999, May 30, 2000, and May 29, 2001 all consisted of 52 weeks. Principles of Consolidation The consolidated financial statements include the accounts of Discount Auto Parts, Inc. and its subsidiaries (the "Company" or "Discount"). All significant intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition The Company recognizes revenue upon delivery of products for commercial sales and upon sale to the customer for retail sales. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets principally include amounts due from vendors related to cooperative advertising and various incentive programs and trade accounts receivable resulting from the Company's commercial delivery program. Property and Equipment Property and equipment is stated at cost. Depreciation is provided using accelerated and straight-line methods over periods that approximate the assets' estimated useful lives. Maintenance and repairs are charged against operations as incurred. Pre-Opening Costs Costs associated with the opening of new stores, which primarily consist of payroll and occupancy costs, are charged against operations as incurred. Advertising Costs The Company expenses its share of all advertising costs as such costs are incurred. The portion of advertising expenditures, which is to be recovered through vendor cooperative advertising and other similar programs, is recorded as receivables. Advertising expense, net of vendor rebates, was approximately $4.0 million for fiscal 1999, $1.9 million for fiscal 2000, and $2.9 million for fiscal 2001. F-55 DISCOUNT AUTO PARTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Income Taxes The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. Stock Option Plans The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its employee stock options and presents disclosures required under Statement of Financial Accounting Standards Statement No. 123, Accounting for Stock-Based Compensation. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Fair Values of Financial Instruments The Company's financial instruments consist of cash, accounts receivable, accounts payable and long-term debt. The carrying value of cash, accounts receivable and accounts payable approximates fair market values. The carrying amount of long-term debt approximates fair market value based on current interest rates. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. New Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (Statement 133), Accounting for Derivative Instruments and Hedging Activities. The Company expects to adopt Statement 133 effective the beginning of fiscal year 2002. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Because the Company is not party to any derivative instruments at May 29, 2001, the adoption of this Statement will not have any effect on its results of operations or financial position. In July 2001, the Financial Accounting Standards Board issued Statements of Financial Standards ("SFAS") No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 establishes accounting and reporting standards for business combinations and eliminates the pooling-of- interests method of accounting for combinations for those combinations initiated after July 1, 2001. SFAS No. 141 also includes new criteria to recognize intangible assets separately from goodwill. SFAS No. 142 establishes the accounting and reporting standards for goodwill and intangible lives. Goodwill and intangibles with indefinite lives will no longer be amortized, but, alternatively, will be reviewed periodically for indicators of impairment. Separate intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The Company does not anticipate that the adoption of SFAS No. 141 and SFAS No. 142 will have a significant effect on its results of operations or financial position. 2. Accounting Change During the fourth quarter of fiscal year 1999, the Company changed its method of accounting for store inventories from the first-in, first-out retail inventory method to the weighted average cost method. The new F-56 DISCOUNT AUTO PARTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) method for computing inventory is preferable because it more accurately measures the cost of the Company's merchandise and produces a better matching of revenues and expenses. The effect of the change as of June 3, 1998 has been presented as a cumulative effect of a change in accounting method, net of a $5,190,000 income tax benefit, of $8,245,000, and has been recorded as of the beginning of fiscal year 1999. The effect of this change in fiscal year 1999 was to decrease income before cumulative effect of change in accounting principle by $805,000 ($.05 per diluted share). 3. Property and Equipment Property and equipment consists of the following (dollars in thousands):
May 30, May 29, Life 2000 2001 (Years) -------- -------- ------ Land............................................. $197,489 $178,660 Buildings........................................ 182,982 169,136 5-31.5 Furniture, fixtures and equipment................ 121,698 133,064 5-7 Building and leasehold improvements.............. 4,470 4,628 5-31.5 Automotive equipment............................. 4,907 4,911 3-7 Construction in progress......................... 12,507 16,856 -------- -------- $524,053 $507,255 ======== ========
Depreciation expense totaled approximately $18,415,000, $22,013,000, and $23,032,000 for fiscal years 1999, 2000 and 2001, respectively. 4. Long-Term Debt Long-term debt consists of the following (in thousands):
May 30, May 29, 2000 2001 -------- -------- Revolving credit agreements............................ $211,000 $140,500 Senior term notes...................................... 50,000 50,000 Senior secured notes................................... 6,000 3,600 -------- -------- 267,000 194,100 Less current maturities................................ (2,400) (1,200) -------- -------- $264,600 $192,900 ======== ========
Effective July 29, 1999, the Company entered into a five year $265 million unsecured revolving credit agreement (the "Revolver"). The rate of interest payable under the Revolver is a function of LIBOR or the prime rate of the lead agent bank, at the option of the Company. During the term of the Revolver, the Company is also obligated to pay a fee, which fluctuates based on the Company's debt-to-capitalization ratio, for the unused portion of the Revolver. Effective August 8, 1997, the Company issued a $50 million senior term notes facility (the "Notes"). The Notes provide for interest at a fixed rate of 7.46%, payable semi-annually, with semi-annual principal payments of $7.1 million, beginning July 15, 2004. At May 30, 2000 and May 29, 2001, the Company's weighted average interest rate on its borrowings under the revolving credit agreement was 7.3% and 7.1%, respectively. F-57 DISCOUNT AUTO PARTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of May 29, 2001, the Company had approximately $124.5 million of available borrowings. The Company issued two senior secured notes, each for an original principal of $12 million, to an insurance company. The notes were collateralized by a first mortgage on certain store properties, equipment and fixtures. During fiscal 2001, the Company retired one of the two senior secured notes. The remaining agreement provides for interest at a fixed rate of 9.8%, payable quarterly, with annual principal payments of $1.2 million due on May 31. The carrying value of all assets mortgaged or otherwise subject to lien totaled approximately $8.2 million at May 29, 2001. The Company's debt agreements contain various restrictions, including the maintenance of certain financial ratios and restrictions on dividends, with which the Company is in compliance. Based on the terms of the debt agreements, as of May 29, 2001, $42.7 million of the retained earnings were available for dividend distribution. Annual maturities, as of May 29, 2001, of all long-term debt for the next five years are as follows (in thousands):
Amount ------- 2002............................................................. $ 1,200 2003............................................................. 1,200 2004............................................................. 1,200 2005............................................................. 14,286 2006............................................................. 14,286
The table excludes amounts due under the Revolver in 2005 as it is expected to be renewed or replaced prior to its expiration. Total interest paid during fiscal years 1999, 2000 and 2001was approximately $13,843,000, $19,242,000, and $22,088,000, respectively. Capitalized interest for fiscal years 1999, 2000 and 2001 totaled approximately $668,000, $684,000, and $319,000, respectively. 5. Stockholders' Equity The Board of Directors is authorized, without further stockholder action, to divide any or all shares of the authorized preferred stock into series and to fix and determine the designation, preferences and relative participating, option or other special rights, and qualifications, limitations, or restrictions thereon, of any series so established, including voting powers, dividend rights, liquidation preferences, redemption rights and conversion privileges. As of May 29, 2001, the Board had not authorized any series of preferred stock and there are no plans, agreements or understandings for the authorization or issuance of any shares of preferred stock. 6. Leases Certain of the Company's retail stores and equipment are leased under noncancelable operating leases. The majority of the retail store leases include options to purchase and provisions for rental increases based on the consumer price index. F-58 DISCOUNT AUTO PARTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Future minimum annual rental commitments under noncancelable operating leases with initial or remaining terms of one year or more are as follows (in thousands):
Amount -------- 2002............................................................ $ 13,289 2003............................................................ 11,749 2004............................................................ 10,605 2005............................................................ 9,677 2006 and thereafter............................................. 128,767 -------- $174,087 ========
Rental expense for fiscal years 1999, 2000 and 2001 totaled approximately $5,094,000, $7,720,000, and $11,053,000, respectively. The Company also leases certain portions of its owned facilities to outside parties. Rental income for fiscal years 1999, 2000 and 2001 totaled approximately $719,000, $1,099,000, and $666,000, respectively. In May 2000, the Company entered into a lease agreement, as amended, in which the lessor agreed to fund up to $34 million for construction of a new 400,000 square foot distribution center in Copiah County, Mississippi. The agreement continues for five years following completion of the construction. Construction of the distribution center was completed in May 2001. At the end of the lease term, the Company has the option to renew the lease for two five- year terms, or to purchase the building for a price including the outstanding lease balance. If the Company elects not to renew the lease or purchase the building, the Company must arrange the sale of the building to a third party. Under the sale option, the Company has guaranteed a percentage of the total original cost as the residual fair value of the building. Lease payments are expected to be approximately $2.0 million on an annual basis and are included in the table above. On February 27, 2001, the Company completed a sale/leaseback transaction. Under the terms of the transaction, the Company sold 101 properties, including land, buildings, and improvements, for $62.2 million. The stores were leased back from the purchaser over a period of 22.5 years. The sale of the properties generated a gain, net of expenses incurred, of $6.0 million, which gain has been deferred and is being amortized over the lease term. Rent expense during the first five years of the lease will be approximately $6.4 million annually, with increases periodically thereafter, and is included in the table of future minimum annual rental commitments under non-cancelable operating leases. 7. Benefit Plans The Company has a 401(k) profit-sharing plan covering substantially all of its team members (employees) who have at least one year of service and work more than 1,000 hours per year. Team members may contribute up to 15% of their annual compensation subject to Internal Revenue Code maximum limitations. The Company has agreed to make matching contributions, based upon the team member's first six percent of compensation, ranging from 25% to 100% of the team member's contribution depending on the team member's years of service. After three years of service, Company contributions and earnings thereon vest at the rate of 20% per year of service with the Company. Expense recognized under this plan for fiscal years 1999, 2000 and 2001 was approximately $964,000, $947,000, and $1,279,000, respectively. The Company has a Supplemental Executive Profit Sharing Plan (the SEPS Plan). The SEPS Plan is an unfunded deferred compensation plan covering certain key members of management. The amount of benefit each participant is entitled to is established annually by the Board of Directors or, in certain cases, by a F-59 DISCOUNT AUTO PARTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) committee of the Board of Directors. Each participant's account accrues interest on unpaid awards at a rate determined annually as defined in the plan agreement. As of May 30, 2000 and May 29, 2001, the Company has accrued approximately $1,049,000 and $1,122,000, respectively, for benefits due under the SEPS Plan. The Board of Directors has adopted a stock purchase plan (the Purchase Plan), which initially reserved an aggregate of 550,000 shares of common stock. Under the Purchase Plan, all team members have the right to purchase shares of common stock of the Company at a price equal to 85% of the value of the stock immediately prior to the beginning of each exercise period. All team members are eligible to participate except for those who have been employed by the Company for less than one year, team members who customarily work twenty hours or less per week, team members who customarily work five months or less in any calendar year, and team members owning at least 5% of the Company's stock. During fiscal years 1999, 2000 and 2001, 8,805, 6,499, and 7,454 shares, respectively, were purchased under the terms of the Purchase Plan. As of May 29, 2001, 464,002 shares of common stock remain reserved for issuance under the Purchase Plan. 8. Stock Option Plans The Company has stock option plans, which provide for the granting to key team members options to purchase shares of its common stock. A total of 2,540,000 shares of common stock were reserved for issuance under the plans and, as of May 29, 2001, a total of 2,448,808 shares of common stock remain so reserved. The per share exercise price of each stock option is not less than the fair market value of the stock on the date of the grant or, in the case of a team member owning more than 10% of the outstanding stock of the Company, the price for incentive stock options is not less than 110% of such fair market value. A summary of the Company's stock option activity and related information is as follows (shares in thousands):
June 1, 1999 May 30, 2000 May 29, 2001 ---------------- ---------------- ---------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ -------- ------ -------- ------ -------- Outstanding at beginning of year...................... 1,127 $21 1,337 $23 1,515 $22 Granted.................... 333 27 376 19 427 9 Exercised.................. (51) 18 (4) 19 -- -- Canceled................... (72) 24 (194) 22 (432) 18 ----- ----- ----- Outstanding at end of year...................... 1,337 23 1,515 22 1,510 19 ===== ===== ===== Exercisable at end of year...................... 445 21 556 24 536 21 ===== ===== ===== Weighted-average fair value of options granted during the year.................. 14 11 6
Options outstanding and exercisable at May 29, 2001 are summarized as follows (options in thousands):
Options Outstanding Options Exercisable -------------------------------- -------------------- Weighted Weighted Average Weighted Average Remaining Exercisable Average Exercise Number Contractual Stock Exercise Range of Exercise Prices Prices Outstanding Life Options Price ------------------------ -------- ----------- ----------- ----------- -------- $7-$10................... $ 9 353 9.3 -- $ -- $16-$19.................. 18 562 5.9 232 17 $22-$31.................. 26 595 5.2 304 25 ----- --- $7-$31................... 19 1,510 6.4 536 21 ===== ===
F-60 DISCOUNT AUTO PARTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) All options outstanding generally vest beginning after three years and then in equal installments over a four-year period and have a ten-year duration. In the event of a change of ownership control, all options become 100% vested. The Company also has a Non-Employee Directors' Stock Option Plan. A total of 40,000 shares are reserved for future issuance under this plan. As of May 29, 2001, 25,000 options had been granted under this plan at an average price of $19.18. As of May 29, 2001, 8,250 of such options were exercisable. Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123 (SFAS 123), and has been determined as if the Company had accounted for its employee and non- employee director stock options under the fair value method of SFAS 123. The fair values for these options were estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: risk-free interest rate of return of 6.50% for 1999, 6.57% for 2000 and 5.8% for 2001; volatility factor of .41 for 1999, .44 for 2000 and .56 for 2001, and weighted average expected option life of seven years for all options. The Company assumed that no dividends would be paid over the expected life of the options. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The effects of applying SFAS 123 for pro forma disclosures are not likely to be representative of the effects on reported net income or losses for future years. The Company's pro forma information follows (in thousands, except per share amounts):
1999 2000 2001 ------- ------- ------- Pro forma net income.............................. $18,579 $25,534 $16,727 Pro forma net income per basic share.............. $ 1.12 $ 1.53 $ 1.00 Pro forma net income per diluted share............ $ 1.11 $ 1.53 $ 1.00
9. Income Taxes The provision for income taxes is comprised of the following (in thousands):
Fiscal Year Ended ----------------------- June 1, May 30, May 29, 1999 2000 2001 ------- ------- ------- Current: Federal.......................................... $12,233 $ 9,264 $4,618 State............................................ 2,129 898 -- ------- ------- ------ 14,362 10,162 4,618 Deferred: Federal.......................................... 2,062 5,219 4,884 State............................................ 342 125 378 ------- ------- ------ 2,404 5,344 5,262 ------- ------- ------ $16,766 $15,506 $9,880 ======= ======= ======
F-61 DISCOUNT AUTO PARTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A reconciliation of the provision for income taxes to the amounts computed at the federal statutory tax rate is as follows (in thousands):
Fiscal Year Ended ------------------------ June 1, May 30, May 29, 1999 2000 2001 ------- ------- ------- Federal income taxes at statutory rate.......... $15,339 $14,635 $9,621 State income taxes, net of federal tax benefit.. 1,606 850 378 Other items, net................................ (179) 21 (119) ------- ------- ------ $16,766 $15,506 $9,880 ======= ======= ======
Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
May 30, May 29, 2000 2001 -------- -------- Deferred tax assets: Change in inventory accounting method............... $ 2,487 $ 1,296 Various accrued expenses............................ 735 932 Deferred gain from sale/leaseback................... -- 2,711 Other, net.......................................... 736 1,067 -------- -------- Total deferred tax assets......................... 3,958 6,006 Deferred tax liabilities: Depreciation........................................ 10,977 16,881 Accrued liabilities................................. 1,397 1,796 Inventory related items............................. 1,124 2,006 Other, net.......................................... 485 610 -------- -------- Total deferred tax liabilities.................... 13,983 21,293 -------- -------- Net deferred tax liability........................ $ 10,025 $ 15,287 ======== ======== Classified as follows: Current asset (liability)........................... $ 469 $ (2,014) Noncurrent asset (liability)........................ (10,494) (13,273) -------- -------- $(10,025) $(15,287) ======== ========
For fiscal years 1999, 2000 and 2001, the Company paid income taxes of approximately $15,526,000, $9,922,000, and $2,820,000, respectively. 10. Commitments And Contingencies The Company is involved in various legal proceedings arising out of the normal conduct of its business. Although the Company cannot ascertain the amount of liability that it may incur from any of these matters, it does not believe that, individually or in the aggregate, these legal proceedings will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. As of May 29, 2001, the Company's cost to complete construction contracts in progress was approximately $3.4 million. F-62 DISCOUNT AUTO PARTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. Litigation Settlement In May 2001, the Company settled a claim related to litigation that was concluded in August 1997 by entering into a settlement agreement. The 1997 litigation stemmed from the sale and distribution of freon. The Company recorded a net gain of $6.5 million resulting from the settlement. Such amount is included in the other income caption on the income statement. 12. Subsequent Event (Unaudited) On August 7, 2001, the Company entered into a definitive agreement with Advance Holding Corporation, Advance Auto Parts, Inc., Advance Stores Company, Incorporated and AAP Acquisition Corporation (collectively, Advance) under which the Company would be acquired by Advance in a merger transaction. Terms of the agreement call for each share of Discount common stock to be exchanged for $7.50 in cash and 0.2577 shares of common stock of Advance Auto Parts, Inc., a holding company which has been formed to own and operate the combined companies. The transaction has been approved by the boards of directors of both companies and is subject to approval by the shareholders of Discount, clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other customary closing conditions. The transaction is expected to close in the fourth calendar quarter of 2001. 13. Quarterly Results Of Operations (Unaudited) The following quarterly financial data is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of the selected data for these interim periods presented have been included.
First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- -------- (In thousands, except per share amounts) Fiscal year ended May 30, 2000: Net sales............................. $143,625 $142,643 $147,374 $164,616 Gross profit.......................... 58,427 58,547 58,683 65,818 Net income............................ 7,346 6,020 5,813 7,110 Basic net income per common share..... .44 .36 .35 .43 Diluted net income per common share... .44 .36 .35 .43 Fiscal year ended May 29, 2001: Net sales............................. $167,074 $160,950 $159,477 $174,216 Gross profit.......................... 63,924 63,364 61,594 68,636 Net income............................ 3,569 2,281 2,309 9,449 Basic net income per common share..... .21 .14 .14 .57 Diluted net income per common share... .21 .14 .14 .57
F-63 DISCOUNT AUTO PARTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
May 29 August 2001 28 2001 -------- -------- (In thousands) ASSETS ------ Current assets: Cash....................................................... $ 9,669 $ 6,372 Inventories................................................ 242,718 243,053 Prepaid expenses and other current assets.................. 14,391 18,734 -------- -------- Total current assets...................................... 266,778 268,159 Property and equipment...................................... 507,255 513,102 Less allowances for depreciation and amortization........... (122,742) (128,639) -------- -------- 384,513 384,463 Other assets................................................ 4,638 4,431 -------- -------- Total assets.............................................. $655,929 $657,053 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Trade accounts payable..................................... $ 96,442 $ 75,609 Other current liabilities.................................. 25,286 25,105 Current maturities of long-term debt....................... 1,200 1,200 -------- -------- Total current liabilities................................. 122,928 101,914 Deferred gain on sale/leaseback............................. 5,966 5,874 Deferred income taxes....................................... 13,273 13,333 Long-term debt.............................................. 192,900 209,608 Stockholders' equity: Preferred stock............................................ -- -- Common stock............................................... 167 167 Additional paid-in capital................................. 142,429 142,640 Retained earnings.......................................... 178,266 183,517 -------- -------- Total stockholders' equity................................. 320,862 326,324 -------- -------- Total liabilities and stockholders' equity................ $655,929 $657,053 ======== ========
See accompanying notes. F-64 DISCOUNT AUTO PARTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Thirteen Weeks Ended ------------------ August August 29 2000 28 2001 -------- -------- (In thousands, except per share amounts) Net sales................................................... $167,074 $173,381 Cost of sales, including distribution costs................. 103,150 104,189 -------- -------- Gross profit............................................... 63,924 69,192 Selling, general and administrative expenses................ 52,850 56,830 Merger related expenses..................................... -- 943 -------- -------- Income from operations..................................... 11,074 11,419 Other income, net........................................... 85 100 Interest expense............................................ (5,583) (3,318) -------- -------- Income before income taxes.................................. 5,576 8,201 Income taxes................................................ 2,007 2,950 -------- -------- Net income.................................................. $ 3,569 $ 5,251 ======== ======== Net income per share: Basic net income per common share.......................... $ 0.21 $ 0.31 Diluted net income per common share........................ $ 0.21 $ 0.31 -------- -------- Average common shares outstanding........................... 16,695 16,708 Dilutive effect of stock options............................ -- 156 -------- -------- Average common shares outstanding--assuming dilution........ 16,695 16,864 ======== ========
See accompanying notes. F-65 DISCOUNT AUTO PARTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Thirteen Weeks Ended ----------------------- August 29 August 28 2000 2001 ---------- ---------- (In Thousands) Operating activities Net income.......................................... $ 3,569 $ 5,251 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization...................... 6,129 6,070 Gain on disposals of property and equipment........ (3) (47) Amortization of deferred gain on sale/leaseback.... -- (92) Changes in operating assets and liabilities: (Increase) decrease in inventories................ 4,324 (335) Increase in prepaid expenses and other current assets........................................... (973) (4,013) Decrease (increase) in other assets............... (423) 36 Decrease in trade accounts payable................ (35,436) (20,833) Decrease in other current liabilities............. (4,640) (240) ---------- ---------- Net cash used in operating activities............ (27,453) (14,203) Investing activities Proceeds from sales of property and equipment....... 282 520 Purchases of property and equipment................. (10,616) (6,322) ---------- ---------- Net cash used in investing activities............ (10,334) (5,802) Financing activities Proceeds from short-term borrowings and long-term debt............................................... 57,374 36,819 Payments of short-term borrowings and long-term debt............................................... (26,261) (20,111) ---------- ---------- Net cash provided by financing activities........ 31,113 16,708 Net decrease in cash................................. (6,674) (3,297) Cash at beginning of period.......................... 12,612 9,669 ---------- ---------- Cash at end of period................................ $ 5,938 $ 6,372 ========== ==========
See accompanying notes. F-66 DISCOUNT AUTO PARTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) August 28, 2001 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Discount Auto Parts, Inc. (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended May 29, 2001. Operating results for the thirteen-week period ended August 28, 2001 are not necessarily indicative of the results that may be expected for the entire fiscal year. 2. Sale/Leaseback Transaction On February 27, 2001, the Company completed a sale/leaseback transaction. Under the terms of the transaction, the Company sold 101 properties, including land, buildings, and improvements, for a net price of approximately $62.2 million. The stores were leased back from the purchaser under non-cancelable operating leases with lease terms of 22.5 years each. The sale of the properties generated a gain for financial reporting purposes, net of expenses incurred, of $6.0 million, which gain has been deferred and is being amortized over the lease term. 3. Long-Term Debt Long-term debt consists of the following (in thousands):
May 29, August 2001 28, 2001 -------- -------- Revolving credit agreements............................ $140,500 $158,408 Senior term notes...................................... 50,000 50,000 Senior secured notes................................... 3,600 2,400 -------- -------- 194,100 210,808 Less current maturities................................ (1,200) (1,200) -------- -------- $192,900 $209,608 ======== ========
Effective July 29, 1999, the Company entered into a five year $265 million unsecured revolving credit agreement (the Revolver). The rate of interest payable under the Revolver is a function of LIBOR or the prime rate of the lead agent bank, at the option of the Company. During the term of the Revolver, the Company is also obligated to pay a fee, which fluctuates based on the Company's debt-to-capitalization ratio, for the unused portion of the Revolver. Effective August 8, 1997, the Company issued $50 million of senior term notes (the Notes). The Notes provide for interest at a fixed rate of 7.46%, payable semi-annually, with semi-annual principal payments of $7.1 million, beginning July 15, 2004. F-67 DISCOUNT AUTO PARTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued) August 28, 2001 3. Long-Term Debt -- Continued At May 29, 2001 and August 28, 2001, the Company's weighted average interest rate on its borrowings under the revolving credit agreement was 7.1% and 5.3%, respectively. As of August 28, 2001, the Company had approximately $106.6 million of available borrowings. As of August 28, 2001, the Company has outstanding a senior secured note of $2.4 million. The note provides for interest at a fixed rate of 9.8%, payable quarterly, with annual principal payments of $1.2 million due on May 31. The note is collateralized by a first mortgage on certain store properties, equipment and fixtures. The Company's debt agreements contain various restrictions, including the maintenance of certain financial ratios and restrictions on dividends, with which the Company is in compliance. 4. Pending Merger On August 7, 2001, the Company entered into a definitive agreement with Advance Holding Corporation, Advance Auto Parts, Inc., Advance Stores Company, Incorporated and AAP Acquisition Corporation (collectively, Advance) under which the Company will be acquired by Advance in a merger transaction. Terms of the agreement call for each share of Discount Auto Parts common stock to be exchanged for $7.50 in cash and 0.2577 shares of common stock of Advance Auto Parts, Inc., a holding company which has been formed to own and operate the combined companies. The transaction has been approved by the boards of directors of both companies and is subject to approval by shareholders of the Company, and other customary closing conditions. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 waiting period expired September 18, 2001. The transaction is expected to close in the fourth calendar quarter of 2001. As a result of the above described transaction, the Company incurred expenses in the first quarter of fiscal 2002 of $943,000. Additional expenses associated with the described transaction are expected to be incurred during the second quarter of fiscal 2002. 5. Comprehensive Income Comprehensive income for the periods presented equals net income. F-68 ANNEX A AGREEMENT AND PLAN OF MERGER AMONG ADVANCE HOLDING CORPORATION, ADVANCE AUTO PARTS, INC., AAP ACQUISITION CORPORATION, ADVANCE STORES COMPANY, INCORPORATED AND DISCOUNT AUTO PARTS, INC. Dated as of August 7, 2001 TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS.................................................... A-2 Section 1.1 Definitions of Certain Terms............................ A-2 Section 1.2 Cross Reference Table of Certain Additional Defined Terms................................................... A-5 ARTICLE 2 THE MERGER..................................................... A-7 Section 2.1 The Merger.............................................. A-7 Section 2.2 Filing.................................................. A-7 Section 2.3 Effective Time of Merger................................ A-7 Section 2.4 Articles of Incorporation and Bylaws.................... A-7 Section 2.5 Directors and Officers.................................. A-7 Section 2.6 Effect of the Merger.................................... A-8 Section 2.7 Contribution of Surviving Corporation Stock............. A-8 Section 2.8 Further Assurances...................................... A-8 Section 2.9 Closing................................................. A-8 ARTICLE 3 CONVERSION OF SECURITIES....................................... A-8 Section 3.1 Conversion of Capital Stock............................. A-8 Section 3.2 Stockholder Approval, Proxy Statement/Prospectus........ A-10 Section 3.3 Exchanging Certificates and In-the-Money Options for Payment of Merger Consideration and Option Merger Consideration........................................... A-11 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF DISCOUNT..................... A-14 Section 4.1 Organization of Discount................................ A-14 Section 4.2 Discount Capital Structure.............................. A-14 Section 4.3 Authority; No Conflict; Required Filings and Consents... A-15 Section 4.4 SEC Filings; Financial Statements....................... A-16 Section 4.5 No Undisclosed Liabilities.............................. A-16 Section 4.6 Absence of Certain Changes or Events.................... A-17 Section 4.7 Taxes................................................... A-17 Section 4.8 Properties.............................................. A-18 Section 4.9 Agreements, Contracts and Commitments................... A-19 Section 4.10 Litigation.............................................. A-20 Section 4.11 Employee Benefit Plans.................................. A-20 Section 4.12 Compliance With Laws.................................... A-21 Section 4.13 Registration Statement; Blue Sky Filings; Proxy Statement/Prospectus; Other Information................. A-22 Section 4.14 Labor Matters........................................... A-22 Section 4.15 Insurance............................................... A-22 Section 4.16 Environmental Matters................................... A-23 Section 4.17 No Existing Discussions................................. A-23 Section 4.18 Opinion of Financial Advisor............................ A-23 Section 4.19 Brokers................................................. A-24 Section 4.20 Anti-Takeover Laws; Stockholder Rights Agreement........ A-24 Section 4.21 Noncompetition Agreements............................... A-24 Section 4.22 Suppliers............................................... A-24 Section 4.23 Potential Conflict of Interest.......................... A-24 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF NEW HOLDING, HOLDING, ASCI AND MERGER SUB................................................. A-25 Section 5.1 Organization of Holding, New Holding, ASCI and Merger Sub..................................................... A-25
i TABLE OF CONTENTS-(Continued)
Page ---- Section 5.2 Capital Structures..................................... A-25 Section 5.3 Authority; No Conflict; Required Filings and Consents.. A-27 Section 5.4 Financing.............................................. A-27 Section 5.5 SEC Filings; Financial Statements...................... A-28 Section 5.6 No Undisclosed Liabilities............................. A-28 Section 5.7 Taxes.................................................. A-28 Section 5.8 Employee Benefit Plans................................. A-29 Section 5.9 Compliance With Laws................................... A-29 Section 5.10 Labor Matters.......................................... A-29 Section 5.11 Environmental Matters.................................. A-30 Section 5.12 Absence of Certain Changes or Events................... A-30 Section 5.13 Registration Statement; Blue Sky Filings; Proxy Statement/Prospectus; Other Information................ A-31 Section 5.14 Litigation............................................. A-31 Section 5.15 Brokers................................................ A-31 Section 5.16 New Holding and Merger Sub............................. A-32 Section 5.17 No Other Transactions Being Negotiated................. A-32 ARTICLE 6 CERTAIN COVENANTS............................................. A-32 Section 6.1 Covenants of Discount.................................. A-32 Section 6.2 Covenants of Holding and New Holding................... A-34 Section 6.3 Cooperation; Access.................................... A-37 Section 6.4 Confidentiality........................................ A-38 Section 6.5 Notices of Certain Events.............................. A-38 ARTICLE 7 ADDITIONAL AGREEMENTS......................................... A-38 Section 7.1 No Solicitation........................................ A-38 Section 7.2 Proxy Statement/Prospectus; Registration Statement; Stockholders Meeting................................... A-41 Section 7.3 NYSE Listing........................................... A-42 Section 7.4 Legal Conditions to Merger............................. A-42 Section 7.5 Public Disclosure...................................... A-44 Section 7.6 Certain Employee Benefit Plan Obligations.............. A-44 Section 7.7 Indemnification, Exculpation and Insurance............. A-45 Section 7.8 Control of Operations.................................. A-46 Section 7.9 No Rights Triggered.................................... A-47 Section 7.10 Securityholder Litigation.............................. A-47 Section 7.11 Directors.............................................. A-47 Section 7.12 Delivery of Discount Financial Information............. A-47 Section 7.13 Delivery of Holding Financial Information.............. A-48 ARTICLE 8 CONDITIONS TO MERGER.......................................... A-48 Section 8.1 Conditions to Each Party's Obligation to Effect the Merger................................................. A-48 Section 8.2 Additional Conditions to Obligations of Holding, New Holding and Merger Sub................................. A-49 Section 8.3 Additional Conditions to Obligations of Discount....... A-50 ARTICLE 9 TERMINATION AND AMENDMENT..................................... A-51 Section 9.1 Termination............................................ A-51 Section 9.2 Effect of Termination.................................. A-52 Section 9.3 Termination Fee; Expenses.............................. A-53 Section 9.4 Amendment.............................................. A-54
ii TABLE OF CONTENTS-(Continued)
Page ---- Section 9.5 Extension; Waiver....................................... A-54 ARTICLE 10 MISCELLANEOUS.................................................. A-55 Section 10.1 Survival................................................ A-55 Section 10.2 Notices................................................. A-55 Section 10.3 Interpretation; Headings; Terms......................... A-56 Section 10.4 Counterparts............................................ A-56 Section 10.5 Waivers................................................. A-56 Section 10.6 Entire Agreement; No Third Party Beneficiaries.......... A-56 Section 10.7 Governing Law........................................... A-56 Section 10.8 Jurisdiction; Enforcement............................... A-56 Section 10.9 Assignment.............................................. A-57 Section 10.10 Severability............................................ A-57 Section 10.11 Expenses................................................ A-57 Section 10.12 No Rule of Construction................................. A-57 Section 10.13 Incorporation of Exhibits and Schedules................. A-57 Section 10.14 Waiver of Jury Trial.................................... A-57
Exhibits
Exhibit ------- Plan of Merger...................................................... A Articles of Merger.................................................. B Opinion of Counsel to Discount...................................... C Amendments to Master Lease.......................................... C-1 Irrevocable Proxy and Voting Agreement.............................. D Stock Option Agreement.............................................. E Opinion of Counsel to Holding, New Holding, Merger Sub and ASCI..... F
Schedules
Schedule -------- Existing Senior Credit Facilities of ASCI to be refinanced.......... A Certain indebtedness of Discount to be repaid....................... B Designated Discount Real Properties................................. C Holding Designated Consents......................................... D
iii AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of August 7, 2001 among Advance Holding Corporation, a Virginia corporation ("Holding"), Advance Auto Parts, Inc., a Delaware corporation and wholly-owned subsidiary of Holding ("New Holding"), AAP Acquisition Corporation, a Florida corporation and wholly- owned subsidiary of New Holding ("Merger Sub"), Advance Stores Company, Incorporated a Virginia corporation and wholly-owned subsidiary of Holding ("ASCI") and Discount Auto Parts, Inc., a Florida corporation ("Discount"). RECITALS WHEREAS, Holding will reincorporate in Delaware by merging with and into New Holding, which is the owner of 100% of the issued and outstanding capital stock of Merger Sub, pursuant to which merger each outstanding share of Holding Common Stock will be converted into one outstanding share of New Holding Common Stock and the existing outstanding shares of New Holding will be cancelled (the "Reincorporation"); WHEREAS, the Boards of Directors of Holding, New Holding, Merger Sub and Discount deem advisable and in the best interests of their respective stockholders that simultaneously with the Reincorporation, a merger of Merger Sub with and into Discount (the "Merger") be consummated upon the terms and conditions set forth herein and in accordance with the Florida Business Corporation Act ("FBCA") (Discount and Merger Sub being hereinafter sometimes referred to as the "Constituent Corporations" and Discount, following the effectiveness of the Merger, being hereinafter sometimes referred to as the "Surviving Corporation"); WHEREAS, immediately following consummation of the Merger and the Reincorporation, New Holding will contribute all of the issued and outstanding capital stock of the Surviving Corporation to ASCI; WHEREAS, simultaneously with the execution and delivery of this Agreement, Holding, ASCI and Fontaine Industries Limited Partnership, a entity directly or indirectly controlled by Peter J. Fontaine (the "Principal Stockholder") are entering into (i) an agreement (the "Irrevocable Proxy and Voting Agreement") pursuant to which the Principal Stockholder will agree to, among other things, vote in favor of the Merger and (ii) an agreement (the "Stock Option Agreement") pursuant to which the Principal Stockholder has granted to ASCI an option to purchase shares of Discount Common Stock owned by it; WHEREAS, the Boards of Directors of Holding, ASCI, New Holding, Merger Sub and Discount, as appropriate, have approved this Agreement, the Merger and the plan of merger attached hereto as Exhibit A (the "Plan of Merger"), upon the terms and subject to the conditions set forth herein; WHEREAS, subject to the terms and conditions of this Agreement, the Board of Directors of Discount has resolved to recommend that the holders of the outstanding shares of Discount Common Stock approve this Agreement and the Merger and the consummation of the transactions contemplated hereby upon the terms and subject to the conditions set forth herein and in the Plan of Merger; and WHEREAS, the Reincorporation and the Merger constitute interdependent steps of a single plan and Holding, New Holding, Merger Sub and Discount intend that, after giving effect to the transactions contemplated by this Agreement and the contemporaneous merger of Holding with and into New Holding, the exchange of New Holding Common Stock and cash for Discount Common Stock in the Merger be treated as part of an exchange subject to Section 351 of the Code. A-1 NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants, agreements and conditions contained herein, and in order to set forth the terms and conditions of the Merger and the mode of carrying the same into effect, the parties hereby agree as follows: ARTICLE 1 DEFINITIONS Section 1.1 Definitions of Certain Terms. As used in this Agreement, the following terms have the meanings set forth below: "Affiliate" or "affiliate" means, as to a designated Person, another Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with the designated Person. "Business Day" means any day on which banking institutions in New York, New York and Lakeland, Florida are open for business. "Charter Documents" means the articles or certificate of incorporation, bylaws and other constitutive documents of a Person. "Code" means the United States Internal Revenue Code of 1986, as amended. "Designated Discount Real Properties" means those parcels of Discount Owned Real Property listed on Schedule C to this Agreement. "Discount Common Stock" means the common stock, par value $.01 per share, of Discount. "Discount Intellectual Property Rights" means all intellectual property rights of Discount and pertaining to the business of Discount and the Discount Subsidiaries, including all (i) trademarks, tradenames, service marks or other trade rights, whether or not registered, and all pending applications for any such registrations; (ii) copyrights, copyrightable materials or pending applications therefor; (iii) trade secrets; (iv) inventions, discoveries, designs, and drawings; (v) computer software (including all source and object codes and manuals); and (vi) patents and patent applications. "Discount Leased Personal Property" means the personal property leased by Discount or a Discount Subsidiary under the Discount Personal Property Leases. "Discount Leased Real Property" means the real property leased by Discount or a Discount Subsidiary pursuant to the Discount Real Property Leases. "Discount Owned Personal Property" means all personal property used by Discount or a Discount Subsidiary in its business, other than Discount Leased Personal Property and Discount Intellectual Property Rights. "Discount Owned Real Property" means real property owned by Discount or a Discount Subsidiary. "Discount Permitted Liens" means (i) Liens securing Taxes or assessments not yet due and payable or which are being contested in good faith by appropriate proceedings, which contested proceedings are disclosed in the relevant Discount Disclosure Schedule, (ii) statutory or common law Liens of landlords, warehousemen, mechanics, materialmen, laborers or the like securing obligations incurred in the ordinary course of business that are not yet delinquent or which are being contested in good faith by appropriate proceedings, and (iii) Liens securing Indebtedness reflected in the Discount Balance Sheet (including changes in the outstanding balances thereof in the ordinary course of business since the date of the most recent balance sheet included in the Discount Balance Sheet). A-2 "Discount Personal Property Lease" means a lease of personal property under which Discount or a Discount Subsidiary is the lessee, whether the lease is treated as a capital lease or an operating lease for accounting purposes. "Discount Real Property" means the Discount Owned Real Property and the Discount Leased Real Property. "Discount Real Property Lease" means a lease or sublease (and all amendments thereto) of real property under which Discount or a Discount Subsidiary is the lessee or sublessee. "Discount Subsidiary" means any Subsidiary of Discount. "Environmental Law" means any and all federal, state, local or foreign law, regulation, order, decree, permit, authorization, common law or agency requirement relating to: (i) the protection, investigation or restoration of the environment or the public health as it relates to the environment, (ii) the handling, use, presence, disposal, release or threatened release of any Hazardous Substance or (iii) noise, odor, wetlands, pollution, contamination or any injury or threat of injury to the environment. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC thereunder. "Exchange Act Filings" means (i) as to Discount, Discount's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and proxy statements filed by Discount with the SEC at any time after May 1, 1998 and (ii) as to Holding and ASCI, Holding's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and proxy statements filed by Holding with the SEC at any time after May 1, 1998 and ASCI's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and proxy statements filed by ASCI with the SEC at any time after May 1, 1998. "Hazardous Substance" means any substance that is: (i) listed, classified, regulated or which falls within the definition of a "hazardous substance" or "hazardous material" pursuant to or is otherwise regulated by any Environmental Law or (ii) any petroleum product or by-product, asbestos-containing material, lead-containing paint or plumbing, polychlorinated biphenyls, radioactive materials or radon. "Holding Subsidiary" means any Subsidiary of Holding. "Knowledge" or "knowledge" means (i) with respect to Discount, the knowledge of one or more of Peter Fontaine, C. Michael Moore, Clement Bottino, Simon Gregorich, Kristi Mullis or Kevin Sullivan, and (ii) with respect to Holding and/or ASCI, the knowledge of one or more of Lawrence Castellani, Jimmie Wade, David Reid or Jeffrey Gray. An individual will be deemed to have knowledge of a particular fact or other matter if: (a) that individual is actually aware of that fact or matter; or (b) a prudent individual similarly situated in a comparable business organization would be expected to discover or otherwise become aware of that fact or matter after reasonable inquiry of the executive or senior managerial employees responsible for the relevant matters. "Liens" means all liens, pledges, security interests, options, mortgages, easements, charges, encumbrances or other interests in real or personal property that secure the payment or performance of an obligation or encumber real or personal property. "Material Adverse Effect" or "material adverse effect" or "material adverse change" means: (i) as to Discount, any change in or effect on the business of Discount or a Discount Subsidiary that (after giving effect to any benefits or beneficial or mitigating consequences or effects A-3 occasioned by or arising out of or in connection with the availability of any insurance or any contractual reimbursement or indemnity) is or has been or is reasonably likely to be materially adverse to the results of operations, properties, financial condition, assets or business of Discount and the Discount Subsidiaries, taken as a whole, except for any such change or effect reasonably attributable to (x) general economic conditions in the countries in which Discount or any Discount Subsidiary operates or in which products sold by Discount or any Discount Subsidiary are sourced, or (y) matters generally affecting the industries in which Discount or any Discount Subsidiary operates; and (ii) as to Holding, ASCI or New Holding, any change in or effect on the business of Holding, a Holding Subsidiary, New Holding or a Subsidiary of New Holding that (after giving effect to any benefits or beneficial or mitigating consequences or effects occasioned by or arising out of or in connection with the availability of any insurance or any contractual reimbursement or indemnity) is or has been or is reasonably likely to be materially adverse to the results of operations, properties, financial condition, assets or business of Holding, New Holding, the Holding Subsidiaries and the Subsidiaries of New Holding, taken as a whole, except for any such change or effect reasonably attributable to (x) general economic conditions in the countries in which Holding, any Holding Subsidiary, New Holding or any Subsidiary of New Holding operates or in which products sold by Holding, any Holding Subsidiary, New Holding or any Subsidiary of New Holding are sourced, or (y) matters generally affecting the industries in which Holding, any Holding Subsidiary, New Holding or any Subsidiary of New Holding operates. "Merger Consideration" means the aggregate shares of New Holding Common Stock (the "Stock Consideration") plus the aggregate cash, including without limitation cash paid for fractional shares, (the "Cash Consideration") payable upon the conversion of the Discount Common Stock pursuant to Section 3.1 hereof. "New Holding Common Stock" means the Common Stock, par value $0.0001 per share, of New Holding. "Option Merger Consideration" means the aggregate cash payable in respect of Outstanding Discount Options ("Option-Related Cash Consideration") plus all of the New Holding Options that Outstanding Discount Options become or are converted into pursuant to Section 3.1(f) hereof. "Outstanding Discount Options" means all outstanding stock options to purchase Discount Common Stock granted under any stock option or compensation plan or arrangement of Discount and includes all In-the-Money Options and all Fully Converted Options. "Per Share Merger Consideration" means (i) cash in the amount of $7.50 and (ii) 0.2577 of a fully paid and nonassessable share of New Holding Common Stock. The cash portion of the Per Share Merger Consideration is herein sometimes referred to as the "Per Share Cash Portion of the Per Share Merger Consideration" and the New Holding Common Stock portion of the Per Share Merger Consideration is herein sometimes referred to as the "Per Share Stock Portion of the Per Share Merger Consideration." "Person" means an individual and any corporation, partnership, trust, limited liability company, association, governmental authority or other entity. "Principal Holding Stockholders" means FS Equity Partners IV, L.P., Ripplewood Partners, L.P., Ripplewood Advance Auto Parts Employee Fund I L.L.C., Nicholas F. Taubman, the Arthur Taubman Trust dated July 13, 1964, and WA Holding Co. "SEC" means the United States Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder. A-4 "Subsidiary" means with respect to any Person, any corporation or other entity a majority (by number of votes) of the outstanding shares (or other equity interests) of any class or classes of which shall at the time be directly or indirectly owned by such Person or by a Subsidiary of such Person, if the holders of the shares of such class or classes (a) are ordinarily, in the absence of contingencies, entitled to vote for the election of a majority of the directors (or Persons performing similar functions) of the issuer thereof, even though the right so to vote has been suspended by the happening of such a contingency, or (b) are at the time entitled, as such holders, directly or indirectly, to vote, or control or direct the outcome of any vote, for the election of a majority of the directors (or Persons performing similar functions) of the issuer thereof, whether or not the right so to vote exists by reason of the happening of a contingency. "Tax" means any federal, state or local tax or any foreign tax (including, without limitation, any net income, gross income, profits, premium, estimated, excise, sales, value added, services, use, occupancy, gross receipts, franchise, license, ad valorem, real property, personal property, severance, capital levy, production, stamp, transfer, withholding, employment, unemployment, social security (including FICA), payroll or property tax, customs duty, or any other governmental charge or assessment), together with any interest, addition to tax, or penalty. "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. Section 1.2 Cross Reference Table of Certain Additional Defined Terms. In addition to the terms defined in Section 1.1, the following terms are defined in the Sections set forth below:
Term Section ---- ------- Acquisition Proposal................................. Section 7.1(a) Acquiror Plan........................................ Section 3.1(f)(ii) Acquisition Transaction.............................. Section 9.3(g) Agreement............................................ Preamble Antitrust Laws....................................... Section 7.4(b) Articles of Merger................................... Section 2.2 ASCI................................................. Preamble ASCI Account......................................... Section 9.3(a) Bankruptcy and Equity Exception...................... Section 4.3(a) Blue Sky Filings..................................... Section 7.2(a) Certificates......................................... Section 3.3(b) Closing.............................................. Section 2.9 Closing Date......................................... Section 2.9 Commitments.......................................... Section 5.4 Confidentiality Agreements........................... Section 6.4 Constituent Corporations............................. Recitals Disclosed Discount Employment Arrangements........... Section 7.6(b) Discount............................................. Preamble Discount Approvals................................... Section 4.12 Discount Audited Financial Statements................ Section 7.12 Discount Balance Sheet............................... Section 4.4(b) Discount Disclosure Schedule......................... Preamble to Article 4 Discount Employee Plans.............................. Section 4.11(a) Discount Employees................................... Section 7.6(a) Discount Financial Statements........................ Section 4.4(b) Discount Material Contracts.......................... Section 4.9 Discount Material Leases............................. Section 4.8(b) Discount Material Personal Property.................. Section 4.8(a) Discount Material Real Property...................... Section 4.8(a)
A-5
Term Section ---- ------- Discount Meeting..................................... Section 3.2(a)(i) Discount Option Plans................................ Section 3.1(f)(iii) Discount Preferred Stock............................. Section 4.2(a) Discount Q1 Financial Statements..................... Section 7.12 Discount Q1 Form 10-Q................................ Section 7.12 Discount Recommendation.............................. Section 3.2(a)(ii) Discount SEC Financial Statements.................... Section 4.4(b) Discount SEC Reports................................. Section 4.4(a) Discount Stockholder Vote............................ Section 6.2(a) Discount Unaudited Financial Statements.............. Section 4.4(b) DOJ.................................................. Section 7.4(b) Effective Time....................................... Section 2.3 Environmental Law.................................... Section 4.16(b) ERISA................................................ Section 4.11 (a) ERISA Affiliate...................................... Section 4.11 (a) Exchange Agent....................................... Section 3.3(a) Exchange Fund........................................ Section 3.3(a) Expenses............................................. Section 9.3(a) Expenses Cap......................................... Section 9.3(a) FBCA................................................. Recitals FTC.................................................. Section 7.4(b) Fully Converted Option............................... Section 3.1(f)(ii) Government Action.................................... Section 7.4(b) Governmental Entity.................................. Section 4.3(c) Government Order..................................... Section 7.4(b) Hazardous Substance.................................. Section 4.16(c) Holding.............................................. Preamble Holding Approvals.................................... Section 5.9 Holding Balance Sheet................................ Section 5.5(b) Holding Class B Stock................................ Section 5.2(a) Holding Common Stock................................. Section 5.2(a) Holding Designated Consents.......................... Section 7.4(a) Holding Disclosure Schedule.......................... Preamble to Article 5 Holding Employee Plans............................... Section 5.8(a) Holding Financial Statements......................... Section 5.5(b) Holding Option Plans................................. Section Holding Preferred Stock.............................. Section 5.2(a) Holding SEC Reports.................................. Section 5.5(a) HSR Act.............................................. Section 4.3(c) In-the-Money Option.................................. Section 3.1(f)(i) IRS.................................................. Section 4.11(b) Merger............................................... Recitals Merger Sub........................................... Preamble Moody's.............................................. Section 7.1(f) New Holding.......................................... Preamble New Holding Common Stock............................. Section 5.2(b) New Holding Merger Agreement......................... Section 5.2(b) New Holding Preferred Stock.......................... Section 5.2(b) Option Exchange Ratio................................ Section 3.1(f)(ii) Outside Date......................................... Section 2.9 Plan of Merger....................................... Recitals
A-6
Term Section ---- ------- Principal Stockholder....................................... Recitals Private Party Action........................................ Section 7.4(b) Private Party Order......................................... Section 7.4(b) Proxy Statement/Prospectus.................................. Section 7.2(c) Rating Date................................................. Section 7.1(f) Registration Statement...................................... Section 7.2(a) Reincorporation............................................. Recitals Rights...................................................... Section 4.20 S&P......................................................... Section 7.1(f) Salomon Smith Barney........................................ Section 4.18 Salomon Smith Barney Engagement Letter...................... Section 4.19 significant vendor.......................................... Section 4.22 Stockholder Approval........................................ Section 4.3(a) Stockholder Rights Agreement................................ Section 4.20 Stockholders Agreement...................................... Section 8.3(c) Stock Option Agreement...................................... Recitals Superior Proposal........................................... Section 7.1(b) Surviving Corporation....................................... Recitals Termination Fee............................................. Section 9.3(a) Irrevocable Proxy and Voting Agreement...................... Recitals
ARTICLE 2 THE MERGER Section 2.1 The Merger. Upon the terms and conditions hereinafter set forth and in accordance with the FBCA, at the Effective Time, Merger Sub shall merge with and into Discount and thereupon the separate existence of Merger Sub shall cease, and Discount, as the Surviving Corporation, shall continue to exist under and be governed by the FBCA. Section 2.2 Filing. At the Closing to be held pursuant to Section 2.9, upon the satisfaction or waiver of the conditions set forth in Article 8 hereof, Merger Sub and Discount will cause articles of merger, in substantially the form of Exhibit B attached hereto (the "Articles of Merger"), to be executed and promptly filed with the Department of State of the State of Florida as provided in the relevant provisions of the FBCA. Section 2.3 Effective Time of Merger. The Merger shall become effective upon the filing of the Articles of Merger pursuant to the FBCA (the "Effective Time"), it being understood that the parties intend to use their reasonable best efforts to arrange for the filing of the Articles of Merger pursuant to the FBCA simultaneously with the effectiveness of the merger of Holding into New Holding. Section 2.4 Articles of Incorporation and Bylaws. Upon the effectiveness of the Merger, the Articles of Incorporation of Merger Sub as in effect immediately prior to the Effective Time shall be the Articles of Incorporation of the Surviving Corporation, and the By-Laws of Merger Sub as in effect immediately prior to the Effective Time shall be the By-Laws of the Surviving Corporation. Section 2.5 Directors and Officers. The persons serving as directors of Merger Sub immediately prior to the Effective Time shall serve as the directors of the Surviving Corporation after the Effective Time, and the persons serving as officers of Discount immediately prior to the Effective Time shall serve as officers of the Surviving Corporation after the Effective Time, in each case such directors and officers to hold office until their successors have been duly elected and qualified in accordance with the Articles of Incorporation and By-Laws of the Surviving Corporation, or their earlier death, resignation or removal. A-7 Section 2.6 Effect of the Merger. The Merger shall have the effect set forth in Section 1106 of the FBCA. Section 2.7 Contribution of Surviving Corporation Stock. Immediately following the consummation of the Merger, New Holding, as the owner of 100% of the issued and outstanding capital stock of the Surviving Corporation, pursuant to Section 3.1 hereof, shall cause all of such capital stock of the Surviving Corporation to be contributed to ASCI such that, after giving effect to the contribution, the Surviving Corporation shall be a wholly-owned subsidiary of ASCI. Section 2.8 Further Assurances. If at any time after the Effective Time the Surviving Corporation shall consider or be advised that any further deeds, assignments or assurances in law or any other acts are necessary, desirable or proper (a) to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation, the title to any property or right of the Constituent Corporations acquired or to be acquired by reason of, or as a result of, the Merger, or (b) otherwise to carry out the purposes of this Agreement, the Constituent Corporations agree that the Surviving Corporation and its proper officers and directors shall and will execute and deliver all such deeds, assignments and assurances in law and do all acts necessary, desirable or proper to vest, perfect or confirm title to such property or right in the Surviving Corporation and otherwise to carry out the purposes of this Agreement, and that the proper officers and directors of the Constituent Corporations and the proper officers and directors of the Surviving Corporation are fully authorized in the name of the Constituent Corporations or otherwise to take any and all such action. Section 2.9 Closing. The closing of the Merger, the Reincorporation and the contribution pursuant to Section 2.7 (the "Closing") will take place at 10:00 a.m., New York City time, on a date to be specified by the parties (the "Closing Date"), which shall be no later than the second Business Day after satisfaction or waiver of the conditions set forth in Article 8 hereof (other than the conditions with respect to the documents to be delivered at the Closing), but no later than December 31, 2001 (the "Outside Date"), at the offices of Cravath, Swaine & Moore, New York, New York, unless another date, place or time is agreed to in writing by the parties. ARTICLE 3 CONVERSION OF SECURITIES Section 3.1 Conversion of Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of any holder of any shares of Discount Common Stock, or capital stock of Merger Sub and subject to Section 3.2 and subject to the other terms and conditions of this Agreement: (a) Capital Stock of Merger Sub. Each issued and outstanding share of the capital stock of Merger Sub shall be converted into and become one validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation. (b) Cancellation of Treasury Stock. All shares of Discount Common Stock that are owned directly or indirectly by Discount as treasury stock, if any, shall be cancelled and retired and shall cease to exist, and no payment shall be made with respect thereto. (c) Conversion of Discount Common Stock. Each issued and outstanding share of Discount Common Stock shall be converted into the right to receive the Per Share Merger Consideration and any cash in lieu of fractional shares of New Holding Common Stock to be issued or paid in consideration therefor. As of the Effective Time, all such shares of Discount Common Stock shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate representing any such shares shall cease to have any rights with respect thereto, except the right to receive with respect to each share represented thereby the Per Share Merger Consideration and any cash in lieu of fractional shares of New Holding Common Stock to be issued or paid in consideration therefor upon the surrender of such certificate in accordance with Section 3.3, without interest. A-8 (d) Withholding Taxes. The right of any stockholder of Discount to receive the Per Share Merger Consideration shall be subject to and reduced by the amount of any required Tax withholding obligation from the Per Share Cash Portion of the Per Share Merger Consideration. (e) Fractional Shares. No fraction of a share of New Holding Common Stock will be issued in the Merger but, in lieu thereof, each holder of Discount Common Stock who would otherwise be entitled to a fraction of a share of New Holding Common Stock will be entitled to receive from the Surviving Corporation, which amount shall be paid by the Exchange Agent as provided for in Section 3.3 an amount in cash (rounded to the nearest whole cent) equal to the product of (i) the fraction multiplied by (ii) $29.11. (f) Stock Options. (i) At or immediately before the Effective Time, each outstanding option to purchase shares of Discount Common Stock, granted under any stock option or compensation plan or arrangement of Discount, and with a per share exercise price or strike price of less than $15.00 per share (an "In-the-Money Option") shall be cancelled and converted into the right to receive at the Effective Time or as soon as practicable thereafter in consideration for such cancellation an amount in cash equal to the product of (1) the number of shares of the Discount Common Stock previously subject to such In-the-Money Option and (2) the difference between $15.00 and the exercise price per share of Discount Common Stock previously subject to such In-the-Money Option. At the Effective Time, such In-the-Money Options shall no longer be outstanding and shall automatically be cancelled and retired and converted into the right to receive the cash payment specified in this Section 3.1(f)(i), and each holder of an In-the-Money Option shall cease to have any rights with respect to the In-the-Money Option other than the right to receive with respect thereto the cash payment specified in this Section 3.1(f)(i) upon the surrender of the In-the- Money Option in accordance with Section 3.3, without interest. The surrender of the In-the-Money Option shall be deemed a release of any and all rights the holder had or may have had in respect of such option. In addition, the right of any holder of In-the-Money Options to receive the cash payment specified in this Section 3.1(f)(i) shall be subject to and reduced by the amount of any required tax withholding obligation. (ii) Each issued and outstanding stock option to purchase shares of Discount Common Stock granted under any stock option or compensation plan or arrangement of Discount that is not an outstanding In-the-Money Option (each, a "Fully Converted Option", and together with the In-the- Money Options, the "Outstanding Discount Options"), whether or not then exercisable, shall at the Effective Time be converted into an option to acquire, on substantially the same terms and conditions as were applicable under such Fully Converted Option immediately prior to the Effective Time (but reflecting the acceleration of vesting occasioned by the consummation of the transactions contemplated by this Agreement) and which option shall be considered issued under and subject to the terms of the 2001 Acquiror Executive Stock Option Plan (the "Acquiror Plan"), the number of shares of New Holding Common Stock determined by multiplying the number of shares of Discount Common Stock that were purchasable immediately prior to the Effective Time upon the exercise of such Fully Converted Option by 0.5154 (the "Option Exchange Ratio") (rounded as hereinafter provided) at a price per share (rounded up to the nearest whole cent) equal to (A) the exercise price per share of Discount Common Stock immediately prior to the Effective Time under such Fully Converted Option divided by (B) the Option Exchange Ratio; provided, however, that with respect to a Fully Converted Option with the same exercise price and option term, the number of shares of New Holding Common Stock to be represented by the Fully Converted Option shall be computed on an aggregate basis so as to create options for whole shares of New Holding Common Stock with any then remaining fractional share rounded up the nearest whole share. As soon as practicable after the Effective Time, New Holding shall deliver to each holder of a Fully Converted Option a stock option agreement or certificate issued under the Acquiror Plan as a replacement for the stock option certificate previously provided to such holder by Discount and evidencing such Fully Converted Option and setting forth such holder's rights pursuant thereto, including the number of shares of New A-9 Holding Common Stock purchasable under the converted stock option and replacement option agreement or certificate and the corresponding exercise price thereunder. In addition, New Holding shall take all corporate action necessary to reserve for issuance a sufficient number of shares of New Holding Common Stock for delivery upon exercise of a Fully Converted Option. As soon as practicable after the Effective Time, New Holding shall file a registration statement on Form S-3 or Form S-8, as the case may be (or any successor or appropriate forms), or another appropriate form, with respect to the shares of New Holding Common Stock subject to such Fully Converted Options and shall use its reasonable best efforts to maintain the effectiveness of such registration statement or registration statements (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such Fully Converted Options, as herein converted, remain outstanding. For example, assume an out of the money option for 10,500 shares of Discount Common Stock with an exercise price of $20.00. At the Effective Time, the out of the money option shall be converted so as to thereafter constitute an option to acquire 5,412 shares of New Holding Common Stock (10,500 X 0.5154) (rounded up) at a price per share equal to $38.80 ($20.00 / 0.5154). (iii) As soon as practicable following the date of this Agreement, Holding, Merger Sub and New Holding (or, if appropriate, any committee administering any stock option or compensation plan or arrangement) shall take such additional actions, if any, as may reasonably be required or necessary to cause each Fully Converted Option to be converted at the Effective Time by virtue of the Merger and continued as an option of New Holding under the corresponding New Holding option plans. On or prior to the Effective Date, Discount shall take such additional action, if any, as may be reasonably required or necessary to cause the stock option or compensation plans or arrangements of Discount providing for the granting of stock options with respect to stock of Discount ("Discount Option Plans") to terminate immediately following the Effective Time and for the provisions in any other plan, program or arrangement providing for the issuance or grant by Discount of any interest in respect of the capital stock of Discount to be terminated immediately following the Effective Time. The holders of Outstanding Discount Options shall be entitled to enforce this Section 3.1(f) against the Surviving Corporation. (g) Adjustments to Per Share Merger Consideration. If, subject to Section 6.1, during the period between the date of this Agreement and the Effective Time, any change in the outstanding shares of Discount Common Stock or New Holding Common Stock shall occur (other than the change contemplated by the Reincorporation), including by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment, or stock dividend with a record date during such period, but excluding any change resulting from the issuance of shares upon exercise of options, warrants or other rights to acquire Discount Common Stock outstanding on the date of this Agreement and listed in the Discount Disclosure Schedule, the Per Share Merger Consideration (including both the Per Share Cash Portion of the Per Share Merger Consideration and the Per Share Stock Portion of the Per Share Merger Consideration) and the Option Merger Consideration applicable to each Outstanding Discount Option shall be appropriately adjusted. Section 3.2 Stockholder Approval, Proxy Statement/Prospectus. (a) Discount Meeting. Discount, acting through its Board of Directors, shall in accordance with applicable law and its Charter Documents: (i) as soon as practicable, duly call, give notice of, convene and hold a special meeting of its stockholders for the purpose of considering and taking action upon this Agreement, the Plan of Merger and the Merger (the "Discount Meeting"); (ii) subject to its fiduciary duties under applicable laws and subject to Section 7.1, recommend that its stockholders vote in favor of the approval and adoption of this Agreement, the Plan of Merger, the Merger and the transactions contemplated hereby (the "Discount Recommendation") and A-10 include in the Proxy Statement/Prospectus with respect to the Discount Meeting, the Discount Recommendation; and (iii) use its reasonable best efforts (A) to obtain and furnish the information required to be included by it in the Proxy Statement/Prospectus, (B) to file the Proxy Statement/Prospectus with the SEC as promptly as practicable after the date of this Agreement, in accordance with Section 7.2, (C) to amend or supplement the Proxy Statement/Prospectus from time to time as necessary to assure that it does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading, subject to the approval of Holding, which approval Holding shall not unreasonably withhold, (D) after consultation with Holding, ASCI and Merger Sub, to respond as promptly as is reasonably practicable to any comments made by the SEC with respect to the Proxy Statement/Prospectus, any preliminary version thereof or any amendments or supplements thereto, (E) to cause the Proxy Statement/Prospectus and any amendments or supplements thereto to be mailed to its stockholders at the earliest practicable time, and (F) subject to the fiduciary duties of its Board of Directors under applicable laws and subject to Section 7.1, to obtain the necessary approval of the Merger by its stockholders. (b) No Amendment. After the adoption of this Agreement by the stockholders of Discount, without the affirmative vote of the holders of shares of Discount Common Stock representing a majority of the votes that may be cast by the holders of all then outstanding shares of Discount Common Stock, Discount will not (i) enter into any amendment to this Agreement that would alter or change any of the terms and conditions of this Agreement if such alteration or change would materially adversely affect the holders of shares of Discount Common Stock, or (ii) waive any condition set forth in Section 8.1 or 8.3 if such waiver would materially adversely affect the holders of shares of Discount Common Stock. (c) New Holding's Consent; Approval of Reincorporation. New Holding, as the sole stockholder of Merger Sub, hereby consents to the adoption of this Agreement by Merger Sub and agrees that such consent shall be treated for all purposes as a vote duly adopted at a meeting of the stockholders of Merger Sub held for this purpose. The directors and the stockholder of New Holding and the directors of Holding have each duly adopted, approved and authorized the Reincorporation. The Principal Holding Stockholders have entered into a binding and fully enforceable voting agreement pursuant to which each Principal Holding Stockholder agrees to vote in favor of adopting, approving and authorizing the Reincorporation and Discount shall be a third party beneficiary of that voting agreement. Prior to the Discount Meeting, Holding shall in accordance with applicable law and its Charter Documents duly call, give notice of, convene and hold a special meeting of its stockholders for the purpose of considering and taking action upon the Reincorporation. Section 3.3 Exchanging Certificates and In-the-Money Options for Payment of Merger Consideration and Option Merger Consideration. The procedures for exchanging outstanding shares of Discount Common Stock and In-the-Money Options for Merger Consideration and Option Merger Consideration pursuant to the Merger are as follows: (a) Exchange Agent. Prior to the Effective Time, New Holding and Holding shall designate a United States bank or trust company, which shall be US Stock Transfer & Trust, to act as exchange agent (the "Exchange Agent") for the payment of Merger Consideration and Option Merger Consideration upon surrender of certificates representing Discount Common Stock and certificates or agreements representing In-the-Money Options, and for no other purpose. At or immediately following the Effective Time, (i) New Holding shall provide to the Exchange Agent the shares of New Holding Common Stock to be issued as the Stock Consideration and (ii) New Holding and ASCI shall cause the Surviving Corporation to provide to the Exchange Agent from funds contributed to or otherwise provided to the Surviving Corporation by ASCI cash in immediately available funds in an amount sufficient to pay the Cash Consideration and the Option Merger Consideration (such cash and stock A-11 being hereinafter referred to as the "Exchange Fund"). The monies in the Exchange Fund may, as directed by the Surviving Corporation (so long as such directions do not impair the rights of holders of shares of Discount Common Stock to receive the Per Share Merger Consideration promptly upon the surrender of their shares in accordance with this Agreement or the rights of holders of In-the-Money Options to receive the Option Merger Consideration promptly upon surrender of their options in accordance with this Agreement), be invested by the Exchange Agent in direct obligations of the United States of America, obligations for which the full faith and credit of the United States of America is pledged to provide for the payment of principal and interest, commercial paper rated of the highest quality by Moody's Investors Services, Inc. or Standard & Poor's Corporation, or certificates of deposit issued by a commercial bank having at least $1,000,000,000 in assets. Deposit of funds with the Exchange Agent shall not relieve the Surviving Corporation of its obligations to make payments in respect of the shares of Discount Common Stock or in respect of In-the-Money Options. (b) Exchange Procedures. Promptly after the Effective Time, New Holding shall irrevocably instruct the Exchange Agent and the Exchange Agent shall mail and/or make available to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Discount Common Stock (the "Certificates") whose shares of Discount Common Stock were converted pursuant to Section 3.1 into the right to receive Per Share Merger Consideration (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent, and shall be in such form and have such other provisions as New Holding and Discount may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for Per Share Merger Consideration. As promptly as practicable after surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by New Holding, together with such letter of transmittal, duly executed, the holder of such Certificate shall be paid in exchange therefor, subject to any required withholding of Taxes, the amount of cash and the shares of New Holding Common Stock that such holder is entitled to receive as Per Share Merger Consideration plus any cash in lieu of fractional shares that such holder is entitled to receive with respect to the shares of Discount Common Stock theretofore represented by such Certificate, and the Certificate so surrendered shall immediately be cancelled. In the event of a transfer of ownership of Discount Common Stock which is not registered in the transfer records of Discount, payment may be made to a Person other than the Person in whose name the Certificate so surrendered is registered, if such Certificate shall be properly endorsed, with signature guaranteed, or otherwise be in proper form for transfer and the Person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a Person other than the registered holder of such Certificate or establish to the satisfaction of New Holding that such tax has been paid or is not applicable. Until surrendered as contemplated by this Section 3.3, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the certificate the shares of New Holding Common Stock and the amount of cash, without interest, that the holder thereof is entitled to receive as Per Share Merger Consideration (together with any cash in lieu of fractional shares) with respect to the shares of Discount Common Stock theretofore represented by such Certificate, subject to any required withholding of Taxes from the Per Share Cash Portion of the Per Share Merger Consideration. No interest shall be paid or shall accrue on the cash payable upon surrender of any Certificate. Promptly after the Effective Time, New Holding shall irrevocably instruct the Exchange Agent and the Exchange Agent shall take similar actions to address payment of cash with respect to In-the-Money Options. (c) No Further Ownership Rights in Discount Common Stock. Delivery of the Merger Consideration and Option Merger Consideration in accordance with the terms of this Article 3 upon conversion of any shares of Discount Common Stock and any In-the-Money Options in the Merger, and the assumption by New Holding of any Fully Converted Option, shall be deemed to have satisfied in full all rights pertaining to such shares of Discount Common Stock or such Outstanding Discount A-12 Options, as the case may be, subject, however, to the Surviving Corporation's obligation to pay any dividends or make any other distributions with a record date prior to the Effective Time which may have been declared or made by Discount on such shares of Discount Common Stock in accordance with the terms of this Agreement (to the extent permitted under Section 6.1) prior to the date hereof and which remain unpaid at the Effective Time, and from and after the Effective Time there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Discount Common Stock which were outstanding immediately prior to the Effective Time and no further exercises of Outstanding Discount Options. If, after the Effective Time, Certificates or option agreements or certificates are presented to the Surviving Corporation or the Exchange Agent for any reason, they shall be cancelled and exchanged as provided in this Section 3.3. (d) Termination of Exchange Fund. Any portion of the Exchange Fund which remains undistributed to the stockholders and optionholders of Discount for 180 days after the Effective Time shall be delivered to the Surviving Corporation, upon demand of the Surviving Corporation, subject to compliance with any applicable abandoned property, escheat or similar law, and any stockholders or optionholders of Discount who have not previously complied with this Section 3.3 shall thereafter look only to New Holding and the Surviving Corporation for payment of their claim for Merger Consideration or Option Merger Consideration, without interest; provided, however, that New Holding and the Surviving Corporation shall continue to be liable for any payments required to be made thereafter under Section 3.1 hereof. (e) No Liability. To the extent permitted by applicable law, none of ASCI, New Holding, the Surviving Corporation or the Exchange Agent or any of their Affiliates shall be liable to any Person in respect of any cash or stock from the Exchange Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. If any Certificate or option agreement or certificate has not been surrendered prior to five years after the Effective Time (or immediately prior to such earlier date on which Merger Consideration in respect of such Certificate would otherwise escheat to or become the property of any Governmental Entity), any such shares, cash, dividends or distributions in respect of such Certificate and any such rights in respect of such option agreement or certificate shall, to the extent permitted by applicable law, become the property of the Surviving Corporation, free and clear of all claims or interest of any Person previously entitled thereto. (f) Withholding Rights. The Surviving Corporation shall be entitled to deduct and withhold from the cash portion of the consideration otherwise payable pursuant to this Agreement to any holder of shares of Discount Common Stock or In-the-Money Options such amounts as it is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by the Surviving Corporation, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Discount Common Stock or In-the-Money Options in respect of which such deduction and withholding was made by the Surviving Corporation. (g) Lost Certificates and Lost Option Agreements and Certificates. If any Certificate or any option agreement or certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate or such option agreement or certificate to be lost, stolen or destroyed, the satisfaction of any applicable rules of the New York Stock Exchange and, if required by the Surviving Corporation, the posting by such Person of a bond in such reasonable amount as the Surviving Corporation may direct as indemnity against any claim that may be made against it with respect to such Certificate or such option agreement or certificate, the Exchange Agent will pay in exchange for such lost, stolen or destroyed Certificate or option agreement or certificate, as the case may be, the Merger Consideration or the Option Merger Consideration deliverable in respect thereof pursuant to this Agreement. A-13 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF DISCOUNT Discount represents and warrants to Holding, New Holding, ASCI and Merger Sub that the statements contained in this Article 4 are true and correct, except as set forth herein or as set forth in the disclosure schedule delivered by Discount to Holding on or before the date of this Agreement (the "Discount Disclosure Schedule"). The Discount Disclosure Schedule shall be arranged in paragraphs corresponding to the numbered and lettered sections contained in this Article 4 (and in the other Articles of this Agreement) and the disclosure in any paragraph shall qualify other sections in this Article 4 (and in the other Articles of this Agreement) to the extent that it is readily apparent from a reading of such disclosure that it should also qualify or apply to such other sections. Section 4.1 Organization of Discount. (a) Discount and each of its Subsidiaries is duly organized, validly existing and in active status or good standing under the laws of the jurisdiction of its incorporation, has all requisite corporate power to own, lease and operate its properties and to carry on its business as now being conducted, and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a Material Adverse Effect. (b) The Discount Disclosure Schedule lists each Discount Subsidiary and its jurisdiction of incorporation. All the outstanding shares of capital stock of each Discount Subsidiary have been validly issued and are fully paid and nonassessable and, except as set forth in the Discount Disclosure Schedule, are owned by Discount, by another Discount Subsidiary or by Discount and another Discount Subsidiary, free and clear of all Liens and free of any other restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock). (c) Except for the Subsidiaries listed in the Discount Disclosure Schedule, neither Discount nor any of its Subsidiaries directly or indirectly owns any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any corporation, partnership, joint venture or other business association or entity. (d) The copies of the Charter Documents of Discount and each Subsidiary provided to Holding are complete and correct as of the date of this Agreement. Section 4.2 Discount Capital Structure. (a) The authorized capital stock of Discount consists of 50,000,000 shares of Common Stock ("Discount Common Stock") and 5,000,000 shares of Preferred Stock ("Discount Preferred Stock"). As of June 30, 2001, (i) 16,707,923 shares of Discount Common Stock were issued and outstanding, all of which are validly issued, fully paid and nonassessable, (ii) no shares of Discount Common Stock were held in the treasury of Discount or by Subsidiaries of Discount, and (iii) no shares of Discount Preferred Stock were issued and outstanding. The Discount Disclosure Schedule shows the number of shares of Discount Common Stock reserved for future issuance pursuant to stock options and warrants granted and outstanding as of June 30, 2001 and the Discount Option Plans and the number of shares of Discount Common Stock and the number of shares of Discount Preferred Stock reserved for issuance in connection with the rights issued pursuant to the Stockholder Rights Agreement dated as of November 21, 2000, as amended from time to time between Discount and ChaseMellon Shareholder Services, LLC (n/k/a Mellon Investor Services LLC). No change in such capitalization has occurred between June 30, 2001 and the date of this Agreement. All shares of Discount Common Stock reserved for issuance as specified above are duly authorized and, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, shall be validly issued, fully paid and nonassessable. There are no bonds, debentures, notes or other indebtedness of Discount having the right to vote (or convertible into securities having the right to vote) on any A-14 matters on which stockholders of Discount may vote. There are no obligations, contingent or otherwise, of Discount or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of Discount Common Stock, Discount Preferred Stock, or the capital stock of any Subsidiary or to provide funds to or make any material investment (in the form of a loan, capital contribution or otherwise) in any such Subsidiary or any other entity other than guarantees of bank obligations of Subsidiaries entered into in the ordinary course of business. The Discount Disclosure Schedule sets forth a true and complete description of the changes in vesting of Outstanding Discount Options that would occur if the Merger were consummated. (b) Except as set forth in the Discount Disclosure Schedule or as reserved for future grants of options and warrants under the Discount Option Plans, there are no equity securities of any class of Discount or any of its Subsidiaries, or any security exchangeable or convertible into or exercisable for such equity securities, issued, reserved for issuance or outstanding, and there are no options, warrants, equity securities, calls, rights, commitments, undertakings or agreements of any character to which Discount or any of its Subsidiaries is a party or by which such entity is bound (including under letters of intent, whether binding or nonbinding) obligating Discount or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other equity interests of Discount or any of its Subsidiaries or obligating Discount or any of its Subsidiaries to grant, extend, accelerate the vesting of, otherwise modify or amend or enter into any such option, warrant, equity security, call, right, commitment or agreement. To the Knowledge of Discount, there are no voting trusts, proxies or other voting agreements or understandings with respect to the shares of capital stock or other equity interests of Discount or any Subsidiary. Section 4.3 Authority; No Conflict; Required Filings and Consents. (a) Discount has all requisite corporate power and authority to execute and deliver this Agreement and, subject only to the approval of the Merger by Discount's stockholders under the FBCA, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by Discount have been duly authorized by all necessary corporate action on the part of Discount, subject only to the approval of the Merger by Discount's stockholders under the FBCA; the vote of Discount's stockholders required to approve the Merger is the affirmative vote of the holders of a majority of the shares of Discount Common Stock outstanding on the record date for the Discount Meeting ("Stockholder Approval"). This Agreement has been duly executed and delivered by Discount and constitutes the valid and binding obligation of Discount, enforceable against Discount in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles (the "Bankruptcy and Equity Exception"). (b) Except as set forth in the Discount Disclosure Schedule, the execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby and thereby will not (i) assuming the approval of the stockholders of Discount as contemplated by Section 3.2, conflict with, or result in any violation or breach of, any provision of the Charter Documents of Discount or any of its Subsidiaries, (ii) result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit) under, or require a consent or waiver under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, loan, credit agreement, contract or other agreement, instrument or obligation to which Discount or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound, or (iii) conflict with, violate, or cause the termination of any instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Discount or any of its Subsidiaries or any of its or their properties or assets, except, in the case of (ii) and (iii), for any such conflicts, violations, defaults, terminations, cancellations or accelerations which are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. A-15 (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality ("Governmental Entity") is required by or with respect to Discount or any of its Subsidiaries in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) the filing of the pre-merger notification report under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act") and otherwise satisfying the requirements of the HSR Act, (ii) the filing of the Articles of Merger with the Department of State of the State of Florida and appropriate documents with the relevant authorities of the other jurisdictions in which Discount is qualified to do business, (iii) the simultaneous merger of Holding with and into New Holding, (iv) the filing of the Proxy Statement/Prospectus with the SEC in accordance with the Exchange Act, (v) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable state securities laws and the laws of any foreign country and (vi) such other consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not be reasonably likely to have a Material Adverse Effect. Section 4.4 SEC Filings; Financial Statements. (a) Since the date of its initial public offering, and except to the extent that their failure to do so would not be reasonably likely to have a Material Adverse Effect, Discount and/or its Subsidiaries have filed all forms, reports, registration statements, prospectuses, schedules, statements and documents, including the exhibits thereto, required to be filed by Discount and/or its Subsidiaries with the SEC under the Securities Act or the Exchange Act, including without limitation the Exchange Act Filings (these forms, reports, registration statements, prospectuses, schedules, statements and documents, including the exhibits thereto, are referred to collectively as "Discount SEC Reports"). Each Discount SEC Report (i) at the time filed complied in all material respects with the applicable requirements of the Securities Act and the Exchange Act, as the case may be, and (ii) did not at the time filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in such Discount SEC Report or necessary in order to make the statements in such Discount SEC Report, in the light of the circumstances under which they were made, not misleading. None of Discount's Subsidiaries is required to file any forms, reports or other documents with the SEC. (b) Each of the consolidated financial statements (including, in each case, any related notes) contained in the Discount SEC Reports, as of the date of the applicable Discount SEC Report (collectively, the "Discount SEC Financial Statements"), as well as the unaudited consolidated balance sheet, statements of income and cash flows of Discount and its Subsidiaries as of and for the three-month and twelve-month periods ended May 29, 2001 included in the Discount Disclosure Schedule (the "Discount Unaudited Financial Statements", and collectively with the Discount SEC Financial Statements, the "Discount Financial Statements"), complied as to form in all material respects with the applicable published rules and regulations of the SEC with respect thereto, were prepared in accordance with U.S. GAAP applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such Discount Financial Statements, in the Discount SEC Reports, or, in the case of unaudited interim financial statements, as permitted by Form 10-Q of the SEC) and fairly presented the consolidated financial position of Discount and its Subsidiaries as of the dates and the consolidated results of its operations and cash flows for the periods indicated, except that the Discount Unaudited Financial Statements were or are subject to normal and recurring year- end adjustments, and do not contain any of the footnotes required by U.S. GAAP or by the requirements of Form 10-Q. The unaudited balance sheet of Discount as of May 29, 2001 is referred to herein as the "Discount Balance Sheet." Section 4.5 No Undisclosed Liabilities. Except as set forth on the Discount Disclosure Schedule or as disclosed in the Discount SEC Reports that have been filed and are publicly available prior to the date hereof or A-16 as disclosed in the Discount Unaudited Financial Statements, and except for normal or recurring liabilities incurred since the date of the Discount Balance Sheet in the ordinary course of business consistent with past practices, Discount and its Subsidiaries do not have any liabilities, either accrued, contingent or otherwise (whether or not required to be reflected in financial statements in accordance with GAAP), and whether due or to become due, which individually or in the aggregate, have had or will have a Material Adverse Effect. Section 4.6 Absence of Certain Changes or Events. Except as disclosed in the Discount SEC Reports that have been filed and are publicly available prior to the date hereof or the Discount Disclosure Schedule, since the date of the Discount Balance Sheet, Discount and its Subsidiaries have conducted their businesses only in the ordinary course and in a manner consistent with recent past practice and, since such date, there has not been (i) any change in the financial condition, results of operations, business, prospects, assets or properties of Discount and its Subsidiaries, taken as a whole, that has had, or will have, a Material Adverse Effect; (ii) any damage, destruction or loss (whether or not covered by insurance) with respect to Discount or any of its Subsidiaries that has had, or will have, a Material Adverse Effect; (iii) any material change by Discount in its accounting methods, principles or practices to which Holding has not previously consented in writing; (iv) any revaluation by Discount of any of its assets or liabilities that has had, or will have, a Material Adverse Effect; or (v) any other action or event that would have required the consent of New Holding pursuant to Section 6.1 of this Agreement had such action or event occurred after the date of this Agreement. Section 4.7 Taxes. (a) Except as set forth on the Discount Disclosure Schedule, Discount and each of its Subsidiaries (i) have timely filed all material Tax Returns required to be filed by them prior to the date of this Agreement (taking into account extensions) and will timely file all such material Tax Returns required to be filed on or before the Closing Date except where the failure to so file is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect, and (ii) have paid or accrued, or will pay or accrue, all material Taxes payable (whether or not such Taxes are set forth on the Tax Returns of Discount and its Subsidiaries or are otherwise then due) for all taxable periods or partial periods ending on or before the Closing Date except where the failure to so pay or accrue is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. Discount and each of its Subsidiaries have withheld or collected and paid over to the appropriate governmental authorities (or are properly holding for such payment) all Taxes required by law to be withheld or collected except where the failure to so pay is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. There are no liens for Taxes upon the assets of Discount or any of its Subsidiaries (other than liens for Taxes that are not yet due or that are being contested in good faith by appropriate proceedings and other than liens for Taxes that are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect). (b) Except as set forth in the Discount Disclosure Schedule, (i) neither Discount nor any Discount Subsidiary is currently the beneficiary of any extension of time within which to file any material Tax Return, (ii) neither Discount nor any Discount Subsidiary has waived any statute of limitations in respect of material Taxes or agreed to, or requested, any extension of time with respect to a material Tax assessment or deficiency, (iii) no action or proceeding (including, but not limited to, any audit, examination, deficiency, claim, assessment or violation) is pending with respect to any past or current material Tax liability of Discount or any Discount Subsidiary, or, to the Knowledge of Discount and any Discount Subsidiary, threatened by any governmental authority, (iv) neither Discount nor any Discount Subsidiary has received, before the date of this Agreement, a notice of deficiency or assessment of additional material Taxes which notice or assessment remains unresolved, and (v) all resolved material Tax assessments against Discount and any Discount Subsidiary have been paid or are reflected in the Discount Balance Sheet. (c) (i) Neither Discount nor any Discount Subsidiary has any liability for the Taxes of any Person under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign A-17 law), as a transferee or successor, by contract, or otherwise other than liability that is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. (ii) Except as set forth on the Discount Disclosure Schedule, neither Discount nor any Discount Subsidiary is or ever has been a party to or bound by any Tax indemnity, Tax sharing or Tax allocation agreement (whether written or unwritten or arising under operation of federal law as a result of being a member of a group filing consolidated or combined Tax Returns, under operation of any state or local laws as a result of being a member of a combined, consolidated or unitary group, or under comparable laws of any other foreign jurisdiction) which includes a party other than Discount and the Discount Subsidiaries, nor does Discount or any Discount Subsidiary owe any amount under any such agreement. (d) Neither Discount nor any Discount Subsidiary is a "consenting corporation" within the meaning of Section 341(f) of the Code, and none of the assets of Discount or the Subsidiaries are subject to an election under Section 341(f) of the Code. (e) Except as set forth on the Discount Disclosure Schedule, neither Discount nor any of its Subsidiaries has made any payments, is obligated to make any payments, or is a party to any agreement that could obligate it to make any payments that will be an "excess parachute payment" under Section 280G of the Code as a result of the transactions contemplated by this Agreement. Except as set forth on the Discount Disclosure Schedule, neither Discount nor any Discount Subsidiary has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could obligate it to make any payments that will be non-deductible under Code Section 162, 280G or 404. (f) Discount has made available to Holding and ASCI complete, current and correct copies of the federal and state Tax Returns of Discount and the Discount Subsidiaries for the fiscal years ended in 1997, 1998, 1999 and 2000. Section 4.8 Properties. (a) Discount has provided to Holding a true and complete list of all owned stores and all other Discount Owned Real Property with a fair market value in excess of $100,000 with respect to any parcel (collectively, "Discount Material Real Property"), as well as all other owned real property. Except as set forth in the Discount Disclosure Schedule, each of Discount and each Subsidiary of Discount has good, valid, marketable and insurable title in fee simple to all of its respective Discount Material Real Property and good, valid, and marketable title to all of its other assets as are material to the conduct of the business of Discount and the Subsidiaries of Discount as currently conducted (collectively, "Discount Material Personal Property"), in each case free and clear of all Liens other than (i) Discount Permitted Liens, (ii) with respect to Discount Material Real Property, imperfections in title and Liens which individually or in the aggregate do not or will not have a Material Adverse Effect, or (iii) Liens set forth or described in the Discount Disclosure Schedule. Discount has permitted Holding and ASCI to have access to the real estate files and related documentation for the Discount Material Real Property and all other Discount Owned Real Property, which files, after taking into account, as if part of such files, the related documentation which has been delivered to Holding or its representatives by Discount, are complete, current and correct in all material respects except as set forth on the Discount Disclosure Schedule. (b) Discount has provided to Holding a true and complete list of all Discount Leased Real Property under leases for stores or with an annual rent in excess of $25,000 (collectively, "Discount Material Leases"), all other Discount Leased Real Property and the location of all Discount Leased Real Property. With respect to each such Discount Material Lease and except as set forth on the Discount Disclosure Schedule: (i) each Discount Material Lease is the legal, valid, binding and enforceable obligation of Discount subject to the Bankruptcy and Equity Exception, and is in full force and effect; (ii) each Discount Material Lease will continue to be the legal, valid, binding, and enforceable obligation of Discount and will remain in full force and effect immediately following the Closing in A-18 accordance with the terms thereof as in effect prior to the Closing (except to the extent that such Discount Material Lease is properly terminated following the Closing for a failure to secure a consent that may prove to have been required as a result of the change of control effectuated by virtue of the consummation of the transactions contemplated by this Agreement); (iii) neither Discount nor, to the Knowledge of Discount, any other party to the Discount Material Lease is in breach or default, and to the Knowledge of Discount no event has occurred which, with notice or lapse of time, would constitute a breach or default or permit termination, modification or acceleration thereunder; (iv) Discount has not assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in the leasehold or subleasehold; (v) Discount has delivered to Holding true, correct and complete copies of all Discount Material Leases, including all amendments thereto and such copies reflect any and all provisions or agreements with the respective landlord which would require consents, if any, as a result of the change of control effectuated by virtue of the consummation of the transactions contemplated by this Agreement; and (vi) each of Discount and its Subsidiaries has good, valid and marketable leasehold title to each of its respective Discount Leased Real Properties, free and clear of all Liens other than Discount Permitted Liens; except, in the case of clauses (i) through (vi), where the same is not reasonably likely to have a Material Adverse Effect. Discount has reviewed the schedule (prepared by Holding's advisors) of consents which may be required to Discount Material Leases as a result of the change of control effectuated by virtue of the consummation of the transactions contemplated by this Agreement, and without any independent investigation, represents that, to its Knowledge, such schedule of consents is true and accurate. (c) The Discount Disclosure Schedule contains a complete and accurate list of all of Discount's and its Subsidiaries material trademarks and describes all of the other material Discount Intellectual Property Rights, including information as to all registrations or other filings related to such trademarks and Discount Intellectual Property Rights. The Discount Intellectual Property Rights listed in the Discount Disclosure Schedule are all those material intellectual property rights necessary for the conduct of the business of Discount and the Discount Subsidiaries as presently conducted. Except as set forth in the Discount Disclosure Schedule, neither Discount nor any Discount Subsidiary has any obligation to compensate any Person for the use of any material Discount Intellectual Property Rights nor has Discount or any Discount Subsidiary granted to any Person any license, option or other rights to use in any manner any of the material Discount Intellectual Property Rights, whether requiring the payment of royalties or not. The material Discount Intellectual Property Rights will not cease to be rights of Discount or any Discount Subsidiary or be impaired by reason of the performance of this Agreement or the consummation of the transactions contemplated hereby. No other Person (i) has notified Discount or any Discount Subsidiary that such Person claims any ownership of or right to use any material Discount Intellectual Property Rights or (ii) is infringing upon any Discount Intellectual Property Rights except for such infringements that are not reasonably likely to have a Material Adverse Effect. Except as set forth in the Discount Disclosure Schedule, Discount's and the Discount Subsidiaries' use of the material Discount Intellectual Property Rights does not conflict with, infringe upon or otherwise violate the valid rights of any third party except for such conflicts or infringements that are not reasonably likely to have a Material Adverse Effect. No written notice has been received and not fully resolved and, no action has been instituted or, to the Knowledge of Discount, threatened against Discount or any Discount Subsidiary alleging that Discount's or any Discount Subsidiary's use of the material Discount Intellectual Property Rights infringes upon or otherwise violates any rights of a third party. Section 4.9 Agreements, Contracts and Commitments. The Discount Disclosure Schedule lists, as of the date of this Agreement, (i) all contracts in the nature of mortgages, indentures, promissory notes, loan or credit agreements, lease obligations or similar instruments under which Discount or its Subsidiaries have borrowed or may borrow at least $250,000, (ii) all employment agreements, change-in-control arrangements or change-in-control bonuses, retention agreements, severance agreements and non-competition agreements (and with respect to this subparagraph (ii) only, also lists the individual dollar amounts that would be payable to the parties to A-19 such agreements either as a result of the transactions contemplated by this Agreement or if the services of the counterparty to such agreement were to be terminated immediately following the Closing based on covered positions and compensation as of June 30, 2001), (iii) all agreements with vendors and suppliers involving purchases in excess of $1,000,000 annually and (iv) all other contracts or other written agreements whether or not made in the ordinary course of business which are material to the business of Discount and its Subsidiaries taken as a whole and which, if lost, would be reasonably likely to have a Material Adverse Effect (collectively, all such contracts and agreements referenced in items (i) through (iv) are referred to as the "Discount Material Contracts"). Neither Discount nor any Subsidiary is in default, and no event has occurred which, whether with or without notice, lapse of time or the happening or occurrence of any other event, would constitute a default under any of the contracts or agreements set forth in the Discount Disclosure Schedule, where such default is reasonably likely to have a Material Adverse Effect. Each Discount Material Contract that has not expired by its terms is in full force and effect, and no party to any of the Discount Material Contracts will have the right to terminate such contract as a result of the transactions contemplated by this Agreement. Except as set forth on the Discount Disclosure Schedule, none of the Discount Material Contracts is currently being renegotiated, and Discount has no Knowledge that any Discount Material Contract will be the subject of a voluntary or regulatory ordered renegotiation within 12 months after the date of this Agreement. Section 4.10 Litigation. Except as described in the Discount SEC Reports that have been filed and are publicly available prior to the date hereof or as set forth on the Discount Disclosure Schedule, there is no action, suit or proceeding, claim, arbitration or investigation against Discount or any of its Subsidiaries pending or as to which Discount or any of its Subsidiaries has received any written notice of assertion, which, individually or in the aggregate, will or would be reasonably likely to have a Material Adverse Effect or a material adverse effect on the ability of Discount to consummate the transactions contemplated by this Agreement. There is no judgment, decree, injunction, rule or order of any Governmental Entity or arbitration outstanding against Discount or any of its Subsidiaries which is reasonably likely to have a Material Adverse Effect. Section 4.11 Employee Benefit Plans. (a) Discount has listed in the Discount Disclosure Schedule all material employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), a general description of the type of bonus plans provided to employees whose positions have historically averaged annual bonuses less than $25,000, all bonus plans for any current or former employee who has or whose position has historically averaged annual bonuses of $25,000 or more or who is an officer, all bonus plans for any current or former officer and all stock option, stock purchase, incentive, deferred compensation, supplemental retirement or severance plans covering two or more employees or material agreements providing for such benefits, for the benefit of, or relating to, any current or former employee, director or independent contractor providing services to Discount, any Subsidiary, or any entity which is a member (an "ERISA Affiliate") of (i) a controlled group of corporations, (ii) a group of trades or businesses (whether or not incorporated) under common control with Discount, or (iii) an affiliated service group, all within the meaning of Section 414 of the Code, which includes Discount, or any Subsidiary of Discount (together, the "Discount Employee Plans"). (b) With respect to each Discount Employee Plan, Discount has made available to Holding a true and correct copy of (i) the most recent annual report (Form 5500) filed with the Internal Revenue Service ("IRS") (and the related financial statement) relating to a Discount Employee Plan subject to such reporting requirement, (ii) such Discount Employee Plan, including all amendments, (iii) the most recent summary plan description for each Discount Employee Plan for which such summary plan description is required, (iv) each trust agreement and group annuity contract, if any, relating to such Discount Employee Plan, including all amendments, (v) the most recent actuarial report or valuation relating to a Discount Employee Plan subject to Title IV of ERISA, and (vi) the most recent IRS determination letter (if applicable) for each Discount Employee Plan intended to be a qualified plan under Section 401(a) of the Code. A-20 (c) With respect to the Discount Employee Plans, individually and in the aggregate, no event has occurred and there exists no condition or set of circumstances, in connection with which Discount could be subject to any liability that is reasonably likely to have a Material Adverse Effect under ERISA, the Code or any other applicable law. (d) None of Discount, any Subsidiary of Discount or any entity that is, or at any time has been, considered one employer with Discount under Section 4001 of ERISA or Section 414 of the Code contributes or has ever contributed or been obligated to contribute to any "multiemployer plan" within the meaning of Sections 3(37) or 4001(a)(3) of ERISA or to any defined benefit pension plan subject to Title IV of ERISA or to Part 3 of Subpart B of Title I of ERISA. (e) With respect to the Discount Employee Plans, individually and in the aggregate, and except as set forth on the Discount Disclosure Schedule, there are no funded benefit obligations for which contributions have not been made or properly accrued and there are no unfunded benefit obligations which have not been accounted for by reserves, or otherwise properly footnoted, in either case in accordance with GAAP, on the financial statements of Discount, which obligations are reasonably likely to have a Material Adverse Effect. (f) Except as disclosed in Discount SEC Reports filed prior to the date of this Agreement, except as set forth on the Discount Disclosure Schedule and except as provided for in this Agreement, neither Discount nor any of its Subsidiaries is a party to any oral or written (i) agreement with any current or former officer or other employee of Discount or any of its Subsidiaries, the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving Discount of the nature contemplated by this Agreement, or by the termination of employment following such transaction, (ii) agreement with any current or former officer or senior management employee of Discount, or with any other current or former employee of Discount, providing any term of employment or compensation guarantee which would continue after the Closing or otherwise preventing the termination at will of such officer or employee after the Closing, or (iii) agreement, arrangement or plan, including any stock option plan, stock appreciation right plan, restricted stock plan or stock purchase plan, deferred compensation, retirement or similar plan, change of control plan or arrangement, retention plan or arrangement, or severance plan or arrangement, any of the benefits of which will be increased, or the vesting or funding of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement, and with respect to any item disclosed under this Section 4.11(f) the Discount Disclosure Schedule includes, to the extent determinable, the value of benefits vested, increased or accelerated. (g) Except as disclosed in the Discount Disclosure Schedule, (i) there are no pending or, to the Knowledge of Discount, threatened claims, actions, suits, termination proceedings, or investigations by any Governmental Entity against or involving any Discount Employee Plan and (ii) any Discount Employee Plan intended to be qualified under Section 401(a) of the Code has received a determination letter from the Internal Revenue Service to that effect, which has not been revoked, and nothing has occurred since the date of the most recent determination letter that would materially and adversely affect such qualification. Section 4.12 Compliance With Laws. Discount and its Subsidiaries have complied with, are not in violation, and have not received any written notice that they have been or are in violation of, any federal, state or local statute, law or regulation or any judgment, decree or order of any Governmental Entity with respect to the conduct of their respective business, or the ownership or operation of their respective businesses, except for failures to comply or violations which, individually or in the aggregate, have not been fully resolved with no continuing material liability to Discount and the Discount Subsidiaries or are not reasonably likely to have a Material Adverse Effect. Discount and its Subsidiaries have in effect all federal, state, local and foreign governmental approvals, authorizations, certificates, filings, franchises, notices, permits, variances and rights A-21 ("Discount Approvals") necessary for them to own or lease and operate their properties and assets and to carry on their respective businesses as now conducted and there has occurred no default under any Discount Approval, or failure to obtain such Discount Approval, which would individually or in the aggregate have a Material Adverse Effect. Section 4.13 Registration Statement; Blue Sky Filings; Proxy Statement/Prospectus; Other Information. None of the information supplied or to be supplied in writing by Discount which is included in either the Registration Statement, the Blue Sky Filings, or the Proxy Statement/Prospectus and any other documents to be filed with the SEC or any regulatory agency in connection with the transactions contemplated hereby will, at the respective times such documents are filed, or, as applicable, declared effective, and at the Effective Time, and, with respect to the Proxy Statement/Prospectus, when first published, sent or given to stockholders of Discount, in light of the circumstances under which it shall be made, be false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein not misleading with respect to any material fact or, in the case of the Proxy Statement/Prospectus or any amendment thereof or supplement thereto, at the time of the special meeting of Discount's stockholders provided for in Section 3.2, be false or misleading with respect to any material fact, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for such meeting. If, at any time prior to the Effective Time, any event relating to Discount or any of its affiliates, officers or directors is discovered by Discount that should be set forth in an amendment to the Registration Statement or Blue Sky Filings or a supplement to the Proxy Statement/Prospectus, Discount will promptly inform Holding, and Discount shall cooperate so as to enable such amendment or supplement to be promptly filed with the SEC and appropriate state securities administrators, and disseminated to the stockholders of Discount, to the extent required by applicable federal and state securities laws. All documents which Discount files or is responsible for filing with the SEC and any regulatory agency in connection with the Merger (including, without limitation, the Proxy Statement/Prospectus) will comply as to form and, to the extent provided by Discount, as to content, in each case in all material respects with the provisions of applicable law. Notwithstanding the foregoing, neither Discount nor the Subsidiary make any representations or warranties with respect to any information that has been supplied by New Holding, Holding, Merger Sub or ASCI, or their auditors, attorneys, financial advisors, other consultants or advisors specifically for use in the Registration Statement, Blue Sky Filings, the Proxy Statement/Prospectus, or in any other documents to be filed with the SEC or any regulatory agency in connection with the transactions contemplated hereby. Section 4.14 Labor Matters. Neither Discount nor any of its Subsidiaries is a party to or otherwise bound by or subject to any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor, as of the date hereof, is Discount or any of its Subsidiaries the subject of any material proceeding asserting that Discount or any of its Subsidiaries has committed an unfair labor practice, has failed to bargain, has denied recognition, or has otherwise interfered with the representation rights of any labor union or labor organization nor, as of the date of this Agreement, is there pending or, to the Knowledge of Discount, threatened, any material labor strike, dispute, walkout, work stoppage, slow- down or lockout involving Discount or any of its Subsidiaries, nor, has Discount or any of its Subsidiaries been requested within the last three years to recognize or bargain with any labor union or labor organization with respect to any employees of Discount or any of its Subsidiaries. Section 4.15 Insurance. Discount and its Subsidiaries maintain, in coverages and amounts believed by Discount to be customary in the industry, property and casualty insurance with respects to their business, operations, properties and assets. The Discount Disclosure Schedule contains a list of all insurance policies (including self-insurance arrangements) maintained by Discount and the Discount Subsidiaries (including coverage limits, deductibles, named insureds and policy periods), all of which policies are in full force and effect. Neither Discount nor any Discount Subsidiary is in default with respect to any material provision contained in such policy or binder nor has any of Discount or a Discount Subsidiary failed to give any material notice or present any material claim under any such policy or binder in due and timely fashion. Except as set forth in the Discount Disclosure Schedule, neither Discount nor any Discount Subsidiary has received notice of cancellation or non-renewal of any such policy or binder. A-22 Section 4.16 Environmental Matters. (a) Except as described in the Discount Disclosure Schedule: (i) Discount and the Discount Subsidiaries have complied in all respects with, and are currently in compliance in all respects with all, and have no liability under any, applicable Environmental Laws, except for any noncompliance or liability that would not reasonably be expected to result in a Material Adverse Effect; (ii) the properties currently owned, leased or operated by Discount and the Discount Subsidiaries (including soils, groundwater, surface water, buildings or other structures) are in compliance in all respects with all applicable Environmental Laws, and are not contaminated with any Hazardous Substances in a manner so as to create any liability for Discount and the Discount Subsidiaries, except for any noncompliance or contamination that would not reasonably be expected to result in a Material Adverse Effect; (iii) the properties formerly owned, leased or operated by Discount or any of the Discount Subsidiaries were in compliance in all respects with all applicable Environmental Laws, and were not contaminated with Hazardous Substances during the period of ownership or operation by Discount or any of the Discount Subsidiaries in a manner so as to create any liability for Discount and the Discount Subsidiaries, except for any noncompliance or contamination that would not reasonably be expected to result in a Material Adverse Effect; (iv) neither Discount nor any of the Discount Subsidiaries are or are alleged to be subject to any liability for any Hazardous Substance disposal or contamination on the property of any third party, except for any liability or contamination that would not reasonably be expected to result in a Material Adverse Effect; (v) neither Discount nor any of the Discount Subsidiaries have released any Hazardous Substance except in compliance in all respects with applicable Environmental Law and in a manner that would not reasonably be expected to result in a Material Adverse Effect; and (vi) neither Discount nor any of the Discount Subsidiaries has received any written notice, demand, letter, claim or request for information alleging that any of the properties currently or previously owned, leased or operated by Discount or any of the Discount Subsidiaries, or Discount or any of the Discount Subsidiaries may be in violation of, liable under or have obligations under any Environmental Law, except for any violation that would not reasonably be expected to result in a Material Adverse Effect. For purposes of this Section 4.16, (A) a property will be deemed to be "contaminated" with a Hazardous Substance only if the Hazardous Substance is present in such quantity as to give rise to any remediation obligation or other liability under applicable Environmental Laws, and (B) Discount and its Subsidiaries shall include (x) all partnerships, joint ventures and other entities in which any of them was at any time a partner, joint venturer, member or participant and (y) all predecessor or former entities, whether or not in existence as of the date hereof, the assets or obligations of which have been acquired or assumed by any of them or to which any of them has succeeded. (b) The representations and warranties in this Section 4.16 are intended to be the only representations and warranties of Discount relating to environmental matters. No other representation or warranty made by Discount shall extend to or cover such matters, even though it is, by its terms, broad enough to do so. Section 4.17 No Existing Discussions. As of the date hereof, Discount has terminated all discussions or negotiations with any third party with respect to an Acquisition Proposal and each such third party has been instructed to return any Confidential Information obtained from Discount (or to the extent permitted, has certified the destruction thereof). Section 4.18 Opinion of Financial Advisor. Salomon Smith Barney Inc. ("Salomon Smith Barney"), the financial advisor to Discount, has delivered to the Board of Directors of Discount an opinion dated the date of approval by such Board of Directors of the terms hereof to the effect that, as of such date and based upon the matters considered by Salomon Smith Barney in connection with the transactions contemplated by this Agreement, the Per Share Merger Consideration is fair from a financial point of view to the holders of Discount Common Stock and a copy of the subsequently delivered confirming written opinion to such effect based on the review of the executed copy of this Agreement, which is being addressed to the Board of Directors of Discount A-23 only, will be provided to Holding promptly following the execution and delivery of this Agreement and the receipt thereof by Discount. Section 4.19 Brokers. No broker, investment banker, financial advisor or other Person, other than Salomon Smith Barney, the fees of which are the obligation of Discount, is entitled to any broker's, finder's, investment banker's, financial advisor's or other similar fee or commission in connection with the transaction contemplated by this Agreement based upon arrangements made by or on behalf of Discount. Discount has delivered to Holding a fully executed copy of its engagement letter with Salomon Smith Barney, including all amendments thereto through the date hereof, and such engagement letter (the "Salomon Smith Barney Engagement Letter") remains in full force and effect as of the date hereof. Section 4.20 Anti-Takeover Laws; Stockholder Rights Agreement. Discount has taken all actions necessary under Florida law such that no "fair price", "business combination", "control share acquisition", or similar statute will be applicable to the transactions contemplated by this Agreement. With respect to that certain Stockholder Rights Agreement between Discount and ChaseMellon Shareholder Services, LLC (n/k/a Mellon Investor Services LLC) dated as of November 21, 2000 (the "Stockholder Rights Agreement") and the preferred stock purchase rights issued under or pursuant thereto (the "Rights"), Discount has taken all actions necessary such that the entering into of this Agreement and the consummation of the transactions contemplated hereby do not and will not result in any Right becoming exercisable. Section 4.21 Noncompetition Agreements. Except as described in the Discount Disclosure Schedule and except for ordinary and customary restrictions in lease agreements, neither Discount nor any of its Subsidiaries is a party to or bound by any noncompetition agreement or any other agreement or arrangement that limits or otherwise restricts Discount or any of its Subsidiaries or any successor thereto or that would, after the Effective Time, limit or restrict Holding, ASCI or the Surviving Corporation or any of its affiliates or any successors thereto, from engaging or competing in any line of business or in any geographical area. Section 4.22 Suppliers. Neither Discount nor its Subsidiaries has received notice, and Discount does not otherwise have Knowledge, that any of their suppliers or vendors with whom Discount and its Subsidiaries engage in $1,000,000 or more in business annually ("significant vendors") intend to cancel, terminate or otherwise materially modify such significant vendor's relationship with Discount or its Subsidiaries, including with respect to credit terms or any requirement that Discount or its Subsidiaries provide letters of credit, nor, to the Knowledge of Discount, has any such significant vendor threatened such action as a result of execution of this Agreement or the consummation of the transactions contemplated hereby, which in the case of any of the foregoing, is reasonably likely to have a Material Adverse Effect. Except as set forth on the Discount Disclosure Schedule, no contracts with suppliers or vendors of Discount or any of its Subsidiaries (and regardless of whether or not they are "significant vendors," as defined in this Section 4.22) have terms requiring Discount or its Subsidiaries to purchase any services, a product or line of products exclusively from such supplier or vendor that extend for a period beyond December 31, 2001. Section 4.23 Potential Conflict of Interest. As of the date of this Agreement, except as set forth in the Discount SEC Reports that have been filed and are publicly available prior to the date hereof, since June 1, 1998, there have been no transactions, agreements, arrangements or understandings between Discount or any of it Subsidiaries, on the one hand, and any other person, on the other hand, that would be required to be disclosed under Item 404 of Regulation S-K under the Securities Act. A-24 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF NEW HOLDING, HOLDING, ASCI AND MERGER SUB Holding, New Holding, ASCI and Merger Sub jointly and severally represent and warrant to Discount that the statements contained in this Article 5 are true and correct, except as set forth herein in the disclosure schedule delivered by Holding, New Holding, ASCI and Merger Sub to Discount on or before the date of this Agreement (the "Holding Disclosure Schedule"). The Holding Disclosure Schedule shall be arranged in paragraphs corresponding to the numbered and lettered sections contained in this Article 5 (and in the other Articles of this Agreement) and the disclosure in any paragraph shall qualify other sections in this Article 5 (and in the other Articles of this Agreement) to the extent that it is readily apparent from a reading of such disclosure that it should also qualify or apply to such other sections. Section 5.1 Organization of Holding, New Holding, ASCI and Merger Sub. Each of Holding, New Holding, ASCI and Merger Sub is a corporation duly organized, validly existing and in good standing or of active status under the laws of the jurisdiction of its incorporation, has all requisite corporate power to own, lease and operate its property and to carry on its business as now being conducted, and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified would have or be reasonably likely to have a Material Adverse Effect. Section 5.2 Capital Structures. (a) The authorized capital stock of Holding consists of 62,500,000 shares of Class A Common Stock, par value $0.01 per share ("Holding Common Stock"), 21,875,000 shares of Class B Common Stock, par value $0.01 per share ("Holding Class B Stock"), and 100,000 shares of Preferred Stock, no par value per share ("Holding Preferred Stock"). As of June 30, 2001, (i) 28,321,150 shares of Holding Common Stock were issued and outstanding, all of which are validly issued, fully paid and nonassessable, (ii) except as set forth on the Holding Disclosure Schedule, no shares of Holding Common Stock were held in the treasury of Holding or by Subsidiaries of Holding, and (iii) no shares of Holding Preferred Stock or Holding Class B Stock were issued and outstanding. The option and equity incentive plans in effect for Holding are set forth on and described in the Holding Disclosure Schedule (the "Holding Option Plans"). The Holding Disclosure Schedule also shows the number of shares of Holding Common Stock reserved for future issuance pursuant to stock options and warrants granted and outstanding as of June 30, 2001 and under the Holding Option Plans. No change in such capitalization has occurred between June 30, 2001 and the date of this Agreement. All shares of Holding Common Stock reserved for issuance as specified above are duly authorized and, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, shall be validly issued, fully paid and nonassessable. There are no bonds, debentures, notes or other indebtedness of Holding having the right to vote (or convertible into securities having the right to vote) on any matters on which stockholders of Holding may vote. Except as set forth in the Holding Disclosure Schedule, there are no obligations, contingent or otherwise, of Holding or any of its Subsidiaries to (x) repurchase, redeem or otherwise acquire any shares of Holding Common Stock, Holding Class B Stock, Holding Preferred Stock, or the capital stock of any Subsidiary, or (y) provide funds to or make any material investment (in the form of a loan, capital contribution or otherwise) in any such Subsidiary or any other entity, other than (A) guarantees of bank obligations of Subsidiaries entered into in the ordinary course of business, and (B) intercompany loans to and from Subsidiaries through the central disbursement account located at ASCI. (b) The authorized capital stock of New Holding consists of 100,000,000 shares of Common Stock, par value $0.0001 per share ("New Holding Common Stock"), and 10,000,000 shares of Preferred Stock, par value $0.0001 per share ("New Holding Preferred Stock"). As of the date hereof and prior to the merger of Holding with and into New Holding, one share of New Holding Common Stock and no shares of new Holding Preferred Stock were issued and outstanding. There are no shares of New A-25 Holding Common Stock reserved for future issuance pursuant to any stock options or warrants as of June 30, 2001. The option and equity incentive plans in effect for New Holding are set forth on and described in the Holding Disclosure Schedule. No material change in such capitalization has occurred from the date of formation of New Holding through the date of this Agreement. There are no bonds, debentures, notes or other indebtedness of New Holding having the right to vote (or convertible into securities having the right to vote) on any matters on which stockholders of New Holding may vote. Except for obligations arising under the merger agreement pursuant to which the Reincorporation will be effectuated (the "New Holding Merger Agreement"), there are no obligations, contingent or otherwise, of New Holding or any of its Subsidiaries to repurchase, redeem or otherwise acquire any share of New Holding Common Stock, or the capital stock of any Subsidiary or to provide funds or make any material investment (in the form of a loan, capital contribution or otherwise) in any such Subsidiary or any other entity other than guarantees of bank obligations of Subsidiaries entered into in connection with the transactions contemplated by this Agreement or investments in Subsidiaries in connection with the transactions contemplated by this Agreement. Simultaneously with the execution and delivery of this Agreement, Holding and New Holding have executed and delivered the New Holding Merger Agreement which constitutes the valid and binding obligation of each of Holding and New Holding, enforceable against each of them in accordance with its terms, subject to the Bankruptcy and Equity Exception. (c) Except as set forth in the Holding Disclosure Schedule or as reserved for future grants of options and warrants under the Holding Option Plans, there are no equity securities of any class of Holding, New Holding or any of their respective Subsidiaries, or any security exchangeable or convertible into or exercisable for such equity securities, issued, reserved for issuance or outstanding, and there are no options, warrants, equity securities, calls, rights, commitments, undertakings or agreements of any character to which Holding, New Holding or any of their respective Subsidiaries is a party or by which such entity is bound (including under letters of intent, whether binding or nonbinding) obligating Holding, New Holding or any of their respective Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other equity interests of Holding or any of its Subsidiaries or obligating Holding, New Holding or any of their respective Subsidiaries to grant, extend, accelerate the vesting of, otherwise modify or amend or enter into any such option, warrant, equity security, call, right, commitment or agreement. To the Knowledge of Holding or New Holding, except as set forth in the Holding Disclosure Schedule, there are no voting trusts, proxies or other voting agreements or understandings with respect to the shares of capital stock or other equity interests of Holding, New Holding or any of their respective Subsidiaries. (d) The shares of New Holding Common Stock to be issued in connection with the Merger have been duly authorized and, when issued as contemplated hereby at the Effective Time, will be validly issued, fully paid and non-assessable, and not subject to any preemptive rights. (e) The authorized capital stock of Merger Sub consists in its entirety of 1,000 shares of common stock, $0.01 par value per share. As of the date hereof, one share of common stock of Merger Sub is issued and outstanding, which share is owned by New Holding, free and clear of all liens, charges, encumbrances, options, rights of first refusal or limitations or agreements regarding voting rights of any nature. All of the outstanding shares of capital stock of ASCI and each of the other Subsidiaries of Holding or ASCI are owned beneficially and of record by Holding, ASCI or another Subsidiary free and clear of all liens, charges, encumbrances, options, rights of first refusal or limitations or agreements regarding voting rights of any nature. All of the outstanding shares of capital stock of ASCI and each of the other Subsidiaries of Holding have been validly issued and are fully paid and nonassessable. All of the outstanding shares of capital stock of Merger Sub have been validly issued and are fully paid and nonassessable. New Holding has no Subsidiaries, other than Merger Sub. A-26 Section 5.3 Authority; No Conflict; Required Filings and Consents. (a) Each of Holding, New Holding, ASCI and Merger Sub has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by each of Holding, New Holding, ASCI and Merger Sub have been duly authorized by all necessary corporate action on the part of each of Holding, New Holding, ASCI and Merger Sub (including the approval of the Merger by New Holding as the sole stockholder of Merger Sub). No vote of Holding's stockholders or of New Holding's stockholders is required to approve this Agreement or the transactions contemplated hereby except for the approval and authorization of Holding's stockholders, which approval and authorization will be sought at a meeting to be called for such purpose, and the approval and authorization of New Holding's stockholder of the Reincorporation, which approval and authorization has been obtained. This Agreement has been duly executed and delivered by each of Holding, New Holding, Merger Sub and ASCI and constitutes the valid and binding obligation of each of Holding, New Holding, ASCI and Merger Sub, enforceable against each of them in accordance with its terms, subject to the Bankruptcy and Equity Exception. (b) The execution and delivery of this Agreement by each of Holding, New Holding, ASCI and Merger Sub does not, and the consummation of the transactions contemplated hereby will not, (i) conflict with, or result in any violation or breach of, any provision of the Charter Documents of Holding, New Holding, ASCI or Merger Sub, (ii) result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit) under, or require a consent or waiver under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, loan, credit agreement, contract or other agreement, instrument or obligation to which Holding or any of its Subsidiaries or New Holding or Merger Sub is a party or by which any of them or any of their properties or assets may be bound, or (iii) conflict with, violate, or cause the termination of any instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Holding or any of its Subsidiaries or New Holding or Merger Sub or any of its or their properties or assets, except, in the case of (ii) and (iii), for any such conflicts, violations, defaults, terminations, cancellations or accelerations which are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to Holding or any of its Subsidiaries or New Holding or Merger Sub in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) the filing of the pre-merger notification report under the HSR Act and otherwise satisfying the requirements of the HSR Act, (ii) the filing of the Articles of Merger with the Department of State of the State of Florida and appropriate documents with the relevant authorities of the other jurisdictions in which Discount is qualified to do business, (iii) the simultaneous merger of Holding with and into New Holding (iv) the filing of the Registration Statement with the SEC in accordance with the Securities Act, (v) the filing of the Articles of Merger with respect to the Reincorporation with the State Corporation Commission of Virginia, (vi) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable state securities laws and the laws of any foreign country and (vii) such other consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not be reasonably likely to have a Material Adverse Effect. Section 5.4 Financing. Holding has, or has received binding (subject to the terms and conditions thereof) written commitments from financially responsible financial institutions to obtain, the funds necessary to pay the cash portion of the Merger Consideration and the Option Merger Consideration as provided in Article 3, to refinance the existing senior credit facilities of ASCI as more specifically listed on Schedule A to this Agreement, to repay certain indebtedness of Discount as more specifically listed on Schedule B to this Agreement, and to pay related fees and expenses, and will make such funds available to the Surviving A-27 Corporation. Holding has provided Discount with true and complete copies of all commitments and agreements from third parties to provide such financing to Holding or ASCI (the "Commitments"). As of the date hereof, each of the Commitments is in full force and effect, and neither Holding nor ASCI has any reason to expect that such Commitments will not remain in full force and effect or that the conditions included in any of the Commitments will not be satisfied before the Effective Time. Holding believes that the financing described in this Section 5.4 is sufficient to enable Holding, New Holding and the Surviving Corporation to complete the transactions contemplated by this Agreement. Holding shall give Discount prompt notice of any change with respect to such financing that would adversely affect the ability of Holding, New Holding or Merger Sub to consummate the Merger. Section 5.5 SEC Filings; Financial Statements. (a) Since April 15, 1998, and except to the extent that their failure to do so would not be reasonably likely to have a Material Adverse Effect, Holding and/or its Subsidiaries have filed all forms, reports, registration statements, prospectuses, schedules, statements and documents, including the exhibits thereto, required to be filed by Holding and/or its Subsidiaries with the SEC under the Securities Act or the Exchange Act, including without limitation the Exchange Act Filings (these forms, reports, registration statements, prospectuses, schedules, statements and documents, including the exhibits thereto, are referred to collectively as "Holding SEC Reports"). Each Holding SEC Report (i) at the time filed complied in all material respects with the applicable requirements of the Securities Act and the Exchange Act, as the case may be, and (ii) did not at the time filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in such Holding SEC Report or necessary in order to make the statements in such Holding SEC Report, in the light of the circumstances under which they were made, not misleading. Other than ASCI, none of Holding's Subsidiaries is required to file any forms, reports or other documents with the SEC. (b) Each of the consolidated financial statements (including, in each case, any related notes) contained in the Holding SEC Reports, as of the date of the applicable Holding SEC Report (collectively, the "Holding Financial Statements"), complied as to form in all material respects with the applicable published rules and regulations of the SEC with respect thereto, were prepared in accordance with U.S. GAAP applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such Holding Financial Statements, in the Holding SEC Reports, or, in the case of unaudited interim financial statements, as permitted by Form 10-Q of the SEC) and fairly presented the consolidated financial position of Holding and its Subsidiaries as of the dates and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited financial statements were or are subject to normal and recurring year-end adjustments and may not contain all of the footnotes required by U.S. GAAP. The unaudited balance sheet of Holding as of April 21, 2001 is referred to herein as the "Holding Balance Sheet." Section 5.6 No Undisclosed Liabilities. Except as set forth on the Holding Disclosure Schedule or as disclosed in the Holding SEC Reports that have been filed and are publicly available prior to the date hereof, and except for normal or recurring liabilities incurred since the date of the Holding Balance Sheet in the ordinary course of business consistent with past practices, Holding and its Subsidiaries do not have any liabilities, either accrued, contingent or otherwise (whether or not required to be reflected in financial statements in accordance with GAAP), and whether due or to become due, which individually or in the aggregate, have had or will have a Material Adverse Effect. Section 5.7 Taxes. (a) Holding and each of its Subsidiaries, and any consolidated, combined, unitary or aggregate group for tax purposes of which Holding or any of its Subsidiaries is or has been a member, has timely filed all material Tax Returns required to be filed by it in the manner provided by law and has paid all Taxes shown thereon to be due. A-28 (b) Holding has made available to Discount complete, current and correct copies of the federal Tax Returns of Holding and the Holding Subsidiaries for the fiscal years ended in 1998 and 1999. Section 5.8 Employee Benefit Plans. (a) Holding has listed in the Holding Disclosure Schedule all material employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and all material stock option, stock purchase, incentive, deferred compensation, supplemental retirement or severance plans or agreements, for the benefit of, or relating to, any current or former employee, director or independent contractor providing services to Holding, any Holding Subsidiary, or any entity which is a member (an "ERISA Affiliate") of (i) a controlled group of corporations, (ii) a group of trades or businesses (whether or not incorporated) under common control with Holding, or (iii) an affiliated service group, all within the meaning of Section 414 of the Code, which includes Holding, or any Subsidiary of Holding (together, the "Holding Employee Plans"). (b) With respect to the Holding Employee Plans, individually and in the aggregate, no event has occurred and, to the Knowledge of Holding, there exists no condition or set of circumstances, in connection with which Holding could be subject to any liability under ERISA, the Code or any other applicable law where such liability is reasonably likely to have a Material Adverse Effect. (c) With respect to the Holding Employee Plans, individually and in the aggregate, and except as set forth on the Holding Disclosure Schedule, there are no funded benefit obligations for which contributions have not been made or properly accrued and there are no unfunded benefit obligations which have not been accounted for by reserves, or otherwise properly footnoted, in either case in accordance with GAAP, on the financial statements of Holding, which obligations are reasonably likely to have a Material Adverse Effect. (d) Except as disclosed in the Holding Disclosure Schedule, (i) there are no pending or, to the Knowledge of Holding, threatened claims, actions, suits, termination proceedings, or investigations by any Governmental Entity against or involving any Holding Employee Plan and (ii) any Holding Employee Plan intended to be qualified under Section 401(a) of the Code has received a determination letter from the Internal Revenue Service to that effect, which has not been revoked, and nothing has occurred since the date of the most recent determination letter that would materially and adversely affect such qualification. Section 5.9 Compliance With Laws. Holding and its Subsidiaries have complied with, are not in violation of, and have not received any written notice that they have been or are in violation of, any federal, state or local statute, law or regulation or any judgment, decree or order of any Governmental Entity with respect to the conduct of their respective business, or the ownership or operation of their respective businesses, except for failures to comply or violations which, individually or in the aggregate, have not been fully resolved with no continuing material liability to Holding and the Holding Subsidiaries or are not reasonably likely to have a Material Adverse Effect. Holding and its Subsidiaries have in effect all federal, state, local and foreign governmental approvals, authorizations, certificates, filings, franchises, notices, permits, variances and rights ("Holding Approvals") necessary for them to own or lease and operate their properties and assets and to carry on their respective businesses as now conducted and there has occurred no default under any Holding Approval, or failure to obtain such Holding Approval, which would individually or in the aggregate have a Material Adverse Effect. Section 5.10 Labor Matters. Neither Holding nor any of its Subsidiaries is a party to or otherwise bound by or subject to any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor, as of the date hereof, is Holding or any of its Subsidiaries the subject of any material proceeding asserting that Holding or any of its Subsidiaries has committed an unfair labor practice, has failed to bargain, has denied recognition, or has otherwise interfered with the representation rights of any labor union or labor organization nor, as of the date of this Agreement, is there pending or, to the A-29 Knowledge of Holding, threatened, any material labor strike, dispute, walkout, work stoppage, slow-down or lockout involving Holding or any of its Subsidiaries, nor, as of the date of this Agreement, has Holding or any of its Subsidiaries been requested within the last three years to recognize or bargain with any labor union or labor organization with respect to any employees of Holding or any of its Subsidiaries. Section 5.11 Environmental Matters. (a) Except as described in the Holding Disclosure Schedule, to the Knowledge of Holding: (i) Holding and the Holding Subsidiaries have complied in all respects with, and are currently in compliance in all respects with all applicable Environmental Laws except for any noncompliance that would not reasonably be expected to result in a Material Adverse Effect; (ii) the properties currently owned, leased or operated by Holding and the Holding Subsidiaries (including soils, groundwater, surface water, buildings or other structures) are in compliance in all respects with all applicable Environmental Laws, and are not contaminated with any Hazardous Substances in a manner so as to create any liability for Holding and the Holding Subsidiaries, except for any noncompliance or contamination or liability that would not reasonably be expected to result in a Material Adverse Effect; (iii) the properties formerly owned, leased or operated by Holding or any of the Holding Subsidiaries were in compliance in all material respects with all applicable Environmental Laws, and were not contaminated with Hazardous Substances during the period of ownership or operation by Holding or any of the Holding Subsidiaries in a manner so as to create any liability for Holding and the Holding Subsidiaries, except for any noncompliance or contamination that would not reasonably be expected to result in a Material Adverse Effect; (iv) neither Holding nor any of the Holding Subsidiaries are or are alleged to be subject to any liability for any Hazardous Substance disposal or contamination on the property of any third party, except for any liability or contamination that would not reasonably be expected to result in a Material Adverse Effect; (v) neither Holding nor any of the Holding Subsidiaries have released any Hazardous Substance except in compliance in all material respects with applicable Environmental Law other than such noncompliance that would not reasonably be expected to result in a Material Adverse Effect; and (vi) neither Holding nor any of the Holding Subsidiaries has received any written notice, demand, letter, claim or request for information alleging that any of the properties currently or previously owned, leased or operated by Holding or any of the Holding Subsidiaries, or Holding or any of the Holding Subsidiaries may be in violation of, liable under or have obligations under any Environmental Law, except for such violations, liabilities and obligations that would not reasonably be expected to result in a Material Adverse Effect. For purposes of this Section 5.11, (A) a property will be deemed to be "contaminated" with a Hazardous Substance only if the Hazardous Substance is present in such quantity as to give rise to any remediation obligation or other liability under applicable Environmental Laws, and (B) Holding and its Subsidiaries shall include (x) all partnerships, joint ventures and other entities in which any of them was at any time a partner, joint venturer, member or participant and (y) all predecessor or former entities, whether or not in existence as of the date hereof, the assets or obligations of which have been acquired or assumed by any of them or to which any of them has succeeded. (b) The representations and warranties in this Section 5.11 are intended to be the only representations and warranties of Holding relating to environmental matters. No other representation or warranty made by Holding shall extend to or cover such matters, even though it is, by its terms, broad enough to do so. Section 5.12 Absence of Certain Changes or Events. Except as disclosed in the Holding SEC Reports that have been filed and are publicly available prior to the date hereof or the Holding Disclosure Schedule, since the date of the Holding Balance Sheet, Holding and its Subsidiaries have conducted their businesses only in the ordinary course and in a manner consistent with recent past practice and, since such date, there has not been (i) any change in the financial condition, results of operations, business, prospects, assets or properties of Holding and its Subsidiaries, taken as a whole, that has had, or will have, a Material Adverse Effect; (ii) any damage, destruction or loss (whether or not covered by insurance) with respect to Holding or any of its Subsidiaries that has had, or will have, a Holding Material Adverse Effect; (iii) any material change by Holding A-30 in its accounting methods, principles or practices to which Discount has not previously consented in writing; (iv) any revaluation by Holding of any of its assets that has had, or will have, a Holding Material Adverse Effect; or (v) any other action or event that would have required the consent of Discount pursuant to Section 6.2 of this Agreement had such action or event occurred after the date of this Agreement. Section 5.13 Registration Statement; Blue Sky Filings; Proxy Statement/Prospectus; Other Information. Neither the Registration Statement nor Blue Sky Filings, nor any of the information supplied or to be supplied in writing by either Holding, New Holding or their respective Subsidiaries which is included in the Proxy Statement/Prospectus and any other documents to be filed with the SEC or any regulatory agency in connection with the transactions contemplated hereby will, at the respective times such documents are filed or, as applicable, declared effective and, at the Effective Time, and, with respect to the Proxy Statement/ Prospectus, when first published, sent or given to stockholders of Discount, in light of the circumstances under which it shall be made, be false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein not misleading or, in the case of the Proxy Statement/Prospectus or any amendment thereof or supplement thereto, at the time of the special meeting of Discount's stockholders provided for in Section 3.2, be false or misleading with respect to any material fact, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for such meeting. If, at any time prior to the Effective Time, any event relating to Holding, New Holding or any of their affiliates, officers or directors is discovered by Holding that should be set forth in an amendment to the Registration Statement or Blue Sky Filings or a supplement to the Proxy Statement/Prospectus, Holding will promptly inform Discount, and Discount shall cooperate so as to enable such amendment or supplement to be promptly filed with the SEC and appropriate state securities administrators, and disseminated to the stockholders of Discount, to the extent required by applicable federal and state securities laws. All documents which Holding, New Holding or their respective Subsidiaries file or are responsible for filing with the SEC and any regulatory agency in connection with the Merger will comply as to form and, to the extent provided by Holding, New Holding or their respective Subsidiaries, as to content, in each case in all material respects with the provisions of applicable law. Notwithstanding the foregoing, Holding, ASCI, New Holding and Merger Sub make no representations or warranties with respect to any information that has been supplied by Discount or its auditors, attorneys, financial advisors, other consultants or advisors specifically for use in the Registration Statement, Blue Sky Filings, the Proxy Statement/Prospectus, or in any other documents to be filed by Holding, New Holding or their respective Subsidiaries with the SEC or any regulatory agency in connection with the transactions contemplated hereby. Section 5.14 Litigation. Except as described in the Holding SEC Reports that have been filed and are publicly available prior to the date hereof or as set forth on the Holding Disclosure Schedule, there is no action, suit or proceeding, claim, arbitration or investigation against Holding, New Holding or any of their respective Subsidiaries pending or as to which Holding, New Holding or any of their respective Subsidiaries has received any written notice of assertion, which, individually or in the aggregate, will have a Material Adverse Effect or a material adverse effect on the ability of Holding, New Holding, ASCI or Merger Sub to consummate the transactions contemplated by this Agreement. There is no judgment, decree, injunction, rule or order of any Governmental Entity or arbitration outstanding against Holding, New Holding or any of their respective Subsidiaries having or which is reasonably likely to have a Material Adverse Effect. Section 5.15 Brokers. No broker, investment banker, financial advisor or other Person, other than J.P. Morgan Securities Inc., The Chase Manhattan Bank, Credit Suisse First Boston and Lehman Commercial Paper Inc. the fees of which are the obligation of Holding and ASCI, is entitled to any broker's, finder's, investment banker's, financial advisor's or other similar fee or commission in connection with the transaction contemplated by this Agreement based upon arrangements made by or on behalf of the Holding ASCI, New Holding or Merger Sub. Holding has delivered to Discount a fully executed copy of its engagement letter with J.P. Morgan Securities Inc. relating to the Merger, including all amendments thereto through the date hereof, and each such engagement letter remains in full force and effect as of the date hereof. A-31 Section 5.16 New Holding and Merger Sub. Neither New Holding nor Merger Sub has any operations or liabilities, other than liabilities arising out of the organization of the respective companies and liabilities incurred and reasonably contemplated in connection with the transactions contemplated by this Agreement. Section 5.17 No Other Transactions Being Negotiated. As of the date hereof, neither New Holding, Holding, ASCI or Merger Sub or any of their respective representatives or agents are negotiating the acquisition of, or an agreement to acquire by merging or consolidating with, or by purchasing any interest in or assets of, or by any other manner, any business or any corporation, partnership or other business organization or division (other than Discount) or otherwise to acquire or agree to acquire any assets other than in the ordinary course of business, which in any such case would be material to Holding and ASCI, taken as a whole. For the purposes of this Section 5.17 only, the term "material" shall be deemed not to include up to 14 stores acquired by any of New Holding, Holding, or ASCI from a third party. ARTICLE 6 CERTAIN COVENANTS Section 6.1 Covenants of Discount. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, Discount agrees as to itself and its respective Subsidiaries, taken as a whole, (except to the extent that Holding shall otherwise consent in writing or except as contemplated in this Agreement or except as disclosed on the Discount Disclosure Schedule), to carry on its business in the usual, regular and ordinary course in substantially the same manner as previously conducted (including without limitation with respect to the purchase of inventory and supplies), to pay its debts and taxes when due (subject to good faith disputes over such debts or taxes which are then being diligently pursued), to pay or perform its other obligations when due, and, to the extent consistent with such business, use commercially reasonable efforts consistent with past practices and policies to preserve intact its present business organization, keep available the services of its present officers and key employees and preserve in all material respects its relationships with customers, suppliers, distributors, and others having business dealings with it, provided that Discount shall not be required to make any payments or enter into or amend any contractual arrangements or understandings to satisfy the foregoing obligations. Discount shall promptly notify Holding of any material event or occurrence not in the ordinary course of its or its Subsidiaries business and of any event that is reasonably likely to have a Material Adverse Effect. Except for matters set forth in the Discount Disclosure Schedule or as otherwise expressly contemplated or permitted by this Agreement, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, Discount shall not (and shall not permit any of its respective Subsidiaries to), without the written consent of Holding: (a) declare or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock (other than dividends and distributions by a direct or indirect wholly owned subsidiary of Discount to its parent), or split, combine or reclassify any of its capital stock; (b) grant any options or other rights to acquire securities of Discount or accelerate, amend or change the period of exercisability or vesting of any Outstanding Discount Options or authorize cash payments in exchange for any such Outstanding Discount Options or purchase any shares of Discount Common Stock, except as set forth on the Discount Disclosure Schedule; (c) issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock or securities convertible into shares of its capital stock, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities, other than the issuance of shares of Discount Common Stock pursuant to the exercise of options and warrants outstanding on the date of this Agreement and in accordance with their terms; A-32 (d) acquire or agree to acquire by merging or consolidating with, or by purchasing any interest in or assets of, or by any other manner, any business or any corporation, partnership or other business organization or division, or otherwise acquire or agree to acquire any assets other than in the ordinary course of business; (e) sell, lease, license, mortgage or otherwise encumber or otherwise dispose of any of its material properties or assets in an amount in excess of $250,000 in any one instance or $1,000,000 in the aggregate, except as required to carry on Discount's business in the usual, regular and ordinary course, consistent with past practices, provided that Discount's sale leaseback consummated in February 2001 shall not be considered a sale or lease that is consistent with past practice; (f) except to the extent required under applicable law, and except for amendments as may be requested by the Internal Revenue Service in connection with a determination letter request, (i) increase or agree to increase the compensation payable or to become payable to its officers or employees, except for increases in salary or wages of non- officer employees in accordance with past practices or for other increases in salary or wages as set forth on the Discount Disclosure Schedule, (ii) grant any additional severance or termination pay to, or enter into or amend any employment, retention, change of control or severance agreements or arrangements with, any employees or officers, (iii) enter into any collective bargaining agreement, (iv) establish, adopt, enter into or amend any bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance, retention, change of control or other plan, trust, fund, policy or arrangement for the benefit of any directors, officers or employees, except as permitted by subsection (vi) of this subsection (f), (v) pay any bonuses to any directors, officers or employees, except for bonuses paid to officers or employees based on the performance of Discount and the respective officer or employee during Discount's fiscal year ended May 29, 2001 and for any period thereafter up through the Effective Time and which in each and every case are either (x) set forth on the Discount Disclosure Schedule, (y) consistent in nature and amount with bonus payments paid to such officer or employee for Discount's prior fiscal year (which bonus payments for all officers of Discount and its Subsidiaries, as well as all bonus payments paid to any other employee of Discount and its Subsidiaries in an amount in excess of $25,000, are set forth on the Discount Disclosure Schedule) or (z) in accordance with contracts or bonus plans in effect on the date hereof or (vi) elect or appoint any new director or hire any new officer level employee, with the exception of the appointment or hiring of a replacement for a director or officer who resigns provided that such replacement is (x) engaged on an at-will basis and on terms of compensation comparable to the person being replaced, (y) is not provided with any employment, change in control or other severance agreement by Discount other than an oral employment agreement that may be terminated at any time without any change of control payment and without any compensation payments due following such termination and (z) is not engaged as the chief executive officer or president; (g) amend or propose to amend the Charter Documents of Discount or any Discount Subsidiary, except as contemplated by this Agreement; (h) incur any indebtedness for borrowed money or guarantee any such indebtedness of another Person other than pursuant to credit agreements in effect as of the date hereof or indebtedness in the form of deferred purchase price identified on the Discount Disclosure Schedule and furnished to Holding and its counsel prior to the date hereof; (i) initiate, compromise, or settle any material litigation or arbitration proceeding; (j) enter into, or otherwise modify, amend or violate in any material respect, or terminate any Discount Material Contract (including without limitation the Salomon Smith Barney Engagement Letter) or waive, release or assign any material rights or claims; (k) make or change any material Tax election, settle, adopt or change any material accounting method in respect of Taxes (except insofar as such adoption or change may be required by GAAP), enter into A-33 any closing agreement, consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of any material Taxes, or compromise any material Tax liability or claim or amend any material Tax return; (l) change in any material respect its methods of accounting as in effect at the date of the Discount Balance Sheet, except insofar as such change may be required by GAAP; (m) make or commit to make any capital expenditures, except to the extent consistent with and within the limits of Discount's capital expenditures budget by quarter and major categories for its fiscal year 2002 as included as an attachment to the Discount Disclosure Schedule; (n) adopt, implement or amend any stockholder rights plan that could have the effect of impeding or restricting the consummation of the transactions contemplated hereby; (o) open any new store or enter into or commit to enter into any lease or purchase contract related to the opening of a new store, except as set forth on the Discount Disclosure Schedule; (p) materially change the amount of any insurance coverage provided by existing insurance policies; (q) fail to give all notices and other information required to be given by Discount or any of its Subsidiaries to the employees of Discount or any of its Subsidiaries, any collective bargaining unit representing any group of employees of Discount, and any applicable governmental authority under the WARN Act, the National Labor Relations Act, the Internal Revenue Code, the Consolidated Omnibus Budget Reconciliation Act, and other applicable law in connection with the transactions provided for in this Agreement where the effect of such failure would be reasonably likely to have a Material Adverse Effect on Discount or on Holding after consummation of the transactions provided for in this Agreement; (r) revalue any of its assets, including without limitation writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business except to the extent required by GAAP; (s) take, or agree in writing or otherwise to take (i) any of the actions described in Subsections (a) through (r) above, (ii) any action not otherwise expressly authorized by this Agreement that would materially and adversely impact Discount's ability to consummate the transactions contemplated hereby, or prevent it from performing, cause it not to perform or impair its ability to perform its covenants hereunder in each case in any material respect, (iii) any action not otherwise expressly authorized by this Agreement that will result in any of the conditions to the transactions contemplated by this Agreement as set forth in Article 8 not being satisfied or will result in violation of any provision of this Agreement, or (iv) any other action not otherwise expressly authorized by this Agreement that would materially adversely delay or materially adversely impair the ability of Discount to consummate the transactions contemplated hereby. Section 6.2 Covenants of Holding and New Holding. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, Holding, ASCI and New Holding agree as to themselves and their respective Subsidiaries, taken as a whole, (except to the extent that Discount shall otherwise consent in writing or except as contemplated in this Agreement or except as disclosed on the Holding Disclosure Schedule), to carry on their respective business in the usual, regular and ordinary course in substantially the same manner as previously conducted, to pay their respective debts and taxes when due (subject to good faith disputes over such debts or taxes which are then being diligently pursued), to pay or perform their respective other obligations when due, and, to the extent consistent with such business, use commercially reasonable efforts consistent with past practices and policies to preserve intact its present business organization and preserve in all material respects their respective relationships with customers, suppliers, distributors and others having business dealings with them; provided, that Holding, ASCI, New Holding or Merger Sub shall not be required to make any payments or enter into or amend any contractual arrangements or understandings to satisfy the foregoing obligations. Holding shall promptly notify A-34 Discount of any material event or occurrence not in the ordinary course of its or its Subsidiaries' business, and of any event which could have a Material Adverse Effect. Except for matters set forth in the Holding Disclosure Schedule or as otherwise expressly contemplated or permitted by this Agreement, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, Holding, ASCI and New Holding shall not (and shall not permit any of its respective Subsidiaries to), without the written consent of Discount: (a) grant any options or other rights to acquire securities of Holding or New Holding or accelerate, amend or change the period of exercisability or vesting of any options issued under any of the Holding Option Plans or authorize cash payments in exchange for any such options issued under any of the Holding Option Plans or purchase any shares of Holding Common Stock, except (i) as set forth on the Holding Disclosure Schedule or except as otherwise consistent with the past practice of grants of options to employees (including without limitation senior management) of Holding and/or its Subsidiaries (it being understood that for these purposes prior grants of options to Larry Castellani and/or Nicholas Taubman will not be considered as part of the past practice); (ii) in order to repurchase Holding Common Stock from directors, officers or employees of Holding in connection with such individuals' termination of employment with Holding, where such repurchases are consistent with the past practice of Holding and/or its Subsidiaries; (iii) grants of options to purchase Holding Common Stock (with an exercise price at or above the then current fair market value of the Holding Common Stock as determined in accordance with the applicable Holding Option Plan) which fall within the categories set forth in the following subsections (x), (y) and (z), but covering up to but no more than 2% of outstanding Holding Common Stock in the aggregate: (x) grants to new members of senior management, (y) grants as integration incentives or (z) grants of options or other such rights, at any time prior to the taking of the Discount Stockholder Vote, in connection with the purchase or acquisition of another entity, whether by acquisition of assets, merger, tender offer, stock purchase, consolidation or recapitalization, subject in all respects to being in compliance with Holding's obligations under Section 6.2(g) and provided that there shall be no such grants of options or other rights to any of the Principal Holding Stockholders or to any of their respective Affiliates in connection with such a purchase or acquisition transaction even if the terms of such grants are determined by the Board of Directors of Holding, in reasonable good faith, based on full and fair disclosure to the Board of Directors of Holding, to be no less favorable to Holding than are available from any unaffiliated third party and provided further that such grants (A) dilute all stockholders of Holding (after giving effect to the transactions contemplated by this Agreement, so that such dilutive impact is measured on a pro forma basis as if the stockholders of Discount were then holding New Holding Common Stock as a result of the Merger) on a pro rata basis, (B) are fully disclosed to Discount promptly following such grants and, (C) to the extent such grants, individually or collectively, could reasonably be considered material to the Discount stockholders in their consideration of whether to vote in favor of the Merger, are fully disclosed to Discount stockholders as part of or by way of amendment or supplement to the Proxy Statement/Prospectus prior to the taking of the vote at the Discount Meeting (the "Discount Stockholder Vote"), as promptly as reasonably possible following such issuance or sale; (b) issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock or securities convertible into shares of its capital stock, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities, other than: (i) options authorized to be issued pursuant to subsection (a) of this Section 6.2; (ii) issuances, deliveries, or sales, or authorizations to issue, deliver, or sell, at any time prior to the taking of the Discount Stockholder Vote, any of the capital stock or securities described in this subparagraph (b) in connection with the purchase or acquisition of another entity, whether by acquisition of assets, merger, tender offer, stock purchase, consolidation or recapitalization, subject in all respects to being in compliance with Holding's obligations under Section 6.2(g); provided, that such issuances and sales (x) dilute all stockholders of Holding (after giving effect to the transactions contemplated by this Agreement, so that such dilutive impact is A-35 measured on a pro forma basis as if the stockholders of Discount were then holding New Holding Common Stock as a result of the Merger) on a pro rata basis, (y) are fully disclosed to Discount promptly following such issuances and sales and, (z) to the extent such issuances and sales, individually or collectively, could reasonably be considered material to the Discount stockholders in their consideration of whether to vote in favor of the Merger, are fully disclosed to Discount stockholders as part of or by way of amendment or supplement to the Proxy Statement/Prospectus prior to the taking of the Discount Stockholder Vote and as promptly as reasonably possible following such issuance or sale and, provided, that there shall be no issuances or sales of capital stock or securities to any of the Principal Holding Stockholders or to any of their respective Affiliates even if the terms of such issuances or sales are determined by the Board of Directors of Holding, in reasonable good faith based on full and fair disclosure to the Board of Directors of Holding, to be no less favorable to Holding than are available from any unaffiliated third party; or (iii) the issuance of shares of Holding Common Stock pursuant to the exercise of options and warrants outstanding on the date of this Agreement or granted thereafter in compliance with the terms of subsection (a) of this Section 6.2; (c) enter into any transaction or series of related transactions with any Affiliate of Holding, ASCI, New Holding or Merger Sub unless such transaction is entered into and consummated on terms (as determined in reasonable good faith based on full and fair disclosure to the Board of Directors of Holding) that are no less favorable to Holding, ASCI, New Holding and Merger Sub than are available from an unaffiliated third party and is not otherwise prohibited under any other subsection of this Section 6.2; (d) change in any material respect its methods of accounting as in effect at the date of the Holding Balance Sheet, except insofar as such change may be required by GAAP; (e) adopt, implement or amend any stockholder rights plan that could have the effect of impeding or restricting the consummation of the transactions contemplated hereby; (f) (i) amend its Articles or Certificate of Incorporation or By-Laws in any manner that is material and adverse to Discount's stockholders, (ii) amend the terms of or reclassify, or effect a stock split or combination with respect to, any of its capital stock, distribute to stockholders any material assets or securities of Holding, New Holding or any of their respective Subsidiaries, or otherwise materially alter its capital structure except (x) in connection with financing transactions entered into in order to effectuate the consummation of the transactions contemplated by this Agreement as more particularly expressly described in the Commitments, and (y) as may be necessary to consummate the permitted purchase or acquisition of another entity, whether by acquisition of assets, merger, tender offer, stock purchase, consolidation or recapitalization subject in all respects to being in compliance with Holding's obligations under Section 6.3(g) and provided that such amendment, reclassification, stock split, combination, distribution or capital structure alteration would not impact (after giving effect to the transactions contemplated by this Agreement, so that such impact is measured on a pro forma basis as if the stockholders of Discount were then holding New Holding Common Stock as a result of the Merger) any such common stockholder of New Holding in a manner disproportionate to the relative stock ownership of such common stockholder otherwise contemplated by the Merger and the Reincorporation, (iii) pay any dividend to stockholders of Holding or New Holding, or (iv) adopt a plan of liquidation or dissolution or sell all or substantially all of its assets; (g) permit New Holding or Merger Sub to have any operations or incur any liabilities, other than liabilities arising out of the organization of the respective companies and liabilities incurred in connection with the transactions contemplated by this Agreement; (h) take, or agree in writing or otherwise to take (i) any of the actions described in Subsections (a) through (g) above, (ii) any action not otherwise expressly authorized by this Agreement that would materially and adversely impact Holding's or New Holding's or Merger Sub's or ASCI's ability to consummate the transactions contemplated hereby, or prevent any of them from performing or cause A-36 either of them not to perform its respective covenants hereunder in any material respect, (iii) any action not otherwise expressly authorized by this Agreement that will result in any of the conditions to the transactions contemplated by this Agreement as set forth in Article 8 not being satisfied or will result in violation of any provision of this Agreement, (iv) amend, modify or terminate the New Holding Merger Agreement in any material respect, or (v) any other action not otherwise expressly authorized by this Agreement that would materially adversely delay or materially adversely impair the ability of Holding, ASCI, New Holding or Merger Sub to consummate the transactions contemplated hereby or any action that could reasonably be expected to materially adversely delay or materially adversely impair the ability of Holding, New Holding and ASCI to satisfy the conditions to, and/or to secure, the financing contemplated by or under the Commitments. Section 6.3 Cooperation; Access. (a) Subject to compliance with applicable law, from the date hereof until the Effective Time, each of Holding and Discount shall confer on a regular and frequent basis with one or more representatives of the other party to report on the general status of ongoing operations and shall promptly provide the other party or its counsel with copies of all filings made by such party with any Governmental Entity in connection with this Agreement, the Merger and the transactions contemplated hereby and thereby, or with the SEC pursuant to the Exchange Act. (b) Prior to the Closing, Discount will, and will cause each of its Subsidiaries to, permit representatives of Holding and ASCI to have full access at all reasonable times and with reasonable advance notice, and in a manner so as not to interfere with the normal business operations of Discount and its Subsidiaries, to all premises, properties, officers (and any other specific employees to whom such officers may expressly authorize access in writing from time to time), books, records (including Tax records), contracts, commitments and documents of or pertaining to each of Discount and its Subsidiaries and to conduct such inspections and investigations as Holding and ASCI may reasonably require; provided, however, that, prior to the expiration or termination of any waiting period under the HSR Act or other similar law applicable to the transaction, Holding and ASCI shall only be permitted such reasonable access which, in their discretion, after consultation with their counsel, is appropriate during such inspection and investigation process and provided further, Discount may withhold such portions of documents or information relating to pricing or other matters that are highly sensitive and the exchange of such documents (or portions thereof) or information, as determined by Discount or Discount's outside legal counsel, that might reasonably result in antitrust difficulties between Discount and Holding (or any of its Affiliates). If any material is withheld from Holding or ASCI pursuant to the second proviso of the preceding sentence, Discount shall inform Holding as to what is being withheld. No information or knowledge obtained in any investigation pursuant to this Section 6.3 shall affect or be deemed to modify any representation or warranty contained in the Agreement or the conditions to the obligations of the parties to consummate the transactions contemplated by this Agreement. The confidentiality of all such documents and information furnished in connection with the transactions contemplated by this Agreement shall be governed by the terms of Section 6.4. In addition to the foregoing, with respect to the Designated Discount Real Properties, Discount shall use its best efforts to complete any and all environmental questionnaires that may be required or deemed necessary by Holding and ASCI; and, if required and to the extent required by the providers of the Commitments, Discount shall arrange for environmental reports to be prepared and/or further testing to be conducted with respect to those Designated Discount Real Properties for which the providers of the Commitments may so require the preparation of such reports and/or conduct of further testing. The cost of any such environmental reports and any such further testing shall be borne by Discount. (c) Prior to the Closing, Holding will, and will cause each of its Subsidiaries to, permit representatives of Discount to have access at all reasonable times and with reasonable advance notice, and in a manner so as not to interfere with the normal business operations of Holding and its Subsidiaries, to such premises, properties, books, records (including Tax records), contracts, commitments and documents A-37 of or pertaining to each of Holding and its Subsidiaries and to conduct such inspections and investigations in all cases only as Discount may reasonably believe is necessary in order to confirm the accuracy of the representations and warranties of Holding and ASCI (if Discount reasonably believes that a representation or warranty may have been breached), the compliance by Holding and ASCI of their respective covenants under this Agreement, and the satisfaction of the conditions to Discount's obligation to consummate the transactions hereunder; provided, however, that, prior to the expiration or termination of any waiting period under the HSR Act or other similar law applicable to the transaction, Discount shall only be permitted such reasonable access which, in their discretion, after consultation with their counsel, is appropriate during such inspection and investigation process and provided further, Holding may withhold such portions of documents or information relating to pricing or other matters that are highly sensitive and the exchange of such documents (or portions thereof) or information, as determined by Holding or Holding's outside legal counsel, might reasonably result in antitrust difficulties between Discount and Holding (or any of its Affiliates). If any material is withheld from Discount pursuant to the second proviso of the preceding sentence, Holding shall inform Discount as to what is being withheld. No information or knowledge obtained in any investigation pursuant to this Section 6.3 shall affect or be deemed to modify any representation or warranty contained in the Agreement or the conditions to the obligations of the parties to consummate the transactions contemplated by this Agreement. The confidentiality of all such documents and information furnished in connection with the transactions contemplated by this Agreement shall be governed by the terms of Section 6.4. Section 6.4 Confidentiality. The parties acknowledge that ASCI has previously executed a confidentiality agreement dated as of March 15, 2001 and Discount has previously executed a confidentiality agreement dated as of June 12, 2001 (the "Confidentiality Agreements"), which Confidentiality Agreements will continue in full force and effect in accordance with their terms, except as expressly modified herein, until the Effective Time, and if this Agreement is terminated or if the Effective Time shall not have occurred for any reason whatsoever, the Confidentiality Agreements shall thereafter remain in full force and effect in accordance with their terms. Notwithstanding the foregoing, each party hereby expressly consents to the disclosure of any information subject to the Confidentiality Agreements required to be disclosed by applicable law in connection with the consummation of the transactions contemplated by this Agreement; provided, that the parties shall consult with one another prior to the disclosure of any such information. Section 6.5 Notices of Certain Events. Each of Holding and New Holding, on the one hand and Discount, on the other hand, shall give prompt notice to the other of (i) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the Merger; (ii) any notice of other communication from any Governmental Entity in connection with the Merger or any party's filings under the Exchange Act; and (iii) any actions, suits, claims, investigations or proceedings commenced or, to its knowledge, threatened against, relating to or involving or otherwise affecting Holding, New Holding or Discount or their respective Subsidiaries that relate to the consummation of the Merger. Each of Holding and Discount will use commercially reasonable efforts to promptly notify the other if, in the course of such party's investigations with respect to the other and the other's Affiliates, such party obtains knowledge that any representation or warranty of the other is, or is reasonably expected to be, untrue or inaccurate so as to have a Material Adverse Effect. ARTICLE 7 ADDITIONAL AGREEMENTS Section 7.1 No Solicitation. (a) From the date hereof until the Effective Time, Discount shall immediately cease and desist and discontinue and cause to be terminated any and all existing activities with respect to any of the following and shall not, nor shall it authorize or permit any of its Subsidiaries, directly or indirectly, A-38 to, nor shall it authorize or permit any officer, director, affiliate, employee, attorney, accountant, financial advisor, independent representative or independent agent or any other advisor or representative of Discount or of any of its Subsidiaries to, solicit, initiate, encourage or take any action to facilitate (including by way of furnishing information or engaging in discussions or negotiations) any inquiries, proposals or offers that constitute, or could reasonably be expected to lead to or relate to, a proposal or offer to acquire any assets, business or properties of Discount or any of its Subsidiaries other than assets, businesses or properties that are permitted to be sold by Discount and its Subsidiaries pursuant to Section 6.1 or any part of the capital stock of Discount or any of its Subsidiaries, whether by merger, share purchase or exchange, reorganization, recapitalization, liquidation, dissolution, consolidation, business combination, purchase of assets, tender offer, exchange offer or similar transaction, whether for cash, securities or any other consideration or combination thereof other than the transactions contemplated by this Agreement and other than another transaction or series of related transactions in which Holding, New Holding or a Subsidiary of Holding or of New Holding is the acquiring Person (any of the foregoing inquiries or proposals being referred to in this Agreement as an "Acquisition Proposal"); provided, however, that if, at any time prior to the Discount Stockholder Vote on this Agreement, the Plan of Merger and the Merger, the Board of Directors of Discount determines in good faith, after consultation with outside counsel, that failure to do so would constitute a breach of its fiduciary duties to Discount's stockholders under applicable law, Discount in response to a bona fide written Acquisition Proposal that the Discount Board of Directors determines in good faith is not subject to a financing contingency that is more uncertain or conditioned than the financing contingency applicable to the Merger that is contained in the Commitments described in Section 8.2(h) of this Agreement and, if consummated, would constitute a Superior Proposal, and that was unsolicited or that did not otherwise result from a breach of this section, may, (x) furnish non-public information with respect to Discount to the Person or group who made such Acquisition Proposal pursuant to a confidentiality agreement containing confidentiality terms at least as stringent as those contained in the Confidentiality Agreement protecting information of Discount and executed by ASCI and (y) participate in discussions and negotiations regarding such Acquisition Proposal. Notwithstanding the foregoing, Discount agrees not to release any third party from, or waive any provision of, any confidentiality agreement between Discount and another Person previously entered into by Discount in the course of Discount's efforts to identify an acquisition partner, unless the Board of Directors of Discount determines in good faith, after consultation with outside legal counsel, that such action is necessary for the Board of Directors to comply with its fiduciary duties to Discount's stockholders and to enable such third party to communicate with and make an Acquisition Proposal addressed to the Board of Directors of Discount, and in such event, such waiver shall only be made to the extent necessary to permit such third party to make such Acquisition Proposal directly to the Board of Directors of Discount, to negotiate a Superior Proposal with the Board of Directors of Discount, and/or to enter into and to consummate a Superior Proposal that is ultimately approved by the Board of Directors of Discount. No other provisions of such confidentiality agreement shall be released or waived, and no authorization shall be given to such third party to obtain proxies, voting agreements, options or option agreements or to purchase shares of any shareholder of Discount other than pursuant to a tender offer approved by Discount's Board of Directors in connection with and as part of consummating a Superior Proposal. In the event that the Board of Directors of Discount determines in good faith, after consultation with outside legal counsel, that such action is necessary as described in the foregoing two sentences, then the Board of Directors of Discount shall concurrent with its release of such third party from those provisions of the confidentiality agreement between Discount and such person that are necessary to accomplish the foregoing, simultaneously release Holding and ASCI from the comparable provisions of their Confidentiality Agreement previously entered into with Discount. In addition, in the event that any third party that has not entered into a confidentiality agreement with Discount takes any action or actions that would lead to or constitutes an Acquisition Proposal, then the Board of Directors of Discount shall immediately release Holding and ASCI from those A-39 provisions of their Confidentiality Agreement previously entered into with Discount that would enable Holding and ASCI to take such action or actions comparable to those then being taken by such third party. (b) For these purposes, a "Superior Proposal" shall mean any bona fide unsolicited written proposal made by a third party to acquire all or substantially all the equity securities or assets of Discount, pursuant to a tender offer or exchange offer, a merger, a consolidation, a liquidation or dissolution, a recapitalization, a sale of all or substantially all of its assets or a similar transaction, (i) on terms which the Board of Directors of Discount determines in their good faith judgment is more favorable from a financial point of view for the holders of Discount Common Stock than the Merger, after consultation with its outside counsel and financial advisor, taking into account all the terms and conditions of such proposal and this Agreement (including any proposal in the form of a firm commitment by Holding to amend the terms of the Merger) and (ii) that is not subject to a financing contingency that is more uncertain or conditioned than the financing contingency applicable to the Merger that is contained in the Commitments described in Section 8.2(h) of this Agreement and is reasonably capable of being completed, taking into account all financial, regulatory, legal and other aspects of such proposal and the Person making such proposal. (c) Nothing contained in this Section 7.1 shall prohibit Discount from at any time taking and disclosing to its stockholders a position contemplated by Rule 14e-2(a) of the Exchange Act with regard to an Acquisition Proposal. (d) Neither the Board of Directors of Discount, nor any committee thereof, shall withdraw, modify or qualify (or propose to withdraw, modify or qualify) the Discount Recommendation in any manner adverse to Holding or ASCI, or take any action or make any statement in connection with the Discount Meeting inconsistent with such Discount Recommendation. Notwithstanding the foregoing, at any time prior to the Discount stockholder vote on this Agreement, the Plan of Merger and the Merger, the Board of Directors of Discount may, in response to a Superior Proposal that was unsolicited and did not otherwise result from a breach of this Section 7.1, withdraw, modify or qualify the Discount Recommendation if the Board of Directors of Discount determines, in good faith, after consultation with outside counsel, that its fiduciary obligations require it to do so. (e) Notwithstanding the foregoing, (i) two (2) Business Days prior to providing any information to any Person or entering into discussions or negotiations with any such Person regarding such Superior Proposal, Discount shall notify Holding promptly of such inquiries or proposals received by, any such information requested from, or any such discussions or negotiations sought to be initiated or continued with, any of Discount's authorized representatives indicating, in connection with such notice, the name of such Person and the material terms and conditions of any inquiries, proposals or offers, and Discount agrees that it will keep Holding informed in all material respects of the status and terms of any such inquiries, proposals or offers, and not enter into any agreements which would prohibit or impair its obligation to do so hereunder, and (ii) Discount shall not terminate this Agreement pursuant to Section 9.1(g) nor enter into an agreement with respect to a Superior Proposal unless Discount shall have first (x) furnished Holding with written notice not later than 12:00 noon (New York time) five (5) Business Days in advance of any date that it intends to terminate this Agreement and enter into such agreement, and (y) caused its financial and legal advisors to negotiate with Holding during such five day period in an effort to make such adjustments in the terms and conditions of this Agreement as would enable Discount to proceed with the transactions contemplated hereby on such adjusted terms. In addition, as provided for in Section 9.3, if Discount enters into an agreement with respect to any Superior Proposal, it shall concurrently with or prior to entering into such agreement pay, or cause to be paid, to ASCI the Termination Fee (as defined in Section 9.3), plus any amounts payable for Expenses pursuant to the provisions of Section 9.3. (f) Notwithstanding the foregoing, if Holding shall have received notice from Discount pursuant to the provisions of either Section 7.1(e)(i) or Section 7.1(e)(ii) and then only in the case where such notice A-40 is received after the Rating Date, Holding shall have the right, by written notice to Discount given within five (5) Business Days of the receipt of such notice, to require Discount to call and hold the Discount Meeting, notwithstanding the existence of such Superior Proposal, in which event (i) Discount shall not have the right to terminate this Agreement pursuant to the provisions of Section 9.1(g) and (ii) Holding shall not have the right to terminate this Agreement pursuant to the provisions of Section 9.1(e) due to (x) any approval or recommendation by the Board of Directors of Discount of such Superior Proposal reasonably considered necessary as a result of such Superior Proposal or adoption of a resolution to such effect, (y) any withdrawal or modification or qualification of its recommendation or qualification of its approval of this Agreement, the Plan of Merger or the Merger by the Board of Directors of Discount in a manner adverse to the interests of Holding or ASCI reasonably considered necessary as a result of such Superior Proposal or adoption of a resolution to such effect, or (z) any failure to include in the Proxy Statement/Prospectus the recommendation without adverse modification or qualification that the stockholders of Discount approve this Agreement, the Plan of Merger and the Merger reasonably considered necessary as a result of such Superior Proposal. For these purposes, the "Rating Date" shall mean the earlier of (i) thirty (30) days after the date of this Agreement or (ii) the date on which Holding delivers to Discount copies of letters from each of Standard & Poors Rating Service ("S&P") and Moody's Investors Service, Inc. ("Moody's") which confirm that, with respect to ASCI's Senior Subordinated Facility (as such term is defined in the Commitments), ASCI's senior subordinated debt, on a pro forma basis, after giving effect to the Transactions (as is defined in the Commitments), has been issued ratings from each of S&P and Moody's, with such ratings (x) being B- or better, in the case of S&P, and B3 or better, in the case of Moody's and (y) each having an "outlook" of stable or better. Section 7.2 Proxy Statement/Prospectus; Registration Statement; Stockholders Meeting. (a) As promptly as practicable after the execution of this Agreement, Discount, ASCI, Holding and New Holding will (i) prepare and file with the SEC a registration statement on Form S-4 (as amended or supplemented, the "Registration Statement") relating to the adoption of this Agreement and the approval of the Merger and Plan of Merger by the stockholders of Discount pursuant to the Proxy Statement/Prospectus described in subsection (c) below and the registration under the Securities Act of the Stock Consideration included in the Merger Consideration, and (ii) file with state securities administrators such registration statements or other documents as may be required under applicable blue sky laws to qualify or register the Stock Consideration in such states as are designated by Discount (the "Blue Sky Filings"). Discount, ASCI, Holding and New Holding will use their reasonable best efforts to cause the Registration Statement to become effective as soon as practicable. Holding and New Holding will notify Discount promptly of the receipt of any comments from the SEC or its staff or from any state securities administrators and of any request by the SEC or its staff or by any state securities administrators for amendments or supplements to the Registration Statement or any Blue Sky Filings or for additional information, and will supply Discount with copies of all correspondence between Holding, New Holding or any of their respective representatives, on the one hand, and the SEC, its staff or any state securities administrators, on the other hand, with respect to the Registration Statement. If at any time prior to receipt of the Stockholder Approval there shall occur any event that should be set forth in an amendment or supplement to the Proxy Statement/Prospectus, Discount, Holding and New Holding shall promptly prepare and arrange for the mailing to Discount stockholders such an amendment or supplement. Each party will cause its counsel and independent auditors, promptly upon request therefor, to deliver any consents, legal opinions or "cold comfort" letters that may reasonably be required by any party or its financial advisor or agents in connection with the transactions contemplated by this Agreement. (b) Discount hereby represents that its Board of Directors has (i) determined that the Merger is fair to and in the best interests of Discount's stockholders, (ii) approved the Merger and (iii) resolved to recommend in the Proxy Statement/Prospectus adoption of this Agreement and authorization of the Merger by the stockholders of Discount. A-41 (c) Discount agrees, subject to Section 7.1, that this Agreement shall be submitted at the Discount Meeting. As soon as practicable after the date of this Agreement and following the date on which the Proxy Statement/Prospectus is in a position to be mailed to the Discount stockholders, Discount shall take all action, to the extent necessary in accordance with applicable law and its Charter Documents, to convene a meeting of its stockholders promptly to consider and vote upon the approval of the Merger, and Discount shall prepare and file with the SEC, subject to the prior approval of Holding, which approval Holding shall not unreasonably withhold, together with the Registration Statement, the Proxy Statement/Prospectus and proxy and other filings relating to the Discount Meeting as required by the Exchange Act. The term "Proxy Statement/Prospectus" shall mean such proxy statement at the time it initially is mailed to stockholders and all duly filed amendments or revisions made thereto, if any, similarly mailed. Notice of the Discount Meeting shall be mailed to the stockholders of Discount along with the Proxy Statement/Prospectus. Discount, Holding and ASCI each shall use its reasonable best efforts to obtain and furnish the information required to be included in the Proxy Statement/Prospectus; and Discount, Holding and ASCI, as appropriate, shall respond promptly to any comments made by the SEC with respect to the Proxy Statement/Prospectus and cause the Proxy Statement/Prospectus and proxy to be mailed to Discount's stockholders at the earliest practicable time. Section 7.3 NYSE Listing. Discount agrees to use reasonable efforts to continue the listing of Discount Common Stock on the New York Stock Exchange through the earlier of the Closing or termination of this Agreement. Section 7.4 Legal Conditions to Merger. (a) Upon the terms and subject to the conditions set forth in this Agreement, and subject to Section 7.1 and 9.1(g), Discount, Holding, ASCI and New Holding shall use their respective reasonable best efforts to (i) take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary and proper under applicable law to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated hereby, (ii) obtain from any Governmental Entity any consents, licenses, permits, waivers, approvals, authorizations, or orders required to be obtained or made by Discount or Holding or New Holding or any of their Subsidiaries in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions contemplated hereby including, without limitation, the Merger, and (iii) as promptly as practicable, make all necessary material filings, and thereafter make any other required material submissions, with respect to this Agreement and the Merger required under (A) the Securities Act and the Exchange Act, and any other applicable federal or state securities laws, (B) the HSR Act and any related governmental request thereunder, and (C) any other applicable law. Discount, Holding, New Holding and ASCI shall cooperate with each other in connection with the making of all such filings, including providing copies of all such documents to the non- filing party and its advisors prior to filing and, if requested, to accept all reasonable additions, deletions or changes suggested in connection therewith. Discount, Holding, New Holding and ASCI shall use reasonable commercial efforts to furnish to each other all information required for any application or other filing to be made pursuant to the rules and regulations of any applicable law (including all information required to be included in the Proxy Statement/Prospectus) in connection with the transactions contemplated by this Agreement. If Discount is requested to do so in writing by Holding, Discount will use commercially reasonable efforts to obtain those Holding Designated Consents identified in such request; provided, however, that in no event shall Discount be required to pay any money or provide any guarantee to obtain such Holding Designated Consent; provided, further, that the failure to obtain any Holding Designated Consent shall not in any way prevent or delay the parties from closing the transactions contemplated by this Agreement. In connection therewith, and in connection with its negotiations for such Holding Designated Consents, Discount may not offer or consent to any modification or amendment of any lease or other contract without Holding's prior written consent which consent may be withheld in Holding's sole discretion. At Holding's election, A-42 Holding may participate in and jointly control the process of obtaining any such Holding Designated Consents. Discount agrees to transmit the form of requested consent to the appropriate parties for approval promptly after the execution of this Agreement. Holding shall have the right to approve the form of consent and the transmittal letter used to transmit such consents to each such party. Discount shall keep Holding advised of its progress in obtaining such Holding Designated Consents and shall obtain Holding's written consent which consent may be withheld in Holding's sole discretion prior to offering or consenting to any substantive change or modification of the form of the consent approved by Holding. The "Holding Designated Consents" are set forth on Schedule D to this Agreement and such Schedule D may be updated from time to time to add any material consents, material licenses, material permits, material waivers, material approvals or material authorizations that are discovered by Holding after the date of this Agreement. Discount shall take all necessary action so that the Senior Term Notes issued under the Note Purchase Agreement dated as of July 17, 1997 and the Senior Secured Notes issued under the Note Agreement dated as of October 30, 1989 may be repaid in full and retired on the Closing Date. If requested by Holding, Discount shall further take all necessary action so that, effective on the Closing Date, the Master Lease Agreement dated as of May 30, 2000 between Atlantic Financial Group, Ltd. and Discount Auto Parts Distribution Center, Inc. and all other documents related to said transaction are terminated (except for obligations that expressly survive termination under the terms of such documents, as such documents exist as of the date hereof) and the real property subject thereto is reacquired by Discount in accordance with their terms free and clear of all monetary liens (other than any lien for nondelinquent taxes) and take all other action associated therewith without any liability other than provided for in such Master Lease Agreement and the other related documents. (b) Holding, New Holding and Discount agree, and shall cause each of their respective Subsidiaries and Affiliates, to cooperate and to use reasonable commercial efforts to obtain any government clearances or approvals required for Closing under the HSR Act, the Sherman Act, as amended, the Clayton Act, as amended, the Federal Trade Commission Act, as amended, and any other Federal, state or foreign law or, regulation or decree designed to prohibit, restrict or regulate actions for the purpose or effect of monopolization or restraint of trade (collectively "Antitrust Laws"), to respond to any government requests for information under any Antitrust Law and, unless either Holding or New Holding determines that there is a reasonable basis to conclude that such action is reasonably likely to have a Material Adverse Effect either on Holding and its Subsidiaries, on Discount and its Subsidiaries or on the consolidated entities after the Merger and the Reincorporation and notifies Discount to such effect or Discount determines that there is a reasonable basis to conclude that such action is reasonably likely to have a Material Adverse Effect on the consolidated entities after the Merger and the Reincorporation and notifies Holding to such effect, to contest and resist any action, brought by a private party under the Antitrust Laws (a "Private Party Action") , and to have vacated, lifted, reversed or overturned any order, stay, decree, judgment, injunction or other order (whether temporary, preliminary or permanent) obtained by a private party (a "Private Party Order") that restricts, prevents or prohibits the consummation of the Merger or any other transactions contemplated by this Agreement under any Antitrust Law. Holding and New Holding shall not be obligated to but may elect to contest and resist any action brought by a Governmental Entity, including any legislation, administrative or judicial action (a "Government Action"), or to seek to vacate, lift, reverse or overturn any order issued by a Governmental Entity as a consequence or arising out of an action brought by a Governmental Entity (a "Government Order") that restricts, prevents or prohibits the consummation of the Merger or any other transactions contemplated by this Agreement under any Antitrust Law. If Holding or New Holding so elects, Discount shall fully cooperate and assist Holding and New Holding therewith. The parties hereto will consult and cooperate with one another, and consider in good faith the views of one another, in connection with any analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or on behalf of any party hereto in connection with proceedings under or relating to A-43 any Antitrust Law. Holding, New Holding and Discount shall mutually direct any proceedings or negotiations with any private party relating to proceedings under or relating to any Antitrust Law and constituting a Private Party Action or a Private Party Order and shall share equally the reasonable costs and expenses incurred in connection therewith (except that if such Private Party Action or Private Party Order is to be contested and Discount determines that there is a reasonable basis to conclude that such action is reasonably likely to have a Material Adverse Effect either on Holding and its Subsidiaries, on Discount and its Subsidiaries or on the consolidated entities after the Merger and the Reincorporation and notifies Holding to such effect, the parties shall not share the costs and expenses equally but instead each party shall bear its own costs and expenses). Holding and New Holding shall direct any proceedings or negotiations with any Governmental Entity relating to any Government Action or Government Order, and shall afford Discount a reasonable opportunity to participate therein, and Discount shall fully cooperate and assist Holding in any such proceedings or negotiations. Discount and its Subsidiaries shall cooperate with Holding and New Holding with respect to any action which Holding and/or New Holding shall choose to take in response to any demand, requirement, or other action taken by the United States Federal Trade Commission ("FTC") or the United States Department of Justice ("DOJ") or any other regulatory body or agency, including, but not limited to, divesting any of its businesses, retail stores, product lines or assets; provided such divestitures or other actions are not required to be taken, completed or implemented until on or after the Effective Time and is not reasonably expected to have a Material Adverse Effect on the consolidated New Holding after the Merger and the Reincorporation. If a Private Party Action or a Private Party Order is reasonably likely to have a Material Adverse Effect either on Holding and its Subsidiaries, on Discount and its Subsidiaries or on the consolidated entities after the Merger and the Reincorporation, Holding shall not be obligated to consummate the transactions contemplated by this Agreement and may terminate this Agreement pursuant to Section 9.1(c). If a Private Party Action or a Private Party Order is reasonably likely to have a Material Adverse Effect on the consolidated entities after the Merger and the Reincorporation, Discount shall not be obligated to consummate the transactions contemplated by this Agreement and may terminate this Agreement pursuant to Section 9.1(c). Notwithstanding anything to the contrary contained in this Section 7.4, Holding, ASCI or their Subsidiaries shall not be required to (i) divest or agree to divest any of their or Discount's and its Subsidiaries' respective businesses, retail stores, product lines or assets or to take or agree to take any other action with respect to Holding, New Holding, ASCI, Discount or their respective Subsidiaries, or (ii) take any other action under this Section 7.4, if the DOJ or the FTC or any other regulatory body or agency authorizes its staff to seek a preliminary injunction or restraining order to enjoin consummation of the Merger. Each Person shall pay any filing fee required under the regulations promulgated pursuant to the HSR Act with respect to its own filing thereunder. Section 7.5 Public Disclosure. The initial press release with respect to the execution of this Agreement shall be a joint press release acceptable to Holding and Discount. Thereafter, Holding and Discount shall consult with each other before issuing any press release or otherwise making any public statement or public filing with respect to the Merger or this Agreement and shall not issue any such press release or make any such public statement or public filing prior to such consultation, except as, in the reasonable judgment of the Board of Directors of either Holding or Discount, may be required by law or the rules and regulations of the New York Stock Exchange. Section 7.6 Certain Employee Benefit Plan Obligations. (a) During the period commencing at the Effective Time and ending twelve (12) months thereafter, New Holding, ASCI and/or the Surviving Corporation shall provide the employees of Discount and the Discount Subsidiaries (the "Discount Employees") with benefits (other than stock and stock-based benefits and the value thereof) that are in the aggregate substantially equivalent to or more favorable than the benefits provided to such employees immediately before the Effective Time by Discount and the Discount Subsidiaries identified in the Discount Disclosure Schedule; provided however, this covenant shall not prohibit changes in benefit plans required by law or in the ordinary course of A-44 business on a basis reasonably consistent with the practices of ASCI, it being understood by Discount, Holding, ASCI and New Holding that the benefits provided by ASCI to its employees on the date hereof (as described in a schedule of benefits delivered by ASCI to Discount) satisfy such agreement. New Holding, ASCI and the Surviving Corporation will treat, and cause their benefit plans to treat, the service of the Discount Employees with Discount or any Discount Subsidiary attributable to any period before the Effective Time as service rendered to New Holding, ASCI and/or the Surviving Corporation, as applicable, for purposes of eligibility to participate, vesting, benefit accrual and for other benefits including, but not limited to, applicability of minimum waiting periods for participation. Without limiting the foregoing, New Holding, ASCI and the Surviving Corporation shall not, except as may be required by applicable law, treat any Discount Employee as a "new" employee for purposes of any exclusions under any health or similar plan of New Holding, ASCI and/or the Surviving Corporation for a pre-existing medical condition, and will make appropriate arrangements with its insurance carrier(s) to ensure such result. (b) Following the Effective Time, the Surviving Corporation shall honor and shall cause its Subsidiaries to honor (i) in accordance with their terms, all written individual employment, termination, severance, bonus, change in control, post-employment and other written compensation agreements, arrangements and plans existing prior to the execution of this Agreement and referred to in the Discount Disclosure Schedule ("Disclosed Discount Employment Arrangements"), which are between Discount or any Discount Subsidiary and any current or former director, officer or employee thereof, and (ii) all legally imposed obligations relating to employment matters pursuant to applicable law. Notwithstanding anything to the contrary contained herein, no officer or employee shall have any right to continued employment or any other right, except to the extent specifically set forth in such officer's or employee's Disclosed Discount Employment Arrangement or as provided in Section 7.6(a). New Holding and/or ASCI will cause the Surviving Corporation to honor its obligations under the Designated Arrangements on the Discount Disclosure Schedule. As for those items which are included as part of the Disclosed Discount Employment Arrangements and which are expressly identified as Designated Arrangements on the Discount Disclosure Schedule, the provisions of this Section 7.6(b) are (x) intended to be for the benefit of, and will be enforceable by, each Person who is a counterparty to the Designated Arrangements, his or her heirs and his or her representatives and (y) in addition to, and not in substitution for, any other rights that any such Person may have by contract or otherwise. (c) If the Surviving Corporation or any of the Discount Subsidiaries, or any of their respective successors or assigns, transfers all or substantially all of its properties and assets to any Person or Persons within twelve months of the Effective Time, then, and in each such case, proper provision shall be made so that the transferee assumes (and if more than one, the transferees assume, jointly and severally) the obligations set forth in this Section 7.6. (d) Except as expressly provided in this Section 7.6, the Surviving Corporation shall have sole discretion with respect to the determination as to whether to terminate, merge or continue any employee benefit plans and programs of Discount or any Discount Subsidiary. Nothing in this Agreement shall alter or limit New Holding's, ASCI's and/or the Surviving Corporation's obligations, if any, under ERISA, as amended by the Consolidated Omnibus Budget Reconciliation Act of 1985 and/or the Health Insurance Portability and Accountability Act of 1996 with respect to the rights of the Discount Employees and their qualified beneficiaries in connection with the group health plan maintained by Discount as of the Effective Time. Section 7.7 Indemnification, Exculpation and Insurance. (a) Holding, New Holding and ASCI each agree that all rights to indemnification, expense advancement and exculpation from liabilities for acts or omissions occurring at and/or prior to the Effective Time now existing in favor of the current or former directors, officers, employees or agents of Discount and its Subsidiaries as provided in their respective Charter Documents and any indemnification A-45 agreements or arrangements of Discount or any of its Subsidiaries shall survive the Merger and shall be assumed in all respects by and will be fulfilled and honored by the Surviving Corporation and guaranteed by Holding, New Holding and ASCI and shall continue in full force and effect, without amendment, for at least six years after the Effective Time; provided, however, that all rights to indemnification in respect of any claim asserted or made within such period shall continue until the final disposition of such claim. Without limiting the foregoing, (i) Holding, New Holding, ASCI and/or the Surviving Corporation shall pay any expenses of any indemnified Person under this Section 7.7 in advance of the final disposition of any action, proceeding or claim relating to any such act or omission to the fullest extent permitted under applicable law upon receipt from the applicable indemnified Person to whom advances are to be advanced of an undertaking to repay such advances required under applicable law and (ii) each of Holding, New Holding, ASCI and the Surviving Corporation shall cooperate in the defense of any such matter. In addition, from and after the Effective Time, directors or officers of Discount and its Subsidiaries who become directors or officers of Holding, New Holding or their respective Subsidiaries will be entitled to the same indemnity rights and protections as are afforded to other directors and officers of Holding and/or of New Holding. (b) For not less than six years after the Effective Time, New Holding, ASCI or the Surviving Corporation shall maintain in effect Discount's current directors' and officers' liability insurance covering acts or omissions occurring at and/or prior to the Effective Time with respect to those Persons who are currently covered by Discount's directors' and officers' liability insurance policy on terms with respect to such coverage and amount no less favorable in the aggregate to Discount's directors and officers currently covered by such insurance than those of such policy in effect on the date hereof; provided, that New Holding may substitute therefor policies of New Holding, ASCI or their Subsidiaries containing terms with respect to coverage and amount no less favorable to such directors or officers so long as no lapse in coverage occurs as a result of such substitution; provided, further, that in no event shall Holding or New Holding or the Surviving Corporation be required to pay annual premiums for such insurance in excess of 150% of the annual premiums currently paid by Discount for such insurance and if New Holding and/or the Surviving Corporation are unable to obtain the insurance required by this Section 7.7(b), they shall obtain as much comparable insurance as possible for an annual premium equal to such maximum amount. In the event that any claim or claims are asserted or made within such six-year period, such insurance shall be continued in respect of any such claim or claims until final disposition of any and all such claims. (c) In the event that either of the Surviving Corporation or New Holding or ASCI or any of their respective successors or assigns (i) consolidates with or merges with or into any other Person and is not the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each such case, proper provision will be made so that the successors and assigns of New Holding, ASCI or the Surviving Corporation, as applicable, will assume the obligations thereof set forth in this Section 7.7. (d) New Holding and ASCI shall cause the Surviving Corporation or any successor thereto to comply with its obligations under this Section 7.7. (e) The provisions of this Section 7.7 are (i) intended to be for the benefit of, and will be enforceable by, each indemnified party, his or her heirs and his or her representatives and (ii) in addition to, and not in substitution for, any other rights to indemnification or contribution that any such Person may have by contract or otherwise. Section 7.8 Control of Operations. Subject to the terms and provisions contained in Section 6.1 and Section 6.3 of this Agreement, nothing contained in this Agreement shall give Holding, directly or indirectly, the right to control or direct the operations of Discount or its Subsidiaries prior to the Effective Time. Subject to the terms and provisions contained in Section 6.1 and Section 6.3 of this Agreement, nothing contained in this Agreement shall give Discount, directly or indirectly, the right to control or direct the operations of Holding or New Holding or any of their Subsidiaries prior to the Effective Time. Prior to the Effective Time, A-46 each of Holding, New Holding and Discount shall exercise, consistent with the terms and conditions of this Agreement, complete control and supervision over its respective operations. Section 7.9 No Rights Triggered. Discount shall take all actions necessary, and Holding and New Holding shall cooperate in the taking of such actions, such that the entering into of this Agreement and the consummation of the transactions contemplated hereby do not and will not result in any Right becoming exercisable. Section 7.10 Securityholder Litigation. (a) Discount and its directors shall use reasonable commercial efforts to contest and resist any action, including any legislative, administrative or judicial action, initiated by or in the name of Discount or its securityholders and to have vacated, lifted, reversed or overturned any Government Order that restricts, prevents or prohibits the consummation of the Merger or any other transactions contemplated by this Agreement arising therefrom. Discount shall give Holding and New Holding the opportunity to participate in the defense or settlement of any securityholder litigation against Discount or its directors relating to any of the transactions contemplated by this Agreement. No settlement of any such securityholder litigation shall be agreed to without Holding's consent, which shall not be unreasonably withheld. (b) Holding, New Holding, ASCI and their respective directors shall use reasonable commercial efforts to contest and resist any action, including any legislative, administrative or judicial action, initiated by or in the name of Holding, New Holding, ASCI or its securityholders and to have vacated, lifted, reversed or overturned any Government Order that restricts, prevents or prohibits the consummation of the Merger or any other transactions contemplated by this Agreement arising therefrom. Holding, New Holding and ASCI shall give Discount the opportunity to participate in the defense or settlement of any securityholder litigation against Holding, New Holding, or ASCI or their respective directors relating to any of the transactions contemplated by this Agreement. No settlement of any such securityholder litigation shall be agreed to without Discount's consent, which shall not be unreasonably withheld. Section 7.11 Directors. At or before the Effective Time, Discount and each of its Subsidiaries shall have obtained the written resignation of each of their respective directors in their capacities as such (and not as employees), it being understood that any such resignation shall not constitute a voluntary termination of employment, an involuntary termination of employment or a termination for good reason by any such director for purposes of any change of control agreement, employment agreement, severance agreement or program or otherwise and shall not be considered as affecting any contract right then in existence between Discount and such director. Section 7.12 Delivery of Discount Financial Information. Discount will deliver to Holding and ASCI (a) (i) as promptly as is reasonably practicable, but in no event later than August 15, 2001, an audited consolidated balance sheet, statements of income and cash flows and stockholders' equity of Discount and its Subsidiaries as of and for the twelve month period ended May 29, 2001, complete with a report of Ernst & Young LLP, the auditors for Discount, that is not qualified in any respect (the "Discount Audited Financial Statements"), which Discount Audited Financial Statements will not be materially different in any respect from the Discount Unaudited Financial Statements included in the Discount Disclosure Schedule, (ii) as promptly as is reasonably practicable, but in no event later than October 12, 2001, the Form 10-Q (including the unaudited consolidated balance sheet, statements of income and cash flows of Discount and its Subsidiaries as of and for the three month period ended August 28, 2001 to be included therein (the "Discount Q1 Financial Statements"), and the exhibits thereto) required to be filed by Discount and its Subsidiaries with the SEC under the Exchange Act on or before such date (the "Discount Q1 Form 10-Q") and (iii) promptly upon request, any and all consents of Ernst & Young LLP, the auditors for Discount, that are required to be included in the Registration Statement and the Proxy Statement/Prospectus with respect to the Discount Q1 Financial Statements and the Discount Audited Financial Statements, and (b) subject to the provisions and limitations of A-47 Section 6.3, as promptly as is reasonably practicable for all periods after the date of this Agreement prior to Closing, (i) monthly financial reports, including profit and loss, a balance sheet and changes in cash position, and (ii) weekly sales and comparable sales reports (in each case broken down by Florida sales in the aggregate (and reflecting DIY and commercial sales separately) and comparable sales in the aggregate (and reflecting DIY and commercial sales separately) and non-Florida sales in the aggregate (and reflecting DIY and commercial sales separately) and comparable sales in the aggregate (and reflecting DIY sales and commercial sales separately)). Once delivered in accordance with this Section 7.12, (a) the Discount Audited Financial Statements and the "Discount Q1 Financial Statements" shall collectively be deemed to be "Discount Financial Statements" for the purposes of the representations and warranties contained in Section 4.4(b) of this Agreement (provided, that the Discount Q1 Financial Statements are subject to normal and recurring year-end adjustments, and contain all of the footnotes required by Regulation S-X), and (b) the Discount Q1 Form 10-Q shall be deemed to be included in the definition of "Discount SEC Reports" for the purposes of the representations and warranties contained in Section 4.4(a) and Section 4.4(b) of this Agreement. Discount will cause Ernst & Young LLP to deliver any "cold comfort" or similar letters regarding the Discount Financial Statements (including the Discount Q1 Financial Statements) and the Discount Audited Financial Statements as are customarily provided in similar transactions. Section 7.13 Delivery of Holding Financial Information. Holding and New Holding will deliver to Discount (a) promptly upon request, any and all consents of Arthur Andersen LLP, the auditors for Holding, that are required to be included in the Registration Statement and the Proxy Statement/Prospectus with respect to the Holding Financial Statements and/or the financial statements of New Holding and (b), subject to the provisions and limitations of Section 6.3 as promptly as is reasonably practicable for all periods after the date of this Agreement prior to Closing, (i) monthly consolidated financial reports, including consolidated profit and loss, a consolidated balance sheet and consolidated changes in cash position, and (ii) four week period sales reports and weekly sales reports for the partial four week period prior to the Closing (in each case exclusive of sales reports by individual location). Holding will cause Arthur Andersen LLP to deliver any "cold comfort" or similar letters regarding the Holding Financial Statements as are customarily provided in similar transactions. ARTICLE 8 CONDITIONS TO MERGER Section 8.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligations of each party to this Agreement to effect the Merger and otherwise consummate the transactions contemplated by this Agreement shall be subject to the satisfaction prior to the Closing Date of the following conditions, any of which may be waived, in writing, by agreement of all the parties hereto: (a) Stockholder Approval. The Agreement, the Merger and the Plan of Merger shall have received Stockholder Approval. (b) HSR Act. The waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or otherwise been terminated. (c) Approvals. Other than the filing provided for by Section 2.2, all authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any Governmental Entity, the failure of which to file, obtain or occur is reasonably likely to have a Material Adverse Effect, have been filed, been obtained or occurred. (d) No Injunctions. No Governmental Entity or federal, state or foreign court of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any Government Order or statute, rule, or regulation which is in effect and which has the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger. A-48 (e) Registration Statement. The Registration Statement shall have been declared effective, and no stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC or shall be continuing to be in effect, and no proceedings for that purpose shall have been initiated or threatened by the SEC. (f) Simultaneous Merger. Simultaneously with the Merger and at the Effective Time, Holding shall have merged with and into New Holding and said merger shall have become effective under the Delaware General Corporation Law and the Virginia Stock Corporation Act. (g) New Holding Common Stock. The shares of New Holding Common Stock issuable to Discount's stockholders and option holders in the Merger or thereafter shall have been authorized for listing on either the NYSE or Nasdaq National Markets, upon official notice of issuance. Section 8.2 Additional Conditions to Obligations of Holding, New Holding and Merger Sub. The obligations of Holding, New Holding and Merger Sub to effect the Merger and otherwise consummate the transactions contemplated by this Agreement are subject to the satisfaction of each of the following conditions, any of which may be waived in writing exclusively by Holding or New Holding: (a) Representations and Warranties. The representations and warranties of Discount set forth in this Agreement shall be true and correct as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, except (other than the representations and warranties contained in Sections 4.1, 4.2, 4.3(a), 4.3(b)(i), 4.17, 4.19 and 4.20 (with respect to matters of Florida law) which shall be true and correct in all material respects) where the failures to be true and correct individually or in the aggregate have not had and would not reasonably be expected to have a Material Adverse Effect upon Discount or the Surviving Corporation or a material adverse effect upon the ability of Discount to consummate the transactions contemplated hereby; and Holding and New Holding shall have received a certificate signed on behalf of Discount by the Chief Executive Officer and the Chief Financial Officer of Discount to such effect. (b) Performance of Obligations of Discount. Discount shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date; and Holding and New Holding shall have received a certificate signed on behalf of Discount by the Chief Executive Officer and the Chief Financial Officer of Discount to such effect. (c) Physical Inventory. Discount shall have performed a physical inventory observation of its salable inventory at its Lakeland, Florida distribution center within 45 days of the date hereof, which inventory shall have been taken in accordance with Discount's historical physical inventory procedures and practices and consistent with such past practice and performed in a manner reasonably satisfactory to Holding and with representatives of Holding being allowed to observe the taking of the inventory and to review the reconciliation of the inventory to the general ledger; and the results of such inventory shall reflect an aggregate inventory value at the Lakeland, Florida distribution center which does not, on a historic cost basis, result in a reduction greater than 5% of the portion of the inventory amount shown on the balance sheet included in Discount's Q1 Financial Statements as pertaining to that facility and as reflected in the general ledger as of such date, adjusting such portion of the inventory amount reflected in such balance sheet as follows: such amount will include adjustments for the appropriate and necessary normal and recurring reconciling items which are consistent with Discount's past practices for reconciling inventory, including without limitation, reconciling items to take into account activity with respect to such inventory between the actual date of the inventory observations and August 28, 2001, and which reconciling items are more particularly set forth on the Discount Disclosure Schedule. (d) Sale/Leaseback Agreement. Discount shall have entered into amendments to each of those certain Master Leases dated as of February 27, 2001between Discount, on the one hand, and Dapper Properties I, LLC, Dapper Properties II, LLC and Dapper Properties III, LLC, respectively, on the A-49 other hand, each of which amends such Master Lease in the manner set forth in Exhibit C-1 hereto, such amendment shall be satisfactory to Holding, and each of such Master Leases shall continue to qualify for off balance sheet treatment under U.S. GAAP. In connection with obtaining such amendments (including the consent identified in Exhibit C-1), Discount shall not offer or consent to the modification of any of such Master Leases or any documents delivered in connection with the closing of the Master Leases (other than the modifications specifically set forth in Exhibit C-1 and corresponding modifications in the documents delivered in connection with the closing of the Master Leases), except as expressly approved by Holding, and Discount shall keep Holding apprised of the status of obtaining such amendments (including the consent identified in Exhibit C-1). (e) Legal Opinion. Holding shall have received a legal opinion from Discount's legal counsel, Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis, Professional Association, in substantially the form of Exhibit C. (f) Irrevocable Proxy and Voting and Stock Option Agreements. The Principal Stockholder shall have executed and delivered the Irrevocable Proxy and Voting Agreement, in the form of Exhibit D, and the Stock Option Agreement, in the form of Exhibit E. (g) No Material Adverse Change. There shall not have occurred since the date of this Agreement a material adverse change in the financial condition, results of operations, properties, assets, business or prospects of Discount and its Subsidiaries, taken as whole. (h) Commitments. The financial institutions who are parties to the Commitments shall under the terms of the Commitments be obligated to fund under the Commitments because all conditions to such funding have been, or at the closing thereof will be, in the opinion of the lenders who are parties to such Commitments, acting in their sole discretion, satisfied or waived. (i) Certificates. Discount shall, prior to the Closing Date, provide to Holding a certificate from the Secretary of State of the State of Florida as to Discount's active status, and such other certificates and closing documents as are reasonably requested by Holding and customary for transactions of the type contemplated hereby. (j) Other Agreements. Discount shall have executed and delivered each of the other agreements and instruments to be delivered by it pursuant to this Agreement. Section 8.3 Additional Conditions to Obligations of Discount. The obligation of Discount to effect the Merger and otherwise consummate the transactions contemplated by this Agreement is subject to the satisfaction of each of the following conditions, any of which may be waived, in writing, exclusively by Discount: (a) Representations and Warranties. The representations and warranties of Holding, New Holding, ASCI and Merger Sub set forth in this Agreement shall be true and correct as of the date of this Agreement and (except to the extent such representations speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, except (other than the representations and warranties contained in Sections 5.1, 5.2, 5.3(a), 5.3(b)(i) and 5.15, which shall be true and correct in all material respects) where the failures to be true and correct, individually or in the aggregate, have not had and would not reasonably be expected to have a Material Adverse Effect or a material adverse effect upon the ability of Holding, New Holding, Merger Sub and ASCI to consummate the transactions contemplated hereby; and Discount shall have received a certificate signed on behalf of Holding and New Holding by the chief executive officer and chief financial officer of Holding and the President of New Holding to such effect. (b) Performance of Obligations of Holding, New Holding, Merger Sub and ASCI. Holding, New Holding, Merger Sub and ASCI shall have performed in all material respects all obligations required to be performed by them under this Agreement at or prior to the Closing Date, and Discount shall have received a certificate signed on behalf of Holding and New Holding by the chief executive officer and chief financial officer of Holding and the President of New Holding to such effect. A-50 (c) Election of Peter Fontaine. Effective upon the Closing Date, Peter J. Fontaine shall be elected as a member of the Board of Directors of New Holding, and the Amended and Restated Stockholders Agreement dated November 2, 1998 by and among Holding and certain of its stockholders (the "Stockholders Agreement") shall have been amended (i) to provide the Principal Stockholder with registration rights equivalent to those held by the Existing Stockholder and described in the Terms of the Registration Rights of the Common Stock attached as Exhibit A to the Stockholders Agreement; provided, that (i) the Principal Stockholder shall have no ability to make a written request for a Demand Registration, and (ii) with respect to the first time that the Existing Stockholder shall make a written request for a Demand Registration, the Principal Stockholder shall have registration rights equivalent to those held by the Ripplewood Stockholder (other than the ability to make a written request for a Demand Registration). and (ii) to require that Peter J. Fontaine shall continue to be elected to a seat on the Board of Directors of New Holding until the earlier of (A) 2004, (B) his submission of a voluntary resignation from such board, (C) his removal from such director position for cause, (D) Peter J. Fontaine no longer having beneficial interest in at least 50% of the shares of New Holding Common Stock beneficially acquired by Peter J. Fontaine pursuant to the Merger or (E) the expiration of the voting rights of the other parties to the Stockholders Agreement. If the voting rights of the other parties to the Stockholders Agreement expire after Peter J. Fontaine has been so elected, New Holding will thereafter continue to nominate Peter J. Fontaine for a seat on the Board of Directors of New Holding until the earlier of (w) 2004, (x) his submission of a voluntary resignation from such board, (y) his removal from such director position for cause, or (z) Peter J. Fontaine no longer having beneficial interest in at least 50% of the shares of New Holding common stock beneficially acquired by Peter J. Fontaine pursuant to the Merger. (d) No Material Adverse Change. There shall not have occurred since the date of this Agreement a material adverse change in the financial condition, results of operations, properties, assets, business or prospects of Holding and ASCI and their respective Subsidiaries, taken as a whole. (e) Exchange Agent. An officer of the Exchange Agent shall have certified in writing to Discount that the deposit required to be made by Holding and ASCI, into the Exchange Fund pursuant to Section 3.3 hereof has been made or is being made immediately following the Closing and the associated contribution of Discount Common Stock to ASCI. (f) Legal Opinion. Discount shall have received from Riordan & McKinzie, counsel to Holding, New Holding, Merger Sub and ASCI, an opinion dated the date of the Effective Time in substantially the form of Exhibit F. (g) Tax Opinion. Discount shall have received from Trenam, Kemker, Scharf, Barkin, Frye & O'Neill, P.A., counsel to Discount, an opinion to the effect that the exchange of new Holding Common Stock and cash for Discount Common Stock in the Merger, assuming the contemporaneous merger of Holding into New Holding, should be treated as part of an exchange subject to Section 351 of the Code. (h) Other Agreements. Holding and ASCI shall have executed and delivered each of the other agreements and instruments to be delivered by them pursuant to this Agreement. ARTICLE 9 TERMINATION AND AMENDMENT Section 9.1 Termination. This Agreement may be terminated at any time prior to the Effective Time (with respect to Sections 9.1(b) through 9.1(g)), by written notice by the terminating party to the other party), whether before or after approval of the matters presented in connection with the Merger by the stockholders of Discount: (a) by mutual written consent of Holding, New Holding and Discount; or A-51 (b) by either Holding or Discount if the Merger shall not have been consummated by the Outside Date (provided, that the right to terminate this Agreement under this Section 9.1(b) shall not be available to any party whose breach of or failure to fulfill any of its obligations under this Agreement has been the primary cause of, or resulted in, the failure of the Merger to occur on or before such date); or (c) by either Holding or Discount, if a court of competent jurisdiction or other Governmental Entity shall have issued a non-appealable final Government Order or taken any other non-appealable final action, in each case having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger or if by such party pursuant to its right to terminate as provided for in Section 7.4; or (d) by either Holding or Discount, if at the Discount Meeting (including any adjournment or postponement), the requisite Stockholder Approval shall not have been obtained (provided, that the right to terminate this Agreement under this Section 9.1(d) shall not be available to any party seeking termination who at the time is in material breach of or has materially failed to fulfill any of its material obligations under this Agreement); or (e) by Holding, if (i) the Board of Directors of Discount shall have withdrawn or modified or qualified its recommendation or qualified its approval of this Agreement, the Plan of Merger or the Merger in a manner adverse to the interests of Holding or ASCI or shall have adopted a resolution to such effect; (ii) the Board of Directors of Discount shall have failed to include in the Proxy Statement/Prospectus its recommendation, without adverse modification or qualification, that the stockholders of Discount approve this Agreement, the Plan of Merger and the Merger; (iii) the Board of Directors of Discount shall have approved or recommended to the stockholders of Discount an Acquisition Proposal or a Superior Proposal or adopted a resolution to such effect; or (iv) a tender offer or exchange offer for 50% or more of the outstanding shares of Discount Common Stock is commenced (other than by Holding or an Affiliate of Holding) and the Board of Directors of Discount recommends that the stockholders of Discount tender their shares in such tender or exchange; or (f) by either Holding or Discount, if there has been a material breach of any representation, warranty, covenant or agreement set forth in this Agreement on the part of Discount (in the case of termination by Holding) or on the part of Holding, New Holding, Merger Sub or ASCI (in the case of termination by Discount), which breach (i) causes the conditions set forth in Section 8.2(a) or (b) (in the case of termination by Holding) or 8.3(a) or (b) (in the case of termination by Discount) not to be satisfied, and (ii) shall not have been cured (if capable of being cured) within 30 days following receipt by Discount from Holding of written notice of Discount's breach or by Holding from Discount of written notice of Holding's breach or New Holding's breach or Merger Sub's breach or ASCI's breach, as the case may be; (g) by Discount if, at any time prior to the Discount stockholder vote on this Agreement, the Plan of Merger and the Merger, and after it has received a Superior Proposal in compliance with Section 7.1 and has otherwise complied with its obligations under Section 7.1, the Board of Directors of Discount determines in good faith, after consultation with outside counsel, that its fiduciary obligations require Discount to terminate this Agreement, in order to permit Discount to enter into an agreement with respect to such Superior Proposal pursuant to Section 7.1; provided, that such termination shall not be effective until the payments required by Section 9.3 are made; or (h) by Holding, if either of the conditions to closing in Section 8.2(c) or Section 8.2(d) is not satisfied; provided, however, Holding's right to exercise this particular right of termination relative to the condition to closing in Section 8.2(c) shall expire fifteen (15) Business Days after Discount delivers the results of the physical inventory to Holding. Section 9.2 Effect of Termination. In the event of a valid termination of this Agreement as provided in Section 9.1, this Agreement will immediately become void and there will be no liability or obligation on the part of Holding, New Holding, Merger Sub, Discount, ASCI or their respective officers, directors, stockholders or Affiliates, except as set forth in Sections 6.4 and 9.3; provided that (i) nothing contained herein shall relieve A-52 any party from liability for any willful breach of its representations, warranties, covenants or agreements contained in this Agreement, and (ii) the provisions of Sections 6.4 and 9.3 of this Agreement and the Confidentiality Agreements shall remain in full force and effect and survive any termination of this Agreement. Section 9.3 Termination Fee; Expenses. (a) If Holding shall terminate this Agreement pursuant to Section 9.1(e), or Discount shall terminate this Agreement pursuant to Section 9.1(g), then, in each case, Discount shall pay to ASCI, on or prior to the date of such termination, a fee, in cash by wire transfer in immediately available funds to an account designated by ASCI (the "ASCI Account") in the amount of $9,000,000 (the "Termination Fee"), and shall, within five (5) Business Days of receipt from Holding or ASCI of reasonably satisfactory documentation of Holding and ASCI's expenses and out-of- pocket costs actually incurred by Holding and/or ASCI in connection with this Agreement and the transactions contemplated hereby, including, but not limited to, costs and expenses of accountants, attorneys, sources and arrangers of financing, and financial advisors (collectively, the "Expenses"), pay to ASCI, in cash by wire transfer in immediately available funds to the ASCI Account up to $7,000,000 (the "Expense Cap") of the Expenses. (b) If the requisite Stockholder Approval is not obtained at the Discount Meeting and Holding, New Holding, Merger Sub and ASCI have not materially breached or failed to fulfill in any material respect any of their respective material obligations under this Agreement, Discount shall pay to ASCI (in cash by wire transfer in immediately available funds to the ASCI Account), following the Discount Meeting and within five (5) Business Days of receipt from Holding or ASCI of reasonably satisfactory documentation thereof, up to $2,500,000 of the Expenses plus fifty percent (50%) of any Expenses over $4,000,000 up to a maximum of an additional $1,000,000 being paid by Discount. If prior to the Discount Meeting (including an adjournment or postponement) there has been a Superior Proposal and, within twelve (12) months of the Discount Meeting, Discount enters into an agreement for the Superior Proposal, then concurrently with entering into the agreement for the Superior Proposal, Discount shall pay to ASCI the Termination Fee and any Expenses to the extent not previously paid by Discount (including Expenses paid by Holding and/or ASCI) up to the Expense Cap when aggregated with any amount that was previously paid by Discount to ASCI following the Discount Meeting. If prior to the Discount Meeting (including an adjournment or postponement) there has been a Superior Proposal and, within twelve (12) months of the Discount Meeting, Discount does not enter into an agreement for the Superior Proposal but within such 12 month period consummates another Acquisition Transaction or enters into an agreement for another Acquisition Transaction, which is subsequently consummated, then concurrently with the closing of such Acquisition Transaction, Discount shall pay to ASCI the Termination Fee and any Expenses to the extent not previously paid by Discount (including Expenses paid by Holding and/or ASCI) up to the Expense Cap when aggregated with any amount that was previously paid by Discount to ASCI following the Discount Meeting. If prior to the Discount Meeting (including an adjournment or postponement) there has been an Acquisition Proposal which is not a Superior Proposal and, within twelve (12) months of the Discount Meeting, Discount consummates an Acquisition Transaction or enters into an agreement for an Acquisition Transaction, which is subsequently consummated, then concurrently with the closing of the Acquisition Transaction, Discount shall pay to ASCI, in cash by wire transfer in immediately available funds to the ASCI Account, the Termination Fee and any Expenses to the extent not previously paid by Discount (including those Expenses paid by Holding and/or ASCI) up to the Expense Cap when aggregated with any amount that was previously paid by Discount to ASCI following the Discount Meeting. (c) If (i) there has been an Acquisition Proposal prior to the Outside Date (as the same may be extended), (ii) the Discount Meeting has not been held, (iii) Holding would be permitted to terminate this Agreement pursuant to Section 9.1(b), (iv) either Holding or Discount terminates this Agreement pursuant to Section 9.1(b), and (v) within twelve (12) months of the Outside Date (as the same may A-53 be extended), Discount consummates an Acquisition Transaction with the person who made the Acquisition Proposal or enters into an Agreement for an Acquisition Transaction with the person who made the Acquisition Proposal, which is subsequently consummated, then concurrently with the closing of the Acquisition Transaction, Discount shall pay to ASCI the Termination Fee and, following such closing and within five (5) Business Days of receipt from Holding or ASCI of reasonably satisfactory documentation thereof, the Expenses up to the Expense Cap, in each case in cash by wire transfer in immediately available funds to the ASCI Account. (d) If Holding terminates this Agreement pursuant to Section 9.1(f), then Discount shall within five (5) Business Days of receipt from Holding or ASCI of reasonably satisfactory documentation thereof, pay to ASCI the Expenses up to the Expense Cap in cash by wire transfer in immediately available funds to the ASCI Account. (e) If Holding terminates this Agreement pursuant to Section 9.1(h) as a result of the failure of the closing condition set forth in Section 8.2(c) or as a result of the failure of the closing condition set forth in Section 8.2(d), Discount shall pay to ASCI, within five (5) Business Days of receipt from Holding or ASCI of reasonably satisfactory documentation thereof, in cash by wire transfer in immediately available funds to the ASCI Account, in the case of termination as a result of the failure of the closing condition set forth in Section 8.2(c) up to $1,000,000 of the Expenses and in the case of a termination as a result of the failure of the closing condition set forth in Section 8.2(d), up to $2,500,000, plus fifty percent (50%) of any Expenses over $4,000,000 up to an additional $1,000,000 being paid by Discount. (f) For purposes of this Agreement, an Acquisition Transaction shall mean the occurrence of any of the following events: (i) the acquisition of Discount by merger, tender offer, exchange offer, consolidation or otherwise by any person or entity other than Holding, New Holding or ASCI or any Affiliate thereof; (ii) the acquisition by any person or entity other than Holding, New Holding or ASCI or any Affiliate thereof of all or a substantial portion of the assets of Discount and its Subsidiaries taken as a whole; (iii) the acquisition by any person or entity other than Holding, New Holding or ASCI or any Affiliate thereof of 50% of more of the outstanding shares of Common Stock of Discount; (iv) the adoption by Discount of a plan of liquidation or the declaration or payment of an extraordinary dividend; or (v) the repurchase by Discount or any Subsidiary of Discount of fifty percent (50%) or more of the outstanding shares of Common Stock of Discount. (g) Notwithstanding any language in this Section 9.3 which might be considered to be to the contrary, ASCI shall never be entitled to receive more than one Termination Fee under this Agreement and shall never be entitled to be reimbursed for any item of Expense more than one time (it being understood that reimbursement of the aggregate Expenses may, where applicable and as set forth in this Section 9.3, wind up being achieved by way of two separate payments). Section 9.4 Amendment. Subject to Section 3.2(b), this Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Merger by the stockholders of Discount, but, after any such approval, no amendment shall be made which by law requires further approval by such stockholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Section 9.5 Extension; Waiver. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein except those conditions which are conditions that are imposed by and required to be satisfied under applicable law. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. A-54 ARTICLE 10 MISCELLANEOUS Section 10.1 Survival. The representations, warranties and covenants set forth herein or in any instrument, agreement, certificate or other document delivered pursuant to this Agreement shall not survive the Closing or any termination of this Agreement, except that (i) the Confidentiality Agreements shall survive the execution and any termination of this Agreement, and (ii) the provisions of Sections 2.8, 3.1, 3.3, 7.6 and 7.7 shall survive the Closing, (iii) Section 9.2 and Section 9.3 shall survive any termination of this Agreement, and (iv) the provisions of Article 10 shall survive the Closing and any termination of this Agreement. Section 10.2 Notices. All notices and other communications required or permitted hereunder shall be in writing (including any facsimile transmission or similar writing), and shall be sent by telecopy, hand delivery or reputable overnight courier. The telecopier numbers and addresses of the parties set forth below shall be used for the delivery of notices unless and until a party changes its telecopier number or address for such purposes by notice to the other parties. Each such notice or other communication shall be effective (i) if given by telecopy, when transmission of the telecopy is confirmed by the sender's telecopier, (ii) if given by reputable overnight courier, one Business Day after being delivered to the courier or (iii) if given by any other means, when actually received. (i) if to Holding, New Holding, Merger Sub or ASCI, to Advance Stores Company, Incorporated 5673 Airport Road Roanoke, Virginia 24012 Attention: Lawrence Castellani, Chief Executive Officer Telecopier: (540) 561-1448 with a copy to: Riordan & McKinzie 300 S. Grand Avenue, 29th Floor Los Angeles, CA 90071 Attn: Richard J. Welch, Esq. Telecopier: (213) 229-8550 (ii) if to Discount, to: Discount Auto Parts, Inc. 4900 Frontage Road South Lakeland, Florida 33815 Attn: Peter J. Fontaine C. Michael Moore Telecopier: (863) 284-2063 with a copy to: Trenam, Kemker, Scharf, Barkin, Frye, O'Neill, & Mullis, Professional Association 2700 Bank of America Plaza 101 E. Kennedy Boulevard Tampa, FL 33601 Attn: Gary I. Teblum Telecopier: (813) 229-6553 A-55 Section 10.3 Interpretation; Headings; Terms. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Defined terms will have the meanings specified, applicable to both singular and plural forms, for all purposes of this Agreement. All pronouns (and any variation) will be deemed to refer to the masculine, feminine or neuter, as the identity of the Person may require. The singular or plural includes the other, as the context requires or permits. The word include (and any variation) is used in an illustrative sense rather than a limiting sense. Unless otherwise specified in a specific instance, the word day means a calendar day. Section 10.4 Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. The signatures of the parties on this Agreement may be delivered by facsimile and any such facsimile signature shall be deemed an original. Section 10.5 Waivers. No waiver by any party of any default, misrepresentation or breach of warranty or covenant hereunder will be deemed to extend to any prior or subsequent default, misrepresentation or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence, and no waiver will be effective unless set forth in writing and signed by the party against whom such waiver is asserted. Section 10.6 Entire Agreement; No Third Party Beneficiaries. Except as specifically otherwise provided in this Agreement, this Agreement (including the documents and the instruments referred to herein or executed in connection herewith) (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, except for the Confidentiality Agreements, which shall continue in full force and effect, and shall survive any termination of this Agreement or the Closing, (b) except as provided in Sections 3.3, 7.6(b) (with respect to the Designated Arrangements on the Discount Disclosure Schedule) and 7.7, is not intended to confer upon any Person other than the parties hereto any rights or remedies hereunder. Each party hereto agrees that, except for the representations and warranties contained in this Agreement, neither Discount nor Holding, New Holding, Merger Sub or ASCI makes any other representations or warranties, and each hereby disclaims any other representations and warranties made by itself or any of its officers, directors, employees, agents, financial and legal advisors or other representatives, with respect to the execution and delivery of this Agreement or the transactions contemplated hereby, notwithstanding the delivery or disclosure to the other or the other's representatives of any documentation or other information with respect to any one or more of the foregoing. Section 10.7 Governing Law. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO OR GIVING EFFECT TO ANY APPLICABLE CHOICE OR CONFLICTS OF LAW RULE OR PROVISION THAT WOULD CAUSE THE APPLICATION OF THE DOMESTIC SUBSTANTIVE LAWS OF ANY OTHER JURISDICTION. Section 10.8 Jurisdiction; Enforcement. (a) Each of the parties hereto (i) consents to submit itself to the personal jurisdiction of any Federal court located in the State of Delaware or the State of Florida or the State of Virginia or any Delaware state court or any Florida state court or any Virginia state court in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement, (ii) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, and (iii) agrees that it will not bring any action relating to this Agreement or any of the transactions contemplated by this Agreement in any court other than a Federal court sitting in the State of Delaware or the State of Florida or the State of Virginia or a Delaware state court or a Florida state court or any Virginia state court. A-56 (b) The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of the United States located in the State of Florida, in the State of Virginia or in the State of Delaware or in any Florida state court, Virginia state court or Delaware state court this being in addition to any other remedy to which they are entitled at law or in equity. Section 10.9 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. This Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Section 10.10 Severability. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other Persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision. Section 10.11 Expenses. Except as otherwise contemplated by this Agreement, whether or not the transactions contemplated hereby are consummated, each party shall bear its own costs and expenses (including, without limitation, legal fees and expenses) incurred either before or after the date of this Agreement in connection with this Agreement or the transactions contemplated hereby. Section 10.12 No Rule of Construction. The parties agree that, because all parties participated in negotiating and drafting this Agreement, no rule of construction shall apply to this Agreement which construes ambiguous language in favor of or against any party by reason of that party's role in drafting this Agreement. Section 10.13 Incorporation of Exhibits and Schedules. The Exhibits and Disclosure Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. Section 10.14 Waiver of Jury Trial. Each party hereto waives its right to a jury trial with respect to any action or claim arising out of any dispute in connection with this Agreement, any agreement, contract or other document or instrument executed in connection herewith, or any of the transactions contemplated hereby. A-57 IN WITNESS WHEREOF, Holding, New Holding, Merger Sub, ASCI and Discount have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. HOLDING: Advance Holding Corporation /s/ Lawrence P. Castellani By: _________________________________ Name: Lawrence P. Castellani Title: Chief Executive Officer NEW HOLDING: Advance Auto Parts, Inc. /s/ Lawrence P. Castellani By: _________________________________ Name: Lawrence P. Castellani Title: Chief Executive Officer MERGER SUB: AAP Acquisition Corporation /s/ Lawrence P. Castellani By: _________________________________ Name: Lawrence P. Castellani Title: Chief Executive Officer ASCI: Advance Stores Company, Incorporated /s/ Lawrence P. Castellani By: _________________________________ Name: Lawrence P. Castellani Title: Chief Executive Officer DISCOUNT: Discount Auto Parts, Inc. /s/ Peter J. Fontaine By: _________________________________ Peter J. Fontaine, Chief Executive Officer A-58 ANNEX B [LETTERHEAD OF SALOMON SMITH BARNEY INC.] August 7, 2001 The Board of Directors Discount Auto Parts, Inc. 4900 Frontage Road South Lakeland, Florida 33815 Members of the Board: You have requested our opinion as to the fairness, from a financial point of view, to the holders of the common stock of Discount Auto Parts, Inc. ("Discount Auto") of the Merger Consideration (defined below) provided for in the Agreement and Plan of Merger, dated as of August 7, 2001 (the "Merger Agreement"), by and among Advance Holding Corporation ("Advance Holding"), Advance Auto Parts, Inc. ("New Advance Holding"), AAP Acquisition Corporation, a wholly owned subsidiary of New Advance Holding ("Merger Sub"), Advance Stores Company, Incorporated, a wholly owned subsidiary of Advance Holding ("Advance Stores" and, together with Advance Holding, "Advance"), and Discount Auto. As more fully described in the Merger Agreement, (i) Merger Sub will be merged with and into Discount Auto (the "Merger") and (ii) each outstanding share of the common stock, par value $0.01 per share, of Discount Auto ("Discount Auto Common Stock") will be converted into the right to receive (x) $7.50 in cash (the "Cash Consideration") and (y) 0.2577 of a share of the common stock, par value $0.0001 per share, of New Advance Holding ("New Advance Holding Common Stock" and, the number of shares of New Advance Holding Common Stock into which each outstanding share of Discount Auto Common Stock will be so converted, together with the Cash Consideration, the "Merger Consideration"). The Merger Agreement also provides that (i) concurrently with the Merger, Advance Holding will merge with and into New Advance Holding (the "Holding Reincorporation") and (ii) immediately following the Merger and the simultaneous Holding Reincorporation, all of the outstanding capital stock of the surviving company in the Merger will be contributed to Advance Stores (such contribution, together with the Merger and the Holding Reincorporation, the "Transaction" and, such surviving company and Advance together, the "Combined Company"). In arriving at our opinion, we reviewed the Merger Agreement and certain related documents referred to in the Merger Agreement, and held discussions with certain senior officers, directors and other representatives and advisors of Discount Auto and certain senior officers and other representatives and advisors of Advance and its affiliates concerning the businesses, operations and prospects of Discount Auto, Advance and the Combined Company. We examined certain publicly available business and financial information relating to Discount Auto and Advance and certain available business and financial information relating to the Combined Company as well as certain financial forecasts and other information and data for Discount Auto, Advance and the Combined Company which were provided to or otherwise discussed with us by the managements of Discount Auto and Advance and its affiliates, including certain information relating to the potential strategic implications and operational benefits anticipated by the managements of Discount Auto and Advance and its affiliates to result from the Transaction. We reviewed the financial terms of the Transaction as set forth in the Merger Agreement in relation to, among other things: current and historical market prices and trading volumes of Discount Auto Common Stock; the financial condition and historical and projected operating data of Discount Auto, Advance and the Combined Company; and the capitalization of Discount Auto, Advance and the Combined Company. We considered, to the extent publicly available, the financial terms of other transactions B-1 The Board of Directiors Discount Auto Parts, Inc. August 7, 2001 Page 2 recently effected which we considered relevant in evaluating the Transaction and analyzed certain financial, stock market and other publicly available information relating to the businesses of other companies whose operations we considered relevant in evaluating those of Discount Auto. In addition to the foregoing, we conducted such other analyses and examinations and considered such other financial, economic and market criteria as we deemed appropriate in arriving at our opinion. In rendering our opinion, we have assumed and relied, without independent verification, upon the accuracy and completeness of all financial and other information and data publicly available or furnished to or otherwise reviewed by or discussed with us. With respect to financial forecasts and other information and data provided to or otherwise reviewed by or discussed with us, we have been advised by the managements of Discount Auto and Advance and its affiliates that such forecasts and other information and data were reasonably prepared on bases reflecting the best currently available estimates and judgments of the managements of Discount Auto and Advance and its affiliates as to the future financial performance of Discount Auto, Advance and the Combined Company and the potential strategic implications and operational benefits (including the amount, timing and achievability thereof) anticipated to result from the Transaction. We have assumed, with your consent, that the Transaction will be consummated in accordance with its terms, without waiver, modification or amendment of any material term, condition or agreement. We are not expressing any opinion as to what the value of New Advance Holding Common Stock actually will be when issued in the Transaction or the prices at which New Advance Holding Common Stock will trade or otherwise be transferable at any time. We have not made or been provided with an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of Discount Auto, Advance or the Combined Company nor have we made any physical inspection of the properties or assets of Discount Auto, Advance or the Combined Company. In connection with our engagement, we were requested to solicit, and we held discussions with, certain third parties regarding the possible acquisition of all or a part of Discount Auto. We express no view as to, and our opinion does not address, the relative merits of the Transaction as compared to any alternative business strategies that might exist for Discount Auto or the effect of any other transaction in which Discount Auto might engage. Our opinion is necessarily based upon information available to us, and financial, stock market and other conditions and circumstances existing and disclosed to us, as of the date hereof. Salomon Smith Barney Inc. has acted as financial advisor to Discount Auto in connection with the proposed Transaction and will receive a fee for such services, a significant portion of which is contingent upon the consummation of the Transaction. We also will receive a fee upon delivery of this opinion. We and our affiliates in the past have provided services to Discount Auto and affiliates of Advance unrelated to the proposed Transaction, for which services we and our affiliates have received compensation. In the ordinary course of our business, we and our affiliates may actively trade or hold the securities of Discount Auto and Advance and its affiliates for our own account or for the account of our customers and, accordingly, may at any time hold a long or short position in such securities. In addition, we and our affiliates (including Citigroup Inc. and its affiliates) may maintain relationships with Discount Auto, Advance and their respective affiliates. Our advisory services and the opinion expressed herein are provided for the information of the Board of Directors of Discount Auto in its evaluation of the proposed Transaction, and our opinion is not intended to be and does not constitute a recommendation to any stockholder as to how such stockholder should vote on the proposed Transaction or as to any other matters relating to the Transaction. Based upon and subject to the foregoing, our experience as investment bankers, our work as described above and other factors we deemed relevant, we are of the opinion that, as of the date hereof, the Merger Consideration is fair, from a financial point of view, to the holders of Discount Auto Common Stock. Very truly yours, /s/ Salomon Smith Barney Inc. SALOMON SMITH BARNEY INC. B-2 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers Advance Auto Parts, Inc.'s certificate of incorporation and bylaws provide for indemnification of the officers and directors of Advance Auto Parts to the fullest extent permitted by law. Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL") provides that a Delaware corporation has the power to eliminate or limit the personal liability of a director for violations of the director's fiduciary duty, except (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL (providing for liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions), or (iv) for any transaction from which a director derived an improper personal benefit. Section 145 of the DGCL provides that a corporation may indemnify any persons, including officers and directors, who are, or are threatened to be made, parties to any threatened, pending or completed legal action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation or enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such a manner he reasonably believed to be in or not opposed to the corporation's best interests and, for criminal proceedings, had no reasonable cause to believe that his conduct was unlawful. A Delaware corporation may indemnify officers and directors in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses which such officer or director actually and reasonably incurred. Item 21. Exhibits and Financial Statement Schedules (a) The following exhibits are filed herewith:
Exhibit Number Description ------- ----------- 2.1(1) Merger Agreement dated as of March 4, 1998 among AHC Corporation and Advance Holding with FS Equity Partners III, L.P., FS Equity Partners IV, L.P. ("FSEP IV"), and FS Equity Partners International, L.P. 2.2(3) Agreement and Plan of Merger dated as of August 16, 1998 among Sears, Roebuck and Co., Western Auto Holding Co., Advance Holding, Advance Stores, Western Auto Supply Company, Advance Acquisition Corporation and the stockholders of Advance listed on the signature pages thereto. 2.3(7) Agreement and Plan of Merger dated as of August 7, 2001 among Advance Holding, Advance Auto Parts, Inc., AAP Acquisition Corporation, Advance Stores, Incorporated and Discount Auto Parts, Inc. (schedules and exhibits omitted).* 2.4(7) Agreement and Plan of Merger dated as of August 7, 2001 among Advance Holding and Advance. 2.5 Form of Articles of Merger of AAP Acquisition Corporation into Discount Auto Parts, Inc. and related Plan of Merger. 3.1(8) Form of Restated Certificate of Incorporation of Advance Auto Parts, Inc. 3.2(8) Bylaws of Advance Auto Parts, Inc.
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Exhibit Number Description ------- ----------- 4.1(1) Indenture dated as of April 15, 1998 between Advance Holding and United States Trust Company of New York, as Trustee, with respect to the 12.875% Senior Discount Debentures due 2009 (including the form of 12.875% Senior Discount Debenture due 2009). 4.2(4) Amended and Restated Stockholders' Agreement dated as of November 2, 1998 among FS Equity Partners IV, L.P., Ripplewood Partners, L.P., Ripplewood Advance Auto Parts Employee Fund I L.L.C., Nicholas F. Taubman, Arthur Taubman Trust dated July 13, 1964, WA Holding Co. and Advance Holding (including the Terms of the Registration Rights of the Common Stock). 4.3(2) Indenture dated as of April 15, 1998 among Advance Stores, LARALEV, INC., as guarantor, and United States Trust Company of New York, as trustee, with respect to the 10.25% Senior Subordinated Notes due 2008 (including the form of 10.25% Senior Subordinated Note due 2008). 4.4(7) Supplemental Indenture dated as of November 2, 1998 between Western Auto and United States Trust Company of New York, as trustee. 4.5(7) Irrevocable Proxy and Voting Agreement dated as of August 7, 2001 among Advance Holding, Advance Stores, Fontaine Industries Limited Partnership ("Fontaine Industries, L.P."), the Peter J. Fontaine Revocable Trust (the "Fontaine Trust") and Peter J. Fontaine ("Fontaine"). 4.6(7) Voting Agreement dated as of August 7, 2001 by and among Advance Holding and the persons and entities listed on Exhibit A thereto. 4.7 Form of Amendment No. 1 to Amended and Restated Stockholders' Agreement among Advance Holding, Advance Auto Parts Inc., FS Equity Partners IV, L.P., Ripplewood Partners, L.P., Ripplewood Advance Auto Parts Employee Fund I L.L.C., Nicholas F. Taubman, Arthur Taubman Trust dated July 13, 1964, WA Holding Co., Peter J. Fontaine, Fontaine Industries Limited Partnership and the Peter J. Fontaine Revocable Trust. 4.8 Indenture dated as of October 31, 2001 among Advance Stores, Advance Trucking Corporation, LARALEV, INC., Western Auto Supply Company and The Bank of New York. 4.9 Exchange and Registration Rights Agreement dated as of October 31, 2001 among Advance Stores, Advance Trucking Corporation, LARALEV, INC., Western Auto Supply Company, J.P. Morgan Securities Inc., Credit Suisse First Boston and Lehman Brothers Inc. 4.10 Registration Rights Agreement dated as of October 31, 2001 among Advance Stores, Advance Trucking Corporation, LARALEV, INC., Western Auto Supply Company, Mozart Investments Inc. and Mozart One L.L.C. 5.1(9) Opinion of Riordan & McKinzie as to the legality of securities registered hereunder. 8.1 Opinion of Trenam Kemker, Scharf, Barkin, Frye, O'Neill & Mullis, P.A. as to tax matters. 10.1(4) Amended and Restated Credit Agreement dated November 2, 1998 among Advance Holding, Advance Stores, the lenders party thereto, The Chase Manhattan Bank ("Chase"), Chase Securities Inc., DLJ Capital Funding, Inc. and First Union National Bank. 10.2(4) Pledge Agreement dated as of April 15, 1998, as amended and restated as of November 2, 1998, among Advance Holding, Advance Stores, the Subsidiary Pledgors listed therein and Chase, as collateral agent. 10.3(4) Guarantee Agreement dated as of April 15, 1998, as amended and restated as of November 2, 1998, among Advance Holding, the Subsidiary Guarantors listed therein and Chase, as collateral agent. 10.4(4) Indemnity, Subrogation and Contribution Agreement dated as of April 15, 1998, as amended and restated as of November 2, 1998, among Advance Stores, Holding, the Guarantors listed therein and Chase, as collateral agent.
II-2
Exhibit Number Description ------- ----------- 10.5(4) Security Agreement dated as of April 15, 1998, as amended and restated as of November 2, 1998, among Advance Stores, Advance Holding, the Guarantors listed therein and Chase, as collateral agent. 10.6(2) Lease Agreement dated as of March 16, 1995 between Ki, L.C. and Advance Stores for Advance Stores' headquarters located at 5673 Airport Road, Roanoke, Virginia, as amended. 10.7(2) Lease Agreement dated as of January 1, 1997 between Nicholas F. Taubman and Advance Stores for the distribution center located at 1835 Blue Hills Drive, N.E., Roanoke, Virginia, as amended. 10.8(2) Trust Indenture dated as of December 1, 1997 among McDuffie County Development Authority, First Union National Bank, as trustee, and Branch Banking and Trust Company, as credit facility trustee, relating to the $10,000,000 Taxable Industrial Development Revenue Bonds (Advance Stores Company, Incorporated Project) Series 1997 (the "IRB"). 10.9(2) Lease Agreement dated as of December 1, 1997 between Development Authority of McDuffie County and Advance Stores relating to the IRB. 10.10(2) Letter of Credit and Reimbursement Agreement dated as of December 1, 1997 among Advance Stores, Advance Holding and First Union National Bank relating to the IRB. 10.11 Form of Advance Auto Parts, Inc. 2001 Senior Executive Stock Option Plan. 10.12 Form of Advance Auto Parts, Inc. 2001 Senior Executive Stock Option Agreement. 10.13 Form of Advance Auto Parts, Inc. 2001 Executive Stock Option Plan. 10.14 Form of Advance Auto Parts, Inc. 2001 Senior Executive Stock Subscription Plan. 10.15 Form of Advance Auto Parts, Inc. 2001 Stock Option Agreement. 10.16 Form of Advance Auto Parts, Inc. 2001 Employee Stock Subscription Plan. 10.17 Form of Advance Auto Parts, Inc. Stock Subscription Agreement. 10.18(2) Form of Secured Promissory Note. 10.19(2) Form of Stock Pledge Agreement. 10.20(2) Form of Employment and Non-Competition Agreement between Childs, Cox, Gearheart, Gerald, Gray, Gregory, Hale, Helms, Jeter, Knighten, Kyle, Livesay, McDaniel, Miley, Quinn, Rakes, Richardson, Smith, Turner and Williams and Advance Stores (one-year agreement). 10.21(2) Form of Employment and Non-Competition Agreement between Bigoney, Buskirk, Felts, Fralin, Haan, Klasing, Reid, Stevens, Vaughn, Wade, Weatherly and Wirth and Advance Stores (two-year agreement). 10.22(2) Form of Indemnity Agreement between each of the directors of Advance Holding (other than Nicholas F. Taubman) and Advance Holding. 10.23(2) Consulting and Non-Competition Agreement among Nicholas F. Taubman, Holding and Advance Stores. 10.24(2) Indemnity Agreement dated as of April 15, 1998 between Nicholas F. Taubman and Advance Holding. 10.25(2) Employment and Non-Competition Agreement among Garnett E. Smith, Advance Holding and Advance Stores. 10.26(8) Amendments Nos. 1 and 2 to Employment and Non-Competition Agreement among Garnett E. Smith, Advance Holding and Advance Stores.
II-3
Exhibit Number Description ------- ----------- 10.27(5) First Amendment dated as of June 30, 1999, to the Credit Agreement dated as of April 15, 1998 as amended and restated as of October 19, 1998, among Advance Holding, Advance Stores, the lenders party thereto and Chase, as administrative agent. 10.28(5) Supplement No. 1 dated as of June 30, 1999, to the Guarantee Agreement dated as of April 15, 1998 as amended and restated as of November 2, 1998, among Advance Holding, the Subsidiary Guarantors listed therein and Chase, as collateral agent. 10.29(5) Supplement No. 1 dated as of June 30, 1999, to the Pledge Agreement dated as of April 15, 1998 as amended and restated as of November 2, 1998, among Advance Stores, Advance Holding, the Subsidiary Pledgors listed therein and Chase, as collateral agent. 10.30(5) Supplement No. 1 dated as of June 30, 1999, to the Security Agreement dated as of April 15, 1998 as amended and restated as of November 2, 1998, among Advance Stores, Advance Holding, the Subsidiary Guarantors listed therein and Chase, as collateral agent. 10.31(5) Supplement No. 1 dated as of June 30, 1999, to the Indemnity, Subrogation and Contribution Agreement dated as of April 15, 1998 as amended and restated as of November 2, 1998 among Advance Stores, Advance Holding, the Guarantors listed therein and Chase, as collateral agent. 10.32(6) Employment and Noncompetition Agreement dated as of February 1, 2000, among Advance Stores, Advance Holding and Lawrence P. Castellani. 10.33(6) Senior Executive Stock Subscription Agreement dated as of February 1, 2000, between Advance Holding and Lawrence P. Castellani. 10.34(6) Restricted Stock Agreement dated as of February 1, 2000, between Advance Holding and Lawrence P. Castellani. 10.35(6) Second Amendment and Consent, dated as of December 1, 1999, to the Credit Agreement dated as of April 15, 1998, among Advance Holding, Advance Stores, the lenders party thereto and Chase, as Administrative Agent. 10.36(6) Third Amendment, dated as of February 11, 2000, to the Credit Amendment dated as of April 15, 1998, among Advance Holding, Advance Stores and Chase, as Administrative Agent. 10.37(7) Irrevocable Proxy and Voting Agreement dated as of August 7, 2001 among Advance Holding, Advance Stores, Fontaine Industries L.P., the Fontaine Trust and Fontaine. 10.38 Secured Promissory Note dated September 20, 2001 made by Garnett E. Smith, Vice Chairman of the Board of Advance Holding and Advance Stores, in favor of Advance Stores. 10.39 Stock Pledge Agreement dated September 20, 2001 between Garnett E. Smith, Vice Chairman of the Board of Advance Holding and Advance Stores, and Advance Stores. 10.40 Form of Advance Auto Parts, Inc. 2001 Stock Option Agreement for holders of Discount fully converted options. 10.41 Purchase Agreement dated as of October 31, 2001 among Advance Stores, Advance Trucking Corporation, LARALEV, INC., Western Auto Supply Company, J.P. Morgan Securities Inc., Credit Suisse First Boston and Lehman Brothers Inc. 11.1 Statement re computation of per share earnings. 21.1(8) Subsidiaries of Advance Auto Parts, Inc. 23.1(9) Consent of Riordan & McKinzie (contained in Exhibit 5.1). Consent of Trenam Kemker, Scharf, Barkin, Frye, O'Neill & Mullis, 23.2 P.A. (contained in Exhibit 8.1). 23.3 Consent of Arthur Andersen LLP. 23.4 Consent of Ernst & Young LLP. 24.1(8) Power of Attorney.
II-4 -------- (1) Filed on June 4, 1998 as an exhibit to Registration Statement on Form S-4 (No. 333-56031) of Advance Holding Corporation. (2) Filed on June 4, 1998 as an exhibit to Registration Statement on Form S-4 (No. 333-56013) of Advance Stores Company, Incorporated. (3) Filed on October 6, 1998 as an exhibit to Amendment No. 2 of the Registration Statement on Form S-4 (No. 333-56013) of Advance Stores Company, Incorporated. (4) Filed on November 2, 1998 as an exhibit to Current Report on Form 8-K of Advance Stores Company, Incorporated. (5) Filed on July 17, 1999 as an exhibit to Quarterly Report on Form 10-Q of Advance Stores Company, Incorporated. (6) Filed on March 31, 2000 as an exhibit to Annual Report on Form 10-K of Advance Holding Corporation. (7) Filed on August 7, 2001 as an exhibit to Current Report on Form 8-K of Advance Stores Company, Incorporated. (8) Filed on August 31, 2001 as an exhibit to this Registration Statement. (9) Filed on October 15, 2001 as an exhibit to Amendment No. 1 to this Registration Statement. (*) Schedules to the Agreement and Plan of Merger will be filed with the Commission on request of the Commission. II-5 Item 22. Undertakings The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (a) To include any prospectus required by section 10(a)(3) of the Securities Act. (b) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (c) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the Registrant hereby undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (5) That every prospectus: (i) that is filed pursuant to the paragraph immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to this Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. (6) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-6 (7) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of this Registration Statement through the date of responding to the request. (8) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in this Registration Statement when it became effective. II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Roanoke, State of Virginia, on November 6, 2001. ADVANCE AUTO PARTS, INC. /s/ Jimmie L. Wade By: _________________________________ Jimmie L. Wade President and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title(s) Date --------- -------- ---- * Chief Executive Officer November 6, 2001 ____________________________________ (Principal Executive Lawrence P. Castellani Officer) /s/ Jimmie L. Wade President and Chief November 6, 2001 ____________________________________ Financial Officer Jimmie L. Wade (Principal Financial and Accounting Officer) * Chairman of the Board and November 6, 2001 ____________________________________ Director Nicholas F. Taubman * Vice Chairman of the Board November 6, 2001 ____________________________________ and Director Garnett E. Smith * Director November 6, 2001 ____________________________________ Timothy C. Collins
* Director November 6, 2001 ____________________________________ Mark J. Doran * Director November 6, 2001 ____________________________________ John M. Roth * Director November 6, 2001 ____________________________________ Ronald P. Spogli * Director November 6, 2001 ____________________________________ William L. Salter * Director November 6, 2001 ____________________________________ Jeffrey B. Conner
/s/ Jimmie L. Wade * By __________________________ Jimmie L. Wade Attorney-in-Fact II-8 DISCOUNT AUTO PARTS, INC. PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON NOVEMBER 28, 2001 The undersigned, a shareholder of DISCOUNT AUTO PARTS, INC. ("Discount"), hereby appoints Peter J. Fontaine, C. Michael Moore, and David P. Walling, and each of them, attorney and proxy of the undersigned, each with full powers of substitution, for and on behalf of the undersigned, to represent the undersigned at the Special Meeting of Shareholders of Discount to be held at The Lakeland Center, 700 West Lemon Street, Lakeland, Florida at 9:00 a.m., local time, on Wednesday, November 28, 2001 and any adjournments or postponements thereof (the "Special Meeting"), and to vote at the Special Meeting all the shares of Common Stock of Discount that the undersigned is entitled to vote at the Special Meeting, with the same effect as if the undersigned were personally present at the Special Meeting, all as described in the definitive Proxy Statement and Prospectus dated November 6, 2001 relating to the Special Meeting, and the undersigned hereby authorizes and instructs the above named proxies to vote as specified on the reverse side. The shares represented by this Proxy will be voted in the manner directed herein only if this Proxy is properly executed and timely returned. If the undersigned does not specify a choice, the shares will be voted FOR the proposal to approve the merger, the Agreement and Plan of Merger and the transactions contemplated thereby, in the discretion of the proxies with respect to any adjournments or postponements of the Special Meeting for the purpose of allowing Discount to solicit additional proxies or for any other purpose, and in the discretion of the proxies for other matters that may properly come before the Special Meeting. (Continued and to be signed on reverse side) The Board of Directors recommends voting FOR the following items: 1. PROPOSAL TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF MERGER, DATED AS OF AUGUST 7, 2001, BY AND AMONG DISCOUNT AND AAP ACQUISITION CORPORATION ("MERGER SUB"), ADVANCE AUTO PARTS, INC., ADVANCE HOLDING CORPORATION, AND ADVANCE STORES COMPANY, INCORPORATED, AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER OF DISCOUNT WITH AND INTO MERGER SUB. [_] FOR [_] AGAINST [_] ABSTAIN 2. TO GRANT DISCRETIONARY AUTHORITY TO THE PROXIES TO VOTE WITH RESPECT TO ANY ADJOURNMENTS OR POSTPONEMENTS OF THE SPECIAL MEETING FOR THE PURPOSE OF ALLOWING DISCOUNT TO SOLICIT ADDITIONAL PROXIES OR FOR ANY OTHER PURPOSE. [_] FOR [_] AGAINST [_] ABSTAIN 3. OTHER MATTERS. Unless a line is stricken through this sentence, the proxies herein named may in their discretion vote the shares represented by this Proxy upon such other matters as may properly come before the Special Meeting. The undersigned acknowledges receipt of the Notice of Special Meeting and Proxy Statement and Prospectus of Discount and Advance Auto Parts, Inc. The undersigned does hereby revoke any proxy previously given with respect to the shares represented by this Proxy. Dated: _________, 2001 ---------------------- Signature ---------------------- Signature if held jointly NOTE: Your signature should appear as your name appears hereon. As to shares held in joint names, each joint owner should sign. If the signer is a corporation, please sign full corporate name by a duly authorized officer. If a partnership, please sign in partnership name by an authorized person. If signing as attorney, executor, administrator, trustee, guardian, or in other representative capacity, please give full title as such. Please mark, sign and date this proxy card and promptly return it using the enclosed envelope. EX-2.5 3 dex25.txt ARTICLES OF MERGER EXHIBIT 2.5 ARTICLES OF MERGER OF AAP ACQUISITION CORPORATION INTO DISCOUNT AUTO PARTS, INC. * * * * * * * * * * * * * * * * * * * * * * * AAP ACQUISITION CORPORATION ("Merger Sub") and DISCOUNT AUTO PARTS, INC., ("Discount"), each a Florida corporation, acting in compliance with the provisions of Section 607.1105, Florida Statutes, hereby certify as follows: 1. A plan of merger was approved by the board of directors of each of Merger Sub and Discount on August __, 2001 (the "Plan of Merger"); the Plan of Merger was approved by the sole shareholder of Merger Sub on August __, 2001; and the Plan of Merger was approved by the affirmative vote of a majority of the voting stock held by shareholders of Discount on ___________, 2001. Pursuant to the Plan of Merger, Merger Sub is to be merged into Discount. The terms of the merger are set forth in the copy of the Plan of Merger attached hereto as Exhibit "A" and made a part hereof. ----------- 2. The merger shall be effective as of the date of filing these Articles of Merger with the Florida Secretary of State. Dated: ___________, 2001 AAP ACQUISITION CORPORATION By: __________________________________________ Name: ____________________________________ Its: _____________________________________ DISCOUNT AUTO PARTS, INC. By: __________________________________________ Name: ____________________________________ Its: _____________________________________ PLAN OF MERGER -------------- This is a Plan of Merger (this "Plan of Merger") pursuant to which AAP ACQUISITION CORPORATION ("Merger Sub"), a Florida corporation and wholly owned subsidiary of Advance Auto Parts, Inc., a Delaware corporation ("Advance Auto"), shall be merged into DISCOUNT AUTO PARTS, INC., a Florida corporation ("Discount"). BACKGROUND INFORMATION The board of directors of each of Advance Auto, Merger Sub and Discount has determined that it is advisable and to the advantage of each such corporation and its respective shareholders that Merger Sub be merged into Discount, at the conclusion of which Discount shall remain as the surviving or resulting entity and the corporate existence of Merger Sub shall terminate and expire. In furtherance thereof, each board has approved and adopted the terms of this Plan of Merger and Discount has recommended the adoption of the Plan of Merger and its underlying transactions to the shareholders of Discount. Accordingly, the merger shall be effected as follows: OPERATIVE PROVISIONS 1. Merger. In accordance with applicable provisions of the Florida ------ Business Corporation Act, at the Effective Date (as defined below), Merger Sub shall be merged with and into Discount (the "Merger"), and Discount shall constitute the surviving and resulting corporation of such Merger (hereinafter Discount sometimes is referred to as the "Surviving Corporation"). The separate and corporate existence of Merger Sub shall cease and Discount shall continue its corporate existence pursuant to the laws of Florida. 2. Effective Date. The Merger shall become effective on the date of -------------- filing Articles of Merger with the Florida Secretary of State (the "Effective Date"). 3. Surviving Corporation. The Surviving Corporation shall possess and --------------------- retain every interest in all of its assets and property of every description. The rights, privileges, immunities powers, franchises and authority of a public as well as private nature of Merger Sub shall be vested in the Surviving Corporation without further act or deed. The title to and any interest in all real estate and other property owned by Merger Sub shall be vested in the Surviving Corporation and shall not revert or in any way be impaired by reason of the Merger. 4. Obligations. All obligations belonging to or due to Merger Sub shall ----------- be vested in the Surviving Corporation without further act or deed, and the Surviving Corporation shall be liable for all of the obligations of Merger Sub existing as of the Effective Date. 5. Terms of the Merger. ------------------- a. Capital Stock of Merger Sub. Upon the Effective Date of the --------------------------- Merger, each issued and outstanding share of capital stock of Merger Sub shall be converted into and become one validly issued, fully paid and nonassessable share of common stock of Discount, $.01 par value per share ("Discount Common Stock"). b. Cancellation of Treasury Stock. All shares of Discount Common ------------------------------ Stock that are owned directly or indirectly by Discount as treasury stock, if any, shall be cancelled and retired and shall cease to exist and no payment shall be made with respect thereto. c. Conversion of Discount Common Stock. Each issued and outstanding ----------------------------------- share of Discount Common Stock shall be converted into the right to receive the Per Share Merger Consideration (as defined below) and any cash in lieu of fractional shares of common stock, $.0001 par value per share, of Advance Auto (the "Advance Auto Common Stock"), to be issued or paid in consideration therefor. As of the Effective Date, all such shares of Discount Common Stock shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate representing any such shares shall cease to have any rights with respect thereto, except the right to receive with respect to each share represented thereby the Per Share Merger Consideration and any cash in lieu of fractional shares of Advance Auto Common Stock to be issued or paid in consideration therefor upon the surrender of such certificate, without interest. As used herein, the term "Per Share Merger Consideration" shall mean: (i) cash in the amount of $7.50 and (ii) 0.2577 of a fully paid and nonassessable share of Advance Auto Common Stock. d. Fractional Shares. No fraction of a share of Advance Auto Common ----------------- Stock will be issued in the Merger but, in lieu thereof, each holder of Discount Common Stock who would otherwise be entitled to a fraction of a share of Advance Auto Common Stock will be entitled to receive from the Surviving Corporation an amount in cash (rounded to the nearest whole cent) equal to the product of (i) the fraction multiplied by (ii) $29.11. e. Stock Options. ------------- (i) At or immediately before the Effective Date, each outstanding option to purchase shares of Discount Common Stock, granted under any stock option or compensation plan or arrangement of Discount, and with a per share exercise price or strike price of less than $15.00 per share (an "In-the-Money Option") shall be cancelled and converted into the right to receive at the Effective Date or as soon as practicable thereafter in consideration for such cancellation an amount in cash equal to the product of (1) the number of shares of Discount Common Stock previously subject to such In-the-Money Option and (2) the difference between $15.00 and the exercise price per share of Discount Common Stock previously subject to such In-the-Money Option. At the Effective Date, such In-the-Money Options shall no longer be outstanding and shall automatically be cancelled and retired and converted into the right to receive the cash payment specified in this Section 5(e)(i), and each holder of an In-the-Money Option shall cease to have any rights with respect to the In-the-Money Option other than the right to receive with respect thereto the cash payment specified in this Section 5(e)(i) upon the surrender of the In-the-Money Option, without interest. The surrender of the In-the-Money Option shall be deemed a release of any and all rights the 2 holder had or may have had in respect of such option. In addition, the right of any holder of In-the-Money Options to receive the cash payment specified in this Section 5(e)(i) shall be subject to and reduced by the amount of any required tax withholding obligation. (ii) Each issued and outstanding stock option to purchase shares of Discount Common Stock granted under any stock option or compensation plan or arrangement of Discount that is not an outstanding In-the-Money Option (each, a "Fully Converted Option", and together with the In-the-Money Options, the "Outstanding Discount Options"), whether or not then exercisable, shall at the Effective Date be converted into an option to acquire, on substantially the same terms and conditions as were applicable under such Fully Converted Option immediately prior to the Effective Date (but reflecting the acceleration of vesting occasioned by the consummation of the transactions contemplated by this Plan of Merger) and which option shall be considered issued under and subject to the terms of the 2001 Advance Auto Executive Stock Option Plan (the "Advance Auto Plan"), the number of shares of Advance Auto Common Stock determined by multiplying the number of shares of Discount Common Stock that were purchasable immediately prior to the Effective Date upon the exercise of such Fully Converted Option by 0.5154 (the "Option Exchange Ratio") (rounded as hereinafter provided) at a price per share (rounded up to the nearest whole cent) equal to (A) the exercise price per share of Discount Common Stock immediately prior to the Effective Date under such Fully Converted Option divided by (B) the Option Exchange Ratio; provided, however, that with respect to a Fully Converted Option with the same exercise price and option term, the number of shares of Advance Auto Common Stock to be represented by the Fully Converted Option shall be computed on an aggregate basis so as to create options for whole shares of Advance Auto Common Stock with any then remaining fractional share rounded up the nearest whole share. As soon as practicable after the Effective Date, Advance Auto shall deliver to each holder of a Fully Converted Option a stock option agreement or certificate issued under the Advance Auto Plan as a replacement for the stock option certificate previously provided to such holder by Discount and evidencing such Fully Converted Option and setting forth such holder's rights pursuant thereto, including the number of shares of Advance Auto Common Stock purchasable under the converted stock option and replacement option agreement or certificate and the corresponding exercise price thereunder. In addition, Advance Auto shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Advance Auto Common Stock for delivery upon exercise of a Fully Converted Option. As soon as practicable after the Effective Date, Advance Auto shall file a registration statement on Form S-3 or Form S-8, as the case may be (or any successor or appropriate forms), or another appropriate form, with respect to the shares of Advance Auto Common Stock subject to such Fully Converted Options and shall use its reasonable best efforts to maintain the effectiveness of such 3 registration statement or registration statements (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such Fully Converted Options, as herein converted, remain outstanding. For example, assume an out of the money option for 10,500 shares of Discount Common Stock with an exercise price of $20.00. At the Effective Date, the out of the money option shall be converted so as to thereafter constitute an option to acquire 5,412 shares of Advance Auto Common Stock (10,500 X 0.5154) (rounded up) at a price per share equal to $38.80 ($20.00 0.5154). (iii) As soon as practicable following the date of this Plan of Merger, Advance Holding Corporation, a Virginia corporation and the parent corporation of Advance Auto, Merger Sub and Advance Auto (or, if appropriate, any committee administering any stock option or compensation plan or arrangement) shall take such additional actions, if any, as may reasonably be required or necessary to cause each Fully Converted Option to be converted at the Effective Date by virtue of the Merger and continued as an option of Advance Auto under the corresponding Advance Auto option plans. On or prior to the Effective Date, Discount shall take such additional action, if any, as may be reasonably required or necessary to cause the stock option or compensation plans or arrangements of Discount providing for the granting of stock options with respect to stock of Discount ("Discount Option Plans") to terminate immediately following the Effective Date and for the provisions in any other plan, program or arrangement providing for the issuance or grant by Discount of any interest in respect of the capital stock of Discount to be terminated immediately following the Effective Date. The holders of Outstanding Discount Options shall be entitled to enforce this Section 5(e)(iii) against the Surviving Corporation. 6. Articles of Incorporation; By-Laws. The Articles of Incorporation and ---------------------------------- By-Laws of Merger Sub in effect immediately prior to the Effective Date shall become the Articles of Incorporation and By-Laws of the Surviving Corporation. 7. Directors and Officers. The persons serving as directors of Merger Sub ---------------------- immediately prior to the Effective Date, shall serve as the directors of the Surviving Corporation after the Effective Date, and the persons serving as officers of Discount immediately prior to the Effective Date shall, after the Effective Date, serve as officers of the Surviving Corporation, in each case such directors and officers to hold office until their successors have been duly elected and qualified in accordance with the Articles of Incorporation and By- Laws of the Surviving Corporation, or their earlier death, resignation or removal. 4 EX-4.7 4 dex47.txt AMENDED & RESTATED STOCKHOLDERS' AGMT. EXHIBIT 4.7 AMENDMENT NO. 1 TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED STOCKHOLDERS AGREEMENT (this "Agreement") is made and entered into as of December ___, 2001, by and among Advance Holding Corporation, a Virginia corporation ("Holding"), Advance Auto Parts, Inc., a Delaware corporation (the "Company"), FS Equity Partners IV, L.P., a Delaware limited partnership ("FSEP IV" or the "FS Stockholder"), Ripplewood Partners, L.P. ("Ripplewood Partners"), Ripplewood Advance Auto Parts Employee Fund I L.L.C. ("Ripplewood Employee Fund" and, together with Ripplewood Partners, the "Ripplewood Stockholder"), Nicholas F. Taubman and the Arthur Taubman Trust dated July 13, 1964 (the "Trust") (Mr. Taubman and the Trust collectively, the "Existing Stockholders" and each individually, an "Existing Stockholder"), WA Holding Co., a Delaware corporation (the "Sears Stockholder") and Peter J. Fontaine ("Fontaine"), Fontaine Industries Limited Partnership (the "Fontaine Partnership") and the Peter J. Fontaine Revocable Trust (the "Fontaine Trust"). RECITALS A. On November 2, 1998, Holding, the Existing Stockholders, the FS Stockholder, the Ripplewood Stockholder and the Sears Stockholder entered into an Amended and Restated Stockholders Agreement (the "Restated Agreement"). B. Pursuant to an Agreement and Plan of Merger dated as of August 7, 2001 by and between Holding and the Company, the parties agreed that Holding will merge with and into the Company, with the Company continuing as the surviving corporation (the "Reincorporation Merger"). C. On August 1, 2001, the boards of directors of Holding and the Company approved a resolution stating that following the Reincorporation Merger the rights and obligations of the stockholders of Holding to each other and to Holding shall be preserved and become the rights and obligations of the stockholders of the Company, including without limitation the rights and obligations under the Restated Agreement. D. Pursuant to an Agreement and Plan of Merger dated as of August 7, 2001 (the "Merger Agreement") by and among Holding, Advance Stores Company, Incorporated, the Company, AAP Acquisition Corporation ("Merger Sub") and Discount Auto Parts, Inc. ("Discount"), the parties agreed that Merger Sub, a wholly-owned subsidiary of the Company, will merge with and into Discount, with Discount continuing as the surviving corporation in such merger (the "Discount Merger"). E. Pursuant to the Merger Agreement, the parties thereto agreed to amend the Restated Agreement to, among other things, provide Fontaine with certain registration rights and to provide for Fontaine's election as a member of the Board of Directors of the Company upon the terms and conditions as more fully set forth in this Agreement. F. Under Sections 7.1 and 12 of the Restated Agreement, the Restated ------------ -- Agreement may be amended to add the terms and conditions set forth in this Agreement in connection with the Discount Merger. G. The parties hereto intend that this Agreement shall become effective upon and only upon the consummation of the Reincorporation Merger and the contemporaneous Discount Merger. AGREEMENT NOW, THEREFORE, in consideration of the foregoing, the mutual covenants contained herein and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. The definitions of Common Stock, Company, and Initial ----------- Shares as set forth in Section 1.1 of the Restated Agreement are hereby amended ----------- in their entirety as follows, and seven new definitions, the Agreement, Discount Merger, Fontaine Partnership, Fontaine Stockholder, Fontaine Trust, Mr. Fontaine, and Reincorporation Merger, are hereby added to Section 1.1 as -------------- follows: "Agreement: that certain Amended and Restated Stockholders Agreement --------- dated as of November 2, 1998 by and among Advance Holding Corporation, the FS Stockholder, the Ripplewood Stockholder, the Existing Stockholders, and the Sears Stockholder, , as amended to date and as it may be amended from time to time." "Common Stock: The Common Stock, par value $0.0001 per share, of the ------------ Company." "Company: Advance Auto Parts, Inc., a Delaware corporation." ------- "Discount Merger: The merger of AAP Acquisition Corporation, a wholly owned subsidiary of the Company, with and into Discount Auto Parts, Inc., with Discount Auto Parts, Inc. continuing as the surviving corporation in such merger, all pursuant to an Agreement and Plan of Merger dated as of August 7, 2001 by and among the Company, Advance Stores Company, Incorporated, Advance Holding Corporation, Discount Auto Parts, Inc., and AAP Acquisition Corporation. 2 "Fontaine Partnership: Fontaine Industries Limited Partnership, a Nevada limited partnership." "Fontaine Stockholder: The Fontaine Partnership and its Permitted -------------------- Transferees." "Fontaine Trust: The Peter J. Fontaine Revocable Trust." "Initial Shares: The 28,472,660 shares of Common Stock of the Company -------------- issued and outstanding upon consummation of the Reincorporation Merger and the Discount Merger and held beneficially and of record by the Stockholders and the Fontaine Stockholder and any Option Shares as follows:
Options to Purchase Common Common Stockholder Stock Stock ------------------------------------------------------------- ----------- --------------- FS Equity Partners IV, L.P. ............................... 11,022,652 - Ripplewood Partners, L.P. ................................. 2,763,110 - Ripplewood Advance Auto Parts Employee Fund I L.L.C. ..... 128,685 - Nicholas F. Taubman........................................ 1,148,632 250,000 The Arthur Taubman Trust dated July 13, 1964............... 898,633 250,000 WA Holding Co. ............................................ 11,474,606 - Fontaine Industries Limited Partnership.................... 1,036,342 - "
"Mr. Fontaine: Peter J. Fontaine." "Reincorporation Merger: The merger of Advance Holding Corporation with and into the Company, with the Company continuing as the surviving corporation, all pursuant to an Agreement and Plan of Merger dated as of August 7, 2001 by and between Advance Holding Corporation and the Company." 2. Fontaine Permitted Transferee. With respect to the Fontaine ----------------------------- Partnership, notwithstanding any other provision to the contrary in the Restated Agreement or this Agreement, the term "Permitted Transferee" shall mean (i) the Fontaine Trust, (ii) Mr. Fontaine or his spouse, children, grandchildren or other living descendants, or a trust or family partnership of which there are no principal (i.e., corpus) beneficiaries or partners other than the grantor or one or more of Mr. Fontaine, his spouse or described relatives and provided, in the case of a trust, that the existing beneficiaries and/or trustee(s) and/or grantor(s) of such trust have the power to act with respect to the trust's assets without court approval and, in the case of a family partnership, that the partners thereof have the power to act with respect to the partnership's assets without court approval and the partnership is not permitted to (a) distribute assets to Persons who are not among the relatives listed above or (b) have partners who are not among the relatives listed above or (iii) a legal representative of Mr. Fontaine in the event Mr. Fontaine becomes 3 mentally incompetent or to Mr. Fontaine's personal representative following the death of Mr. Fontaine. Such Permitted Transferee shall be bound by all of the obligations of the Fontaine Partnership hereunder. 3. Registration Rights; Acquisitions of Common Stock. ------------------------------------------------- (a) The first sentence of Section 6.1 of the Restated Agreement is ----------- hereby amended in its entirety as follows: "6.1 Registration Rights. FS Stockholder, the Sears Stockholder, the ------------------- Ripplewood Stockholder, the Existing Stockholders and the Fontaine Partnership shall be entitled to certain registration rights with respect to their shares of Common Stock (the "Registration Rights"). (b) A new sentence shall be added at the end of Section 6.1 as ----------- follows: "The Fontaine Partnership may not assign its Registration Rights except to a Permitted Transferee (provided that any Permitted Transferee of the Fontaine Partnership who is not Mr. Fontaine or the Fontaine Trust shall deliver to the Company a power-of-attorney appointing Mr. Fontaine (or an individual he designates if he is unable to act due to death or disability) as such Permitted Transferee's attorney-in-fact for purposes of exercising such Permitted Transferee's Registration Rights and fulfilling such Permitted Transferee's obligations under this Section 6)." 4. Section 6.2 of the Restated Agreement is hereby amended in its entirety ----------- as follows: "6.2 Acquisition of Common Stock. After consummation of an Initial --------------------------- Public Offering, neither the Stockholders nor the Fontaine Stockholder shall purchase or permit its Affiliates to purchase or otherwise acquire, or agree or offer to purchase or otherwise acquire (subject, in the case of the Trust, to Section 5.1(a)), beneficial ownership of additional shares of Common Stock or Securities." 5. Election to Board of Peter Fontaine. The first two paragraphs of ----------------------------------- Section 7.1 of the Restated Agreement are hereby amended in their entirety as ----------- follows: "7.1 The Board. --------- At each annual or special meeting of stockholders of the Company, or in any written consent executed in lieu of a stockholder meeting, at or pursuant to which persons are being elected to fill positions on the Board, the FS Stockholder, the Sears Stockholder, the Ripplewood Stockholder, the Existing Stockholders 4 and the Fontaine Stockholder agree to exercise, or cause to be exercised, voting rights with respect to the shares of Voting Securities then held of record or beneficially owned by them, in such a manner that (i) three (3) candidates nominated by FS Stockholder, (ii) Mr. Taubman or, in the event of his death or disability, his representative designated in writing, (iii) one (1) candidate nominated by the Ripplewood Stockholder, (iv) the Chief Executive Officer of the Company, (v) three (3) candidates nominated by the Sears Stockholder, and (vi) Mr. Fontaine, shall be elected to fill and continue to hold positions on the Board. The FS Stockholder may require the Board to nominate, and the Stockholders to vote their shares in favor of electing, up to three (3) independent members of the Board of Directors (such persons being mutually acceptable to FS Stockholder and Sears Stockholder), and each Stockholder shall take all actions necessary in connection therewith. Upon consummation of the Discount Merger, or as soon as practicable thereafter, the Company shall have at least three (3) independent members of the Board of Directors (such persons being mutually acceptable to FS Stockholder and Sears Stockholder), as may be required by applicable law or stock exchange requirements or by the National Association of Securities Dealers in connection with the Discount Merger, and each Stockholder shall take all actions necessary in connection therewith. Neither Mr. Taubman (or his representative) nor Mr. Fontaine may be removed from the Board without cause. In addition, Mr. Taubman shall not be disqualified from being a director by virtue of his age. The Board of Directors shall have no fewer than ten (10) and no more than fourteen (14) directors and the Stockholders shall vote to have the Bylaws provide that the Company shall have no fewer than ten (10) nor more than fourteen (14) directors. Notwithstanding the preceding sentence, in the event of an acquisition by the Company where more than 10% of the Voting Securities are issued to the seller, and as an important element of the transaction additional Board seats are required (an "Acquisition Event"), the Stockholders will use reasonable best efforts to make such Board seats available including, without limitation, taking all necessary actions to amend this Agreement and the Bylaws and cause their respective nominees to the Board to approve an increase in the size of the Board, necessary amendments to this Agreement, and the election of new members of the Board." 6. Termination of Fontaine's Rights. The following two sentences are -------------------------------- hereby added to the end of Section 7.4 of the Restated Agreement: ----------- "Mr. Fontaine's rights to be elected to fill and continue to hold a position on the Board pursuant to Section 7.1 shall terminate upon the ----------- earliest to occur of the following events (each, a "Termination Event"): (a) January 1, 2004, (b) his submission of a voluntary resignation from the Board, (c) his removal from the Board for cause, (d) his ceasing to have beneficial interest in at least 50% of the 5 Initial Shares beneficially owned by him upon the consummation of the Discount Merger and the Reincorporation Merger, (e) the expiration of the voting rights of the Stockholders and the Fontaine Stockholder to the Restated Agreement, or (f) his death. If the voting rights of the Stockholders and the Fontaine Stockholder to the Restated Agreement expire after Mr. Fontaine has been so elected, the Company shall thereafter continue to nominate Mr. Fontaine for a position on the Board of Directors until the occurrence of a Termination Event." 7. Restrictions on Amendments and Waivers. The first sentence of Section -------------------------------------- ------- 12 of the Restated Agreement is hereby amended by inserting the following clause -- in line 10 thereof after the words "Ripplewood Stockholder": "and to the extent the terms of the specific Registration Rights of the Fontaine Partnership or board rights of Mr. Fontaine would be prejudiced thereby, the written consent of the Fontaine Partnership or Mr. Fontaine, as the case may be, shall be required to amend, modify or waive compliance with this Agreement," 8. Notice. Section 14 of the Restated Agreement is hereby amended by ------ ---------- adding the following clause between the end of clause (vi) and the parenthetical clause that begins, "or at such other address . . .": "and (vii) if to Fontaine, the Fontaine Partnership or the Fontaine Trust, to Peter J. Fontaine, 41 Hilltop Lane, Asheville, NC 28803, facsimile: (828) 274-0109; with a copy to the Fontaine Industries Limited Partnership, 3305 West Spring Mountain Road, #60, Las Vegas, NV 89012, Attention: Peter J. Fontaine" 9. Registration Rights of the Fontaine Partnership. Exhibit A of the ----------------------------------------------- --------- Restated Agreement is hereby amended as follows: (a) The sentence preceding Section 1 of Exhibit A of the Restated Agreement is hereby amended in its entirety as follows: "Capitalized terms used herein and not otherwise defined shall have the respective meanings given such terms in the Amended and Restated Stockholders Agreement (as amended to date and as it may be further amended from time to time) (the "Agreement") to which this Exhibit A is attached." (b) The definition of Holder in Section 1.1 of Exhibit A of the ----------- --------- Restated Agreement is hereby amended in its entirety as follows: "Holder" means the FS Stockholder, the Sears Stockholder, the Ripplewood Stockholder, any Existing Stockholder, and/or the Fontaine Partnership (or any Permitted Transferee or permitted assignee thereof); provided, 6 that the Fontaine Stockholder shall not be deemed to be a "Holder" for purposes of the first sentence of Section 2.1(a) of Exhibit A (i.e., the -------------- --------- Fontaine Stockholder shall not be entitled to rights to Demand Registrations as defined in Section 2.1(a))." --------------- (c) (The fourth sentence of Section 2.1(a) of Exhibit A of the -------------- --------- Restated Agreement is hereby amended in its entirety as follows: "The first time an Existing Stockholder or the Ripplewood Stockholder requests a Demand Registration, the FS Stockholder and the Sears Stockholder (or their Permitted Transferees or permitted assignees) shall each be entitled to submit to the Company, within ten (10) days after receipt of notice of such Existing Stockholder's or Ripplewood Stockholder's request for a Demand Registration, a written request for a Demand Registration (the "Simultaneous Registration") and shall thereby join in the request of such Existing Stockholder or the Ripplewood Stockholder, and thereupon each of the Existing Stockholders, Ripplewood Stockholder, the Fontaine Partnership, Sears Stockholder and FS Stockholder shall be entitled to include Registrable Securities in such Demand Registration on a pro rata basis, determined based on the number of Registrable Securities then sought to be included by the FS Stockholder, the Sears Stockholder, all Existing Stockholders, the Ripplewood Stockholder and the Fontaine Partnership (in each case including any Permitted Transferees or permitted assignees) and other Persons entitled to include shares therein pursuant to Demand Registration rights, respectively, up to the number of Registrable Securities proposed to be sold in such Demand Registration and, for purposes of Section 2.3, prior to ------------ any person including Registrable Securities under Section 2.2 or other ----------- Piggy-Back Registration Rights." (d) The seventh sentence of Section 2.1(a) of Exhibit A of the -------------- --------- Restated Agreement is hereby amended in its entirety as follows: "The first time the Ripplewood Stockholder requests a Demand Registration, if (i) within the 10-day period set forth in the fourth sentence of this Section 2.1(a), neither the FS Stockholder nor the Sears Stockholder requests a Simultaneous Registration, and (ii) the Existing Stockholder has not previously requested a Demand Registration counted under Section 2.1(b), then, by giving notice within three (3) business days -------------- of the end of said 10-day period, the Existing Stockholders may request a Simultaneous Registration with the Ripplewood Stockholder, and if such a request is made, thereupon the Existing Stockholders, the Ripplewood Stockholder and the Fontaine Partnership shall be entitled to include Registrable Securities in such Demand Registration on a pro rata basis, determined based on the number of Registrable Securities then sought to be included by the Ripplewood Stockholder, all Existing Stockholders, the Fontaine Partnership (in each case including Permitted Transferees) and other Persons 7 entitled to include shares therein pursuant to Demand Registration rights (it being understood that each of the FS Stockholder and the Sears Stockholder shall have waived its right to participate therein except pursuant to Section 2.2), respectively, up to the number of Registrable ------------ Securities proposed to be sold in such Demand Registration and, for purposes of Section 2.3, prior to any Person including Registrable ----------- Securities under Section 2.2 or other Piggy-Back Registration Rights. The ----------- first time an Existing Stockholder requests a Demand Registration, if (i) within the 10-day period set forth in the fourth sentence of this Section 2.1(a), neither the FS Stockholder nor the Sears Stockholder requests a Simultaneous Registration, and (ii) the Existing Stockholder has not previously requested a Demand Registration counted under Section 2.1(b), then, by giving notice within three (3) business days of the end of said 10-day period, the Fontaine Partnership may request a Simultaneous Registration with the Existing Stockholder, and if such a request is made, thereupon the Existing Stockholders and the Fontaine Partnership shall be entitled to include Registrable Securities in such Demand Registration on a pro rata basis, determined based on the number of Registrable Securities then sought to be included by the all Existing Stockholders, the Fontaine Partnership (in each case including Permitted Transferees) and other Persons entitled to include shares therein pursuant to Demand Registration rights (it being understood that each of the FS Stockholder and the Sears Stockholder shall have waived its right to participate therein except pursuant to Section 2.2), respectively, up to the number of Registrable Securities proposed to be sold in such Demand Registration and, for purposes of Section 2.3, prior to any Person including Registrable Securities under Section 2.2 or other Piggy-Back Registration Rights." (e) Section 2.3(a) of Exhibit A of the Restated Agreement is hereby -------------- --------- amended in its entirety as follows: "SECTION 2.3 Reduction of Offering. --------------------- (a) Notwithstanding anything contained herein, if the managing Underwriter or Underwriters of an offering described in Section 2.1 or 2.2 ----------- --- determine that the size of the offering that the Holders, the Company or any other Persons intend to make is such that the success of the offering would be adversely affected by inclusion of the Registrable Securities requested to be included, then (i) with respect to a Demand Registration, if the size of the offering is the basis of such Underwriter's or Underwriters' determination, the Company shall not include in such registration an amount of Registrable Securities requested to be included in such offering equal to the Excess Amount, such reduction first to be allocated pro rata among the Holders or other Persons who did not initiate the request for a Demand Registration according to the number of Registrable Securities requested for inclusion, with the Holder or Holders or other Persons who initiated the request for a Demand Registration entitled to include shares therein to the 8 maximum extent possible provided that if such Holders cannot include all their shares in such offering, the amount of Registrable Securities to be registered shall be reduced pro rata among the initiating Holders (provided further that if the Sears Stockholder or the FS Stockholder initiates a Demand Registration pursuant to Section 2.1(a) and an Existing Stockholder -------------- or the Ripplewood Stockholder or the Fontaine Partnership requests to participate in such Demand Registration, the FS Stockholder or Sears Stockholder (or both in the case of a Simultaneous Registration by them), and such Existing Stockholder, the Ripplewood Stockholder or the Fontaine Partnership and each of them participating shall be treated pari passu with ---------- respect to a reduction under this Section 2.3 and (ii) in the case of a ----------- Piggy-Back Registration, if securities are being offered for the account of other Persons as well as the Company, the securities the Company seeks to include shall have priority over securities sought to be included by any other Person (including the Holders) and, with respect to the Registrable Securities intended to be offered by Holders, the proportion by which the amount of such class of securities intended to be offered by Holders is reduced shall not exceed the proportion by which the amount of such class of securities intended to be offered by such other Persons is reduced (it being understood that with respect to the Holders and third parties such reduction may be all of such class of securities)." (f) Section 2.4 of Exhibit A of the Restated Agreement is hereby ----------- --------- amended in its entirety as follows: "SECTION 2.4 Additional Rights. The Company shall not grant to any ----------------- Person registration rights on terms which are more favorable to such Person than or which otherwise interferes with (it being understood that the granting of registration rights to other stockholders shall not by itself be deemed to so interfere) those accorded to the Ripplewood Stockholder, the Existing Stockholders or the Fontaine Partnership." 10. Deletion of Schedule 1. Schedule 1 to the Restated Agreement is ---------------------- ---------- hereby deleted in its entirety. 11. Effectiveness. This Agreement shall become effective upon and only ------------- upon the consummation of the Reincorporation Merger and the contemporaneous Discount Merger and shall terminate and be of no force and effect upon termination of the Merger Agreement in accordance with its terms. 12. Governing Law. This Agreement shall be governed by and construed and ------------- enforced in accordance with the laws of the State of Delaware without regard to the conflicts of laws rules thereof. 13. Representations and Warranties. ------------------------------ 9 (a) Each Stockholder and the Fontaine Partnership represents and warrants (i) that it has full power, capacity, right and authority, and any requisite approvals or consents to enter into and perform this Agreement; (ii) that this Agreement and the performance of its obligations hereunder have been duly authorized, and that this Agreement has been duly executed and delivered by it and is a valid and binding agreement, enforceable against it in accordance with its terms; (iii) that upon the consummation of the Reincorporation Merger and the Discount Merger, it will own beneficially and of record the shares of Common Stock and the rights, options or warrants to purchase any capital stock of the Company set forth opposite its name under the definition of Initial Shares, free and clear of any lien, claim, charge, option, security interest, restriction or encumbrance other than applicable restrictions set forth in this Agreement; and (iv) that it does not own beneficially or of record any other securities or rights, options or warrants to purchase any securities of the Company. (b) The Trust further represents and warrants that it is a trust duly organized, validly existing and in good standing under the laws of the Commonwealth of Virginia. The sole living Trust beneficiaries are: Nicholas F. Taubman (during his lifetime) and, upon the death of Nicholas F. Taubman, his children then living (presently his children are Marc E. Taubman and Lara L. Taubman). The execution, delivery and performance of this Agreement will not violate any trust document establishing or governing the Trust. Mr. Fontaine, in his individual capacity and as trustee of the Fontaine Trust, further represents and warrants that as of the date hereof, (i) the Fontaine Trust is the record and beneficial owner of all of the general partnership interests of the Fontaine Partnership, (ii) the Fontaine Trust and Fontaine are the record and beneficial owners of all of the limited partnership interests of the Fontaine Partnership, and (iii) the Fontaine Trust and Fontaine own such partnership interests (general and limited) free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on voting rights, charges and other encumbrances of any nature whatsoever (except for any encumbrance arising under the limited partnership agreement of the Fontaine Partnership) 14. Severability. If any term or other provision of this Agreement is ------------ invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect to the maximum extent permitted by applicable law. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that this Agreement be enforced as originally contemplated to the greatest extent possible. 15. Entire Agreement. This Agreement together with the Company's Articles ---------------- of Incorporation and Bylaws as in effect on the date hereof constitute the entire agreement and understanding among the parties pertaining to the subject matter hereof and supersede any and all prior agreements, whether written or oral, relating hereto. 10 16. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 11 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. ADVANCE HOLDING CORPORATION, a Virginia corporation By: ________________________________ Its: ________________________________ ADVANCE AUTO PARTS, INC., a Delaware corporation By: ________________________________ Its: ________________________________ NICHOLAS F. TAUBMAN _____________________________________ THE ARTHUR TAUBMAN TRUST DATED JULY 13, 1964 By: _______________________________ Trustee RIPPLEWOOD PARTNERS, L.P., a Delaware limited partnership By: ________________________________ Its: ________________________________ RIPPLEWOOD ADVANCE AUTO PARTS EMPLOYEE FUND I L.L.C., a Delaware limited liability company 12 By: ________________________________ Its: ________________________________ FS EQUITY PARTNERS IV, L.P., a Delaware limited partnership By: FS Capital Partners, LLC Its: General Partner By: ________________________________ Its: ________________________________ WA HOLDING CO., formerly WESTERN AUTO HOLDING CO., a Delaware corporation By: ____________________________________ Its: ____________________________________ For purposes of the last sentence of Section 12 of the Agreement only: SEARS, ROEBUCK AND CO., a New York corporation By: ___________________________________ Its: ___________________________________ PETER J. FONTAINE, an individual ________________________________________ FONTAINE INDUSTRIES LIMITED PARTNERSHIP, a Nevada limited partnership 13 By: Peter J. Fontaine Revocable Trust Its: General Partner __________________________________ By: Peter J. Fontaine Its: Trustee PETER J. FONTAINE REVOCABLE TRUST, a Florida revocable trust ________________________________________ By: Peter J. Fontaine Its: Trustee 14 EX-4.8 5 dex48.txt INDENTURE DATED AS OF OCTOBER 31, 2001 EXHIBIT 4.8 ================================================================================ ADVANCE STORES COMPANY, INCORPORATED _____________________ 10-1/4% SENIOR SUBORDINATED NOTES DUE 2008 _____________________ ___________ INDENTURE DATED AS OF October 31, 2001 ___________ _____________________ THE BANK OF NEW YORK, as TRUSTEE _____________________ ================================================================================ CROSS-REFERENCE TABLE*
-------------------------------------------------------------------------------- Trust Indenture Act Section Indenture Section -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 310 (a)(1)....................................................... 7.10 (a)(2)....................................................... 7.10 (a)(3)....................................................... N.A. (a)(4)....................................................... N.A. (a)(5)....................................................... 7.10 (b).......................................................... 7.03;7.10 (c).......................................................... N.A. 311 (a).......................................................... 7.11 (b).......................................................... 7.11 (c).......................................................... N.A. 312 (a).......................................................... 2.06 (b).......................................................... 10.03 (c).......................................................... 10.03 313 (a).......................................................... 7.06 (b)(1)....................................................... 7.06 (b)(2)....................................................... 7.06;7.07 (c).......................................................... 7.06;10.02 (d).......................................................... 7.06 314 (a).......................................................... 4.03;10.05 (b).......................................................... N.A. (c)(1)....................................................... 10.04 (c)(2)....................................................... 10.04 (c)(3)....................................................... N.A. (d).......................................................... N.A. (e).......................................................... 10.05 (f).......................................................... N.A. 315 (a).......................................................... 7.01 (b).......................................................... 7.05;10.02 (c).......................................................... 7.01 (d).......................................................... 7.01 (e).......................................................... 6.11 (a).......................................................... 2.14 316 (a)(1)(A).................................................... 6.05 (a)(1)(B).................................................... 6.04 (a)(2)....................................................... N.A. (b).......................................................... 6.07 (c).......................................................... N.A. 317 (a)(1)....................................................... 6.08 (a)(2)....................................................... 6.09 (b).......................................................... 2.05 318 (a).......................................................... 10.01 (b).......................................................... N.A. (c).......................................................... 10.01
N.A. means not applicable. *This Cross-Reference Table is not part of the Indenture. ii TABLE OF CONTENTS
Page ---- ARTICLE I Definitions and Incorporation by Reference ------------------------------------------ SECTION 1.01. Definitions.............................................. 1 SECTION 1.02. Other Definitions........................................ 16 SECTION 1.03. Incorporation by Reference of Trust Indenture Act........ 16 SECTION 1.04. Rules of Construction.................................... 17 ARTICLE 2 The Securities -------------- SECTION 2.01. Amount of Securities; Issuable in Series................. 17 SECTION 2.02. Form and Dating.......................................... 18 SECTION 2.03. Execution and Authentication............................. 18 SECTION 2.04. Registrar and Paying Agent............................... 19 SECTION 2.05. Paying Agent to Hold Money in Trust...................... 19 SECTION 2.06. Holder Lists............................................. 20 SECTION 2.07. Transfer and Exchange.................................... 20 SECTION 2.08. Replacement Securities................................... 21 SECTION 2.09. Outstanding Securities................................... 21 SECTION 2.10. Temporary Securities..................................... 21 SECTION 2.11. Cancelation.............................................. 22 SECTION 2.12. Defaulted Interest....................................... 22 SECTION 2.13. CUSIP and ISIN Numbers................................... 22 SECTION 2.14. When Securities Disregarded.............................. 22 ARTICLE 3 Redemption and Prepayment ------------------------- SECTION 3.01. Notices to Trustee....................................... 22 SECTION 3.02. Selection of Securities to be Redeemed or Purchased...... 23 SECTION 3.03. Notice of Redemption or Purchase......................... 23 SECTION 3.04. Effect of Notice of Redemption or Repurchase............. 24 SECTION 3.05. Deposit of Redemption or Purchase Price.................. 24 SECTION 3.06. Securities Redeemed in Part.............................. 25 SECTION 3.07. Optional Redemption; Special Redemption.................. 25 SECTION 3.08. Mandatory Redemption..................................... 26 SECTION 3.09. Repurchase Offers........................................ 26
iii ARTICLE 4 Covenants --------- SECTION 4.01. Payment of Securities.................................. 28 SECTION 4.02. Maintenance of Office or Agency........................ 28 SECTION 4.03. Commission Reports..................................... 28 SECTION 4.04. Compliance Certificate and Notices of Default.......... 29 SECTION 4.05. Taxes.................................................. 30 SECTION 4.06. Stay, Extension and Usury Laws......................... 30 SECTION 4.07. Restricted Payments.................................... 30 SECTION 4.08. Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries............................... 33 SECTION 4.09. Incurrence of Indebtedness and Issuance of Preferred Stock....................................... 34 SECTION 4.10. Asset Sales............................................ 36 SECTION 4.11. Transactions with Affiliates........................... 37 SECTION 4.12. Liens.................................................. 38 SECTION 4.13. Offer to Purchase Upon Change of Control............... 38 SECTION 4.14. Corporate Existence.................................... 39 SECTION 4.15. Business Activities.................................... 39 SECTION 4.16. Senior Subordinated Debt............................... 39 SECTION 4.17. Limitation on Issuances of Guarantees of Indebtedness.. 39 SECTION 4.18. Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries............................... 40 SECTION 4.19. Limitation on Ability of Company to Release Funds From Escrow........................................... 40 ARTICLE 5 Successors ---------- SECTION 5.01. Merger, Consolidation or Sale of Assets................ 40 SECTION 5.02. Successor Corporation Substituted...................... 41 ARTICLE 6 Defaults and Remedies --------------------- SECTION 6.01. Events of Default...................................... 41 SECTION 6.02. Acceleration........................................... 43 SECTION 6.03. Other Remedies......................................... 43 SECTION 6.04. Waiver of Defaults..................................... 44 SECTION 6.05. Control by Majority.................................... 44 SECTION 6.06. Limitation on Suits.................................... 44 SECTION 6.07. Rights of Holders of Securities to Receive Payment..... 45 SECTION 6.08. Collection Suit by Trustee............................. 45 SECTION 6.09. Trustee May File Proofs of Claim....................... 45 SECTION 6.10. Priorities............................................. 45 SECTION 6.11. Undertaking for Costs.................................. 46
iv ARTICLE 7 Trustee ------- SECTION 7.01. Duties of Trustee......................................... 46 SECTION 7.02. Rights of Trustee......................................... 47 SECTION 7.03. Individual Rights of Trustee.............................. 48 SECTION 7.04. Trustee's Disclaimer...................................... 48 SECTION 7.05. Notice of Defaults........................................ 48 SECTION 7.06. Reports by Trustee to Holders of the Securities........... 48 SECTION 7.07. Compensation and Indemnity................................ 49 SECTION 7.08. Replacement of Trustee.................................... 50 SECTION 7.09. Successor Trustee by Merger, Etc.......................... 50 SECTION 7.10. Eligibility; Disqualification............................. 51 SECTION 7.11. Preferential Collection of Claims Against the Company..... 51 ARTICLE 8 Legal Defeasance and Covenant Defeasance ---------------------------------------- SECTION 8.01. Option to Effect Legal Defeasance or Covenant Defeasance.. 51 SECTION 8.02. Legal Defeasance and Discharge............................ 51 SECTION 8.03. Covenant Defeasance....................................... 52 SECTION 8.04. Conditions to Legal or Covenant Defeasance................ 52 SECTION 8.05. Deposited Money and U.S. Government Securities To Be Held in Trust; Other Miscellaneous Provisions...... 54 SECTION 8.06. Repayment to the Company.................................. 54 SECTION 8.07. Reinstatement............................................. 54 ARTICLE 9 Amendment, Supplement and Waiver -------------------------------- SECTION 9.01. Without Consent of Holders of the Securities.............. 54 SECTION 9.02. With Consent of Holders of Securities..................... 55 SECTION 9.03. Compliance with Trust Indenture Act....................... 56 SECTION 9.04. Revocation and Effect of Consents......................... 56 SECTION 9.05. Notation on or Exchange of Securities..................... 57 SECTION 9.06. Trustee to Sign Amendments, Etc........................... 57 ARTICLE 10 Subordination ------------- SECTION 10.01. Agreement to Subordinate................................. 57 SECTION 10.02. Liquidation; Dissolution; Bankruptcy..................... 57 SECTION 10.03. Default on Designated Senior Debt........................ 58 SECTION 10.04. Acceleration of Securities............................... 58
v SECTION 10.05. When Distribution Must Be Paid Over........................ 59 SECTION 10.06. Notice by the Company...................................... 59 SECTION 10.07. Subrogation................................................ 59 SECTION 10.08. Relative Rights............................................ 59 SECTION 10.09. Subordination May Not Be Impaired by the Company........... 60 SECTION 10.10. Distribution or Notice to Representative................... 60 SECTION 10.11. Rights of Trustee and Paying Agent......................... 61 SECTION 10.12. Authorization to Effect Subordination...................... 61 SECTION 10.13. Amendments................................................. 61 ARTICLE 11 Guarantee of Securities ----------------------- SECTION 11.01. Subsidiary Guarantee....................................... 61 SECTION 11.02. Non-Impairement............................................ 62 SECTION 11.03. Guarantors May Consolidate, Etc., on Certain Terms......... 62 SECTION 11.04. Releases Following Sale of Assets, Merger, Sale of Capital Stock, Etc................................ 63 SECTION 11.05. Additional Guarantors...................................... 63 SECTION 11.06. Limitation on Guarantor Liability.......................... 64 SECTION 11.07. "Trustee" to Include Paying Agent.......................... 64 ARTICLE 12 Subordination of Subsidiary Guarantees -------------------------------------- SECTION 12.01. Agreement to Subordinate................................... 64 SECTION 12.02. Liquidation; Dissolution; Bankruptcy....................... 64 SECTION 12.03. Default on Designated Senior Debt.......................... 64 SECTION 12.04. Acceleration of Securities................................. 65 SECTION 12.05. When Distribution Must Be Paid Over........................ 65 SECTION 12.06. Notice by Guarantor........................................ 66 SECTION 12.07. Subrogation................................................ 66 SECTION 12.08. Relative Rights............................................ 66 SECTION 12.09. Subordination May Not Be Impaired by the Guarantors........ 66 SECTION 12.10. Distribution or Notice to Representative................... 67 SECTION 12.11. Rights of Trustee and Paying Agent......................... 67 SECTION 12.12. Authorization to Effect Subordination...................... 68 SECTION 12.13. Amendments................................................. 68 ARTICLE 13 Miscellaneous ------------- SECTION 13.01. Trust Indenture Act Controls............................... 68 SECTION 13.02. Notices.................................................... 68 SECTION 13.03. Communication by Holders of Securities with Other Holders of Securities..................................... 69 SECTION 13.04. Certificate and Opinion as to Conditions Precedent......... 69
vi SECTION 13.05. Statements Required in Certificate or Opinion............. 69 SECTION 13.06. Rules by Trustee and Agents............................... 70 SECTION 13.07. No Personal Liability of Directors, Officers, Employees and Stockholders......................................... 70 SECTION 13.08. Governing Law............................................. 70 SECTION 13.09. No Adverse Interpretation of Other Agreements............. 70 SECTION 13.11. Severability.............................................. 71 SECTION 13.12. Counterpart Originals..................................... 71 SECTION 13.13. Table of Contents, Headings, Etc.......................... 71 SECTION 13.14. Benefits of Indenture..................................... 71
Appendix A Provisions Relating to Original Securities, Additional Securities and Exchange Securities Exhibit A Form of Face of Initial Security Exhibit B Form of Face of Exchange Security Exhibit C Form of Supplemental Indenture Exhibit D Form of Transferee Letter of Representation INDENTURE, dated as of October 31, 2001, among Advance Stores Company, Incorporated, a Virginia corporation (the "Company"), as issuer, Advance Trucking Corporation, a Virginia corporation, LARALEV, INC., a Delaware corporation, and Western Auto Supply Company, a Delaware corporation (collectively, the "Guarantors") and The Bank of New York, a New York banking corporation, as trustee (the "Trustee"). The Company, the Guarantors and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the holders of (a) the Company's 10-1/4% Senior Subordinated Notes due 2008 issued on the date hereof (the "Original Securities"), (b) any Additional Securities (as defined herein) that may be issued on any Issue Date (all such Securities in clauses (a) and (b) being referred to collectively as the "Initial Securities") and (c) if and when issued as provided in a Registration Agreement (as defined in Appendix A hereto (the "Appendix")), the Company's Exchange 10-1/4% Senior Subordinated Notes due 2008 issued in an Exchange Offer in exchange for any Initial Securities (the "Exchange Securities" and, together with the Initial Securities, the "Securities"). On the date hereof, $200,000,000 in aggregate principal amount of Securities will be initially issued. Subject to the conditions and in compliance with the covenants set forth herein, the Company may issue an unlimited aggregate principal amount of Additional Securities. ARTICLE I Definitions and Incorporation by Reference ------------------------------------------ SECTION 1.01. Definitions. ------------ "Acquired Debt" means, with respect to any specified Person, (i) ------------- Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person or assumed in connection with the acquisition of any asset used or useful in a Permitted Business acquired by such specified Person; provided that such Indebtedness was not incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, or such acquisition, as the case may be. "Acquisition" means the acquisition by the Company of Discount ----------- pursuant to the Merger Agreement. "Additional Securities" means any 10-1/4% Senior Subordinated Notes --------------------- due 2008 issued under the terms of this Indenture subsequent to the Closing Date. "Affiliate" of any specified Person means any other Person directly or --------- indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. 2 "Agent" means any Registrar, Paying Agent or co-registrar. ----- "Asset Sale" means (i) the sale, lease (other than an operating ---------- lease), conveyance or other disposition of any assets or rights (including, without limitation, by way of a sale and leaseback) other than in the ordinary course of business (provided that the sale, lease (other than an operating lease), conveyance or other disposition of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole will be governed by the provisions of this Indenture under Section 5.01 hereto and/or the provisions of Section 4.13 hereto and not by the provisions of the Asset Sales covenant), and (ii) the sale by the Company and the issue or sale by any of the Restricted Subsidiaries of the Company of Equity Interests of any of the Company's Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions that have a fair market value (as determined in good faith by the Board of Directors) in excess of $1.0 million or for net cash proceeds in excess of $1.0 million. Notwithstanding the foregoing, the term Asset Sale shall not include: (i) a sale, conveyance or other disposition of assets or rights by the Company to a Wholly Owned Subsidiary of the Company or an entity that would become a Wholly Owned Subsidiary upon the consummation of such sale, conveyance or other disposition or by a Wholly Owned Subsidiary of the Company to the Company or to a Wholly Owned Subsidiary of the Company, (ii) an issuance of Equity Interests by a Restricted Subsidiary of the Company to the Company or to a Wholly Owned Subsidiary of the Company, (iii) a Restricted Payment that is permitted by the covenant described in Section 4.07 of this Indenture, (iv) the sale and leaseback of any assets within 270 days of the acquisition of such assets, (v) foreclosures on assets, (vi) the clearance of inventory, (vii) sales or dispositions of obsolete equipment or other assets in the ordinary course of business or (viii) the sale, conveyance or other disposition of accounts receivables and related assets customarily transferred in connection with a Qualified Receivables Transaction. "Bankruptcy Law" means Title 11, U.S. Code or any similar federal or -------------- state law for the relief of debtors. "Board of Directors" means the board of directors of the Company or ------------------ any authorized committee of such board of directors. "Business Day" means any day other than a Legal Holiday. ------------ "Capital Lease Obligation" means, at the time any determination ------------------------ thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means (i) in the case of a corporation, corporate ------------- stock, (ii) in the case of an association or business entity, any and all shares, interests, participation, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means (i) securities issued or unconditionally and ---------------- fully guaranteed or insured by the full faith and credit of the United States government or any agency or instrumentality thereof having maturities of not more than one year from the date of acquisition, (ii) obligations issued or fully guaranteed by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, 3 having one of the two highest ratings obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("Moody's"), (iii) certificates of deposit and eurodollar time deposits with maturities of one year or less from the date of acquisition, bankers' acceptances with maturities not exceeding one year and overnight bank deposits, in each case with any lender party to the Senior Credit Facility or with any domestic commercial bank having capital and surplus in excess of $250.0 million, (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (i) and (iii), above entered into with any financial institution meeting the qualifications specified in clause (iii) above, (v) commercial paper having one of the two of the highest ratings obtainable from either Moody's or S&P and in each case maturing within one year after the date of acquisition and (vi) investments in funds investing at least 90% of its assets in investments of the types described in clauses (i) through (v) above. "Change of Control" means the occurrence of any of the following: (i) ----------------- the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that (A) any "person" (as such term is defined in Section 3(a)(9) of the Exchange Act), other than the Principals and their Related Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of 50% or more of the Voting Stock of the Company (measured by voting power rather than number of shares) or (B) any "person" (as defined above), other than the Principals and their Related Parties becomes the "beneficial owner" (as defined above) of more than 33 1/3% of the Voting Stock of the Company (measured by voting power rather than number of shares) and the Principals and their Related Parties beneficially own, directly or indirectly, in the aggregate a lesser percentage of the Voting Stock of the Company than such other "person", (ii) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors or (iii) the Company consolidates with, or merges with or into, any Person, or any Person consolidates with, or merges with or into, the Company, in any such event pursuant to a transaction in which any of the outstanding Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where (A) the Voting Stock of the Company outstanding immediately prior to such transaction is converted into or exchanged for Voting Stock (other than Disqualified Stock) of the surviving or transferee Person and (B) either (1) the "beneficial owners" (as defined above) of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly through one or more subsidiaries, not less than a majority of the total Voting Stock of the surviving or transferee corporation immediately after such transaction or (2) if immediately prior to such transaction the Company is a direct or indirect subsidiary of any other Person (such other Person, the "Holding Company"), then the "beneficial owners" (as defined above) of the Voting Stock of such Holding Company immediately prior to such transaction own, directly or indirectly through one or more subsidiaries not less than a majority of the Voting Stock of the surviving or transferee corporation immediately after such transaction. "Closing Date" means the date of this Indenture ------------ "Code" means the Internal Revenue Code of 1986, as amended. ---- "Commission" means the Securities and Exchange Commission. ---------- "Company" means Advance Stores Company, Incorporated, a Virginia ------- corporation, and its permitted successors. 4 "Consolidated Cash Flow" means, with respect to any Person for any ---------------------- period, the Consolidated Net Income of such Person for such period plus (i) an amount equal to any extraordinary loss plus any net loss realized in connection with an Asset Sale (to the extent such losses were deducted in computing such Consolidated Net Income of such Person and its Restricted Subsidiaries), plus (ii) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period, to the extent that such provision for taxes was included in computing such Consolidated Net Income, plus (iii) consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income, plus (iv) depreciation and amortization (including amortization of goodwill and other intangibles but excluding amortization of a prepaid cash expenses that were paid in a prior period) and other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash charges in any future period or amortization of prepaid cash charge that was paid in a prior period) of such Person and its Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income, plus (v) any interest expense on Indebtedness of another Person that is Guaranteed by such Person or any of its Restricted Subsidiaries or secured by a Lien on assets of such Person or any of its Restricted Subsidiaries, in each case, to the extent that such interest expense was deducted in computing such Consolidated Net Income, plus (vi)(a) fees and expenses incurred in connection with the Recapitalization and deducted in the calculation of Consolidated Net Income and (b) bonuses paid for management and other employees of the Company and its subsidiaries in connection with, and substantially concurrently with, the Recapitalization in an amount not to exceed in the aggregate $11.5 million, minus (vii) non-cash items increasing such Consolidated Net Income for such period, in each case, on a consolidated basis and determined in accordance with GAAP. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and other non-cash charges of, a Restricted Subsidiary of a Person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent (and in the same proportion) that the Net Income of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such Person. "Consolidated Net Income" means, with respect to any Person for any ----------------------- period, the aggregate of the Net Income of such Person and its Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP, provided that (i) the Net Income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iv) the cumulative effect of a change in accounting principles shall be excluded and (v) the Net Income of, or any dividends or other distributions from, any Unrestricted Subsidiary, to the 5 extent otherwise included, shall be excluded, except to the extent actually distributed to the Company or one of its Restricted Subsidiaries. "Continuing Directors" means, as of any date of determination, any -------------------- member of the Board of Directors of the Company or any Holding Company of the Company who (i) was a member of such Board of Directors on the date of the 1998 Notes Indenture immediately after consummation of the Recapitalization or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were either members of such Board at the time of such nomination or election or are successor Continuing Directors appointed by such Continuing Directors (or their successors). "Corporate Trust Office of the Trustee" shall be at the address of the ------------------------------------- Trustee specified in Section 13.02 hereof or such other address as to which the Trustee may give notice to the Company. "Credit Agent" means The Chase Manhattan Bank in its capacity as ------------ Administrative Agent for the lenders party to the Senior Credit Facility or any successor thereto or any person otherwise appointed. "Credit Facilities" means, with respect to the Company and its ----------------- Restricted Subsidiaries, one or more debt facilities (including, without limitation, the Senior Credit Facility) or commercial paper facilities with banks or other institutional lenders, providing for revolving credit loans, term loans, receivables financing (other than a Qualified Receivables Transaction) or letters of credit and related security and collateral agreements, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring (including increasing the amount of available borrowings thereunder; provided that such increase in borrowings is permitted under the covenant contained in Section 4.09 hereto or adding Restricted Subsidiaries of the Company as additional borrowers or guarantors thereunder) all or any portion of the Indebtedness under such agreement or any successor or replacement agreement and whether by the same or any other agent, lender or group of lenders. "Default" means any event that is or with the passage of time or the ------- giving of notice or both would be an Event of Default. "Designated Senior Debt" means (i) any Senior Debt outstanding under ---------------------- the Senior Credit Facility and (ii) any other Senior Debt permitted under this Indenture the principal amount of which is or under which the holders thereof are committed to lend at least $25.0 million or more and that has been designated by the Company in the instrument creating or evidencing such Senior Debt as "Designated Senior Debt." "Discount" means Discount Auto Parts, Inc., a Florida corporation. -------- "Disqualified Stock" means any Capital Stock that, by its terms (or by ------------------ the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to the date on which the Securities mature. 6 "Equity Interests" means Capital Stock and all warrants, options or ---------------- other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Escrow Agreement" means the Escrow Agreement dated the date hereof ---------------- between the Company and The Bank of New York, as escrow agent. "Exchange Act" means the Securities Exchange Act of 1934, as amended. ------------ "Fixed Charges" means, with respect to any Person for any period, the ------------- sum, without duplication, of (i) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations, and (ii) the consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period; provided, however, that in no event shall any amortization of deferred financing costs incurred in connection with the Recapitalization be included in Fixed Charges, and (iii) any interest expense on Indebtedness of another Person to the extent such Indebtedness is Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon), and (iv) the product of (a) (without duplication) (1) all dividends paid or accrued in respect of Disqualified Stock which are not treated as interest for tax purposes for such period and (2) all cash dividend payments on any series of preferred stock of such Person or any of its Restricted Subsidiaries, other than dividend payments on Equity Interests payable solely in Equity Interests (other than Disqualified Stock of the Company), times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "Fixed Charge Coverage Ratio" means with respect to any Person for any --------------------------- period, the ratio of the Consolidated Cash Flow of such Person and its Restricted Subsidiaries for such period to the Fixed Charges of such Person and its Restricted Subsidiaries for such period. In the event that the Company or any of its Restricted Subsidiaries incurs, assumes, Guarantees, repays or redeems any Indebtedness (other than revolving credit borrowings) or issues or redeems preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, Guarantee, repayment or redemption of Indebtedness, or such issuance or redemption of preferred stock, as if the same had occurred at the beginning of the applicable four-quarter reference period. In addition, for purposes of making the computation referred to above, (i) acquisitions that have been made by the Company or any of its Restricted Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be deemed to have occurred on the first day of the four-quarter reference period and Consolidated Cash Flow and Fixed Charges for such reference period shall be calculated without giving effect to clause (iii) of the proviso set forth in the definition of Consolidated Net Income and shall reflect any pro forma expense and cost reductions attributable 7 to such acquisitions (as determined in good faith by a responsible financial or accounting officer of the Company and approved by the Company's Board of Directors), and (ii) the Consolidated Cash Flow and Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded and Consolidated Cash Flow shall reflect any pro forma expense or cost reductions relating to such discontinuance or disposition (as determined in good faith by a responsible financial or accounting officer of the Company and approved by the Company's Board of Directors), and (iii) the Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Fixed Charges will not be obligations of the referent Person or any of its Subsidiaries following the Calculation Date. "GAAP" means generally accepted accounting principles set forth in the ---- opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which were in effect on the date of the 1998 Notes Indenture; provided, however, that all reports and other financial information provided by the Company to the Holders, the Trustee and/or the Commission shall be prepared in accordance with generally accepted accounting principles, as in effect at the date of such report or such other financial information; provided, further, however, that if there are any differences between such principles and GAAP the Company shall provide a written explanation thereof. "Government Securities" means direct obligations of, or obligations --------------------- guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States is pledged. "Guarantee" means a guarantee (other than by endorsement of negotiable --------- instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Guarantor" means any Subsidiary that has issued a Subsidiary --------- Guarantee. "Hedging Obligations" means, with respect to any Person, the ------------------- obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or the value of foreign currencies. "Holder" means a Person in whose name a Security is registered. ------ "Holding" means, prior to the merger of Advance Holding Corporation ------- with and into Advance Auto Parts, Inc. (the "AHC Merger"), Advance Holding Corporation, a Virginia corporation, and, after the consummation of the AHC Merger, Advance Auto Parts, Inc., a Delaware corporation and the corporate parent of the Company, or its successors. "Holding Senior Discount Debentures" means the $112,000,000 aggregate ---------------------------------- principal amount of Holding's 12.875% Senior Discount Debentures due 2009 issued under the indenture dated as of April 15, 1998, between Holding and The Bank of New York, as successor to the corporate trust business of United States Trust Company of New York, as trustee. 8 "Indebtedness" means, with respect to any Person, any Obligation of ------------ such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or banker's acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing Indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all Indebtedness of others secured by a Lien on any asset of such Person (whether or not such Indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any Indebtedness of any other Person to the extent such Indebtedness is so Guaranteed. The amount of any Indebtedness outstanding as of any date shall be the accreted value thereof, in the case of any Indebtedness that does not require current payments of interest. "Investments" means, with respect to any Person, all investments by ----------- such Person in other Persons (including Affiliates) in the form of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel, relocation and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Restricted Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of Section 4.07 hereof. "Indenture" means this Indenture, as amended or supplemented from time --------- to time. "Insolvency or Liquidation Proceedings" means (i) any insolvency or ------------------------------------- bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding, relative to the Company or to the creditors of the Company, as such, or to the assets of the Company or (ii) any liquidation, dissolution, reorganization or winding up of the Company, whether voluntary or involuntary and involving insolvency or bankruptcy, or (iii) any assignment for the benefit of creditors or any other marshalling of assets and liabilities of the Company. "Issue Date", with respect to any Initial Securities, means the date ----------- on which such Initial Securities are originally issued. "Legal Holiday" means a Saturday, a Sunday or a day on which banking ------------- institutions in the City of New York, the city in which the principal Corporate Trust Office of the Trustee is located or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment shall be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. "Lien" means, with respect to any asset, any mortgage, lien, pledge, ---- charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, 9 recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any option or other agreement to sell or give a security interest and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Liquidated Damages" means any liquidated damages payable under a ------------------ Registration Agreement. "Management Note" means any promissory note given by an employee of --------------- the Company or any Affiliate thereof as part of the purchase price for Equity Interests in the Company or in Holding. "Merger Agreement" means the Agreement and Plan of Merger dated as of ---------------- August 7, 2001, among Holding, Advanced Auto Parts, Inc., AAP Acquisition Corporation, the Company and Discount. "Net Income" means, with respect to any Person, the net income (loss) ---------- of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the extinguishment of any Indebtedness of such Person or any of its Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by the ------------ Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), amounts required to be applied to the repayment of Indebtedness (other than Indebtedness under the Credit Facilities) secured by a Lien on the asset or assets that were the subject of such Asset Sale and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "1998 Notes" means the Company's 10-1/4% Senior Subordinated Notes due ---------- 2008 issued under the 1998 Notes Indenture. "1998 Notes Indenture" means the indenture dated as of April 15, 1998, -------------------- as supplemented, among the Company, as issuer, LARALEV, INC., as guarantor, and The Bank of New York, as successor to the corporate trust business of United States Trust Company of New York, as trustee, as in effect on the date hereof. "1998 Notes Issue Date" means April 15, 1998, the date of the issuance --------------------- of the 1998 Notes. "Non-Recourse Debt" means Indebtedness (i) as to which neither the ----------------- Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), or (b) is directly or 10 indirectly liable (as a guarantor or otherwise), and (ii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries, including the stock of any Unrestricted Subsidiary. "Obligations" means, with respect to any Indebtedness, any principal ----------- of, premium, if any, and interest on such Indebtedness and all other amounts, including without limitation, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing, evidencing, securing or guaranteeing such Indebtedness. "Offering Memorandum" means the Offering Memorandum dated October 24, ------------------- 2001, relating to the Company's offering and placement of the Original Securities. "Officer" means, with respect to any Person, the Chairman of the ------- Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Vice-President of such Person. "Officers' Certificate" means a certificate signed on behalf of the --------------------- Company by two Officers of the Company, one of whom must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company that meets the requirements of Section 13.05 hereof. "Opinion of Counsel" means an opinion from legal counsel who is ------------------ reasonably acceptable to the Trustee, that meets the requirements of Section 13.05 hereof. The counsel may be an employee of or counsel to the Company, any Subsidiary of the Company or the Trustee. "Pari Passu Indebtedness" means the 1998 Notes and any other ----------------------- Indebtedness that ranks pari passu in right of payment with the Securities. "Permitted Asset Swap" means any transfer of properties or assets by -------------------- the Company or any of its Restricted Subsidiaries in which at least 80% of the consideration received by the transferor consists of properties or assets (other than cash) that will be used in the business of such transferor; provided, that (i) the aggregate fair market value (as determined in good faith by the Board of Directors of the Company, and in the event that the aggregate fair market value as so determined exceeds $2.5 million, evidenced by a board resolution, a copy of which shall be delivered to the Trustee) of the property or assets (including cash) being transferred by the Company or such Restricted Subsidiary, as the case may be, is not greater than the aggregate fair market value (as determined in good faith by the Board of Directors of the Company) of the property or assets (including cash) received by the Company or such Restricted Subsidiary, as the case may be, in such exchange and (ii) the aggregate fair market value (as determined in good faith by the Board of Directors of the Company) of all property or assets transferred by the Company and any of its Restricted Subsidiaries in connection with exchanges in any period of twelve consecutive months shall not exceed $20 million. "Permitted Business" means the business conducted (or proposed to be ------------------ conducted, including activities referred to as being contemplated by the Company, as described or referred to in the Company's offering memorandum dated April 7, 1998, relating to the issuance of the 1998 Notes) by the Company and the Restricted Subsidiaries as of the 1998 Notes Issue Date and any and all business that in the good faith judgment of the Board of Directors of the Company are reasonably related businesses, including reasonably related extensions or expansions thereof. 11 "Permitted Investments" means (a) any Investment in the Company or in --------------------- a Restricted Subsidiary of the Company; (b) any Investment in Cash and Cash Equivalents; (c) any Investment by the Company or any Restricted Subsidiary in a Person, if as a result of such Investment (i) such Person becomes a Restricted Subsidiary of the Company or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Restricted Subsidiary of the Company; (d) any Restricted Investment made as a result of the receipt of non- cash consideration from an Asset Sale that was made pursuant to and in compliance with Section 4.10 hereto or any transaction not constituting an Asset Sale by reason of the $1.0 million threshold contained in the definition thereof; (e) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Company; (f) Hedging Obligations entered into in the ordinary course of the Company's or its Restricted Subsidiaries' businesses and otherwise in compliance with this Indenture; (g) loans and advances to employees and officers of the Company and its Restricted Subsidiaries in the ordinary course of business for bona fide business purposes not in excess of $1.0 million at any one time outstanding; (h) Management Notes in an aggregate amount not to exceed $3.0 million at any one time outstanding; (i) Investments received in settlement of obligations or pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of customers or other third parties; and (j) additional Investments not to exceed $10.0 million at any one time outstanding. "Permitted Junior Securities" means Equity Interests in the Company or --------------------------- debt securities that are subordinated to all Senior Debt (and any debt securities issued in exchange for Senior Debt) to substantially the same extent as, or to a greater extent than, the Securities are subordinated to Senior Debt pursuant to Article 10 of this Indenture. "Permitted Liens" means (i) Liens existing as of the 1998 Notes Issue --------------- Date to the extent and in the manner such Liens were in effect on the 1998 Notes Issue Date; (ii) Liens securing Senior Debt or Guarantees of Senior Debt permitted to be incurred under this Indenture; (iii) Liens securing the Securities and the Subsidiary Guarantees; (iv) Liens in favor of the Company or a Wholly Owned Restricted Subsidiary on assets of any Restricted Subsidiary of the Company; (v) Liens securing Permitted Refinancing Indebtedness which is incurred to refinance any Indebtedness which has been secured by a Lien permitted under this Indenture and which has been incurred in accordance with the provisions hereof; provided, however, that such Liens (A) are not materially less favorable to the Holders and are not materially more favorable to the lienholders with respect to such Liens than the Liens in respect of the Indebtedness being refinanced and (B) do not extend to or cover any property or assets of the Company or any of its Restricted Subsidiaries not securing the Indebtedness so refinanced; (vi) Liens for taxes, assessments or governmental charges or claims either (A) not delinquent or (B) contested in good faith by appropriate proceedings and as to which the Company or its Restricted Subsidiaries shall have set aside on its books such reserves as may be required pursuant to GAAP; (vii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (viii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security or similar obligations, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, indemnity, surety, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (ix) judgment Liens not giving rise to an Event of Default 12 so long as such Lien is adequately bonded and any appropriate legal proceedings which may have been duly initiated for the review of such judgement shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired; (x) easements, rights-of-way, zoning restrictions and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of the business of the Company or any of its Restricted Subsidiaries; (xi) any interest or title of a lessor under any lease, whether or not characterized as capital or operating; provided that such Liens do not extend to any property or assets which is not leased property subject to such lease; (xii) Liens securing Capital Lease Obligations and Indebtedness incurred in accordance with Section 4.09 hereof; provided, however, that (A) the Indebtedness shall not exceed the cost (including installation and delivery charges and related sales taxes) of such property or assets being acquired, remodeled or constructed and shall not be secured by any property or assets of the Company or any Restricted Subsidiary of the Company other than the property or assets of the Company or any Restricted Subsidiary of the Company other than the property and assets being acquired, remodeled, or constructed and (B) the Lien securing such Indebtedness shall be created within 180 days of such acquisition or the completion of such construction or remodeling; (xiii) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods; (xiv) Liens securing reimbursement obligations with respect to letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (xv) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual, or warranty requirements of the Company or any of its Restricted Subsidiaries, including rights of offset and set-off; (xvi) Liens securing Hedging Obligations which Hedging Obligations relate to Indebtedness that is otherwise permitted under this Indenture; (xvii) Liens securing Acquired Debt incurred in accordance with Section 4.09 hereof; provided that (A) such Liens secured such Acquired Debt at the time of and prior to the incurrence of such Acquired Debt by the Company or a Restricted Subsidiary of the Company and were not granted in connection with, or in anticipation of, the incurrence of such Acquired Debt by the Company or a Restricted Subsidiary of the Company and (B) such Liens do not extend to or cover any property or assets of the Company or any of its Restricted Subsidiaries other than the property or assets that secured the Acquired Debt prior to the time such Indebtedness became Acquired Debt of the Company or a Restricted Subsidiary of the Company and are not more favorable to the lienholders than those securing the Acquired Debt prior to the incurrence of such Acquired Debt by the Company or a Restricted Subsidiary of the Company; (xviii) leases or subleases granted to others not interfering in any material respect with the business of the Company or its Restricted Subsidiaries; (xix) Liens arising out of consignment or similar arrangements for the sale of goods entered into by the Company or any Restricted Subsidiary in the ordinary course of business; (xx) Liens arising from filing Uniform Commercial Code financing statements as a precautionary matter with respect to leases; and (xxi) Liens on accounts receivable and any asset related thereto in connection with a Qualified Receivables Transaction. "Permitted Refinancing Indebtedness" means any Indebtedness of the ---------------------------------- Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, prepay, retire, renew, replace, defease or refund Indebtedness of the Company or any of its Restricted Subsidiaries; provided that: (i) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus accrued interest on, the Indebtedness so extended, refinanced, renewed, prepaid, retired, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith including premiums paid, if any, to the holders thereof); (ii) such Permitted Refinancing Indebtedness has a final maturity date at or later 13 than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, prepaid, retired, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, prepaid, retired, replaced, defeased or refunded is subordinated in right of payment to the Securities, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Securities on terms at least as favorable to the Holders of Securities as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Person" means an individual, partnership, corporation, limited ------ liability company, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof. "Principals" means Freeman Spogli & Co. Incorporated. ---------- "Qualified Receivables Transaction" means any transaction or series of --------------------------------- transactions that may be entered into by the Company or any Restricted Subsidiary pursuant to which the Company or any Restricted Subsidiary may sell, convey or otherwise transfer to any Person, or may grant a security interest in, any accounts receivable (whether now existing or arising in the future) of the Company or any Restricted Subsidiary and any asset related thereto including, without limitation, all collateral securing such accounts receivable, all contracts and all guarantees or other obligations in respect of such accounts receivable, proceeds of such accounts receivable and other assets which are customarily transferred, or in respect of which security interests are customarily granted, in connection with asset securitization transactions involving accounts receivable. "Recapitalization" shall have the meaning assigned to such term in the ---------------- 1998 Notes Indenture. "Related Party" with respect to any Principal means (A) any ------------- controlling stockholder or a majority (or more) owned Subsidiary of such Principal or, in the case of an individual, any spouse or immediate family member of such Principal, or (B) any fund, trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding a majority (or more) controlling interest that consists of such Principal and/or such other Persons referred to in the immediately preceding clause (A). "Responsible Officer" when used with respect to the Trustee, means any ------------------- officer within the Corporate Trust Administration of the Trustee (or any successor group of the Trustee) or any other officer of the trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Investment" means an Investment other than a Permitted --------------------- Investment. "Restricted Subsidiary" means any Subsidiary of the Company other than --------------------- an Unrestricted Subsidiary. 14 "Senior Credit Facility" means the credit facility governed by the ---------------------- credit agreement to be entered into among the Company, Holding, the lenders party thereto, The Chase Manhattan Bank, as administrative agent, Credit Suisse First Boston and Lehman Commercial Paper Inc., as co-syndication agents, concurrently with the Acquisition, as described in the Offering Memorandum. "Senior Debt" means (i) all Indebtedness of the Company or any ----------- Guarantor under Credit Facilities and all Hedging Obligations with respect thereto, (ii) other Indebtedness of the Company or any of its Guarantors permitted to be incurred under the terms of this Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Securities and (iii) all Obligations with respect to the foregoing. Notwithstanding anything to the contrary in the foregoing, Senior Debt will not include (w) any liability for federal, state, local or other taxes owed or owing by the Company, (x) any Indebtedness of the Company to any of its Restricted Subsidiaries or other Affiliates, (y) any trade payables or (z) any Indebtedness that is incurred in violation of this Indenture or that was incurred in violation of the 1998 Notes Indenture (if incurred prior to the Closing Date). "Significant Subsidiary" means any Subsidiary that would be a ---------------------- "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Act, as such Regulation is in effect on the date of the 1998 Notes Indenture. "Stated Maturity" means, with respect to any installment of interest --------------- or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness (including any scheduled sinking fund payment), and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Subsidiary" means, with respect to any Person, (i) any corporation, ---------- association or other business entity of which more than 50% of the total Voting Stock thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "Subsidiary Guarantees" means each Guarantee of the obligations with --------------------- respect to the Securities issued by a Subsidiary pursuant to the terms of this Indenture. "Tax Sharing Agreement" means, the tax sharing agreement among --------------------- Holding, the Company and any one or more of Holding's subsidiaries, as amended from time to time, so long as the method of calculating the amount of the Company's (or any Restricted Subsidiary's) payments, if any, to be made thereunder is not less favorable to the Company than as provided in such agreement as in effect on the 1998 Notes Issue Date, as determined in good faith by the Board of Directors of the Company. "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code (S)(S) --- 77aaa- 77bbbb), as amended, as in effect on the date hereof. 15 "Trustee" means The Bank of New York until a successor replaces it in ------- accordance with the applicable provisions of this Indenture, and thereafter means the successor. "Unrestricted Subsidiary" means any Subsidiary of the Company that is ----------------------- designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a board resolution, a copy of which shall be delivered to the Trustee, but only to the extent that such Subsidiary: (a) has no Indebtedness other than Non- Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (c) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; and (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with a Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted hereunder. If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of this Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date. The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness and issuance of preferred stock by a Restricted Subsidiary of the Company of any outstanding Indebtedness or outstanding issue of preferred stock of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness and preferred stock is permitted to be incurred or issued under this Indenture, (ii) such Subsidiary becomes a Guarantor and (iii) no Default or Event of Default would exist following such designation. "Voting Stock" of any Person as of any date means the Capital Stock of ------------ such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "Weighted Average Life to Maturity" means, when applied to any --------------------------------- Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Wholly Owned Subsidiary" of any Person means a Restricted Subsidiary ----------------------- of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person or by such Person and one or more Wholly Owned Restricted Subsidiaries of such Person. 16 SECTION 1.02. Other Definitions. ------------------ Term Defined in Section ---- ------------------ "Affiliate Transaction" 4.11 "Appendix" Preamble "Asset Sale Offer" 4.10 "Asset Sale Offer Triggering Event" 4.10 "Change of Control Offer" 4.13 "Change of Control Payment" 4.13 "Change of Control Payment Date" 4.13 "Covenant Defeasance" 8.03 "Custodian" 6.01 "Definitive Securities" Appendix A "Depositary" Appendix A "Event of Default" 6.01 "Excess Proceeds" 4.10 "Exchange Offer" Appendix A "Exchange Securities" Preamble "Global Securities" Appendix A "Guaranteed Debt" 4.17 "incur" 4.09 "Initial Securities" Preamble "Legal Defeasance" 8.02 "Non-Payment Default" 10.03 "Offer Amount" 3.09 "Offer Period" 3.09 "Original Securities" Preamble "Pari Passu Indebtedness" 4.10 "Payment Blockage Notice" 10.03 "Paying Agent" 2.04 "Payment Default" 6.01 "Permitted Debt" 4.09 "protected purchaser" 2.08 "Purchase Date" 3.09 "Registrar" 2.04 "Registration Agreement" Appendix A "Representative" 10.05 "Repurchase Offer" 3.09 "Restricted Payments" 4.07 "Securities Custodian" Appendix A "Special Redemption" 3.07 "Special Redemption Date" 3.07 "Special Redemption Price" 3.07 "Transfer Restricted Securities" Appendix A SECTION 1.03. Incorporation by Reference of Trust Indenture Act. -------------------------------------------------- Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in, and made a part of, this Indenture. The following TIA terms used in this Indenture have the following meanings: 17 "indenture securities" means the Securities and the Subsidiary -------------------- Guarantees; "indenture security holder" means a Holder of a Security; ------------------------- "indenture to be qualified" means this Indenture; ------------------------- "indenture trustee" or "institutional trustee" means the Trustee; ----------------- --------------------- "obligor" on the Securities means the Company, each Guarantor and any ------- successor obligor upon the Securities. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by the Commission rule under the TIA have the meanings so assigned to them therein. SECTION 1.04. Rules of Construction. Unless the context otherwise ---------------------- requires: (1) a term has the meaning assigned to it herein; (2) an accounting term not otherwise defined herein has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) references to sections of or rules under the Securities Act shall be deemed to include substitute, replacement or successor sections or rules adopted by the Commission from time to time. ARTICLE 2 The Securities -------------- SECTION 2.01. Amount of Securities; Issuable in Series. The ----------------------------------------- aggregate principal amount of Securities which may be authenticated and delivered under this Indenture shall not be limited. The Securities may be issued in one or more series. All Securities of any one series shall be substantially identical except as to denomination. With respect to any Additional Securities issued after the Closing Date (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 2.07, 2.08, 2.09, 2.10 or 3.06 or the Appendix), there shall be (a) established in or pursuant to a resolution of the Board of Directors and (b)(i) set forth or determined in the manner provided in an Officers' Certificate or (ii) established in one or more indentures supplemental hereto, prior to the issuance of such Additional Securities: 18 (1) whether such Additional Securities shall be issued as part of a new or existing series of Securities and the title of such Additional Securities (which shall distinguish the Additional Securities of the series from Securities of any other series); (2) the aggregate principal amount of such Additional Securities which may be authenticated and delivered under this Indenture, which may be in an unlimited aggregate principal amount; (3) the issue price and issuance date of such Additional Securities, including the date from which interest on such Additional Securities shall accrue; (4) if applicable, that such Additional Securities shall be issuable in whole or in part in the form of one or more Global Securities and, in such case, the respective depositaries for such Global Securities, the form of any legend or legends which shall be borne by such Global Securities in addition to or in lieu of those set forth in Exhibit A hereto and any circumstances in addition to or in lieu of those set forth in Section 2.3 of the Appendix in which any such Global Security may be exchanged in whole or in part for Additional Securities registered, or any transfer of such Global Security in whole or in part may be registered, in the name or names of Persons other than the depositary for such Global Security or a nominee thereof; and (5) if applicable, that such Additional Securities shall not be issued in the form of Initial Securities as set forth in Exhibit A, but shall be issued in the form of Exchange Securities as set forth in Exhibit B. If any of the terms of any Additional Securities are established by action taken pursuant to a resolution of the Board of Directors, a copy of an appropriate record of such action shall be certified by the Secretary or any Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers' Certificate or the indenture supplemental hereto setting forth the terms of the Additional Securities. SECTION 2.02. Form and Dating. Provisions relating to the Original ---------------- Securities, the Additional Securities and the Exchange Securities are set forth in the Appendix, which is hereby incorporated in and expressly made a part of this Indenture. The (a) Original Securities and the Trustee's certificate of authentication and (b) any Additional Securities (if issued as Transfer Restricted Securities) and the Trustee's certificate of authentication shall each be substantially in the form of Exhibit A hereto, which is hereby incorporated in and expressly made a part of this Indenture. The Exchange Securities and any Additional Securities issued other than as Transfer Restricted Securities and the Trustee's certificate of authentication shall each be substantially in the form of Exhibit B hereto, which is hereby incorporated in and expressly made a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company or any Guarantor is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). Each Security shall be dated the date of its authentication. The Securities shall be issuable only in registered form without interest coupons and only in denominations of $1,000 and integral multiples thereof. SECTION 2.03. Execution and Authentication. Two Officers shall sign ----------------------------- the Securities for the Company by manual or facsimile signature. 19 If an Officer whose signature is on a Security no longer holds that office at the time the Trustee authenticates the Security, the Security shall be valid nevertheless. A Security shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate and make available for delivery Securities as set forth in the Appendix. The Trustee may appoint an authenticating agent reasonably acceptable to the Company to authenticate the Securities. Any such appointment shall be evidenced by an instrument signed by a Responsible Officer, a copy of which shall be furnished to the Company. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as any Registrar, Paying Agent or agent for service of notices and demands. SECTION 2.04. Registrar and Paying Agent. (a) The Company shall --------------------------- maintain an office or agency where Securities may be presented for registration of transfer or for exchange (the "Registrar") and an office or agency where Securities may be presented for payment (the "Paying Agent"). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent, and the term "Registrar" includes any co-registrars. The Company initially appoints the Trustee as (i) Registrar and Paying Agent in connection with the Securities and (ii) the Securities Custodian with respect to the Global Securities. (b) The Company shall enter into an appropriate agency agreement with any Registrar or Paying Agent not a party to this Indenture, which shall incorporate the terms of the TIA. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee of the name and address of any such agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.07. The Company or any of its domestically organized Wholly Owned Subsidiaries may act as Paying Agent or Registrar. (c) The Company may remove any Registrar or Paying Agent upon written notice to such Registrar or Paying Agent and to the Trustee; provided, however, -------- ------- that no such removal shall become effective until (i) acceptance of an appointment by a successor as evidenced by an appropriate agreement entered into by the Company and such successor Registrar or Paying Agent, as the case may be, and delivered to the Trustee or (ii) notification to the Trustee that the Trustee shall serve as Registrar or Paying Agent until the appointment of a successor in accordance with clause (i) above. The Registrar or Paying Agent may resign at any time upon written notice to the Company and the Trustee. (d) The Trustee is authorized to enter into a letter of representation with the Depositary in the form provided to the Trustee by the Company and to act in accordance with such letter. SECTION 2.05. Paying Agent to Hold Money in Trust. Prior to each due ------------------------------------ date of the principal of and interest and liquidated damages (if any) on any Security, the Company shall 20 deposit with the Paying Agent (or if the Company or a Wholly Owned Subsidiary is acting as Paying Agent, segregate and hold in trust for the benefit of the Persons entitled thereto) a sum sufficient to pay such principal, interest and liquidated damages (if any) when so becoming due. The Company shall require each Paying Agent (other than the Trustee) to agree in writing that the Paying Agent shall hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal of and interest and liquidated damages (if any) on the Securities, and shall notify the Trustee of any default by the Company in making any such payment. If the Company or a Subsidiary of the Company acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust fund. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed by the Paying Agent. Upon complying with this Section, the Paying Agent shall have no further liability for the money delivered to the Trustee. SECTION 2.06. Holder Lists. The Trustee shall preserve in as current ------------- a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders. If the Trustee is not the Registrar, the Company shall furnish, or cause the Registrar to furnish, to the Trustee, in writing at least five Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders. SECTION 2.07. Transfer and Exchange. The Securities shall be issued ---------------------- in registered form and shall be transferable only upon the surrender of a Security for registration of transfer and in compliance with the Appendix. When a Security is presented to the Registrar with a request to register a transfer, the Registrar shall register the transfer as requested if its requirements therefor are met. When Securities are presented to the Registrar with a request to exchange them for an equal principal amount of Securities of other denominations, the Registrar shall make the exchange as requested if the same requirements are met. To permit registration of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Securities at the Registrar's request. The Company may require payment of a sum sufficient to pay all taxes, assessments or other governmental charges in connection with any transfer or exchange pursuant to this Section. The Company shall not be required to make and the Registrar need not register transfers or exchanges of Securities selected for redemption (except, in the case of Securities to be redeemed in part, the portion thereof not to be redeemed) or any Securities for a period of 15 days before a selection of Securities to be redeemed. Prior to the due presentation for registration of transfer of any Security, the Company, the Guarantors, the Trustee, the Paying Agent, and the Registrar may deem and treat the Person in whose name a Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and (subject to paragraph 2 of the Securities) interest, if any, on such Security and for all other purposes whatsoever, whether or not such Security is overdue, and none of the Company, any Guarantor, the Trustee, the Paying Agent, or the Registrar shall be affected by notice to the contrary. Any Holder of a Global Security shall, by acceptance of such Global Security, agree that transfers of beneficial interest in such Global Security may be effected only through a book-entry system maintained by (a) the Holder of such Global Security (or its agent) or (b) any Holder of a beneficial interest in such Global Security, and that ownership of a beneficial interest in such Global Security shall be required to be reflected in a book entry. 21 All Securities issued upon any transfer or exchange pursuant to the terms of this Indenture shall evidence the same debt and shall be entitled to the same benefits under this Indenture as the Securities surrendered upon such transfer or exchange. SECTION 2.08. Replacement Securities. If a mutilated Security is ----------------------- surrendered to the Registrar or if the Holder of a Security claims that the Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security if the requirements of Section 8-405 of the New York Uniform Commercial Code are met, such that the Holder (a) satisfies the Company or the Trustee within a reasonable time after such Holder has notice of such loss, destruction or wrongful taking and the Registrar does not register a transfer prior to receiving such notification, (b) makes such request to the Company or the Trustee prior to the Security being acquired by a protected purchaser as defined in Section 8-303 of the New York Uniform Commercial Code (a "protected purchaser") and (c) satisfies any other reasonable requirements of the Trustee. If required by the Trustee or the Company, such Holder shall furnish an indemnity bond sufficient in the judgment of the Trustee to protect the Company, the Trustee, the Paying Agent and the Registrar from any loss that any of them may suffer if a Security is replaced. The Company and the Trustee may charge the Holder for their expenses in replacing a Security. In the event any such mutilated, lost, destroyed or wrongfully taken Security has become or is about to become due and payable, the Company in its discretion may pay such Security instead of issuing a new Security in replacement thereof. Every replacement Security is an additional obligation of the Company. The provisions of this Section 2.08 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, lost, destroyed or wrongfully taken Securities. SECTION 2.09. Outstanding Securities. Securities outstanding at any ----------------------- time are all Securities authenticated by the Trustee except for those canceled by it, those delivered to it for cancelation and those described in this Section as not outstanding. Subject to Section 2.14, a Security does not cease to be outstanding because the Company or an Affiliate of the Company holds the Security. If a Security is replaced pursuant to Section 2.08, it ceases to be outstanding unless the Trustee and the Company receive proof satisfactory to them that the replaced Security is held by a protected purchaser. If the Paying Agent segregates and holds in trust, in accordance with this Indenture, on a redemption date or maturity date money sufficient to pay all principal, interest and liquidated damages, if any, payable on that date with respect to the Securities (or portions thereof) to be redeemed or maturing, as the case may be, and the Paying Agent is not prohibited from paying such money to the Holders on that date pursuant to the terms of this Indenture, then on and after that date such Securities (or portions thereof) cease to be outstanding and interest on them ceases to accrue. SECTION 2.10. Temporary Securities. In the event that Definitive --------------------- Securities are to be issued under the terms of this Indenture, until such Definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of Definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate Definitive 22 Securities and make them available for delivery in exchange for temporary Securities upon surrender of such temporary Securities at the office or agency of the Company, without charge to the Holder. SECTION 2.11. Cancelation. The Company at any time may deliver ------------ Securities to the Trustee for cancelation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel all Securities surrendered for registration of transfer, exchange, payment or cancelation and shall dispose of canceled Securities in accordance with its customary procedures or deliver canceled Securities to the Company pursuant to written direction by an Officer. The Company may not issue new Securities to replace Securities it has redeemed, paid or delivered to the Trustee for cancelation. The Trustee shall not authenticate Securities in place of canceled Securities other than pursuant to the terms of this Indenture. SECTION 2.12. Defaulted Interest. If the Company defaults in a ------------------- payment of interest on the Securities, the Company shall pay the defaulted interest (plus interest on such defaulted interest to the extent lawful) in any lawful manner. The Company may pay the defaulted interest to the Persons who are Holders on a subsequent special record date. The Company shall fix or cause to be fixed any such special record date and payment date to the reasonable satisfaction of the Trustee and shall promptly mail or cause to be mailed to each Holder a notice that states the special record date, the payment date and the amount of defaulted interest to be paid. SECTION 2.13. CUSIP and ISIN Numbers. The Company in issuing the ----------------------- Securities may use "CUSIP" and "ISIN" numbers (if then generally in use) and, if so, the Trustee shall use "CUSIP" and "ISIN" numbers in notices of redemption as a convenience to Holders; provided, however, that any such notice may state that -------- ------- no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company shall promptly notify the Trustee of any change in the "CUSIP" and "ISIN" numbers. SECTION 2.14. When Securities Disregarded. In determining whether ---------------------------- the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company, any Guarantor or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any Guarantor shall be disregarded and deemed not to be outstanding, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which the Trustee knows are so owned shall be so disregarded. Subject to the foregoing, only Securities outstanding at the time shall be considered in any such determination. ARTICLE 3 Redemption and Prepayment ------------------------- SECTION 3.01. Notices to Trustee. If the Company elects to redeem ------------------- Securities pursuant to the optional redemption provisions of Section 3.07(a) or is required to redeem Securities pursuant to Section 3.07(b), it shall furnish to the Trustee an Officers' Certificate 23 setting forth (i) the Section of this Indenture pursuant to which the redemption shall occur, (ii) the redemption date, (iii) the principal amount of Securities to be redeemed and (iv) the redemption price. The Company shall give notice to the Trustee provided for in this paragraph at least 45 days but not more than 60 days before a redemption date if the redemption is pursuant to Section 3.07(a) or at least 15 days prior to the Special Redemption Date if the redemption is pursuant to Section 3.07(b), unless in each case, a shorter period is acceptable to the Trustee. If the Company is required to make an offer to purchase Securities pursuant to Section 4.10 or 4.13 hereof, it shall furnish to the Trustee, at least 30 days before the scheduled purchase date, an Officers' Certificate setting forth (i) the section of this Indenture pursuant to which the offer to purchase shall occur, (ii) the terms of the offer, (iii) the principal amount of Securities to be purchased, (iv) the purchase price, (v) the purchase date and (vi) and further setting forth a statement to the effect that (a) the Company or one its Subsidiaries has affected an Asset Sale and there are Excess Proceeds aggregating more than $10.0 million or (b) a Change of Control has occurred, as applicable. SECTION 3.02. Selection of Securities to be Redeemed or Purchased. ---------------------------------------------------- If less than all of the Securities are to be redeemed or repurchased at any time, selection of Securities for redemption or repurchase will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Securities are listed, or, if the Securities are not so listed, on a pro rata basis, by lot or by such other method as the Trustee shall deem fair and appropriate; provided that no Securities of $1,000 principal amount or less shall be redeemed or repurchased in part. Notices of redemption or repurchase shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date or repurchase date to each Holder of Securities to be redeemed or repurchased at its registered address. Notices of redemption or repurchase may not be conditional. If any Security is to be redeemed or repurchased in part only, the notice of redemption or repurchase that relates to such Security shall state the portion of the principal amount thereof to be redeemed or repurchased. A new Security in principal amount equal to the unredeemed or unpurchased portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Security. Securities called for redemption or repurchase become due on the date fixed for redemption or repurchase. On and after the redemption date or repurchase date, interest and Liquidated Damages, if any, will cease to accrue on Securities or portions of them called for redemption or repurchase unless the Company defaults in making the redemption or repurchase payment. SECTION 3.03. Notice of Redemption or Purchase. At least 30 days but --------------------------------- not more than 60 days before a redemption date or repurchase date (except in the case of a redemption pursuant to Section 3.07(b), in which case notice shall be mailed at least 10 days prior to the Special Redemption Date), the Company shall mail or cause to be mailed by first class mail, a notice of redemption or notice of repurchase to each Holder whose Securities are to be redeemed. The notice shall identify the Securities to be redeemed and shall state: (1) the redemption date or repurchase date, as the case may be; (2) the redemption price or repurchase price, as the case may be, for the Securities and accrued and unpaid interest, and Liquidated Damages, if any; (3) if any Security is being redeemed or repurchased in part, the portion of the principal amount of such Securities to be redeemed and that, after the redemption date, 24 upon surrender of such Security, a new Security or Securities in principal amount equal to the unredeemed portion shall be issued upon surrender of the original Security; (4) the name and address of the Paying Agent; (5) that Securities called for redemption or repurchase must be surrendered to the Paying Agent to collect the redemption price or repurchase price, as the case may be; (6) that, unless the Company defaults in making such payment, interest and Liquidated Damages, if any, on Securities called for redemption or repurchase, as the case may be, ceases to accrue on and after the redemption date or repurchase date, as the case may be; (7) the paragraph of the Securities and/or Section of this Indenture pursuant to which the Securities called for redemption are being redeemed; and (8) that no representation is made as to the correctness or accuracy of the CUSIP or ISIN number, if any, listed in such notice or printed on the Securities. At the Company's request, the Trustee shall give the notice of redemption or notice of repurchase in the Company's name and at the Company's expense; provided, however, that the Company shall have delivered to the Trustee, at least 45 days prior to the redemption date or repurchase date or such shorter period as shall be acceptable to the Trustee (except in the case of a redemption pursuant to Section 3.07(b), in which case one Business Day prior to the mailing date for the notice of such redemption), an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in the notice as provided in the preceding paragraph. The notice mailed in the manner herein provided shall be conclusively presumed to have been duly given whether or not the Holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder of any Security shall not affect the validity of the proceeding for the redemption or repurchase of any other Security. SECTION 3.04. Effect of Notice of Redemption or Repurchase. Once --------------------------------------------- notice of redemption or notice of repurchase is mailed in accordance with Section 3.03 hereof, Securities called for redemption or repurchase, as the case may be, become irrevocably due and payable on the redemption date at the redemption price or on the repurchase date at the repurchase price, as the case may be, plus accrued and unpaid interest and Liquidated Damages, if any, to such date. Any such notice may not be conditional. SECTION 3.05. Deposit of Redemption or Purchase Price. On or before ---------------------------------------- 10:00 a.m. (New York City time) on each redemption date or the date on which Securities must be accepted for purchase pursuant to Section 4.10 or 4.13, the Company shall deposit with the Trustee or with the Paying Agent (or, if the Company or any of its Subsidiaries is Paying Agent, shall segregate and hold in trust) money sufficient to pay the redemption price of and accrued and unpaid interest and Liquidated Damages, if any, on all Securities to be redeemed or purchased on that date. The Trustee or the Paying Agent shall promptly return to the Company upon its written request any money deposited with the Trustee or the Paying Agent by the Company in excess of the amounts necessary to pay the redemption price of (including any applicable premium), accrued interest and Liquidated Damages, if any, on all Securities to be redeemed or purchased. If Securities called for redemption or tendered in an Asset Sale Offer or Change of Control Offer are paid or if the Company has deposited with the Trustee or Paying Agent (or, if 25 the Company or any of its Subsidiaries is Paying Agent, shall segregate and hold in trust) money sufficient to pay the redemption or purchase price of, unpaid and accrued interest and Liquidated Damages, if any, on all Securities to be redeemed or purchased, on and after the redemption or purchase date interest and Liquidated Damages, if any, shall cease to accrue on the Securities or the portions of Securities called for redemption or tendered and not withdrawn in an Asset Sale Offer or Change of Control Offer (regardless of whether certificates for such securities are actually surrendered). If a Security is redeemed or purchased on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest and Liquidated Damages, if any, shall be paid to the Person in whose name such Security was registered at the close of business on such record date. If any Security called for redemption shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the preceding paragraph, interest shall be paid on the unpaid principal and Liquidated Damages, if any, from the redemption or purchase date until such principal and Liquidated Damages, if any, is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case, at the rate provided in the Securities and in Section 4.01 hereof. SECTION 3.06. Securities Redeemed in Part. Upon surrender of a ---------------------------- Security that is redeemed in part, the Company shall issue and, upon the Company's written request, the Trustee shall authenticate for the Holder at the expense of the Company a new Security equal in principal amount to the unredeemed portion of the Security surrendered. SECTION 3.07. Optional Redemption; Special Redemption. (a) Optional ---------------------------------------- Redemption. Except as set forth in Section 3.07(b), the Securities will not be redeemable at the Company's option prior to April 15, 2003. Thereafter, the Securities will be subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages, if any, thereon, to the applicable redemption date, if redeemed during the twelve-month period beginning on April 15 of the years indicated below:
YEAR PERCENTAGE ---- ---------- 2003....................................... 105.125% 2004....................................... 103.417% 2005....................................... 101.708% 2006 and thereafter........................ 100.000%
(b) Special Redemption. Notwithstanding the foregoing, in the event ------------------- that, (i) in the sole judgment of the Company, the Acquisition will not be consummated by December 31, 2001, then the Company may redeem the Securities, in whole but not in part, at its sole option prior to January 15, 2002, at a redemption price (the "Special Redemption Price") in cash equal to 101% of the issue price of the Securities plus accrued and unpaid interest (including accrued original issue discount) to the Special Redemption Date or (ii) the Acquisition has not be consummated on or prior to December 31, 2001, then the Company will mandatorily redeem all the Securities on January 15, 2002, at the Special Redemption Price. The "Special Redemption Date" means the earlier of (a) the date that the Company elects to redeem all the Securities if in the sole judgment of the Company, the Acquisition will not be consummated by December 31, 26 2001, or (b) January 15, 2002, if the Acquisition is not consummated by December 31, 2001 (either redemption, a "Special Redemption"). SECTION 3.08. Mandatory Redemption. Except as set forth under --------------------- Sections 3.07(b), 3.09, 4.10 and 4.13 hereof, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Securities. SECTION 3.09. Repurchase Offers. In the event that the Company shall ------------------ be required to commence an offer to all Holders to repurchase Securities (a "Repurchase Offer") pursuant to Section 4.10 hereof, an "Asset Sale," or pursuant to Section 4.13 hereof, a "Change of Control Offer," the Company shall follow the procedures specified below. A Repurchase Offer shall commence no earlier than 30 days and no later than 60 days after a Change of Control (unless the Company is not required to make such offer pursuant to the last paragraph of Section 4.13 hereof) or an Asset Sale Offer Triggering Event (as defined in Section 4.10), as the case may be, and remain open for a period of twenty (20) Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Offer Period"). No later than five (5) Business Days after the termination of the Offer Period (the "Purchase Date"), the Company shall purchase the principal amount of Securities required to be purchased pursuant to Section 4.10 hereof, in the case of an Asset Sale Offer, or 4.13 hereof, in the case of a Change of Control Offer (the "Offer Amount") or, if less than the Offer Amount has been tendered, all Securities tendered in response to the Repurchase Offer. Payment for any Securities so purchased shall be made in the same manner as interest payments are made. If the Purchase Date is on or after an interest record date and on or before the related interest payment date, any accrued and unpaid interest and Liquidated Damages, if any, shall be paid to the Person in whose name a Security is registered at the close of business on such record date, and no additional interest or Liquidated Damages, if any, shall be payable to Holders who tender Securities pursuant to the Repurchase Offer. Upon the commencement of a Repurchase Offer, the Company shall send, by first class mail, a notice to the Trustee and each of the Holders. The notice shall contain all instructions and materials necessary to enable such Holders to tender Securities pursuant to such Repurchase Offer. The Repurchase Offer shall be made to all Holders and, to the extent required by Section 4.10, to all holders of Pari Passu Indebtedness. The notice, which shall govern the terms of the Repurchase Offer, shall describe the transaction or transactions that constitute the Change of Control or Asset Sale Offer Triggering Event, as the case may be, and shall state: (a) that the Repurchase Offer is being made pursuant to this Section 3.09 and Section 4.10 or 4.13 hereof, as the case may be, and the length of time the Repurchase Offer shall remain open; (b) the Offer Amount, the purchase price and the Purchase Date; (c) that any Security not tendered or accepted for payment shall continue to accrue interest; (d) that, unless the Company defaults in making such payment, any Security accepted for payment pursuant to the Repurchase Offer shall cease to accrue interest and Liquidated Damages, if any, after the Purchase Date; 27 (e) that Holders electing to have a Security purchased pursuant to a Repurchase Offer shall be required to surrender the Security, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Security, duly completed, or transfer by book-entry transfer, to the Company, the Depositary, or the Paying Agent at the address specified in the notice not later than the close of business on the last day of the Offer Period; (f) that Holders shall be entitled to withdraw their election if the Company, the Depositary or the Paying Agent, as the case may be, receives, not later than three Business Days prior to the expiration of the Offer Period, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Security purchased; (g) that, if the aggregate principal amount of Securities surrendered by Holders exceeds the Offer Amount, the Company shall select the Securities to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Securities in denominations of $1,000, or integral multiples thereof, shall be purchased); and (h) that Holders whose Securities were purchased only in part shall be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered (or transferred by book-entry transfer). On or before 10:00 a.m. (New York City time) on each Purchase Date, the Company shall irrevocably deposit with the Trustee or Paying Agent in immediately available funds the aggregate purchase price with respect to an aggregate principal amount of Securities equal to the Offer Amount, together with accrued and unpaid interest and Liquidated Damages, if any, thereon, to be held for payment in accordance with the terms of this Section 3.09. On the Purchase Date, the Company shall, to the extent lawful, (i) accept for payment, on a pro rata basis to the extent necessary, the Offer Amount in aggregate principal amount of Securities or portions thereof tendered pursuant to the Repurchase Offer, or if less than the Offer Amount has been tendered, all Securities tendered, (ii) deliver or cause the Paying Agent or Depositary, as the case may be, to deliver to the Trustee Securities so accepted and (iii) deliver to the Trustee an Officers' Certificate stating that such Securities or portions thereof were accepted for payment by the Company in accordance with the terms of this Section 3.09. The Company, the Depositary or the Paying Agent, as the case may be, shall promptly (but in any case not later than three (3) Business Days after the Purchase Date) mail or deliver to each tendering Holder an amount equal to the purchase price of the Securities tendered by such Holder and accepted by the Company for purchase, plus any accrued and unpaid interest and Liquidated Damages, if any, thereon to the Purchase Date, and the Company shall promptly issue a new Security, and the Trustee, shall authenticate and mail or deliver such new Security, to such Holder, equal in principal amount to any unpurchased portion of such Holder's Securities surrendered. Any Security not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. So long as no Default has occurred and is continuing, any money earned on funds held in trust by the Trustee or any Paying Agent and any excess or remaining funds that may exist following the termination of the Offer Period shall be promptly remitted to the Company. If any such excess or remaining funds shall be held by the Company or any of its Subsidiaries in trust, in its capacity as Paying Agent, then, so long as no Default has occurred and is continuing, such funds shall be discharged from such trust and, thereafter, Holders entitled to such funds must look to the Company as a general creditor. 28 Other than as specifically provided in this Section 3.09, any purchase pursuant to this Section 3.09 shall be made pursuant to the provisions of Sections 3.01, 3.02, 3.05 and 3.06 hereof. ARTICLE 4 Covenants --------- SECTION 4.01. Payment of Securities. The Company shall pay or cause ---------------------- to be paid the principal of, premium, if any, and interest on the Securities on the dates and in the manner provided in the Securities. The Company shall pay all Liquidated Damages, if any, in the same manner on the dates and in the amounts set forth in the Registration Agreement. Principal, premium and Liquidated Damages, if any, and interest, shall be considered paid for all purposes hereunder on the date the Paying Agent if other than the Company or a Subsidiary thereof holds, as of 10:00 a.m. (New York City time) money deposited by the Company in immediately available funds and designated for and sufficient to pay all such principal, premium and Liquidated Damages, if any, and interest, then due. The Company shall pay interest (including, to the extent permitted by applicable law, post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Securities to the extent lawful; it shall pay interest (including, to the extent permitted by applicable law, post- petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate to the extent lawful. SECTION 4.02. Maintenance of Office or Agency. The Company shall -------------------------------- maintain in the Borough of Manhattan, The City of New York an office or agency (which may be an office of the Trustee or an affiliate of the Trustee or Registrar) where Securities may be surrendered for registration of transfer or for exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Company in accordance with Section 2.04 hereof. SECTION 4.03. Commission Reports. Whether or not required by the ------------------- rules and regulations of the Commission, so long as any Securities are outstanding, the Company shall furnish to the Holders of Securities (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the 29 Company were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" that describes the financial condition and results of operations of the Company and its consolidated Subsidiaries and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all current reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports, in each case within the time periods set forth in the Commission's rules and regulations (the "Required Filing Dates"). In addition, whether or not required by the rules and regulations of the Commission, the Company shall file a copy of all such information and reports with the Commission for public availability by the Required Filing Dates (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition, at all times that the Commission does not accept the filings provided for in the preceding sentence, the Company and the Guarantors have agreed that, for so long as any Securities remain outstanding, they shall furnish to the Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. The financial information to be distributed to Holders of Securities shall be filed with the Trustee and mailed to the Holders at their addresses appearing in the register of Securities maintained by the Registrar, promptly after each Required Filing Date, but in any event no later than 15 days following any such Required Filing Date. The Company shall provide the Trustee with a sufficient number of copies of all reports and other documents and information and, if requested by the Company and at the Company's expense, the Trustee will deliver such reports to the Holders under this Section 4.03. SECTION 4.04. Compliance Certificate and Notices of Default. The ---------------------------------------------- Company shall deliver to the Trustee, within 90 days after the end of each fiscal year and on or before 45 days after the end of the first, second and third fiscal quarters of each fiscal year, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year or fiscal quarter, as the case may be, has been made under the supervision of the signing Officers with a view to determining whether each has kept, observed, performed and fulfilled its obligations under this Indenture (including, with respect to any Restricted Payments made during such fiscal year or fiscal quarter, as the case may be, the basis upon which the calculations required by Section 4.07 hereof were computed, which calculations may be based on the Company's latest available financial statements), and further stating, as to each such Officer signing such certificate, that, to the best of his or her knowledge, each entity has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto) and that, to the best of his or her knowledge, no event has occurred and remains in existence by reason of which payments on account of the principal of, premium or Liquidated Damages, if any, or interest on the Securities is prohibited or if such event has occurred, a description of the event and what action the Company is taking or proposes to take with respect thereto. The Company shall, so long as any of the Securities are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. 30 SECTION 4.05. Taxes. The Company shall pay, and shall cause each of ------ its Subsidiaries to pay, prior to delinquency all material taxes, assessments and governmental levies, except such as are contested in good faith and by appropriate proceedings and with respect to which appropriate reserves have been taken in accordance with GAAP. SECTION 4.06. Stay, Extension and Usury Laws. The Company and each ------------------------------- Guarantor covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Company and each Guarantor (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. SECTION 4.07. Restricted Payments. From and after the date hereof -------------------- the Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of the Company's or any of its Restricted Subsidiaries' Equity Interests (including, without limitation, any such dividend, distribution or other payment made as a payment in connection with any merger or consolidation involving the Company), other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company or dividends or distributions payable to the Company or any Wholly Owned Subsidiary of the Company; (ii) purchase, redeem or otherwise acquire or retire for value (including, without limitation, any such purchase, redemption or other acquisition or retirement for value made as a payment in connection with any merger or consolidation involving the Company) any Equity Interests of the Company or any Restricted Subsidiary (other than any such Equity Interests owned by the Company or any Restricted Subsidiary of the Company); (iii) make any principal payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the Securities, except a payment of principal at Stated Maturity in the applicable amounts so required; or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), unless, at the time of and immediately after giving effect to such Restricted Payment: (a) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and (b) the Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.09 hereof; and (c) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the 1998 Notes Issue Date (excluding Restricted Payments permitted by clauses (ii), (iii), (v), (vi), (vii), (ix) and (x) of the next succeeding paragraph), is less than the sum (without duplication) of (i) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the 1998 Notes Issue Date to the end of the Company's most recently 31 ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds received by the Company from the issue or sale subsequent to the 1998 Notes Issue Date of Equity Interests of the Company (other than Disqualified Stock) or of Disqualified Stock or debt securities of the Company that have been converted into or exchanged for such Equity Interests (other than Equity Interests (or Disqualified Stock or convertible debt securities) sold to a Restricted Subsidiary of the Company and other than Disqualified Stock or convertible debt securities that have been converted into Disqualified Stock), plus (iii) with respect to any Restricted Investment that was made after the 1998 Notes Issue Date, (A) to the extent that such Restricted Investment is sold for cash or otherwise liquidated or repaid for cash, the amount of cash proceeds received with respect to such Restricted Investment and (B), without duplication of any amount included in Consolidated Net Income, 100% of any cash dividends or other cash distributions received in respect of such Restricted Investment, plus (iv) to the extent not otherwise included in clause (iii) above, 100% of the net cash proceeds realized upon the sale of any Unrestricted Subsidiary (less the amount of any reserve established for purchase price adjustments and less the maximum amount of any indemnification or similar contingent obligation for the benefit of the purchaser, any of its Affiliates or any other third party in such sale, in each case as adjusted for any permanent reduction in any such amount on or after the date of such sale, other than by virtue of a payment made to such Person following the 1998 Notes Issue Date) since the 1998 Notes Issue Date, plus (v) upon the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary since the 1998 Notes Issue Date, the lesser of (x) the fair market value of such Subsidiary or (y) the aggregate amount of all Investments made in such Subsidiary subsequent to the 1998 Notes Issue Date by the Company and its Restricted Subsidiaries, plus (vi) $15.0 million. The foregoing provisions will not prohibit: (i) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of this Indenture; (ii) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness or Equity Interests of the Company or any Restricted Subsidiary in exchange for, or in an amount not in excess of the net cash proceeds of the substantially concurrent sale (other than to a Restricted Subsidiary of the Company) of, other Equity Interests of the Company (other than any Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition and any Net Income resulting therefrom shall be excluded from clauses (c)(i) and (c)(ii) of the preceding paragraph; (iii) the defeasance, redemption, repurchase, retirement or other acquisition of subordinated Indebtedness in exchange for, or in an amount not in excess of the net cash proceeds from, an incurrence of Permitted Refinancing Indebtedness; (iv) so long as no Default or Event of Default shall have occurred and is continuing, the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company, Holding or any Restricted Subsidiary of the Company (including Restricted Payments to any shareholder of the Company in order to permit such shareholder (directly or indirectly) to repurchase, redeem or otherwise acquire 32 Equity Interests in Holding), held by any member of the Company's (or any of its subsidiaries') management, employees, directors or consultants pursuant to any management, employee, director or consultant equity subscription agreement or stock option agreement; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests since the 1998 Notes Issue Date shall not exceed the sum of (A) $3.0 million and (B) the aggregate cash proceeds received by the Company from any issuance of Equity Interests since the 1998 Notes Issue Date by Holding or the Company to members of management, employees, directors or consultants of the Company and its subsidiaries (provided that the cash proceeds referred to in this clause (B) shall be excluded from clause (c)(ii) of the preceding paragraph); provided, further, that Management Notes may be forgiven or returned without regard to the limitation set forth above and the forgiveness or return thereof shall not be treated as Restricted Payments for purposes of determining compliance with such limitation; (v) the payment of any dividend (or the making of a similar distribution or redemption) by a Restricted Subsidiary of the Company to the holders of its common Equity Interests on a pro rata basis; (vi) (A) payments required to be made under the Tax Sharing Agreement or (B) distributions made by the Company on the date of the 1998 Notes Indenture, the proceeds of which were utilized solely to consummate the Recapitalization; (vii) the payment of dividends or the making of loans or advances by the Company to Holding in an aggregate amount not to exceed $1.75 million in any fiscal year for costs and expenses incurred by Holding in its capacity as a holding company or for services rendered by Holding on behalf of the Company; (viii) so long as no Default or Event of Default has occurred and is continuing, the declaration and payment of dividends to holders of any class or series of Disqualified Stock of the Company or any Restricted Subsidiary issued after the date of the 1998 Notes Indenture in accordance with the covenant contained in Section 4.09 hereof or in Section 4.09 of the 1998 Notes Indenture (if issued prior to the Closing Date); (ix) so long as (A) no Default or Event of Default has occurred and is continuing and (B) immediately before and immediately after giving effect thereto, the Company would have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in clause (i) of the first paragraph of Section 4.09 hereof, from and after the 1998 Notes Issue Date, payments of cash dividends to Holding in an amount sufficient to enable Holding to make payments of interest required to be made in respect of the Holding Senior Discount Debentures in accordance with the terms thereof in effect on the date of the 1998 Notes Indenture, provided such interest payments are made with the proceeds of such dividends; and (x) the purchase or redemption of subordinated indebtedness pursuant to a change of control of provision contained in the indenture or other governing instrument relating thereto; provided, however, that (A) no offer or purchase obligation may be triggered in respect of such Indebtedness unless a corresponding obligation also arises for the Securities and (B) in all events, no repurchase or redemption of such Indebtedness may be consummated unless and until the Company shall have satisfied all repurchase obligations with respect to any required purchase offer made with respect to the Securities. 33 The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default or an Event of Default. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments will be deemed to constitute Investments in an amount equal to the greater of (i) the net book value of such Investments at the time of such designation and (ii) the fair market value of such Investments at the time of such designation. Such designation will only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any non-cash Restricted Payment shall be determined by the Board of Directors whose resolution with respect thereto shall be delivered to the Trustee, such determination to be based upon a fairness opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if such fair market value exceeds $10.0 million. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by Section 4.07 were computed, together with a copy of any fairness opinion or appraisal, if any, required by this Indenture. SECTION 4.08. Dividend and Other Payment Restrictions Affecting ------------------------------------------------- Restricted Subsidiaries. The Company shall not, and shall not permit any of its ------------------------ Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (b) pay any Indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or advances to the Company or any of its Restricted Subsidiaries or (iii) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) the Senior Credit Facility, (b)(1) the 1998 Notes Indenture and the 1998 Notes and (2) this Indenture and the Securities, (c) applicable law or any applicable rule, regulation or order, (d) any agreement or instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such agreement or instrument was created or entered into in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, (e) by reason of customary non-assignment provisions in leases, licenses, encumbrances, contracts or similar assets entered into or acquired in the ordinary course of business and consistent with industry practices, (f) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (e) above on the property so acquired, (g) Permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive than those contained in the agreements governing the Indebtedness being refinanced, (h) contracts for the sale of assets containing customary restrictions with respect to a Restricted Subsidiary pursuant to an agreement that has been entered 34 into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary and (i) customary restrictions in security agreements or mortgages securing Indebtedness of the Company or a Restricted Subsidiary to the extent such restrictions restrict the transfer of the property subject to such security agreements and mortgages. SECTION 4.09. Incurrence of Indebtedness and Issuance of Preferred ---------------------------------------------------- Stock. The Company shall not, and shall not permit any of its Restricted ------ Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and that the Company will not issue any Disqualified Stock and will not permit any of its Restricted Subsidiaries to issue any shares of preferred stock or Disqualified Stock other than to the Company or another Restricted Subsidiary; provided, however, that the Company or any of its Restricted Subsidiaries may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock if (i) the Fixed Charge Coverage Ratio for the Company's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock is issued would have been at least 2.0 to 1.0 commencing on the 1998 Notes Issue Date and at any time thereafter, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock had been issued or in the case of any Restricted Subsidiary, such preferred stock had been issued, as the case may be, at the beginning of such four-quarter period and (ii) no Default or Event of Default will have occurred or be continuing or would occur as a consequence thereof. The provisions of the first paragraph of this covenant will not apply to the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (i) the incurrence by the Company and the Restricted Subsidiaries of Indebtedness under the Credit Facilities and any Guarantees thereof; provided that the aggregate principal amount of all Indebtedness (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Company and the Restricted Subsidiaries for reimbursement of drawings that may be made thereunder) outstanding under all Credit Facilities after giving effect to such incurrence, including all Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (i), does not exceed at any time (A) with respect to the term loan portion of such Credit Facilities, $125 million in an aggregate principal amount and (B) with respect to the revolving credit facility and deferred term loan portion of such Credit Facilities, an aggregate principal amount equal to the greater of fifty percent of the amount of inventory shown on the consolidated balance sheet of the Company for the then most recently ended fiscal quarter and $250 million less, in the case of clause (A) or (B), the aggregate principal of all principal payments thereunder since the 1998 Notes Issue Date constituting permanent reductions of such Indebtedness pursuant to such Credit Facilities or in accordance with Section 4.10; (ii) the incurrence by the Company and the Guarantors of Indebtedness represented by (A) the 1998 Notes and the Guarantees of the 1998 Notes and (B) the Securities (not including any Additional Securities) and the Subsidiary Guarantees; (iii) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or other obligations, in each case incurred for the purpose of financing all or any part of the 35 acquisition cost or cost of construction, remodeling or improvements of assets or property used in the business of the Company or any Restricted Subsidiary, in an aggregate principal amount not to exceed $25.0 million at any time outstanding; (iv) other Indebtedness of the Company and its Restricted Subsidiaries outstanding on the 1998 Notes Issue Date (excluding Indebtedness described in clause (i) of this Section 4.09) and Indebtedness incurred prior to the Closing Date and outstanding pursuant to the first paragraph of Section 4.09 of the 1998 Notes Indenture; (v) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness (other than intercompany Indebtedness) that was permitted by this Indenture or the 1998 Notes Indenture (if incurred prior to the Closing Date) to exist or be incurred; (vi) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Wholly Owned Subsidiaries or between or among any Wholly Owned Subsidiaries; provided, that (A) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than a Wholly Owned Subsidiary and (B) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Wholly Owned Subsidiary will be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be; (vii) the incurrence by the Company or any Restricted Subsidiary of Hedging Obligations that are incurred for the purpose of fixing or hedging (i) interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Indenture to be outstanding or (ii) the value of foreign currencies purchased or received by the Company or any Restricted Subsidiary in the ordinary course of business; (viii) Indebtedness incurred in respect of workers' compensation claims, self-insurance obligations, performance, surety and similar bonds and completion guarantees provided by the Company or any Restricted Subsidiary in the ordinary course of business; (ix) Indebtedness arising from guarantees of Indebtedness of the Company or any Restricted Subsidiary or the agreements of the Company or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or Capital Stock of a Restricted Subsidiary, or other guarantees of Indebtedness incurred by any person acquiring all or any portion of such business, assets or Capital Stock of a Restricted Subsidiary for the purpose of financing such acquisition, provided that the maximum aggregate liability in respect of all such Indebtedness shall at no time exceed 25% of the gross proceeds (with proceeds other than cash or Cash Equivalents being valued at the fair market value thereof as determined by the Board of Directors of the Company in good faith) actually received by the Company and its Restricted Subsidiaries in connection with such disposition; (x) the guarantee by the Company or any of the Restricted Subsidiaries of Indebtedness of the Company or a Restricted Subsidiary that was permitted to be incurred by another provision of this covenant; 36 (xi) the incurrence by the Company or any of its Restricted Subsidiaries of Acquired Debt in an aggregate principal amount at any time outstanding not to exceed $10.0 million; (xii) Indebtedness incurred in connection with a Qualified Receivables Transaction except to the extent that such Indebtedness is recourse to the Company or any other Restricted Subsidiary of the Company; and (xiii) the incurrence by the Company or any Restricted Subsidiary of additional Indebtedness in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (xiii) or Section 4.09(xiii) of the 1998 Notes Indenture (if incurred prior to the Closing Date), not to exceed $25.0 million. For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (i) through (xiii) above or is entitled to be incurred pursuant to the first paragraph of this covenant, the Company shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this covenant and such item of Indebtedness will be treated as having been incurred pursuant to only one of such clauses or pursuant to the first paragraph hereof. Accrual of interest, the accretion of accreted value and the payment of interest in the form of additional Indebtedness will not be deemed to be an incurrence of Indebtedness for purposes of this covenant. SECTION 4.10. Asset Sales. The Company shall not, and shall not ------------ permit any of its Restricted Subsidiaries to, engage in or consummate an Asset Sale unless (i) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of (as determined by the Board of Directors in good faith, whose determination shall be conclusive evidence thereof and shall be evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) and (ii) at least 75% of the consideration thereof received by the Company or such Restricted Subsidiary is in the form of cash or Cash Equivalents other than in the case where the Company or such Restricted Subsidiary is undertaking a Permitted Asset Swap; provided that the amount of (x) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet), of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Securities or any Guarantee thereof) that are assumed by the transferee of any such assets pursuant to a customary agreement that releases the Company or such Restricted Subsidiary from further liability and (y) any securities, notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted within 15 days by the Company or such Restricted Subsidiary into cash (to extent of the cash received) shall be deemed to be cash for purposes of this provision. Within 360 days after the receipt of any Net Proceeds from an Asset Sale, the Company or its Restricted Subsidiaries may apply such Net Proceeds, at its option, (a) to permanently reduce Senior Debt, or (b) to the investment in, or the making of a capital expenditure or the acquisition of, other property or assets in each case used or useable in a Permitted Business, or Capital Stock of any Person primarily engaged in a Permitted Business if, as a result of the investment in or acquisition by the Company or any Restricted Subsidiary thereof, such Person becomes a Restricted Subsidiary, or (c) a combination of the uses described in clauses (a) and (b). Pending the final application of any such Net Proceeds, the Company or 37 its Restricted Subsidiaries may temporarily reduce Senior Debt or otherwise invest such Net Proceeds in any manner that is not prohibited by this Indenture. Any Net Proceeds from Asset Sales (including any Net Proceeds from Asset Sales that were not applied or invested in accordance with the second paragraph of Section 4.10 of the 1998 Notes Indenture prior to the Closing Date or used to make an Asset Sale Offer), that are not applied or invested as provided in the first sentence of this paragraph within the 360-day period after receipt of such Net Proceeds will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million (an "Asset Sale Offering Triggering Event"), the Company will be required to make an offer to all Holders of Securities and, to the extent required by the terms of any Pari Passu Indebtedness to all holders of such Pari Passu Indebtedness (an "Asset Sale Offer") to purchase the maximum principal amount of Securities and any such Pari Passu Indebtedness that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase, in accordance with the procedures set forth in Section 3.09 hereof or such Pari Passu Indebtedness, as applicable. To the extent that the aggregate principal amount of Securities and any such Pari Passu Indebtedness tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company or its Restricted Subsidiaries may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Securities and any such Pari Passu Indebtedness surrendered by holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Securities to be purchased on a pro rata basis. Upon completion of such Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. SECTION 4.11. Transactions with Affiliates. The Company shall not, ----------------------------- and shall not permit any of its Restricted Subsidiaries to, make any payment to or Investment in, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) the terms of such Affiliate Transaction are fair and reasonable to the Company or such Restricted Subsidiary, as the case may be, and are at least as favorable as the terms which could be obtained by the Company or such Restricted Subsidiary, as the case may be, in a comparable transaction made on an arm's length basis between unaffiliated parties and (ii) the Company delivers to the Trustee (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $2.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $10.0 million, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing; provided that the following shall not be deemed Affiliate Transactions: (v) certain leases and other arrangements of the Company in effect on the 1998 Notes Issue Date and specified in Schedule 4.11 to the 1998 Notes Indenture, (w) any employment agreements, stock option or other compensation agreements or plans (and the payment of amounts or the issuance of securities thereunder) and other reasonable fees, compensation, benefits and indemnities paid or entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business of the Company or such Restricted Subsidiary to or with the officers, directors or employees of the Company or its Restricted Subsidiaries, (x) transactions between or among the Company and/or its Restricted Subsidiaries, (y) Restricted Payments (other than Restricted Investments) that are permitted by 38 the provisions of this Indenture described in Section 4.07 and (z) sales of Capital Stock (other than Disqualified Stock) of the Company, when such sales are exclusively for cash. SECTION 4.12. Liens. The Company shall not, and shall not permit any ------ of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien on any asset now owned or hereafter acquired, or any income or profits therefrom or assign or convey any right to receive income therefrom for purposes of securing Indebtedness, except Permitted Liens, unless the Obligations due hereunder and the Securities are secured by a Lien on such property, assets or proceeds on an equal and ratable basis (or on a senior basis, in the case of Indebtedness subordinate in right of payment to the Securities), with the Obligations so secured, so long as such Obligations are secured. SECTION 4.13. Offer to Purchase Upon Change of Control. Upon the ----------------------------------------- occurrence of a Change of Control, each Holder of Securities will have the right to require the Company to repurchase all or any part (equal to $1,000 principal amount or an integral multiple thereof) of such Holder's Securities pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase (the "Change of Control Payment"). Within 30 days following any Change of Control, the Company shall mail, or cause to be mailed, a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Securities on the date specified in such notice, which date shall be no earlier than 30 days (or such shorter time period as may be permitted under applicable law, rules and regulations) and no later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"), pursuant to the procedures required by Section 3.09 hereof and described in such notice. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Securities as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the provisions hereof relating to such Change of Control Offer, the Company will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described hereof by virtue thereof. On the Change of Control Payment Date, the Company shall, to the extent lawful, (1) accept for payment all Securities or portions thereof properly tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Securities or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee the Securities so accepted together with an Officers' Certificate stating the aggregate principal amount of Securities or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of Securities so tendered the Change of Control Payment for such Securities, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Security equal in principal amount to any unpurchased portion of the Securities surrendered, if any; provided that each such new Security will be in a principal amount of $1,000 or an integral multiple thereof. Prior to complying with the provisions hereof, but in any event within 90 days following a Change of Control, the Company will either repay all outstanding Senior Debt or obtain the requisite consents, if any, under all agreements governing outstanding Senior Debt to permit the repurchase of Securities required by this Section 4.13. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. The Change of Control provisions described above will be applicable whether or not any other provisions of this Indenture are applicable. The Company will not be required to 39 make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth herein applicable to a Change of Control Offer made by the Company and purchases all Securities validly tendered and not withdrawn under such Change of Control Offer. SECTION 4.14. Corporate Existence. Subject to Section 4.13 and -------------------- Article 5 hereof, as the case may be, the Company and each Guarantor shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each of its Subsidiaries in accordance with the respective organizational documents (as the same may be amended from time to time) of the Company or any such Subsidiary and the rights (charter and statutory), licenses and franchises of the Company and its Subsidiaries; provided that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any of its Subsidiaries, if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders of the Securities. SECTION 4.15. Business Activities. The Company shall not, and shall -------------------- not permit any Restricted Subsidiary to, directly or indirectly, engage to a substantial extent in any business other than a Permitted Business. SECTION 4.16. Senior Subordinated Debt. Notwithstanding the ------------------------- provisions of Section 4.09 hereof, (i) the Company shall not incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Debt and senior in any respect in right of payment to the Securities, and (ii) no Guarantor shall incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to Senior Debt of such Guarantor and senior in any respect in right of payment to such Guarantor's Subsidiary Guarantee. For purposes of this covenant, Indebtedness is deemed to be senior in right of payment to the Securities or the Guarantees, as the case may be, if it is not explicitly subordinated in right of payment to Senior Debt at least to the same extent as the Securities and the Guarantees, as the case may be, are subordinated to such Senior Debt. SECTION 4.17. Limitation on Issuances of Guarantees of Indebtedness. ------------------------------------------------------ The Company shall not permit any Restricted Subsidiary to guarantee the payment of any Indebtedness of the Company or any Indebtedness of any other Restricted Subsidiary (in each case, the "Guaranteed Debt"), unless (i) if such Restricted Subsidiary is not a Guarantor, such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to this Indenture providing for a Subsidiary Guarantee of payment of the Securities by such Restricted Subsidiary, (ii) if the Securities or the Subsidiary Guarantee (if any) of such Restricted Subsidiary are subordinated in right of payment to the Guaranteed Debt, the Subsidiary Guarantee under the supplemental indenture shall be subordinated to such Restricted Subsidiary's guarantee with respect to the Guaranteed Debt substantially to the same extent as the Securities or the Subsidiary Guarantee are subordinated to the Guaranteed Debt under this Indenture, (iii) if the Guaranteed Debt is by its express terms subordinated in right of payment to the Securities or the Subsidiary Guarantee (if any) of such Restricted Subsidiary, any such guarantee of such Restricted Subsidiary with respect to the Guaranteed Debt shall be subordinated in right of payment to such Restricted Subsidiary's Subsidiary Guarantee with respect to the Securities substantially to the same extent as the Guaranteed Debt is subordinated to the Securities or the Subsidiary Guarantee (if any) of such Restricted Subsidiary, (iv) such 40 Restricted Subsidiary subordinates rights of reimbursement, indemnity or subrogation or any other rights against the Company or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee to its obligation under its Subsidiary Guarantee, and (v) such Restricted Subsidiary shall deliver to the Trustee an opinion of counsel to the effect that (A) such Subsidiary Guarantee of the Securities has been duly authorized, executed and delivered, and (B) such Subsidiary Guarantee of the Securities constitutes a valid, binding and enforceable obligation of such Restricted Subsidiary, except insofar as enforcement thereof may be limited by bankruptcy, insolvency or similar laws (including, without limitation, all laws relating to fraudulent transfers) and except insofar as enforcement thereof is subject to general principles of equity. SECTION 4.18. Limitation on the Sale or Issuance of Capital Stock of ------------------------------------------------------ Restricted Subsidiaries. The Company will not, and will not permit any of its ------------------------ Restricted Subsidiaries to, directly or indirectly, transfer, convey, lease, sell or otherwise dispose of any shares (other than directors' qualifying shares) of Capital Stock of a Restricted Subsidiary to any Person, except (i) to the Company or a Wholly Owned Subsidiary or (ii) in a transfer, conveyance, lease, sale or other disposition of all the Capital Stock of such Restricted Subsidiary owned by the Company or another Restricted Subsidiary; provided, that in connection with any such transfer, conveyance, lease, sale or other disposition of Capital Stock the Company or any such Restricted Subsidiary complies with Section 4.10; provided, further that the foregoing shall not restrict (a) any Lien on Capital Stock of a Restricted Subsidiary that is not otherwise prohibited under the Indenture or (b) any transfer, sale or other disposition of Capital Stock pursuant to a foreclosure of any such Lien or similar exercise of remedies in respect thereof. SECTION 4.19. Limitation on Ability of Company to Release Funds From ------------------------------------------------------ Escrow. The Company agrees that (i) the terms of the Escrow Agreement shall ------- exclusively control the conditions under which and procedures pursuant to which Escrow Property (as defined in the Escrow Agreement) can be released and (ii) it will not attempt to have any Escrow Property (as defined in the Escrow Agreement) released from escrow except in accordance with the Escrow Agreement. ARTICLE 5 Successors ---------- SECTION 5.01. Merger, Consolidation or Sale of Assets. The Company ---------------------------------------- shall not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another Person unless (i) the Company is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation or limited liability company organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the Person formed by or surviving any such consolidation or merger (if other than the Company) or the Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Securities and this Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii) immediately prior to and immediately after such transaction no Default or Event of Default exists; (iv) except in the case of a merger of the Company with or into a Wholly Owned Subsidiary of the Company, the Company or the entity or 41 Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of Section 4.09 hereof; and (v) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with this Indenture. For purposes of this Section 5.01, the sale, lease, conveyance, assignment, transfer, or other disposition of all or substantially all of the properties and assets of one or more Subsidiaries of the Company, which properties and assets, if held by the Company instead of such Subsidiaries, would constitute all or substantially all of the properties and assets of the Company on a consolidated basis, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. Clause (iv) of the foregoing paragraph will not prohibit (a) a merger between the Company and a Wholly Owned Subsidiary of Holding created for the purpose of holding the Capital Stock of the Company, (b) a merger between the Company and a Wholly Owned Subsidiary of the Company or (c) a merger between the Company and an Affiliate incorporated solely for the purpose of reincorporating the Company in another State of the United States so long as, in the case of each of clause (a), (b) and (c), the amount of Indebtedness of the Company and its Restricted Subsidiaries is not increased thereby. SECTION 5.02. Successor Corporation Substituted. Upon any ---------------------------------- consolidation or merger, or any sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the assets of the Company in accordance with Section 5.01 hereof, the successor corporation formed by such consolidation or into or with which the Company is merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for (so that from and after the date of such consolidation, merger, sale, lease, conveyance or other disposition, the provisions of this Indenture referring to the "Company" shall refer instead to the successor corporation and not to the Company), and shall exercise every right and power of the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein and thereafter the predecessor company shall be discharged from all obligations and covenants under this Indenture and the Securities; provided, that, (i) solely for the purposes of computing Consolidated Net Income for purposes of clause (b) of the first paragraph of Section 4.07 hereof, the Consolidated Net Income of any person other than the Company and its Subsidiaries shall be included only for periods subsequent to the effective time of such merger, consolidation, combination or transfer of assets; and (ii) in the case of any sale, assignment, transfer, lease, conveyance, or other disposition of less than all of the assets of the predecessor company that does not meet the requirements of Section 5.01, the predecessor company shall not be released or discharged from the obligation to pay the principal of or interest and Liquidated Damages, if any, on the Securities. 42 ARTICLE 6 Defaults and Remedies --------------------- SECTION 6.01. Events of Default. Each of the following constitutes ------------------ an "Event of Default": (i) default for 30 days in the payment when due of interest on, or Liquidated Damages, if any, with respect to, the Securities (whether or not prohibited by Article 10 hereof); (ii) default in payment when due of the principal of or premium, if any, on the Securities (whether or not prohibited by Article 10 hereof); (iii) failure by the Company or any of its Restricted Subsidiaries for 30 days after notice by the Trustee or by the Holders of at least 25% in aggregate principal amount of Securities then outstanding to comply with the provisions described under Sections 4.07, 4.09, 4.10, 4.13 or 4.19; (iv) failure by the Company or any of its Restricted Subsidiaries for 60 days after notice by the Trustee or by the Holders of at least 25% in aggregate principal amount of Securities then outstanding to comply with any of its other agreements in this Indenture or the Securities; (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date hereof, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness at final maturity (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its Stated Maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $20.0 million or more in the case of clause (a) or (b); (vi) failure by the Company or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $20.0 million (net of any amounts with respect to which a reputable and credit worthy insurance company has acknowledged liability in writing), which judgments are not paid, discharged or stayed for a period of 60 days; (vii) the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole would constitute a Significant Subsidiary, pursuant to or within the meaning of any Bankruptcy Law: (a) commences a voluntary case, (b) consents to the entry of an order for relief against it in an involuntary case, 43 (c) consents to the appointment of a Custodian of it or for all or substantially all of its property, (d) makes a general assignment for the benefit of its creditors, or (e) generally is not paying its debts as they become due; or (viii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (a) is for relief against the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary in an involuntary case; (b) appoints a Custodian of the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary or for all or substantially all of the property of the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary; or (c) orders the liquidation of the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary; and the order or decree remains unstayed and in effect for 60 consecutive days. (ix) the Subsidiary Guarantee of a Significant Subsidiary shall be held in any judicial proceeding to be unenforceable or invalid or, except as permitted by this Indenture, shall cease for any reason to be in full force and effect or any Guarantor that is a Significant Subsidiary, or any Person acting on behalf of any Guarantor that is a Significant Subsidiary, shall deny or disaffirm its obligations under its Subsidiary Guarantee; The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. SECTION 6.02. Acceleration. If any Event of Default occurs and is ------------- continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of the then outstanding Securities may declare all the Securities to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default as described in clause (vii) or (viii) of Section 6.01 hereof with respect to the Company, all outstanding Securities will become due and payable without further action or notice. Upon any acceleration of maturity of the Securities, all principal of and accrued interest and Liquidated Damages, if any, on the Securities shall be due and payable immediately. Holders of the Securities may not enforce this Indenture or the Securities except as provided in this Indenture. In the event of a declaration of acceleration of the Securities because an Event of Default has occurred and is continuing as a result of the acceleration of any Indebtedness described in clause (v) of Section 6.01 hereof, the declaration of acceleration of the Securities shall be automatically annulled if the holders of any Indebtedness described in clause (v) of Section 6.01 hereof have rescinded the declaration of acceleration in respect of such Indebtedness within 30 days of the date of such declaration and if (y) the annulment of the acceleration of the Securities would not conflict with any judgment or decree of 44 a court of competent jurisdiction and (z) all existing Events of Default, except nonpayment of principal or interest on the Securities that became due solely because of the acceleration of the Securities, have been cured or waived. SECTION 6.03. Other Remedies. If an Event of Default occurs and is --------------- continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium, if any, interest and Liquidated Damages, if any, on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder of a Security in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. The Company is required to deliver to the Trustee annually a statement regarding compliance with this Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. SECTION 6.04. Waiver of Defaults. The Holders of a majority in ------------------- aggregate principal amount of the Securities then outstanding by notice to the Trustee may on behalf of the Holders of all of the Securities waive any existing Default or Event of Default and its consequences under this Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the Securities, which shall require the consent of all of the Holders of the Securities then outstanding. SECTION 6.05. Control by Majority. The Holders of a majority in -------------------- aggregate principal amount of the then outstanding Securities may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust power conferred on it. However, (i) the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that the Trustee determines may be unduly prejudicial to the rights of other Holders of Securities or that may involve the Trustee in personal liability, and (ii) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. In case an Event of Default shall occur (which shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Notwithstanding any provision to the contrary in this Indenture, the Trustee is under no obligation to exercise any of its rights or powers under this Indenture at the request of any Holder of Securities, unless such Holder shall offer to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. SECTION 6.06. Limitation on Suits. A Holder of a Security may pursue -------------------- a remedy with respect to this Indenture, the Subsidiary Guarantees or the Securities only if: (a) the Holder of a Security gives to the Trustee written notice of a continuing Event of Default or the Trustee receives such notice from the Company; (b) the Holders of at least 25% in aggregate principal amount of the then outstanding Securities make a written request to the Trustee to pursue the remedy; 45 (c) such Holder of a Security or Holders of Securities offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (e) during such 60-day period the Holders of a majority in aggregate principal amount of the then outstanding Securities do not give the Trustee a direction inconsistent with the request. A Holder of a Security may not use this Indenture to prejudice the rights of another Holder of a Security or to obtain a preference or priority over another Holder of a Security. SECTION 6.07. Rights of Holders of Securities to Receive Payment. --------------------------------------------------- Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to receive payment of principal, premium, if any, interest, and Liquidated Damages, if any, on such Security, on or after the respective due dates expressed in such Security (including in connection with an offer to purchase), or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.08. Collection Suit by Trustee. If an Event of Default --------------------------- specified in Section 6.01(i) or (ii) hereof occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company (or any other obligor on the Securities) for the whole amount of principal of, premium and Liquidated Damages, if any, and interest remaining unpaid on the Securities and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 6.09. Trustee May File Proofs of Claim. The Trustee is --------------------------------- authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders of the Securities allowed in any judicial proceedings relative to the Company (or any other obligor upon the Securities), its creditors or its property and shall be entitled and empowered to participate as a member, voting or otherwise, of any official committee of creditors appointed in such matter and to collect, receive and distribute any money or other securities or property payable or deliverable upon the conversion or exchange of the Securities or on any such claims and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing 46 herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10. Priorities. Subject to Articles 10 and 12, if the ----------- Trustee collects any money pursuant to this Article 6, it shall pay out the money in the following order: First: to the Trustee, its agents and attorneys for amounts due under Section 7.07 hereof, including payment of all reasonable compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; Second: to the extent provided in Articles 10 and 12, to the holders of Senior Debt in accordance with such Articles; Third: to Holders of Securities for amounts due and unpaid on the Securities for principal, premium, if any, interest, and Liquidated Damages, if any, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal, premium, if any, interest, and Liquidated Damages, if any, respectively; Fourth: without duplication, to the Holders for any other Obligations owing to the Holders under this Indenture and the Securities; and Fifth: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders of Securities pursuant to this Section 6.10. SECTION 6.11. Undertaking for Costs. In any suit for the enforcement ---------------------- of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, the Company, a suit by a Holder of a Security pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in aggregate principal amount of the then outstanding Securities. ARTICLE 7 Trustee ------- SECTION 7.01. Duties of Trustee. (a) If an Event of Default has ------------------ occurred and is continuing of which a Responsible Officer of the Trustee has knowledge, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in its exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. 47 (b) Except during the continuance of an Event of Default: (i) the duties of the Trustee shall be determined solely by the express provisions of this Indenture or the TIA and the Trustee need perform only those duties that are specifically set forth in this Indenture or the TIA and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section 7.01; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), (c), (e) and (f) of this Section 7.01. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 7.02. Rights of Trustee. (a) The Trustee may conclusively ------------------ rely on the truth of the statements and correctness of the opinions contained in, and shall be protected from acting or refraining from acting upon, any document reasonably believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. Prior to taking, suffering or admitting any action, the Trustee may consult with counsel of the Trustee's own choosing and the written advice of such counsel or any Opinion of Counsel 48 shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent (other than an agent who is an employee of the Trustee) appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith that it reasonably believes to be authorized or within the rights or powers conferred upon it by this Indenture. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company or any Guarantor shall be sufficient if signed by an Officer of the Company or Guarantor, as applicable. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders unless such Holders shall have offered to the Trustee reasonable security or indemnity satisfactory to the Trustee against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction. (g) Except with respect to Section 4.01 hereof, the Trustee shall have no duty to inquire as to the performance of the Company's covenants in Article 4 hereof. In addition, the Trustee shall not be deemed to have knowledge of any Default or Event of Default except (i) any Event of Default occurring pursuant to Sections 6.01(a) (except that the Trustee shall not be deemed to have knowledge of a default in the payment of Liquidated Damages) or 6.01(b), or (ii) any Default or Event of Default of which a Responsible Office of the Trustee shall have received written notification or obtained actual knowledge. SECTION 7.03. Individual Rights of Trustee. The Trustee in its ----------------------------- individual or any other capacity may become the owner of Securities and may other wise deal with the Company, the Guarantors or any Affiliate of the Company or any Guarantor with the same rights it would have if it were not Trustee. The Trustee shall comply with TIA Section 310(b); provided, however, that there shall be excluded from the operation of TIA Section 310(b)(1) any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Company are outstanding if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met. Any Agent may do the same with like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof. SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be --------------------- responsible for and makes no representation as to the validity or adequacy of this Indenture, the Subsidiary Guarantees or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities or any money paid to the Company or upon the Company's direction under any provision of this Indenture, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee, and it shall not be responsible for any statement or recital herein or any statement in the Securities or any other document in connection with the sale of the Securities or pursuant to this Indenture other than its certificate of authentication. SECTION 7.05. Notice of Defaults. If a Default or an Event of ------------------- Default occurs and is continuing and if it is known to a Responsible Officer of the Trustee, the Trustee shall 49 mail to Holders of Securities a notice of the Default or Event of Default within 90 days after it occurs, unless such Default or Event of Default has been cured or waived. Except in the case of a Default or Event of Default in payment on any Security pursuant to Section 6.01(i) or (ii) hereof, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders of the Securities. SECTION 7.06. Reports by Trustee to Holders of the Securities. ------------------------------------------------ Within 60 days after each May 15 beginning with the May 15 following the date of this Indenture, and for so long as Securities remain outstanding, the Trustee shall mail to the Holders of the Securities a brief report dated as of such reporting date that complies with TIA Section 313(a) (but if no event described in TIA Section 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA Section 313(b). The Trustee shall also transmit by mail all reports as required by TIA Section 313(c). A copy of each report at the time of its mailing to the Holders of Securities shall be mailed to the Company and filed with the Commission and each stock exchange on which the Company has informed the Trustee in writing the Securities are listed in accordance with TIA Section 313(d). The Company shall promptly notify the Trustee when the Securities are listed on any stock exchange and of any delisting thereof. SECTION 7.07. Compensation and Indemnity. The Company and the --------------------------- Guarantors shall pay to the Trustee from time to time reasonable compensation for its acceptance of this Indenture and services hereunder. To the extent permitted by law, the Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company and the Guarantors shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company and the Guarantors need not reimburse any expense incurred by the Trustee or any of its agents or counsel through the wilful misconduct, negligence or bad faith of the Trustee or any such agent or counsel. The Company and the Guarantors shall indemnify the Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, including the costs and expenses of enforcing this Indenture against the Company and the Guarantors (including this Section 7.07) and defending itself against any claim (whether asserted by the Company and the Guarantors or any Holder or any other person) or liability in connection with the exercise or performance of any of its powers or duties hereunder except to the extent any such loss, liability or expense may be attributable to its negligence, wilful misconduct or bad faith. The Trustee shall notify the Company and the Guarantors promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company and the Guarantors shall not relieve the Company of its obligations hereunder, except to the extent such failure shall have materially prejudiced the Company or any Guarantor. The Company and the Guarantors shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company and the Guarantors shall pay the reasonable fees and expenses of such counsel. The Company and the Guarantors need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld, delayed or conditioned. The obligations of the Company and the Guarantors under this Section 7.07 shall survive the resignation and removal of the Trustee and the satisfaction and discharge of this Indenture. 50 To secure the Company's and the Guarantors payment obligations in this Section 7.07, the Trustee shall have a Lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal, interest and Liquidated Damages, if any, on particular Securities. Such Lien shall survive the satisfaction and discharge of this Indenture and the resignation or removal of the Trustee. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(vii) or (viii) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. The Trustee shall comply with the provisions of TIA Section 313(b)(2) to the extent applicable. SECTION 7.08. Replacement of Trustee. A resignation or removal of ----------------------- the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.08. The Trustee may resign in writing at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in aggregate principal amount of the then outstanding Securities may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof; (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a Custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in aggregate principal amount of the then outstanding Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company, or the Holders of at least 10% in aggregate principal amount of the then outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee, after written request by any Holder of a Security who has been a Holder of a Security for at least six months, fails to comply with Section 7.10 hereof, such Holder of a Security may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and the duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to the Holders of the Securities. The retiring Trustee 51 shall promptly transfer all property held by it as Trustee to the successor Trustee, provided that all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee. SECTION 7.09. Successor Trustee by Merger, Etc. If the Trustee or --------------------------------- any Agent consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee or any Agent, as applicable. SECTION 7.10. Eligibility; Disqualification. There shall at all ------------------------------ times be a Trustee hereunder that is a corporation organized and doing business under the laws of the United States of America or of any state thereof, is authorized under such laws to exercise corporate trustee power, and is subject to supervision or examination by federal or state authorities. The Trustee and its direct parent shall at all times have a combined capital surplus of at least $50.0 million as set forth in its most recent annual report of condition. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1), (2) and (5). The Trustee is subject to TIA Section 310(b)); provided, however, that there shall be excluded from the operation of TIA Section 310(b)(1) any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Company are outstanding if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met. SECTION 7.11. Preferential Collection of Claims Against the Company. ------------------------------------------------------ The Trustee is subject to TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. ARTICLE 8 Legal Defeasance and Covenant Defeasance ---------------------------------------- SECTION 8.01. Option to Effect Legal Defeasance or Covenant --------------------------------------------- Defeasance. The Company may, at the option of its Board of Directors evidenced ----------- by a resolution set forth in an Officers' Certificate, at any time, elect to have either Section 8.02 or Section 8.03 hereof be applied to all Securities and Subsidiary Guarantees then outstanding upon compliance with the conditions set forth below in this Article 8. SECTION 8.02. Legal Defeasance and Discharge. Upon the Company's ------------------------------- exercise under Section 8.01 hereof of the option applicable to this Section 8.02, the Company and each Guarantor shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be deemed to have been discharged from their respective obligations with respect to all Securities and Subsidiary Guarantees then outstanding on the date the conditions set forth below are satisfied ("Legal Defeasance"). For this purpose, Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented by the Securities outstanding, which shall thereafter be deemed to be "outstanding" only for the purposes of 52 Section 8.05 and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all of the Company's and Guarantors' respective other obligations under such Securities and Subsidiary Guarantees and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall, subject to Section 8.07, execute proper instruments acknowledging the same), except for the following provisions which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding Securities to receive payments in respect of the principal of premium, if any, and interest and Liquidated Damages on such Securities when such payments are due from the trust referred to in Section 8.04(a); (b) the Company's obligations with respect to such Securities under Sections 2.04, 2.05, 2.06, 2.07, 2.08, 2.10, 4.02 and 4.03 hereof; (c) the rights, powers, trusts, duties and immunities of the Trustee and the Company's obligations in connection therewith; and (d) the provisions of this Section 8.02. SECTION 8.03. Covenant Defeasance. Upon the Company's exercise under -------------------- Section 8.01 hereof of the option applicable to this Section 8.03, the Company and each Guarantor shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be released from its obligations under the covenants contained in Article 5 and in Sections 4.03, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.15, 4.16, 4.17, 4.18, 5.01 and 11.01 hereof with respect to the outstanding Securities and Subsidiary Guarantees on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Securities and Subsidiary Guarantees shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Securities shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the outstanding Securities and Subsidiary Guarantees, the Company or any of its Subsidiaries may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.01 hereof, but, except as specified above, the remainder of this Indenture and such Securities and Subsidiary Guarantees shall be unaffected thereby. In addition, upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, Sections 6.01(iii), 6.01(iv) (with respect to the covenants specified in the first sentence hereof) and 6.01(v) hereof shall not constitute Events of Default. SECTION 8.04. Conditions to Legal or Covenant Defeasance. The ------------------------------------------- following shall be the conditions to the application of either Section 8.02 or Section 8.03 hereof to the outstanding Securities and Subsidiary Guarantees: In order to exercise either Legal Defeasance or Covenant Defeasance: (a) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Securities, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal or premium, if any, and interest and Liquidated Damages on the outstanding Securities on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Securities are being defeased to maturity or to a particular redemption date; 53 (b) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date hereof, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, subject to customary assumptions and exclusions, the Holders of the outstanding Securities shall not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (c) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that, subject to customary assumptions and exclusions, the Holders of the outstanding Securities shall not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and shall be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (d) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the financing of amounts to be applied to such deposit) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (e) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than this Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (f) the Company shall have delivered to the Trustee an opinion of counsel to the effect that, subject to customary assumptions and exclusions (which assumptions and exclusions shall not relate to the operation of Section 547 of the United States Bankruptcy Code or any analogous New York State law provision), after the 91st day following the deposit, the trust funds shall not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally. (g) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Securities over the other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (h) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. SECTION 8.05. Deposited Money and U.S. Government Securities To Be ---------------------------------------------------- Held in Trust; Other Miscellaneous Provisions. Subject to Section 8.06 hereof, ---------------------------------------------- all money and non-callable Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 8.05, the "Trustee") pursuant to Section 8.04 hereof in respect of the then outstanding Securities shall be held in trust and 54 applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company or any Subsidiary acting as Paying Agent) as the Trustee may determine, to the Holders of such Securities of all sums due and to become due thereon in respect of principal of, premium, if any, and interest and Liquidated Damages, if any, on such Securities but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or non-callable Government Securities deposited pursuant to Section 8.04 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Securities. Anything in this Article 8 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time at the Company's written request and be relieved of all liability with respect to any money or non- callable Government Securities held by it as provided in Section 8.04 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 8.04(a) hereof), are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. SECTION 8.06. Repayment to the Company. Any money deposited with the ------------------------- Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, interest and Liquidated Damages, if any, on any Security and remaining unclaimed for one year after such principal, and premium, if any, or interest, if any, or Liquidated Damages, if any, have become due and payable shall be paid to the Company on its written request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining shall be repaid to the Company. SECTION 8.07. Reinstatement. If the Trustee or Paying Agent is -------------- unable to apply any United States dollars or non-callable Government Securities in accordance with Section 8.02 hereof or Section 8.03 hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations of the Company and the Guarantors under this Indenture, and the Securities and the Subsidiary Guarantees shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.02 hereof or Section 8.03 hereof, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.02 hereof or Section 8.03 hereof, as the case may be; provided, however, that, if the Company makes any payment of principal of, premium, if any, interest or Liquidated Damages, if any, on any Security following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE 9 55 Amendment, Supplement and Waiver -------------------------------- SECTION 9.01. Without Consent of Holders of the Securities. --------------------------------------------- Notwithstanding Section 9.02 of this Indenture, without the consent of any Holder of Securities, the Company, the Guarantors and the Trustee may amend or supplement this Indenture, the Securities or the Subsidiary Guarantees: (a) to cure any ambiguity, defect or inconsistency; (b) to provide for uncertificated Securities in addition to or in place of certificated Securities; (c) to provide for the assumption of the Company's or a Guarantor's obligations to the Holders of the Securities in the case of a merger or consolidation pursuant to Article 5 or Article 11 hereof, as applicable; (d) to make any change that would provide any additional rights or benefits to the Holders of the Securities or that does not materially adversely affect the legal rights hereunder of any Holder of the Securities; (e) to comply with requirements of the Commission in order to effect or maintain the qualification of this Indenture under the TIA; (f) to allow any Subsidiary to Guarantee the Securities; or (g) to provide for the issuance, subject to the conditions and in compliance with the covenants related thereto set forth herein, of Additional Securities, which shall have terms substantially identical in all material respects to the Original Securities (except that the transfer restrictions contained in the Original Securities shall be modified or eliminated as appropriate), and which may be treated together with any outstanding Original Securities, as a single issue of Securities. Upon the written request of the Company accompanied by a resolution of its Board of Directors of the Company authorizing the execution of any such amended or supplemental indenture, and upon receipt by the Trustee of the documents described in Section 9.06 hereof, the Trustee shall join with the Company or the Guarantors in the execution of any amended or supplemental indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into such amended or supplemental indenture that affects its own rights, duties or immunities under this Indenture or otherwise. SECTION 9.02. With Consent of Holders of Securities. Except as -------------------------------------- provided below in this Section 9.02 or as provided in Section 10.13 or Section 12.13 of this Indenture, this Indenture, the Securities and the Subsidiary Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in aggregate principal amount of the Securities then outstanding (including, without limitation, consents obtained in connection with a purchase of, or a tender offer or exchange offer for, Securities), and subject to Sections 6.04 and 6.07 hereof, any existing default or compliance with any provision of this Indenture, the Securities or the Subsidiary Guarantees may be waived with the consent of the Holders of a majority in aggregate principal amount of the then outstanding Securities (including, without limitation, 56 consents obtained in connection with a purchase of, or a tender offer or exchange offer for, the Securities). Upon the request of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or supplemental indenture, and upon the filing with the Trustee of evidence reasonably satisfactory to the Trustee of the consent of the Holders of Securities as aforesaid, and upon receipt by the Trustee of an Officers' Certificate and an Opinion of Counsel, the Trustee shall join with the Company and the Guarantors in the execution of such amended or supplemental indenture unless such amended or supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may, but shall not be obligated to, enter into such amended or supplemental indenture. It shall not be necessary for the consent of the Holders of Securities under this Section 9.02 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to the Holders of each Security affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amended or supplemental indenture or waiver. Subject to Sections 6.04, 6.07, 10.13 and 12.13 hereof, the Holders of a majority in aggregate principal amount of the Securities then outstanding may amend or waive compliance in a particular instance by the Company or the Guarantors with any provision of this Indenture or the Securities or the Subsidiary Guarantees. However, without the consent of each Holder affected, an amendment, or waiver may not (with respect to any Security held by a non- consenting Holder): (a) reduce the principal amount of Securities whose Holders must consent to an amendment, supplement or waiver; (b) reduce the principal of or change the fixed maturity of any Securities or alter the provisions with respect to the redemption of the Securities (other than provisions relating to Sections 3.09, 4.10 and 4.13 hereof); (c) reduce the rate of or change the time for payment of interest on any Security; (d) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the Securities (except a rescission of acceleration of the Securities by the Holders of at least a majority in aggregate principal amount of the Securities and a waiver of the payment default that resulted from such acceleration); (e) make any Security payable in money other than that stated in the Securities; (f) make any change in Section 6.04 or 6.07 hereof; (g) waive a redemption or repurchase payment with respect to any Security (other than a payment required by Section 4.10 or 4.13 hereof); (h) except as otherwise permitted herein, release any Guarantor from any of its obligations under its Subsidiary Guarantee or this Indenture, or amend the provisions herein relating to the release of Guarantors; or 57 (i) make any change in the amendment and waiver provisions of this Article 9. SECTION 9.03. Compliance with Trust Indenture Act. Every amendment ------------------------------------ or supplement to this Indenture, the Subsidiary Guarantees or the Securities shall be set forth in an amended or supplemental indenture that complies with the TIA as then in effect. SECTION 9.04. Revocation and Effect of Consents. Until an amendment, ---------------------------------- supplement or waiver becomes effective, a consent to it by a Holder of a Security is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder of a Security may revoke the consent as to its Security if the Trustee receives written notice of revocation before the date the waiver, supplement or amendment becomes effective. When an amendment, supplement or waiver becomes effective in accordance with its terms, it thereafter binds every Holder. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to give their consent or take any other action described above or required or permitted to be taken pursuant to this Indenture. If a record date is fixed, then notwithstanding the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to give such consent or to revoke any consent previously given or to take any such action, whether or not such Persons continue to be Holders after such record date. SECTION 9.05. Notation on or Exchange of Securities. The Trustee may -------------------------------------- place an appropriate notation about an amendment, supplement or waiver on any Security thereafter authenticated. The Company in exchange for all Securities may issue and the Trustee shall authenticate new Securities that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or issue a new Security shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.06. Trustee to Sign Amendments, Etc. The Trustee shall -------------------------------- sign any amended or supplemental indenture authorized pursuant to this Article 9 if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. The Company and the Guarantors may not sign an amendment or supplemental indenture until their respective Boards of Directors approve it. In signing or refusing to sign any amended or supplemental indenture the Trustee shall be entitled to receive and (subject to Section 7.01 hereof) shall be fully protected in relying upon an Officers' Certificate and an Opinion of Counsel stating that the execution of such amended or supplemental indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon the Company and the Guarantors and enforceable in accordance with its terms. ARTICLE 10 Subordination ------------- SECTION 10.01. Agreement to Subordinate. The Company agrees, and ------------------------- each Holder of Securities by accepting a Security agrees, that the Indebtedness evidenced by the Security is subordinated in right of payment, to the extent and in the manner provided in this Article, to the prior payment in full of all Obligations in respect of Senior Debt (whether 58 outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed), and that the subordination is for the benefit of the holders of Senior Debt. SECTION 10.02. Liquidation; Dissolution; Bankruptcy. Upon any ------------------------------------- payment or distribution of any kind to creditors of the Company, whether in cash, property or securities, in a total or partial liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, an assignment for the benefit of creditors or any marshalling of the Company's assets and liabilities, whether voluntary or involuntary, the holders of Senior Debt will be entitled to receive payment in full of all Obligations in respect of such Senior Debt (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Debt whether or not such interest is an allowed claim enforceable against a debtor in a bankruptcy case under Title 11 of the United States Code) before the Holders of Securities will be entitled to receive any payment or distribution of any kind with respect to the Securities, and until all Obligations with respect to Senior Debt are paid in full, any payment or distribution to which the Holders of Securities would be entitled shall be made to the holders of Senior Debt (except that Holders of Securities may receive and retain Permitted Junior Securities made pursuant to a reorganization in which the Senior Debt is not impaired and payments made from the trust described under Section 8.02 and 8.03). SECTION 10.03. Default on Designated Senior Debt. The Company shall ---------------------------------- not make any payment upon or in respect of the Securities (except in Permitted Junior Securities made pursuant to a reorganization in which the Senior Debt is not impaired or from the trust described under Section 8.02, 8.03 and 8.04(a)) if (i) any amount of principal, interest or other Obligation in respect of any Designated Senior Debt (including, without limitation, any amount due as a result of the acceleration of the maturity thereof) is not paid when due and remains unpaid (a "Payment Default") or (ii) any other default (a "Nonpayment Default") occurs and is continuing with respect to any Designated Senior Debt that permits holders of such Designated Senior Debt or any agent or trustee thereof to accelerate its maturity and, in the case of any such Nonpayment Default, the Trustee receives a notice of such default invoking the following provisions of this Section 10.03 (a "Payment Blockage Notice") from the holders of any Designated Senior Debt or any agent or trustee thereof. However, the Company may pay the Securities without regard to the foregoing if the Company and the Trustee receive written notice approving such payment from the representative of the Designated Senior Debt affected by such Payment Default or Nonpayment Default. Payments on the Securities may and shall be resumed (a) in the case of a Payment Default, upon the date on which all Payment Defaults have been cured or waived, unless a Payment Blockage Notice has been delivered commencing a payment blockage period in respect of a Nonpayment Default, and (b) in case of a Nonpayment Default, the earlier of (i) the date on which all Payment Defaults and Nonpayment Defaults have been cured or waived or (ii) the date 179 days after the date on which the applicable Payment Blockage Notice is received, unless a Payment Default has occurred and is continuing. No new period of payment blockage may be commenced in respect of a Nonpayment Default unless and until 180 days have elapsed since the effectiveness of the immediately prior Payment Blockage Notice. No Nonpayment Default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice unless such default shall have been cured or waived for a period of not less than 90 days; provided that if such Nonpayment Default arose from the failure to comply with a financial covenant and if the condition or performance measured by such financial covenant has declined further from such condition or performance as reflected in the most recent financial statements available on the date of delivery of the original Payment Blockage Notice to the 59 Trustee, such Nonpayment Default may be, or be made, the basis for a subsequent Payment Blockage Notice. Whenever the Company is prohibited from making any payment in respect of the Securities, the Company also shall be prohibited from making, directly or indirectly, any deposit in the trust described under Section 8.02, 8.03 and 8.04(a) and any payment of any kind on account of the redemption, purchase or other acquisition of the Securities except for payments from a trust described under Section 2.09, 3.05, 8.02, 8.03 or 8.04(a). If any Holder receives any payment or distribution that such Holder is not entitled to receive with respect to the Securities, such Holder shall be required to pay the same over to the holders of Senior Debt. SECTION 10.04. Acceleration of Securities. If payment of the --------------------------- Securities is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Debt of the acceleration. The Company shall not make any payment in respect of the Securities until the earlier of five Business Days after such notice is delivered or the date of acceleration of any Designated Senior Debt and, thereafter, may pay the Securities only if this Article 10 otherwise permits payment at that time. SECTION 10.05. When Distribution Must Be Paid Over. In the event ------------------------------------ that the Trustee or any Holder of a Security receives any payment of any Obligations with respect to the Securities at a time when such payment is prohibited by Sections 10.02 or 10.03 hereof, such payment shall be held by the Trustee or such Holder, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Senior Debt as their interests may appear or their Representative under the indenture or other agreement (if any) pursuant to which Senior Debt may have been issued (the "Representative"), as their respective interests may appear, for application to the payment of all Obligations with respect to Senior Debt remaining unpaid to the extent necessary to pay such Obligations in full in accordance with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. With respect to the holders of Senior Debt, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article 10, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt, and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Holders of the Securities or the Company or any other Person money or assets to which any holders of Senior Debt shall be entitled by virtue of this Article 10, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. SECTION 10.06. Notice by the Company. The Company shall promptly ---------------------- notify the Trustee and the Paying Agent of any facts known to the Company that would cause a payment of any Obligations with respect to the Securities to violate this Article, which notice shall specifically refer to this Article 10, but failure to give such notice shall not affect the subordination of the Securities to the Senior Debt as provided in this Article. SECTION 10.07. Subrogation. After all Senior Debt is paid in full ------------ and until the Securities are paid in full, Holders of the Securities shall be subrogated (equally and ratably with all other pari passu indebtedness) to the rights of holders of Senior Debt to receive distributions applicable to Senior Debt to the extent that distributions otherwise payable to the Holders of the Securities have been applied to the payment of Senior Debt. A distribution made under this Article to holders of Senior Debt that otherwise would have been made to Holders of the 60 Securities is not, as between the Company and Holders of the Securities, a payment by the Company on the Securities. SECTION 10.08. Relative Rights. This Article defines the relative ---------------- rights of Holders of the Securities and holders of Senior Debt. Nothing in this Indenture shall: (1) impair, as between the Company and Holders of the Securities, the obligations of the Company, which are absolute and unconditional, to pay principal of and interest on the Securities in accordance with their terms; (2) affect the relative rights of Holders of the Securities and creditors of the Company other than their rights in relation to holders of Senior Debt; or (3) prevent the Trustee or any Holder of the Securities from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders and owners of Senior Debt to receive distributions and payments otherwise payable to Holders of the Securities. If the Company fails because of this Article to pay principal of or interest on a Security on the due date, the failure is still a Default or an Event of Default. SECTION 10.09. Subordination May Not Be Impaired by the Company. No ------------------------------------------------- right of any holder of Senior Debt to enforce the subordination of the Indebtedness evidenced by the Securities shall be impaired by any act or failure to act by the Company or any Holder or by any act or failure to act, in good faith, by any such holder, or by the failure of the Company or any Holder to comply with this Indenture. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Debt, or any of them, may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring any liabilities to any Holder of any Securities and without impairing or releasing the subordination and other benefits provided in this Indenture or the obligations of the Holders of the Securities to the holders of the Senior Debt, even if any right of reimbursement or subrogation or other right or remedy of any Holder of Securities is affected, impaired or extinguished thereby, do any one or more of the following: (1) change the manner, place or terms of payment or change or extend the time of payment of, or renew, exchange, amend, increase or alter, the terms of any Senior Debt, any security thereof or guaranty thereof or any liability of any obligor thereon (including any guarantor) to such holder, or any liability incurred directly or indirectly in respect thereof or otherwise amend, renew, exchange, extend, modify, increase or supplement in any manner any Senior Debt or any instrument evidencing or guaranteeing or securing the same or any agreement under which Senior Debt is outstanding; (2) sell, exchange, release, surrender, realize upon, enforce or otherwise deal with in any manner and in any order any property pledged, mortgaged or otherwise securing Senior Debt or any liability of any obligor thereon, to such holder, or any liability incurred directly or indirectly in respect thereof; (3) settle or compromise any Senior Debt or any other liability of any obligor of the Senior Debt to such holder or any security thereof or any liability incurred directly or 61 indirectly in respect thereof and apply any sums by whomsoever paid and however realized to any liability (including, without limitation, Senior Debt) in any manner or order; and (4) fail to take or to record or to otherwise perfect, for any reason or for no reason, any lien or security interest securing Senior Debt by whomsoever granted, exercise or delay in or refrain from exercising any right or remedy against any obligor or any guarantor or any other person, elect any remedy and otherwise deal freely with any obligor and any security for the Senior Debt or any liability of any obligor to such holder or any liability incurred directly or indirectly in respect thereof. SECTION 10.10. Distribution or Notice to Representative. Whenever a ----------------------------------------- distribution is to be made or a notice given to holders of Senior Debt, the distribution may be made and the notice given to their Representative. Upon any payment or distribution of assets of the Company referred to in this Article 10, the Trustee and the Holders of the Securities shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such Representative or of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders of the Securities for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Debt and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 10. SECTION 10.11. Rights of Trustee and Paying Agent. Notwithstanding ----------------------------------- the provisions of this Article 10 or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment to or distribution by the Trustee, and the Trustee and the Paying Agent may continue to make payments on the Securities, unless and until the Trustee shall have received at its Corporate Trust Office at least three Business Days prior to the date of such payment written notice of facts that would cause the payment of any Obligations with respect to the Securities to violate this Article, which notice shall specifically refer to this Article 10. Only the Company or a Representative may give the notice. Nothing in this Article 10 shall impair the claims of, or payments to, the Trustee under or pursuant to Section 7.07 hereof. The Trustee in its individual or any other capacity may hold Senior Debt with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. SECTION 10.12. Authorization to Effect Subordination. Each Holder of -------------------------------------- a Security by the Holder's acceptance thereof authorizes and directs the Trustee on the Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 10, and appoints the Trustee to act as the Holder's attorney-in-fact for any and all such purposes, including without limitation the timely filing of a claim for the unpaid balance of the Securities held by such Holder in the form required in any Insolvency or Liquidation Proceeding and causing such claim to be approved. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding referred to in Section 6.09 hereof at least 30 days before the expiration of the time of such claim, the Representatives of the Designated Senior Debt, including the Credit Agent, are hereby authorized to file an appropriate claim for and on behalf of the Holders of the Securities. 62 SECTION 10.13. Amendments. Any amendment to the provisions of this ----------- Article 10 (which relate to subordination or the related definitions) shall require the consent of the Holders of at least 75% in aggregate principal amount of the Securities then outstanding if such amendment would adversely affect the rights of the Holders of Securities. ARTICLE 11 Guarantee of Securities ----------------------- SECTION 11.01. Subsidiary Guarantee. Subject to Section 11.06 and --------------------- Article 12 hereof, each of the Guarantors hereby, jointly and severally, unconditionally guarantees to each Holder of a Security authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Indenture, the Securities and the Obligations of the Company hereunder and thereunder, that: (a) the principal of, premium, if any, interest and Liquidated Damages, if any, on the Securities will be promptly paid in full when due, subject to any applicable grace period, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal, premium, if any, (to the extent permitted by law) interest on any interest, if any, and Liquidated Damages, if any, on the Securities, and all other payment Obligations of the Company to the Holders or the Trustee hereunder or thereunder will be promptly paid in full and performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Securities or any of such other Obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, subject to any applicable grace period, whether at stated maturity, by acceleration, redemption or otherwise. Failing payment when so due of any amount so guaranteed for whatever reason the Guarantors will be jointly and severally obligated to pay the same immediately. An Event of Default under this Indenture or the Securities shall constitute an event of default under the Subsidiary Guarantees, and shall entitle the Holders to accelerate the Obligations of the Guarantors hereunder in the same manner and to the same extent as the Obligations of the Company. The Guarantors hereby agree that their Obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Securities or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a Guarantor. Each Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that this Subsidiary Guarantee will not be discharged (subject to Section 11.04) except by complete performance of the Obligations contained in the Securities and this Indenture. If any Holder or the Trustee is required by any court or otherwise to return to the Company, the Guarantors, or any Securities Custodian, Trustee, liquidator or other similar official acting in relation to either the Company or the Guarantors, any amount paid by either to the Trustee or such Holder, this Subsidiary Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. Each Guarantor agrees that it shall not be entitled to, and hereby waives, any right of subrogation in relation to the Holders in respect of any Obligations guaranteed hereby. Each Guarantor further agrees that, as between the Guarantors, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the Obligations guaranteed hereby may be accelerated as provided in Article 6 for the purposes of this Subsidiary Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby, and (y) in the event of any declaration of 63 acceleration of such Obligations as provided in Article 6 hereof, such Obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantors for the purpose of this Subsidiary Guarantee. The Guarantors shall have the right to seek contribution from any non-paying Guarantor and the Company so long as the exercise of such right does not impair the rights of the Holders under the Subsidiary Guarantees. SECTION 11.02. Non-Impairement. Each Guarantor hereby agrees that ---------------- its Subsidiary Guarantee set forth in Section 11.01 shall remain in full force and effect notwithstanding any failure to endorse on each Security a notation of such Subsidiary Guarantee. SECTION 11.03. Guarantors May Consolidate, Etc., on Certain Terms. --------------------------------------------------- (a) Except as set forth in Articles 4 and 5 hereof, nothing contained in this Indenture shall prohibit a merger between a Guarantor and another Guarantor or a merger between a Guarantor and the Company. (b) Subject to Section 11.04 hereof, no Guarantor may consolidate with or merge with or into (whether or not such Guarantor is the surviving Person), another corporation, Person or entity whether or not affiliated with such Guarantor unless, subject to the provisions of the following paragraph, (i) the Person formed by or surviving any such consolidation or merger (if other than such Guarantor) assumes all the obligations of such Guarantor pursuant to a supplemental indenture in form and substance reasonably satisfactory to the Trustee, under this Indenture and its Subsidiary Guarantees; and (ii) immediately after giving effect to such transaction, no Default or Event of Default exists. (c) In the case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor Person, by supplemental indenture, executed and delivered to the Trustee and substantially in the form of Exhibit C hereto, of the Subsidiary Guarantee endorsed upon the Securities and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Guarantor, such successor Person shall succeed to and be substituted for the Guarantor with the same effect as if it had been named herein as a Guarantor and thereafter the predecessor Guarantor shall be fully discharged from its Subsidiary Guarantee; provided that, solely for purposes of computing Consolidated Net Income for purposes of clause (b) of the first paragraph of Section 4.07 hereof, the Consolidated Net Income of any Person other than the Company and its Restricted Subsidiaries shall only be included for periods subsequent to the effective time of such merger, consolidation, combination or transfer of assets. Such successor Person thereupon may cause to be signed any or all of the Subsidiary Guarantees to be endorsed upon all of the Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee. All of the Subsidiary Guarantees so issued shall in all respects have the same legal rank and benefit under this Indenture as the Subsidiary Guarantees theretofore and thereafter issued in accordance with the terms of this Indenture as though all of such Subsidiary Guarantees had been issued at the date of the execution hereof. SECTION 11.04. Releases Following Sale of Assets, Merger, Sale of -------------------------------------------------- Capital Stock, Etc. In the event (a) of a sale or other disposition of all of ------------------- the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the Capital Stock of any Guarantor, or (b) that the Company designates a Guarantor to be an Unrestricted Subsidiary, or such Guarantor ceases to be a Subsidiary of the Company, then such Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or otherwise, of all of the Capital Stock of such Guarantor or any such designation) or the entity acquiring the property (in the event of a sale or other disposition of all of the assets of such Guarantor) shall be 64 released and relieved of any obligations under its Subsidiary Guarantee. In the case of a sale, assignment, lease, transfer, conveyance or other disposition of all or substantially all of the assets of a Guarantor, upon the assumption provided for in clause (i) of the Section 11.03(b) hereof, such Guarantor shall be discharged from all further liability and obligation under this Indenture. Upon delivery by the Company to the Trustee of an Officers' Certificate to the effect of the foregoing, the Trustee shall execute any documents reasonably required in order to evidence the release of any Guarantor from its Obligation under its Subsidiary Guarantee. Any Guarantor not released from its Obligations under its Subsidiary Guarantee shall remain liable for the full amount of principal of, premium, if any, interest and Liquidated Damages, if any, on the Securities and for the other Obligations of such Guarantor under this Indenture as provided in this Article 11. SECTION 11.05. Additional Guarantors. Any Person that was not a ---------------------- Guarantor on the date of this Indenture may become a Guarantor, and shall become a Guarantor if so required by the terms of this Indenture, by executing and delivering to the Trustee (a) a supplemental indenture in substantially the form of Exhibit C, and (b) an Opinion of Counsel to the effect that such supplemental indenture has been duly authorized and executed by such Person and constitutes the legal, valid, binding and enforceable obligation of such Person (subject to such customary exceptions concerning creditors rights', fraudulent transfers, public policy and equitable principles as may be acceptable to the Trustee in its discretion). SECTION 11.06. Limitation on Guarantor Liability. Notwithstanding ---------------------------------- any term or provision of this Indenture or any Security to the contrary, the maximum aggregate amount of the obligations guaranteed hereunder by any Guarantor shall not exceed the maximum amount that can be hereby guaranteed by that Guarantor without rendering this Subsidiary Guarantee, as it relates to such Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. SECTION 11.07. "Trustee" to Include Paying Agent. In case at any ---------------------------------- time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article 11 shall in each case (unless the context shall otherwise require) be construed as extending to and including such Paying Agent within its meaning as fully and for all intents and purposes as if such Paying Agent were named in this Article 11 in place of the Trustee. ARTICLE 12 Subordination of Subsidiary Guarantees -------------------------------------- SECTION 12.01. Agreement to Subordinate. The Guarantors agree, and ------------------------- each Holder of Securities by accepting a Security agrees, that the Indebtedness evidenced by the Security is general unsecured obligations of the Guarantors, is subordinated in right of payment, to the extent and in the manner provided in this Article, to the prior payment in full of all Senior Debt of such Guarantor (whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed), and that the subordination is for the benefit of the holders of Senior Debt of such Guarantor. SECTION 12.02. Liquidation; Dissolution; Bankruptcy. Upon any ------------------------------------- payment or distribution of any kind to creditors of any Guarantor, whether in cash, property or securities, in a total or partial liquidation or dissolution of such Guarantor or in a bankruptcy, reorganization, 65 insolvency, receivership or similar proceeding relating to any Guarantor or its property, an assignment for the benefit of creditors or any marshalling of such Guarantor's assets and liabilities, whether voluntary or involuntary, the holders of Senior Debt of such Guarantor will be entitled to receive payment in full of all Obligations in respect of such Senior Debt (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Debt whether or not such interest is an allowed claim enforceable against a debtor in a bankruptcy case under Title 11 of the United States Code) before the Holders of Securities will be entitled to receive any payment or distribution of any kind with respect to the Securities, and until all Obligations with respect to such Senior Debt are paid in full, any payment or distribution to which the Holders of Securities would be entitled shall be made to the holders of Senior Debt of such Guarantor (except that Holders of Securities may receive and retain Permitted Junior Securities issued pursuant to a reorganization in which the Senior Debt of such Guarantor is not impaired and payments made from the trust described under Section 8.02 and 8.03). SECTION 12.03. Default on Designated Senior Debt. No Guarantor shall ---------------------------------- make any payment upon or in respect of the Securities (except in Permitted Junior Securities issued pursuant to a reorganization in which the Senior Debt of such Guarantor is not impaired or from the trust described under Sections 2.09, 3.05, 8.02, 8.03 or 8.04(a)) if (i) any amount of principal, interest or other Obligation in respect of any Designated Senior Debt (including, without limitation, any amount due as a result of the acceleration of the maturity thereof) is not paid when due and remains unpaid (a "Payment Default") or (ii) any other default (a "Nonpayment Default") occurs and is continuing with respect to any Designated Senior Debt that permits holders of such Designated Senior Debt or any agent or trustee thereof to accelerate its maturity and, in the case of any such Nonpayment Default, the Trustee receives a notice of such default invoking the following provisions of this Section 12.03 (a "Payment Blockage Notice") from the holders of any Designated Senior Debt or any agent or trustee thereof. However, the Guarantors may pay the Securities without regard to the foregoing if the Company and the Trustee receive written notice approving such payment from the representative of the Designated Senior Debt affected by such Payment Default or Nonpayment Default. Payments on the Securities may and shall be resumed (a) in the case of a Payment Default, upon the date on which all Payment Defaults have been cured or waived, unless a Payment Blockage Notice has been delivered commencing a payment blockage period in respect of a Nonpayment Default, and (b) in case of a Nonpayment Default, the earlier of (i) the date on which all Payment Defaults and Nonpayment Defaults have been cured or waived or (ii) the date 179 days after the date on which the applicable Payment Blockage Notice is received, unless a Payment Default has occurred and is continuing. No new period of payment blockage may be commenced in respect of a Nonpayment Default unless and until 180 days have elapsed since the effectiveness of the immediately prior Payment Blockage Notice. No Nonpayment Default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice unless such default shall have been cured or waived for a period of not less than 90 days; provided that if such Nonpayment Default arose from the failure to comply with a financial covenant and if the condition or performance measured by such financial covenant has declined further from such condition or performance as reflected in the most recent financial statements available on the date of delivery of the original Payment Blockage Notice to the Trustee, such Nonpayment Default may be, or be made, the basis for a subsequent Payment Blockage Notice. Whenever a Guarantor is prohibited from making any payment in respect of the Securities, the Guarantor also shall be prohibited from making, directly or indirectly, any deposit in the trust described under Section 8.02, 8.03 and 8.04(a) and any payment of any kind on account of the redemption, purchase or other acquisition of the Securities except for payments 66 from the trust described under Section 2.09, 3.05, 8.02, 8.03 and 8.04(a). If any Holder receives any payment or distribution that such Holder is not entitled to receive with respect to the Securities, such Holder shall be required to pay the same over to the holders of Senior Debt. SECTION 12.04. Acceleration of Securities. If payment of the --------------------------- Securities is accelerated because of an Event of Default, the Guarantors shall promptly notify holders of Senior Debt of the acceleration. The Guarantors shall not make any payment in respect of the Subsidiary Guarantees until the earlier of five Business Days after such notice is delivered or the date of acceleration of any Designated Senior Debt and, thereafter, may pay the Securities only if this Article 12 otherwise permits payment at that time. SECTION 12.05. When Distribution Must Be Paid Over. In the event ------------------------------------ that the Trustee or any Holder of a Security receives any payment of any Obligations with respect to the Securities at a time when such payment is prohibited by Sections 12.02 or 12.03 hereof, such payment shall be held by the Trustee or such Holder, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Senior Debt as their interests may appear or their Representative under the indenture or other agreement (if any) pursuant to which Senior Debt may have been issued, as their respective interests may appear, for application to the payment of all Obligations with respect to Senior Debt remaining unpaid to the extent necessary to pay such Obligations in full in accordance with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. With respect to the holders of Senior Debt, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article 12, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt, and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Holders of the Securities or the Guarantors or any other Person money or assets to which any holders of Senior Debt shall be entitled by virtue of this Article 12, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. SECTION 12.06. Notice by Guarantor. The Guarantors shall promptly -------------------- notify the Trustee and the Paying Agent of any facts known to the Guarantors that would cause a payment of any Obligations with respect to the Securities to violate this Article, which notice shall specifically refer to this Article 12, but failure to give such notice shall not affect the subordination of the Securities to the Senior Debt as provided in this Article. SECTION 12.07. Subrogation. After all Senior Debt is paid in full ------------ and until the Securities are paid in full, Holders of the Securities shall be subrogated (equally and ratably with all other pari passu indebtedness) to the rights of holders of Senior Debt to receive distributions applicable to Senior Debt to the extent that distributions otherwise payable to the Holders of the Securities have been applied to the payment of Senior Debt. A distribution made under this Article to holders of Senior Debt that otherwise would have been made to Holders of the Securities is not, as between the Guarantor and Holders of the Securities, a payment by the Guarantors on the Securities. SECTION 12.08. Relative Rights. This Article defines the relative ---------------- rights of Holders of the Securities and holders of Senior Debt. Nothing in this Indenture shall: (1) impair, as between the Guarantors and Holders of the Securities, the obligations of the Guarantors, which are absolute and unconditional, to pay principal of and interest on the Securities in accordance with their terms; 67 (2) affect the relative rights of Holders of the Securities and creditors of the Guarantors other than their rights in relation to holders of Senior Debt; or (3) prevent the Trustee or any Holder of the Securities from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders and owners of Senior Debt to receive distributions and payments otherwise payable to Holders of the Securities. If the Guarantors fail because of this Article to pay principal of or interest on a Security on the due date, the failure is still a Default or an Event of Default. SECTION 12.09. Subordination May Not Be Impaired by the Guarantors. ---------------------------------------------------- No right of any holder of Senior Debt to enforce the subordination of the Indebtedness evidenced by the Securities shall be impaired by any act or failure to act by any Guarantor or any Holder or by any act or failure to act, in good faith, by any such holder, or by the failure of any Guarantor or any Holder to comply with this Indenture. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Debt, or any of them, may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring any liabilities to any Holder of any Securities and without impairing or releasing the subordination and other benefits provided in this Indenture or the obligations of the Holders of the Securities to the holders of the Senior Debt, even if any right of reimbursement or subrogation or other right or remedy of any Holder of Securities is affected, impaired or extinguished thereby, do any one or more of the following: (1) change the manner, place or terms of payment or change or extend the time of payment of, or renew, exchange, amend, increase or alter, the terms of any Senior Debt, any security thereof or guaranty thereof or any liability of any obligor thereon (including any guarantor) to such holder, or any liability incurred directly or indirectly in respect thereof or otherwise amend, renew, exchange, extend, modify, increase or supplement in any manner any Senior Debt or any instrument evidencing or guaranteeing or securing the same or any agreement under which Senior Debt is outstanding; (2) sell, exchange, release, surrender, realize upon, enforce or otherwise deal with in any manner and in any order any property pledged, mortgaged or otherwise securing Senior Debt or any liability of any obligor thereon, to such holder, or any liability incurred directly or indirectly in respect thereof; (3) settle or compromise any Senior Debt or any other liability of any obligor of the Senior Debt to such holder or any security thereof or any liability incurred directly or indirectly in respect thereof and apply any sums by whomsoever paid and however realized to any liability (including, without limitation, Senior Debt) in any manner or order; and (4) fail to take or to record or to otherwise perfect, for any reason or for no reason, any lien or security interest securing Senior Debt by whomsoever granted, exercise or delay in or refrain from exercising any right or remedy against any obligor or any guarantor or any other person, elect any remedy and otherwise deal freely with any obligor and any security for the Senior Debt or any liability of any obligor to such holder or any liability incurred directly or indirectly in respect thereof. 68 SECTION 12.10. Distribution or Notice to Representative. Whenever a ----------------------------------------- distribution is to be made or a notice given to holders of Senior Debt, the distribution may be made and the notice given to their Representative. Upon any payment or distribution of assets of any Guarantor referred to in this Article 12, the Trustee and the Holders of the Securities shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such Representative or of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders of the Securities for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Debt and other Indebtedness of the Guarantor, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 12. SECTION 12.11. Rights of Trustee and Paying Agent. Notwithstanding ----------------------------------- the provisions of this Article 12 or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment to or distribution by the Trustee, and the Trustee and the Paying Agent may continue to make payments on the Securities, unless and until the Trustee shall have received at its Corporate Trust Office at least three Business Days prior to the date of such payment written notice of facts that would cause the payment of any Obligations with respect to the Securities to violate this Article, which notice shall specifically refer to this Article 12. Only a Guarantor or a Representative may give the notice. Nothing in this Article 12 shall impair the claims of, or payments to, the Trustee under or pursuant to Section 7.07 hereof. The Trustee in its individual or any other capacity may hold Senior Debt with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. SECTION 12.12. Authorization to Effect Subordination. Each Holder of -------------------------------------- a Security by the Holder's acceptance thereof authorizes and directs the Trustee on the Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 12, and appoints the Trustee to act as the Holder's attorney-in-fact for any and all such purposes, including without limitation the timely filing of a claim for the unpaid balance of the Securities held by such Holder in the form required in any Insolvency or Liquidation Proceeding and causing such claim to be approved. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding referred to in Section 6.09 hereof at least 30 days before the expiration of the time of such claim, the Representatives of the Designated Senior Debt, including the Credit Agent, are hereby authorized to file an appropriate claim for and on behalf of the Holders of the Securities. SECTION 12.13. Amendments. Any amendment to the provisions of this ----------- Article 12 (which relate to subordination or the related definitions) shall require the consent of the Holders of at least 75% in aggregate principal amount of the Securities then outstanding if such amendment would adversely affect the rights of the Holders of Securities. ARTICLE 13 Miscellaneous ------------- 69 SECTION 13.01. Trust Indenture Act Controls. If any provision of ----------------------------- this Indenture limits, qualifies or conflicts with the duties imposed by TIA Section 318(c), the imposed duties shall control. SECTION 13.02. Notices. Any notice or communication by the Company, -------- the Guarantors or the Trustee to the others is duly given if in writing and delivered in Person or mailed by first class mail (registered or certified, return receipt requested), telecopier or overnight air courier guaranteeing next day delivery, to the others' address: If to the Company: Advance Stores Company, Incorporated 5673 Airport Road Roanoke, Virginia 24012 Telecopier: (540) 561-1448 Attention: Chief Financial Officer If to the Trustee: The Bank of New York c/o United States Trust Company of New York 114 West 47th Street New York, New York 10036 Telecopier No.: (212) 852-1626 Attention: Corporate Trust Department/Auto Stores The Company or the Trustee, by notice to the others may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier promising next Business Day delivery. Any notice or communication to a Holder shall be mailed by first class mail or by overnight air courier promising next Business Day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA Section 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it, or notice or communication, however, shall not be effective unless, in the case of the Trustee, actually received. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. SECTION 13.03. Communication by Holders of Securities with Other ------------------------------------------------- Holders of Securities. Holders may communicate pursuant to TIA Section 312(b) ---------------------- with other Holders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). 70 SECTION 13.04. Certificate and Opinion as to Conditions Precedent. --------------------------------------------------- Upon any request or application by the Company or the Guarantors to the Trustee to take any action under this Indenture (other than the initial issuance of the Securities), the Company or Guarantor shall furnish to the Trustee upon request: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 13.05 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied; and (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 13.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. SECTION 13.05. Statements Required in Certificate or Opinion. Each ---------------------------------------------- certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA Section 314(a)(4)) shall comply with the provisions of TIA Section 314(e) and shall include: (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been satisfied; and (d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been satisfied. Any certificate or opinion of an Officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such Officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous, and provided that any such certificate or opinion names the Trustee as an addressee and is furnished to the Trustee at the time of delivery of such certificate or opinion. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Opinions of Counsel required to be delivered to the Trustee may have qualifications customary for opinions of the type required and counsel delivering such Opinions of Counsel may rely on certificates of the Company or government or other officials customary for opinions of the type required, including certificates certifying as to matters of fact, including that various financial covenants have been complied with. 71 SECTION 13.06. Rules by Trustee and Agents. The Trustee may make ---------------------------- reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. SECTION 13.07. No Personal Liability of Directors, Officers, --------------------------------------------- Employees and Stockholders. No director, officer, employee, incorporator or --------------------------- stockholder of the Company or the Guarantors, as such, shall have any liability for any obligations of the Company or any Guarantor under the Securities, this Indenture, the Subsidiary Guarantees or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Securities by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Securities. SECTION 13.08. Governing Law. THE INTERNAL LAW OF THE STATE OF NEW -------------- YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS INDENTURE, THE SECURITIES AND THE SUBSIDIARY GUARANTEES. SECTION 13.09. No Adverse Interpretation of Other Agreements. This ---------------------------------------------- Indenture may not be used to interpret any other indenture, loan or debt agreement of the Company or its Subsidiaries or of any other Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 13.10. Successors. All agreements of the Company and the ----------- Guarantors in this Indenture, the Securities and the Subsidiary Guarantees shall bind their respective successors and assigns. All agreements of the Trustee in this Indenture shall bind its successors and assigns. SECTION 13.11. Severability. In case any provision in this Indenture ------------- or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 13.12. Counterpart Originals. The parties may sign any ---------------------- number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 13.13. Table of Contents, Headings, Etc. The Table of --------------------------------- Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 13.14. Benefits of Indenture. Nothing in this Indenture or ---------------------- in the Securities, express or implied, shall give to any Person, other than the parties hereto, the holders of the Senior Debt (subject to Articles 10 and 12 hereof) and the Holders of the Securities, any benefits or any legal or equitable right, remedy or claim under this Indenture or the Securities. 72 IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above. ADVANCE STORES COMPANY, INCORPORATED, as Issuer, By: /s/ Jeffrey T. Gray ------------------------------- Name: Jeffrey T. Gray Title: Senior Vice President Controller ADVANCE TRUCKING CORPORATION, as Guarantor, By: /s/ Jeffrey T. Gray ------------------------------- Name: Jeffrey T. Gray Title: Senior Vice President Controller LARALEV, INC., as Guarantor, By: /s/ Andrew Panaccione ------------------------------- Name: Andrew Panaccione Title: President WESTERN AUTO SUPPLY COMPANY, as Guarantor, By: /s/ Jeffrey T. Gray ------------------------------- Name: Jeffrey T. Gray Title: Senior Vice President Controller THE BANK OF NEW YORK, as Trustee By: /s/ Louis Young --------------------------------- Name: Louis Young Title: Authorized Signatory APPENDIX A PROVISIONS RELATING TO ORIGINAL SECURITIES, ------------------------------------------- ADDITIONAL SECURITIES AND EXCHANGE SECURITIES --------------------------------------------- 1. Definitions. ------------ 1.1 Definitions. For the purposes of this Appendix A the following ------------ terms shall have the meanings indicated below: "Applicable Procedures" means, with respect to any transfer or transaction involving a Regulation S Global Security or beneficial interest therein, the rules and procedures of the Depositary for such Global Security, Euroclear and Clearstream, in each case to the extent applicable to such transaction and as in effect from time to time. "Clearstream" means Clearstream Banking, societe anonyme, or any successor securities clearing agency. "Definitive Security" means a certificated Initial Security or Exchange Security (bearing the Restricted Securities Legend if the transfer of such Security is restricted by applicable law) that does not include the Global Securities Legend. "Depositary" means The Depository Trust Company, its nominees and their respective successors. "Euroclear" means the Euroclear Clearance System or any successor securities clearing agency. "Exchange Offer" means an the offer by the Company, pursuant to a Registration Agreement, to certain Holders of Initial Securities, to issue and deliver to such Holders, in exchange for their Initial Securities, a like aggregate principal amount of Exchange Securities registered under the Securities Act. "Global Securities Legend" means the legend set forth under that caption in Exhibit A to this Indenture. "IAI" means an institutional "accredited investor" as described in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "Initial Purchasers" means J.P. Morgan Securities Inc., Credit Suisse First Boston and Lehman Brothers Inc. "Purchase Agreement" means (a) the Purchase Agreement dated October 24, 2001, among the Company, the Guarantors and the Initial Purchasers and (b) any other similar Purchase Agreement relating to Additional Securities. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Registration Agreement" means (a) the Exchange and Registration Rights Agreement dated October 31, 2001, among the Company, the Guarantors and the Initial Purchasers and (b) any other similar Exchange and Registration Rights Agreement relating to Additional Securities. 2 "Regulation S" means Regulation S under the Securities Act. "Regulation S Securities" means all Initial Securities offered and sold outside the United States in reliance on Regulation S. "Restricted Period", with respect to any Securities, means the period of 40 consecutive days beginning on and including the later of (a) the day on which such Securities are first offered to persons other than distributors (as defined in Regulation S under the Securities Act) in reliance on Regulation S, notice of which day shall be promptly given by the Company to the Trustee, and (b) the Issue Date with respect to such Securities. "Restricted Securities Legend" means the legend set forth in Section 2.3(e)(i) herein. "Rule 501" means Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "Rule 144A" means Rule 144A under the Securities Act. "Rule 144A Securities" means all Initial Securities offered and sold to QIBs in reliance on Rule 144A. "Securities Act" means the Securities Act of 1933, as amended. "Securities Custodian" means the custodian with respect to a Global Security (as appointed by the Depositary) or any successor person thereto, who shall initially be the Trustee. "Shelf Registration Statement" means a registration statement filed by the Company in connection with the offer and sale of Initial Securities pursuant to a Registration Agreement. "Transfer Restricted Securities" means Definitive Securities and any other Securities that bear or are required to bear the Restricted Securities Legend. 1.2 Other Definitions. ------------------ Term: Defined in Section: ---- ------------------ "Agent Members"............................................. 2.1(c) "IAI Global Security"....................................... 2.1(b) "Global Security"........................................... 2.1(b) "Regulation S Global Security".............................. 2.1(b) "Rule 144A Global Security"................................. 2.1(b) 2. The Securities. --------------- 2.1 Form and Dating. (a) The Initial Securities issued on the date ---------------- hereof will be (i) offered and sold by the Company pursuant to a Purchase Agreement and (ii) except for $3,000,000 principal amount of Securities which will be sold to Mozart Investments Inc., wholly-owned by Nicholas F. Taubman, an affiliate of the Company, and $3,000,000 principal amount which will be sold to Mozart One, L.L.C., wholly-owned by the Arthur Taubman Trust dated July 13, 1964, an affiliate of the Company, in each case in reliance upon another exemption from 3 registration under the Securities Act, resold, initially only to (1) QIBs in reliance on Rule 144A and (2) Persons other than U.S. Persons (as defined in Regulation S) in reliance on Regulation S. Such Initial Securities may thereafter be transferred to, among others, QIBs, purchasers in reliance on Regulation S and, except as set forth below, IAIs in accordance with Rule 501. Additional Securities offered after the date hereof may be offered and sold by the Company from time to time pursuant to one or more Purchase Agreements in accordance with applicable law. (b) Global Securities. Rule 144A Securities shall be issued ------------------ initially in the form of one or more permanent global Securities in definitive, fully registered form (collectively, the "Rule 144A Global Security") and Regulation S Securities shall be issued initially in the form of one or more global Securities (collectively, the "Regulation S Global Security"), in each case without interest coupons and bearing the Global Securities Legend and Restricted Securities Legend, which shall be deposited on behalf of the purchasers of the Securities represented thereby with the Securities Custodian, and registered in the name of the Depositary or a nominee of the Depositary, duly executed by the Company and authenticated by the Trustee as provided in this Indenture. One or more global securities in definitive, fully registered form without interest coupons and bearing the Global Securities Legend and the Restricted Securities Legend (collectively, the "IAI Global Security") shall also be issued on the Closing Date, deposited with the Securities Custodian, and registered in the name of the Depositary or a nominee of the Depositary, duly executed by the Company and authenticated by the Trustee as provided in this Indenture to accommodate transfers of beneficial interests in the Securities to IAIs subsequent to the initial distribution. Beneficial ownership interests in the Regulation S Global Security shall not be exchangeable for interests in the Rule 144A Global Security, the IAI Global Security or any other Security without a Restricted Securities Legend until the expiration of the Restricted Period. The Rule 144A Global Security, the IAI Global Security and the Regulation S Global Security are each referred to herein as a "Global Security" and are collectively referred to herein as "Global Securities", provided, that the term -------- "Global Security" when used in Sections 2.1(b)(third paragraph), 2.1(c), 2.3(g)(i), 2.3(h)(i) and 2.4 shall also include any Security in global form issued in connection with an Exchange Offer. The aggregate principal amount of the Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee and on the schedules thereto as hereinafter provided. (c) Book-Entry Provisions. This Section 2.1(c) shall apply only to a ---------------------- Global Security deposited with or on behalf of the Depositary. The Company shall execute and the Trustee shall, in accordance with this Section 2.1(c) and Section 2.2 and pursuant to an order of the Company signed by two Officers, authenticate and deliver initially one or more Global Securities that (i) shall be registered in the name of the Depositary for such Global Security or Global Securities or the nominee of such Depositary and (ii) shall be delivered by the Trustee to such Depositary or pursuant to such Depositary's instructions or held by the Trustee as Securities Custodian. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depositary or by the Trustee as Securities Custodian or under such Global Security, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its 4 Agent Members, the operation of customary practices of such Depositary governing the exercise of the rights of a holder of a beneficial interest in any Global Security. (d) Definitive Securities. Except as provided in Section 2.3 or 2.4, ---------------------- owners of beneficial interests in Global Securities will not be entitled to receive physical delivery of certificated Securities. 2.2 Authentication. The Trustee shall authenticate and make --------------- available for delivery upon a written order of the Company signed by two Officers (a) Original Securities for original issue on the date hereof in an aggregate principal amount of $200,000,000, (b) subject to the terms of this Indenture, Additional Securities in an unlimited aggregate principal amount and (3) the Exchange Securities for issue only in an Exchange Offer pursuant to a Registration Agreement and for a like principal amount of Initial Securities exchanged pursuant thereto. Such order shall specify the amount of the Securities to be authenticated, the date on which the original issue of Securities is to be authenticated and whether the Securities are to be Initial Securities or Exchange Securities. The aggregate principal amount of Securities that may be outstanding at any time is unlimited. 2.3 Transfer and Exchange. (a) Transfer and Exchange of Definitive ---------------------- Securities. When Definitive Securities are presented to the Registrar with a request: (i) to register the transfer of such Definitive Securities; or (ii) to exchange such Definitive Securities for an equal principal amount of Definitive Securities of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, -------- ------- that the Definitive Securities surrendered for transfer or exchange: (1) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing; and (2) in the case of Transfer Restricted Securities, are accompanied by the following additional information and documents, as applicable: (A) if such Definitive Securities are being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect (in the form set forth on the reverse side of the Initial Security); or (B) if such Definitive Securities are being transferred to the Company, a certification to that effect (in the form set forth on the reverse side of the Initial Security); or (C) if such Definitive Securities are being transferred pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act or in reliance upon another exemption from the registration requirements of the Securities Act, (x) a certification to that effect (in the form set forth on the reverse side of the Initial Security) and (y) if the Company so requests, an opinion of 5 counsel or other evidence reasonably satisfactory to it as to the compliance with the restrictions set forth in the legend set forth in Section 2.3(e)(i). (b) Restrictions on Transfer of a Definitive Security for a ------------------------------------------------------- Beneficial Interest in a Global Security. A Definitive Security may not be ----------------------------------------- exchanged for a beneficial interest in a Global Security except upon satisfaction of the requirements set forth below. Upon receipt by the Trustee of a Definitive Security, duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Registrar, together with: (i) certification (in the form set forth on the reverse side of the Initial Security) that such Definitive Security is being transferred (1) to a QIB in accordance with Rule 144A, (2) to an IAI that has furnished to the Trustee a signed letter substantially in the form of Exhibit D or (3) outside the United States in an offshore transaction within the meaning of Regulation S and in compliance with Rule 904 under the Securities Act; and (ii) written instructions directing the Trustee to make, or to direct the Securities Custodian to make, an adjustment on its books and records with respect to such Global Security to reflect an increase in the aggregate principal amount of the Securities represented by the Global Security, such instructions to contain information regarding the Depositary account to be credited with such increase, then the Trustee shall cancel such Definitive Security and cause, or direct the Securities Custodian to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Securities Custodian, the aggregate principal amount of Securities represented by the Global Security to be increased by the aggregate principal amount of the Definitive Security to be exchanged and shall credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the Global Security equal to the principal amount of the Definitive Security so canceled. If no Global Securities are then outstanding and the Global Security has not been previously exchanged for certificated securities pursuant to Section 2.4, the Company shall issue and the Trustee shall authenticate, upon written order of the Company in the form of an Officers' Certificate, a new Global Security in the appropriate principal amount. (c) Transfer and Exchange of Global Securities. (i) The transfer ------------------------------------------- and exchange of Global Securities or beneficial interests therein shall be effected through the Depositary, in accordance with this Indenture (including applicable restrictions on transfer set forth herein, if any) and the procedures of the Depositary therefor. A transferor of a beneficial interest in a Global Security shall deliver a written order given in accordance with the Depositary's procedures containing information regarding the participant account of the Depositary to be credited with a beneficial interest in such Global Security or another Global Security and such account shall be credited in accordance with such order with a beneficial interest in the applicable Global Security and the account of the Person making the transfer shall be debited by an amount equal to the beneficial interest in the Global Security being transferred. Transfers by an owner of a beneficial interest in the Rule 144A Global Security or the IAI Global Security to a transferee who takes delivery of such interest through the Regulation S Global Security, whether before or after the expiration of the Restricted Period, shall be made only upon receipt by the Trustee of a certification in the form provided on the reverse of the Initial Securities from the transferor to the effect that such transfer is being made in accordance with Regulation S or (if available) Rule 144 under the Securities Act and that, if such transfer is being made prior to the expiration of the Restricted Period, the interest transferred shall be held immediately thereafter through Euroclear or Clearstream. In the case of a transfer of a beneficial interest in either the 6 Regulation S Global Security or the Rule 144A Global Security for an interest in the IAI Global Security, the transferee must furnish a signed letter substantially in the form of Exhibit D to the Trustee. (ii) If the proposed transfer is a transfer of a beneficial interest in one Global Security to a beneficial interest in another Global Security, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the Global Security to which such interest is being transferred in an amount equal to the principal amount of the interest to be so transferred, and the Registrar shall reflect on its books and records the date and a corresponding decrease in the principal amount of Global Security from which such interest is being transferred. (iii) Notwithstanding any other provisions of this Appendix (other than the provisions set forth in Section 2.4), a Global Security may not be transferred as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. (iv) In the event that a Global Security is exchanged for Definitive Securities pursuant to Section 2.4 prior to the consummation of an Exchange Offer or the effectiveness of a Shelf Registration Statement with respect to such Securities, such Securities may be exchanged only in accordance with such procedures as are substantially consistent with the provisions of this Section 2.3 (including the certification requirements set forth on the reverse of the Initial Securities intended to ensure that such transfers comply with Rule 144A, Regulation S or such other applicable exemption from registration under the Securities Act, as the case may be) and such other procedures as may from time to time be adopted by the Company. (d) Restrictions on Transfer of Regulation S Global Security. (i) --------------------------------------------------------- Prior to the expiration of the Restricted Period, interests in the Regulation S Global Security may only be held through Euroclear or Clearstream. During the Restricted Period, beneficial ownership interests in the Regulation S Global Security may only be sold, pledged or transferred through Euroclear or Clearstream in accordance with the Applicable Procedures and only (1) to the Company, (2) so long as such security is eligible for resale pursuant to Rule 144A, to a person whom the selling holder reasonably believes is a QIB that purchases for its own account or for the account of a QIB to whom notice is given that the resale, pledge or transfer is being made in reliance on Rule 144A, (3) in an offshore transaction in accordance with Regulation S, (4) pursuant to an exemption from registration under the Securities Act provided by Rule 144 (if applicable) under the Securities Act, (5) to an IAI purchasing for its own account, or for the account of such an IAI, in a minimum principal amount of Securities of $250,000 or (6) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States. Prior to the expiration of the Restricted Period, transfers by an owner of a beneficial interest in the Regulation S Global Security to a transferee who takes delivery of such interest through the Rule 144A Global Security or the IAI Global Security shall be made only in accordance with Applicable Procedures and upon receipt by the Trustee of a written certification from the transferor of the beneficial interest in the form provided on the reverse of the Initial Security to the effect that such transfer is being made to (1) a QIB within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A or (2) an IAI purchasing for its own account, or for the account of such an IAI, in a minimum principal amount of the Securities of $250,000. Such written 7 certification shall no longer be required after the expiration of the Restricted Period. In the case of a transfer of a beneficial interest in the Regulation S Global Security for an interest in the IAI Global Security, the transferee must furnish a signed letter substantially in the form of Exhibit D to the Trustee. (ii) Upon the expiration of the Restricted Period, beneficial ownership interests in the Regulation S Global Security shall be transferable in accordance with applicable law and the other terms of this Indenture. (e) Legend. ------- (i) Except as permitted by the following paragraphs (ii), (iii) or (iv), each Security certificate evidencing the Global Securities and the Definitive Securities (and all Securities issued in exchange therefor or in substitution thereof) shall bear a legend in substantially the following form (each defined term in the legend being defined as such for purposes of the legend only): "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS AN INSTITUTIONAL ACCREDITED INVESTOR ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR 8 (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE." Each Definitive Security shall bear the following additional legend: "IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS." (ii) Upon any sale or transfer of a Transfer Restricted Security that is a Definitive Security, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Security for a Definitive Security that does not bear the legends set forth above and rescind any restriction on the transfer of such Transfer Restricted Security if the Holder certifies in writing to the Registrar that its request for such exchange was made in reliance on Rule 144 (such certification to be in the form set forth on the reverse of the Initial Security). (iii) After a transfer of any Original or Additional Securities during the period of the effectiveness of a Shelf Registration Statement with respect to such Original or Additional Securities, as the case may be, all requirements pertaining to the Restricted Securities Legend on such Original or Additional Securities shall cease to apply and the requirements that any such Original or Additional Securities be issued in global form shall continue to apply. (iv) Upon the consummation of an Exchange Offer with respect to the Original or Additional Securities pursuant to which Holders of such Original or Additional Securities are offered Exchange Securities in exchange for their Original or Additional Securities, all requirements pertaining to Original or Additional Securities that Original or Additional Securities be issued in global form shall continue to apply, and Exchange Securities in global form without the Restricted Securities Legend shall be available to Holders that exchange such Initial Securities in such Exchange Offer. (v) Upon a sale or transfer after the expiration of the Restricted Period of any Initial Security acquired pursuant to Regulation S, all requirements that such Initial Security bear the Restricted Securities Legend shall cease to apply and the requirements requiring any such Initial Security be issued in global form shall continue to apply. (vi) Any Additional Securities sold in a registered offering shall not be required to bear the Restricted Securities Legend. (f) Cancelation or Adjustment of Global Security. At such time as --------------------------------------------- all beneficial interests in a Global Security have either been exchanged for Definitive Securities, transferred, redeemed, repurchased or canceled, such Global Security shall be returned by the Depositary to 9 the Trustee for cancelation or retained and canceled by the Trustee. At any time prior to such cancelation, if any beneficial interest in a Global Security is exchanged for Definitive Securities, transferred in exchange for an interest in another Global Security, redeemed, repurchased or canceled, the principal amount of Securities represented by such Global Security shall be reduced and an adjustment shall be made on the books and records of the Trustee (if it is then the Securities Custodian for such Global Security) with respect to such Global Security, by the Trustee or the Securities Custodian, to reflect such reduction. (g) Obligations with Respect to Transfers and Exchanges of ------------------------------------------------------ Securities. ----------- (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate, Definitive Securities and Global Securities at the Registrar's request. (ii) No service charge shall be made for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax, assessments, or similar governmental charge payable in connection therewith (other than any such transfer taxes, assessments or similar governmental charge payable upon exchanges pursuant to Sections 2.07, 3.06, 4.10, 4.13 and 9.05 of this Indenture). (iii) Prior to the due presentation for registration of transfer of any Security, the Company, the Trustee, the Paying Agent or the Registrar may deem and treat the person in whose name a Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and interest on such Security and for all other purposes whatsoever, whether or not such Security is overdue, and none of the Company, the Trustee, the Paying Agent or the Registrar shall be affected by notice to the contrary. (iv) All Securities issued upon any transfer or exchange pursuant to the terms of this Indenture shall evidence the same debt and shall be entitled to the same benefits under this Indenture as the Securities surrendered upon such transfer or exchange. (h) No Obligation of the Trustee. ----------------------------- (i) The Trustee shall have no responsibility or obligation to any beneficial owner of a Global Security, a member of, or a participant in the Depositary or any other Person with respect to the accuracy of the records of the Depositary or its nominee or of any participant or member thereof, with respect to any ownership interest in the Securities or with respect to the delivery to any participant, member, beneficial owner or other Person (other than the Depositary) of any notice (including any notice of redemption or repurchase) or the payment of any amount, under or with respect to such Securities. All notices and communications to be given to the Holders and all payments to be made to Holders under the Securities shall be given or made only to the registered Holders (which shall be the Depositary or its nominee in the case of a Global Security). The rights of beneficial owners in any Global Security shall be exercised only through the Depositary subject to the applicable rules and procedures of the Depositary. The Trustee may rely and shall be fully protected in relying upon information furnished by the Depositary with respect to its members, participants and any beneficial owners. (ii) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under 10 applicable law with respect to any transfer of any interest in any Security (including any transfers between or among Depositary participants, members or beneficial owners in any Global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. 2.4 Definitive Securities. (a) A Global Security deposited with the ---------------------- Depositary or with the Trustee as Securities Custodian pursuant to Section 2.1 or issued in connection with an Exchange Offer shall be transferred to the beneficial owners thereof in the form of Definitive Securities in an aggregate principal amount equal to the principal amount of such Global Security, in exchange for such Global Security, only if such transfer complies with Section 2.3 and (i) the Depositary notifies the Company that it is unwilling or unable to continue as a Depositary for such Global Security or if at any time the Depositary ceases to be a "clearing agency" registered under the Exchange Act, and a successor depositary is not appointed by the Company within 90 days of such notice or after the Company becomes aware of such cessation, or (ii) an Event of Default has occurred and is continuing or (iii) the Company, in its sole discretion, notifies the Trustee in writing that it elects to cause the issuance of certificated Securities under this Indenture. (b) Any Global Security that is transferable to the beneficial owners thereof pursuant to this Section 2.4 shall be surrendered by the Depositary to the Trustee, to be so transferred, in whole or from time to time in part, without charge, and the Trustee shall authenticate and make available for delivery, upon such transfer of each portion of such Global Security, an equal aggregate principal amount of Definitive Securities of authorized denominations. Any portion of a Global Security transferred pursuant to this Section shall be executed, authenticated and delivered only in denominations of $1,000 and any integral multiple thereof and registered in such names as the Depositary shall direct. Any certificated Initial Security in the form of a Definitive Security delivered in exchange for an interest in the Global Security shall, except as otherwise provided by Section 2.3(e), bear the Restricted Securities Legend. (c) Subject to the provisions of Section 2.4(b), the registered Holder of a Global Security may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Securities. (d) In the event of the occurrence of any of the events specified in Section 2.4(a)(i), (ii) or (iii), the Company will promptly make available to the Trustee a reasonable supply of Definitive Securities in fully registered form without interest coupons. EXHIBIT A [FORM OF FACE OF INITIAL SECURITY] [Global Securities Legend] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO DTC, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. [Restricted Securities Legend] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES 2 WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS AN INSTITUTIONAL ACCREDITED INVESTOR ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. Each Definitive Security shall bear the following additional legend: IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. 3 No. $__________ 10-1/4% Senior Subordinated Note due 2008 CUSIP No. ______ ISIN No. _____ ADVANCE STORES COMPANY, INCORPORATED, a Virginia corporation, promises to pay to [Cede & Co.], or registered assigns, the principal sum [of Dollars] [listed on the Schedule of Increases or Decreases in Global Security attached hereto]/1/ on April 15, 2008. Interest Payment Dates: April 15 and October 15. Record Dates: April 1 and October 1. Additional provisions of this Security are set forth on the other side of this Security. ________________________ /1/ Use the Schedule of Increases and Decreases language if Note is in Global Form. 4 IN WITNESS WHEREOF, the parties have caused this instrument to be duly executed. ADVANCE STORES COMPANY, INCORPORATED, by ____________________________________ Name: Title: by ____________________________________ Name: Title: Dated: TRUSTEE'S CERTIFICATE OF AUTHENTICATION THE BANK OF NEW YORK, as Trustee, certifies that this is one of the Securities referred to in the Indenture. By:_________________________ Authorized Signatory ______________ */ If the Security is to be issued in global form, add the Global Securities Legend and the attachment from Exhibit A captioned "TO BE ATTACHED TO GLOBAL SECURITIES - SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY". 5 [FORM OF REVERSE SIDE OF INITIAL SECURITY] 10-1/4% Senior Subordinated Notes due 2008 Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. Interest. (a) Advance Stores Company, Incorporated or its --------- successor (the "Company"), promises to pay interest on the principal amount of this Security at the rate of 10-1/4% per annum and shall pay the Liquidated Damages, if any, payable pursuant to Section 3 of the Registration Agreement referred to below. The Company will pay interest and Liquidated Damages, if any, in United States dollars (except as otherwise provided herein) semi-annually in arrears on April 15 and October 15, commencing on April 15, 2002, or if any such day is not a Business Day, on the next succeeding Business Day (each an "Interest Payment Date"). Interest on the Securities shall accrue from the most recent date to which interest has been paid or, if no interest has been paid, from October 15, 2001; provided that if there is no existing Default or Event of Default in the payment of interest, and if this Security is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date, except in the case of the original issuance of Securities, in which case interest shall accrue from October 15, 2001. The Company shall pay interest (including, to the extent permitted by applicable law, post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Securities to the extent lawful; it shall pay interest (including, to the extent permitted by applicable law, post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate to the extent lawful. Interest shall be computed on the basis of a 360-day year comprised of twelve 30-day months. (b) Liquidated Damages. The Holder of this Security is entitled to ------------------- the benefits of an Exchange and Registration Rights Agreement, dated as of October 31, 2001, among the Company, Advance Trucking Corporation, LARALEV, INC. and Western Auto Supply Company (the "Guarantors") and the Initial Purchasers named therein (the "Registration Agreement"). Capitalized terms used in this paragraph (b) but not defined herein have the meanings assigned to them in the Registration Agreement. If (i) the Shelf Registration Statement or Exchange Offer Registration Statement, as applicable under the Registration Agreement, is not filed with the Commission on or prior to 60 days after the closing date of the Acquisition, (ii) the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, is not declared effective within 150 days after the closing date of the Acquisition (or in the case of a Shelf Registration Statement required to be filed in response to a change in law or the applicable interpretations of Commission's staff, if later, within 45 days after publication of the change in law or interpretation), (iii) the Exchange Offer is not consummated on or prior to 180 days after the closing date of the Acquisition, or (iv) the Shelf Registration Statement is filed and declared effective within 150 days after the closing date of the Acquisition (or in the case of a Shelf Registration Statement required to be filed in response to a change in law or the applicable interpretations of Commission's staff, if later, within 45 days after publication of the change in law or interpretation) but shall thereafter cease to be effective (at any time that the Company is obligated to maintain the effectiveness thereof) without being succeeded within 30 days by an additional Registration Statement filed and declared effective (each such event referred to in clauses (i) through (iv), a "Registration Default"), the Company shall pay liquidated damages to each Holder of Transfer Restricted Securities, during the period of one or more such Registration Defaults, in an amount equal to $0.192 per week per $1,000 principal amount of the Securities 6 constituting Transfer Restricted Securities held by such Holder until the applicable Registration Statement is filed or declared effective, the Exchange Offer is consummated or the Shelf Registration Statement again becomes effective, as the case may be. All accrued liquidated damages shall be paid to Holders in the same manner as interest payments on the Securities on semi-annual payment dates which correspond to interest payment dates for the Securities. Following the cure of all Registration Defaults, the accrual of liquidated damages shall cease. The Trustee shall have no responsibility with respect to the determination of the amount of any such liquidated damages. For purposes of the foregoing, "Transfer Restricted Securities" means (i) each Initial Security until the date on which such Initial Security has been exchanged for a freely transferable Exchange Security in the Exchange Offer, (ii) each Initial Security until the date on which such Initial Security has been effectively registered under the Securities Act and disposed of in accordance with a Shelf Registration Statement or (iii) each Initial Security until the date on which such Initial Security is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act. 2. Method of Payment. The Company shall pay interest on the ------------------ Securities (except defaulted interest) to the Persons who are registered Holders at the close of business on the April 1 or October 1 next preceding the interest payment date even if Securities are canceled after the record date and on or before the interest payment date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company shall pay principal, premium, if any, Liquidated Damages, if any, and interest in money of the United States of America that at the time of payment is legal tender for payment of public and private debts. Payments in respect of the Securities represented by a Global Security (including principal, premium, if any, Liquidated Damages, if any, and interest) shall be made by wire transfer of immediately available funds to the accounts specified by The Depository Trust Company or any successor depositary. The Company will make all payments in respect of a certificated Security (including principal, premium, if any, Liquidated Damages, if any, and interest), at the office of the Paying Agent, except that, at the option of the Company, payment of interest or Liquidated Damages may be made by mailing a check to the registered address of each Holder thereof; provided, however, that payments on the Securities may also be made, in the case of a Holder of at least $1,000,000 aggregate principal amount of Securities, by wire transfer to a U.S. dollar account maintained by the payee with a bank in the United States if such Holder elects payment by wire transfer by giving written notice to the Trustee or the Paying Agent to such effect designating such account no later than 30 days immediately preceding the relevant due date for payment (or such other date as the Trustee may accept in its discretion). 3. Paying Agent and Registrar. Initially, The Bank of New York, the --------------------------- Trustee under the Indenture, shall act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act in any such capacity. 4. Indenture. The Company issued the Securities under an Indenture ---------- dated as of October 31, 2001 ("Indenture") among the Company, the Guarantors and the Trustee. The terms of the Securities include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code (S)(S) 77aaa-77bbbb) (the "TIA"). The Securities are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The Securities are senior subordinated unsecured obligations of the Company. This Security is one of the [Original] [Additional] Securities referred to in the Indenture. The Securities include the Original Securities, the Additional Securities and any Exchange Securities 7 issued in exchange for Initial Securities pursuant to the Indenture. The Original Securities, the Additional Securities and any Exchange Securities are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the ability of the Company and its Restricted Subsidiaries to, among other things, make certain Investments and other Restricted Payments, pay dividends and other distributions, incur Indebtedness, enter into consensual restrictions upon the payment of certain dividends and distributions by such Restricted Subsidiaries, issue or sell shares of capital stock of such Restricted Subsidiaries, enter into or permit certain transactions with Affiliates, create or incur Liens and make asset sales. The Indenture also imposes limitations on the ability of the Company to consolidate or merge with or into any other Person or convey, transfer or lease all or substantially all its property. To guarantee the due and punctual payment of the principal, interest and Liquidated Damages, if any, on the Securities and all other amounts payable by the Company under the Indenture and the Securities when and as the same shall be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Securities and the Indenture, the Guarantors have jointly and severally unconditionally guaranteed the Securities on a senior subordinated basis pursuant to the terms of the Indenture. 5. Optional Redemption; Special Redemption. (a) Optional ---------------------------------------- Redemption. Except as set forth in paragraph 5(b) below, the Securities shall not be redeemable at the Company's option prior to April 15, 2003. Thereafter, the Securities shall be subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below together with accrued and unpaid interest and any Liquidated Damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on April 15 of the years indicated below:
YEAR PERCENTAGE ---- ----------- 2003.......................................................... 105.125% 2004.......................................................... 103.417% 2005.......................................................... 101.708% 2006 and thereafter........................................... 100.000%
(b) Special Redemption. Notwithstanding the foregoing, in the event that, (i) in the sole judgment of the Company, the Acquisition will not be consummated by December 31, 2001, then the Company may redeem the Securities, in whole but not in part, at its sole option prior to January 15, 2002, at a redemption price (the "Special Redemption Price") in cash equal to 101% of the issue price of the Securities plus accrued and unpaid interest (including accrued original issue discount) to the Special Redemption Date or (ii) the Acquisition has not be consummated on or prior to December 31, 2001, then the Company will mandatorily redeem all the Securities on January 15, 2002, at the Special Redemption Price. The "Special Redemption Date" means the earlier of (a) the date that the Company elects to redeem all the Securities if in the sole judgment of the Company, the Acquisition will not be consummated by December 31, 2001, or (b) January 15, 2002, if the Acquisition is not consummated by December 31, 2001 (either redemption, a "Special Redemption"). 6. Mandatory Redemption. Except as set forth in paragraphs 5(b) and --------------------- 7 hereof, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Securities. 8 7. Repurchase at Option of Holder. (a) Upon the occurrence of a ------------------------------- Change of Control, each Holder of Securities will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Securities pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, thereon, to the date of purchase. Within 30 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control setting forth the procedures governing the Change of Control Offer required by the Indenture. (b) In connection with any Asset Sale, when the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company will be required to make an offer to all Holders of Securities and, to the extent required by the terms of any Pari Passu Indebtedness to all holders of such Pari Passu Indebtedness (an "Asset Sale Offer") to purchase the maximum principal amount of Securities and any such Pari Passu Indebtedness that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase, in accordance with the procedures set forth in the Indenture or such Pari Passu Indebtedness, as applicable. To the extent that the aggregate principal amount of Securities and any such Pari Passu Indebtedness tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company or its Restricted Subsidiaries may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Securities and any such Pari Passu Indebtedness surrendered by holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Securities to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. (c) Holders of the Securities that are the subject of an offer to purchase will receive a Change of Control Offer or Asset Sale Offer from the Company prior to any related purchase date and may elect to have such Securities purchased by completing the form titled "Option of Holder to Elect Purchase" appearing below. 8. Notice of Redemption or Repurchase. Notice of a redemption or ----------------------------------- repurchase shall be mailed at least 30 days but not more than 60 days before the redemption date or the repurchase date (except in the case of a Special Redemption pursuant to paragraph 5(b) above, in which case notice shall be mailed at least 10 days prior to the Special Redemption Date) to each Holder whose Securities are to be redeemed or repurchased at its registered address. Securities in denominations larger than $1,000 may be redeemed or repurchased in part but only in whole multiples of $1,000, unless all of the Securities held by a Holder are to be redeemed or repurchased. On and after the redemption date or repurchased date, as the case may be, interest and Liquidated Damages, if any, ceases to accrue on the Securities or portions thereof called for redemption or repurchase, as the case may be, unless the Company defaults in making the redemption payment or repurchase payment, as the case may be. 9. Denominations, Transfer, Exchange. The Securities are in ---------------------------------- registered form without coupons in initial denominations of $1,000 and integral multiples of $1,000. The transfer of the Securities may be registered and the Securities may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company need not exchange or register the transfer of any Security or portion of a Security selected for redemption, except for the unredeemed portion of any Security being redeemed in part. Also, it need not 9 exchange or register the transfer of any Securities for a period of 15 days before a selection of Securities to be redeemed or during the period between a record date and the corresponding Interest Payment Date. 10. Persons Deemed Owners. Except as provided in paragraph 2 hereof, ---------------------- the registered Holder of a Security may be treated as its owner for all purposes. 11. Amendment, Supplement and Waiver. Subject to the following --------------------------------- paragraphs and the provisions of the Indenture, the Indenture, the Securities and the Subsidiary Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in aggregate principal amount of the Securities then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Securities), and any existing default or compliance with any provision of the Indenture, the Securities and the Subsidiary Guarantees may be waived with the consent of the Holders of a majority in aggregate principal amount of the then outstanding Securities (including consents obtained in connection with a purchase of, or a tender offer or exchange offer for, Securities). Any amendment to the provisions of Article 10 or 12 shall require the consent of the Holders of at least 75% in aggregate principal amount of Securities then outstanding if such amendment would adversely affect the rights of the Holders of Securities. Without the consent of any Holder of Securities, the Company, the Guarantors and the Trustee may amend or supplement the Indenture, the Securities or the Subsidiary Guarantees to cure any ambiguity, defect or inconsistency, to provide for uncertificated Securities in addition to or in place of certificated Securities, to provide for the assumption of the Company's or a Guarantor's obligations to Holders of Securities in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of Securities or that does not materially adversely affect the legal rights under the Indenture of any such Holder, to comply with requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act, to allow any Subsidiary to guarantee the Securities or to provide for the issuance of the Exchange Securities or Additional Securities. 12. Defaults and Remedies. Events of Default include: (i) default ---------------------- for 30 days in the payment when due of interest on, or Liquidated Damages, if any, with respect to, the Securities (whether or not prohibited by the subordination provisions of the Indenture); (ii) default in payment when due of the principal of or premium, if any, on the Securities (whether or not prohibited by the subordination provisions of the Indenture); (iii) failure by the Company or any of its Restricted Subsidiaries for 30 days after notice from the Trustee or at least 25% in aggregate principal amount of the Securities then outstanding to comply with the provisions described in Sections 4.07, 4.09, 4.10, 4.13 or 4.19 of the Indenture; (iv) failure by the Company or any of its Restricted Subsidiaries for 60 days after notice from the Trustee or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding to comply with its other agreements in the Indenture or the Securities; (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness at final maturity (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its Stated Maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which 10 there has been a Payment Default or the maturity of which has been so accelerated, aggregates $20.0 million or more in the case of clause (a) or (b); (vi) failure by the Company or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $20.0 million (net of any amounts with respect to which a reputable and creditworthy insurance company has acknowledged liability in writing), which judgments are not paid, discharged or stayed for a period of 60 days; (vii) any Subsidiary Guarantee of a Significant Subsidiary shall be held in any judicial proceeding to be unenforceable or invalid or, except as permitted by the Indenture, shall cease for any reason to be in full force and effect or any Guarantor that is a Significant Subsidiary, or any Person acting on behalf of any Guarantor that is a Significant Subsidiary, shall deny or disaffirm its obligations under its Subsidiary Guarantee; and (viii) certain events of bankruptcy or insolvency with respect to the Company or any of its Significant Subsidiaries. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Securities may declare all the Securities to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Company, all outstanding Securities will become due and payable without further action or notice. Upon any acceleration of maturity of the Securities, all principal of and accrued interest and Liquidated Damages, if any, on the Securities shall be due and payable immediately. Holders of the Securities may not enforce the Indenture or the Securities except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Securities notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. In the event of a declaration of acceleration of the Securities because an Event of Default has occurred and is continuing as a result of the acceleration of any Indebtedness described in clause (v) of the preceding paragraph, the declaration of acceleration of the Securities shall be automatically annulled if the holders of any Indebtedness described in clause (v) of the preceding paragraph have rescinded the declaration of acceleration in respect of such Indebtedness within 30 days of the date of such declaration and if (a) the annulment of the acceleration of Securities would not conflict with any judgment or decree of a court of competent jurisdiction and (b) all existing Events of Default, except nonpayment of principal or interest on the Securities that became due solely because of the acceleration of the Securities, have been cured or waived. 13. Subordination. The Securities and Subsidiary Guarantees are -------------- subordinated to Senior Debt, as defined in the Indenture. To the extent provided in the Indenture, Senior Debt must be paid before the Securities may be paid. The Company and each Guarantor agrees, and each Holder by accepting a Security agrees, to the subordination provisions contained in the Indenture and authorizes the Trustee to give it effect and appoints the Trustee as attorney- in-fact for such purpose. 14. Trustee Dealings with Company. The Trustee, in its individual or ------------------------------ any other capacity, may make loans to, accept deposits from, and perform services for the Company, the Guarantors or their respective Affiliates, and may otherwise deal with the Company, the Guarantors or their respective Affiliates, as if it were not the Trustee. 15. No Recourse Against Others. No director, officer, employee, --------------------------- incorporator or stockholder, of the Company or any Guarantor, as such, shall have any liability for any obligations of the Company or any Guarantor under the Securities or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of 11 Securities by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. 16. Authentication. This Security shall not be valid until --------------- authenticated by the manual signature of the Trustee or an authenticating agent. 17. Abbreviations. Customary abbreviations may be used in the name -------------- of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 18. CUSIP and ISIN Numbers. The Company has caused CUSIP and ISIN ----------------------- numbers to be printed on the Securities and the Trustee may use CUSIP and ISIN numbers in notices of redemption as a convenience to the Holders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company shall furnish to any Holder upon written request and without charge a copy of the Indenture and/or the Registration Agreement. Requests may be made to: Advance Stores Company, Incorporated 5673 Airport Road Roanoke, Virginia 24012 Telecopier: (540) 561-1448 Attention: Chief Financial Officer 12 ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date: __________________________ Your Signature: _______________________________ ________________________________________________________________________________ Sign exactly as your name appears on the other side of this Security. 13 CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER RESTRICTED SECURITIES This certificate relates to $_________ principal amount of Securities held in (check applicable space) ____ book-entry or _____ definitive form by the undersigned. The undersigned (check one box below): [_] has requested the Trustee by written order to deliver in exchange for its beneficial interest in the Global Security held by the Depositary a Security or Securities in definitive, registered form of authorized denominations and an aggregate principal amount equal to its beneficial interest in such Global Security (or the portion thereof indicated above); [_] has requested the Trustee by written order to exchange or register the transfer of a Security or Securities. In connection with any transfer of any of the Securities evidenced by this certificate occurring prior to the expiration of the period referred to in Rule 144(k) under the Securities Act, the undersigned confirms that such Securities are being transferred in accordance with its terms: CHECK ONE BOX BELOW (1) [_] to the Company; or (2) [_] to the Registrar for registration in the name of the Holder, without transfer; or (3) [_] pursuant to an effective registration statement under the Securities Act of 1933; or (4) [_] inside the United States to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act of 1933) that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that such transfer is being made in reliance on Rule 144A, in each case pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or (5) [_] outside the United States in an offshore transaction within the meaning of Regulation S under the Securities Act in compliance with Rule 904 under the Securities Act of 1933 and such Security shall be held immediately after the transfer through Euroclear or Clearstream until the expiration of the Restricted Period (as defined in the Indenture); or (6) [_] to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933) that has furnished to the Trustee a signed letter containing certain representations and agreements; or (7) [_] pursuant to another available exemption from registration provided by Rule 144 under the Securities Act of 1933. 14 Unless one of the boxes is checked, the Trustee will refuse to register any of the Securities evidenced by this certificate in the name of any Person other than the registered Holder thereof; provided, however, that if box -------- ------- (5), (6) or (7) is checked, the Trustee may require, prior to registering any such transfer of the Securities, such legal opinions, certifications and other information as the Company has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933. _______________________________ Your Signature Signature Guarantee: Date: ____________________________ _______________________________ Signature must be guaranteed Signature of Signature by a participant in a Guarantee recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee ________________________________________________________________________________ TO BE COMPLETED BY PURCHASER IF (4) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: _______________________ ____________________________________ NOTICE: To be executed by an executive officer 15 [TO BE ATTACHED TO GLOBAL SECURITIES] SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY The initial principal amount of this Global Security is $[ ]. The following increases or decreases in this Global Security have been made:
Date of Exchange Amount of Decrease in Amount of increase in Principal amount of Signature of authorized Principal Amount of Principal Amount of this Global Security signatory of Trustee or this Global Security this Global Security following such Securities Custodian decrease or increase
16 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.10 (Asset Sale) or 4.13 (Change of Control) of the Indenture, check the box: Asset Sale [_] Change of Control [_] If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.10 or 4.13 of the Indenture, state the amount ($1,000 or an integral multiple thereof): $ Date: ___________________________ Your Signature: ____________________________ (Sign exactly as your name appears on the other side of the Security) Signature Guarantee:____________________________________________________________ Signature must be guaranteed by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee EXHIBIT B [FORM OF FACE OF EXCHANGE SECURITY] [Global Securities Legend] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO DTC, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. 2 No. $__________ 10-1/4% Senior Subordinated Note due 2008 CUSIP No. ______ ISIN No. _____ ADVANCE STORES COMPANY, INCORPORATED, a Virginia corporation, promises to pay to [Cede & Co.], or registered assigns, the principal sum [of Dollars] [listed on the Schedule of Increases or Decreases in Global Security attached hereto]/2/ on April 15, 2008. Interest Payment Dates: April 15 and October 15. Record Dates: April 1 and October 1. Additional provisions of this Security are set forth on the other side of this Security. ________________________ /2/ Use the Schedule of Increases and Decreases language if Note is in Global Form. 3 IN WITNESS WHEREOF, the parties have caused this instrument to be duly executed. ADVANCE STORES COMPANY, INCORPORATED, by _________________________________ Name: Title: by _________________________________ Name: Title: Dated: TRUSTEE'S CERTIFICATE OF AUTHENTICATION THE BANK OF NEW YORK, as Trustee, certifies that this is one of the Securities referred to in the Indenture. by ___________________________ Authorized Signatory ______________ */ If the Security is to be issued in global form, add the Global Securities Legend and the attachment from Exhibit A captioned "TO BE ATTACHED TO GLOBAL SECURITIES - SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY". 4 [FORM OF REVERSE SIDE OF EXCHANGE SECURITY] 10-1/4% Senior Subordinated Note due 2008 Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. Interest. Advance Stores Company, Incorporated or its successor --------- (the "Company"), promises to pay interest on the principal amount of this Security at the rate of 10-1/4% per annum. The Company will pay interest in United States dollars (except as otherwise provided herein) semi-annually in arrears on April 15 and October 15, commencing on April 15, 2002, or if any such day is not a Business Day, on the next succeeding Business Day (each an "Interest Payment Date"). Interest on the Securities shall accrue from the most recent date to which interest has been paid or, if no interest has been paid, from October 15, 2001, provided that if there is no existing Default or Event of Default in the payment of interest, and if this Security is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date, except in the case of the original issuance of Securities, in which case interest shall accrue from October 15, 2001. The Company shall pay interest (including, to the extent permitted by applicable law, post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Securities to the extent lawful; it shall pay interest (including, to the extent permitted by applicable law, post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate to the extent lawful. Interest shall be computed on the basis of a 360-day year comprised of twelve 30-day months. 2. Method of Payment. The Company shall pay interest on the ------------------ Securities (except defaulted interest) to the Persons who are registered Holders at the close of business on the April 1 or October 1 next preceding the interest payment date even if Securities are canceled after the record date and on or before the interest payment date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company shall pay principal, premium, if any, and interest in money of the United States of America that at the time of payment is legal tender for payment of public and private debts. Payments in respect of the Securities represented by a Global Security (including principal, premium and interest) shall be made by wire transfer of immediately available funds to the accounts specified by The Depository Trust Company or any successor depositary. The Company will make all payments in respect of a certificated Security (including principal, premium, if any, and interest), at the office of the Paying Agent, except that, at the option of the Company, payment of interest may be made by mailing a check to the registered address of each Holder thereof; provided, however, that payments on the Securities may also be made, in the case of a Holder of at least $1,000,000 aggregate principal amount of Securities, by wire transfer to a U.S. dollar account maintained by the payee with a bank in the United States if such Holder elects payment by wire transfer by giving written notice to the Trustee or the Paying Agent to such effect designating such account no later than 30 days immediately preceding the relevant due date for payment (or such other date as the Trustee may accept in its discretion). 3. Paying Agent and Registrar. Initially, The Bank of New York, the --------------------------- Trustee under the Indenture, shall act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act in any such capacity. 5 4. Indenture. The Company issued the Securities under an Indenture ---------- dated as of October 31, 2001 ("Indenture") among the Company, the Guarantors and the Trustee. The terms of the Securities include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code (S)(S) 77aaa-77bbbb) (the "TIA"). The Securities are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The Securities are senior subordinated unsecured obligations of the Company. This Security is one of the [Exchange] [Additional] Securities referred to in the Indenture. The Securities include the Original Securities, the Additional Securities and any Exchange Securities issued in exchange for Initial Securities pursuant to the Indenture. The Original Securities, the Additional Securities and any Exchange Securities are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the ability of the Company and its Restricted Subsidiaries to, among other things, make certain Investments and other Restricted Payments, pay dividends and other distributions, incur Indebtedness, enter into consensual restrictions upon the payment of certain dividends and distributions by such Restricted Subsidiaries, issue or sell shares of capital stock of such Restricted Subsidiaries, enter into or permit certain transactions with Affiliates, create or incur Liens and make asset sales. The Indenture also imposes limitations on the ability of the Company to consolidate or merge with or into any other Person or convey, transfer or lease all or substantially all its property. To guarantee the due and punctual payment of the principal and interest on the Securities and all other amounts payable by the Company under the Indenture and the Securities when and as the same shall be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Securities and the Indenture, the Guarantors have jointly and severally unconditionally guaranteed the Securities on a senior subordinated basis pursuant to the terms of the Indenture. 5. Optional Redemption. The Securities shall not be redeemable at -------------------- the Company's option prior to April 15, 2003. Thereafter, the Securities shall be subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below together with accrued and unpaid interest and any Liquidated Damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on April 15 of the years indicated below:
YEAR PERCENTAGE ---- ----------- 2003....................................................... 105.125% 2004....................................................... 103.417% 2005....................................................... 101.708% 2006 and thereafter........................................ 100.000%
6. Mandatory Redemption. Except as set forth in paragraph 7 hereof, --------------------- the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Securities. 7. Repurchase at Option of Holder. (a) Upon the occurrence of a ------------------------------- Change of Control, each Holder of Securities will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Securities pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% 6 of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages, if any, thereon, to the date of purchase. Within 30 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control setting forth the procedures governing the Change of Control Offer required by the Indenture. (b) In connection with any Asset Sale, when the aggregate amount of excess Proceeds exceeds $10.0 million, the Company will be required to make an offer to all Holders of Securities and, to the extent required by the terms of any Pari Passu Indebtedness to all holders of such Pari Passu Indebtedness (an "Asset Sale Offer") to purchase the maximum principal amount of Securities and any such Pari Passu Indebtedness that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase, in accordance with the procedures set forth in the Indenture or such Pari Passu Indebtedness, as applicable. To the extent that the aggregate principal amount of Securities and any such Pari Passu Indebtedness tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company or its Restricted Subsidiaries may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of Securities and any such Pari Passu Indebtedness surrendered by holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Securities to be purchased on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero. (c) Holders of the Securities that are the subject of an offer to purchase will receive a Change of Control Offer or Asset Sale Offer from the Company prior to any related purchase date and may elect to have such Securities purchased by completing the form titled "Option of Holder to Elect Purchase" appearing below. 8. Notice of Redemption or Repurchase. Notice of a or repurchase ----------------------------------- shall be mailed at least 30 days but not more than 60 days before the redemption date or the repurchase date to each Holder whose Securities are to be redeemed or repurchased at its registered address. Securities in denominations larger than $1,000 may be redeemed or repurchased in part but only in whole multiples of $1,000, unless all of the Securities held by a Holder are to be redeemed or repurchased. On and after the redemption date or repurchase date, as the case may be, interest ceases to accrue on the Securities or portions thereof called for redemption or repurchase, as the case may be, unless the Company defaults in making the redemption payment or repurchase payment, as the case may be. 9. Denominations, Transfer, Exchange. The Securities are in ---------------------------------- registered form without coupons in initial denominations of $1,000 and integral multiples of $1,000. The transfer of the Securities may be registered and the Securities may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company need not exchange or register the transfer of any Security or portion of a Security selected for redemption, except for the unredeemed portion of any Security being redeemed in part. Also, it need not exchange or register the transfer of any Securities for a period of 15 days before a selection of Securities to be redeemed or during the period between a record date and the corresponding Interest Payment Date. 10. Persons Deemed Owners. Except as provided in paragraph 2 hereof, ---------------------- the registered Holder of a Security may be treated as its owner for all purposes. 7 11. Amendment, Supplement and Waiver. Subject to the following --------------------------------- paragraphs and to the provisions of the Indenture, the Indenture, the Securities and the Subsidiary Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in aggregate principal amount of the Securities then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Securities), and any existing default or compliance with any provision of the Indenture, the Securities and the Subsidiary Guarantees may be waived with the consent of the Holders of a majority in aggregate principal amount of the then outstanding Securities (including consents obtained in connection a purchase of, or with a tender offer or exchange offer for, Securities). Any amendment to the provisions of Article 10 or 12 shall require the consent of the Holders of at least 75% in aggregate principal amount of Securities then outstanding if such amendment would adversely affect the rights of the Holders of Securities. Without the consent of any Holder of Securities, the Company, the Guarantors and the Trustee may amend or supplement the Indenture, the Securities or the Subsidiary Guarantees to cure any ambiguity, defect or inconsistency, to provide for uncertificated Securities in addition to or in place of certificated Securities, to provide for the assumption of the Company's or a Guarantor's obligations to Holders of Securities in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of Securities or that does not materially adversely affect the legal rights under the Indenture of any such Holder, to comply with requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act, to allow any Subsidiary to guarantee the Securities or to provide for the issuance of the Exchange Securities or Additional Securities. 12. Defaults and Remedies. Events of Default include: (i) default ---------------------- for 30 days in the payment when due of interest on, or Liquidated Damages, if any, with respect to, the Securities (whether or not prohibited by the subordination provisions of the Indenture); (ii) default in payment when due of the principal of or premium, if any, on the Securities (whether or not prohibited by the subordination provisions of the Indenture); (iii) failure by the Company or any of its Restricted Subsidiaries for 30 days after notice from the Trustee or at least 25% in aggregate principal amount of the Securities then outstanding to comply with the provisions described in Sections 4.07, 4.09, 4.10, 4.13 or 4.19 of the Indenture; (iv) failure by the Company or any of its Restricted Subsidiaries for 60 days after notice from the Trustee or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding to comply with its other agreements in the Indenture or the Securities; (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness at final maturity (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its Stated Maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $20.0 million or more in the case of clause (a) or (b); (vi) failure by the Company or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $20.0 million (net of any amounts with respect to which a reputable and creditworthy insurance company has acknowledged liability in writing), which judgments are not paid, discharged or stayed for a period of 60 days; (vii) any Subsidiary Guarantee of a Significant Subsidiary shall be held in any judicial proceeding to be unenforceable or invalid or, except as permitted by the Indenture, shall 8 cease for any reason to be in full force and effect or any Guarantor that is a Significant Subsidiary, or any Person acting on behalf of any Guarantor that is a Significant Subsidiary, shall deny or disaffirm its obligations under its Subsidiary Guarantee; and (viii) certain events of bankruptcy or insolvency with respect to the Company or any of its Significant Subsidiaries. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Securities may declare all the Securities to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Company, all outstanding Securities will become due and payable without further action or notice. Upon any acceleration of maturity of the Securities, all principal of and accrued interest and Liquidated Damages, if any, on the Securities shall be due and payable immediately. Holders of the Securities may not enforce the Indenture or the Securities except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Securities notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. In the event of a declaration of acceleration of the Securities because an Event of Default has occurred and is continuing as a result of the acceleration of any Indebtedness described in clause (v) of the preceding paragraph, the declaration of acceleration of the Securities shall be automatically annulled if the holders of any Indebtedness described in clause (v) of the preceding paragraph have rescinded the declaration of acceleration in respect of such Indebtedness within 30 days of the date of such declaration and if (a) the annulment of the acceleration of Securities would not conflict with any judgment or decree of a court of competent jurisdiction and (b) all existing Events of Default, except nonpayment of principal or interest on the Securities that became due solely because of the acceleration of the Securities, have been cured or waived. 13. Subordination. The Securities and Subsidiary Guarantees are -------------- subordinated to Senior Debt, as defined in the Indenture. To the extent provided in the Indenture, Senior Debt must be paid before the Securities may be paid. The Company and each Guarantor agrees, and each Holder by accepting a Security agrees, to the subordination provisions contained in the Indenture and authorizes the Trustee to give it effect and appoints the Trustee as attorney- in-fact for such purpose. 14. Trustee Dealings with Company. The Trustee, in its individual or ------------------------------ any other capacity, may make loans to, accept deposits from, and perform services for the Company, the Guarantors or their respective Affiliates, and may otherwise deal with the Company, the Guarantors or their respective Affiliates, as if it were not the Trustee. 15. No Recourse Against Others. No director, officer, employee, --------------------------- incorporator or stockholder, of the Company or any Guarantor, as such, shall have any liability for any obligations of the Company or any Guarantor under the Securities or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Securities by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. 16. Authentication. This Security shall not be valid until --------------- authenticated by the manual signature of the Trustee or an authenticating agent. 9 17. Abbreviations. Customary abbreviations may be used in the name -------------- of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 18. CUSIP and ISIN Numbers. Pursuant to a recommendation promulgated ----------------------- by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP and ISIN numbers to be printed on the Securities and the Trustee may use CUSIP and ISIN numbers in notices of redemption as a convenience to the Holders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company shall furnish to any Holder upon written request and without charge a copy of the Indenture and/or the Registration Agreement. Requests may be made to: Advance Stores Company, Incorporated 5673 Airport Road Roanoke, Virginia 24012 Telecopier: (540) 561-1448 Attention: Chief Financial Officer 10 ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date: __________________________ Your Signature: _______________________________ ________________________________________________________________________________ Sign exactly as your name appears on the other side of this Security. 11 [TO BE ATTACHED TO GLOBAL SECURITIES] SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY The initial principal amount of this Global Security is $[ ]. The following increases or decreases in this Global Security have been made:
Date of Exchange Amount of Decrease in Amount of increase in Principal amount of Signature of Principal Amount of Principal Amount of this Global Security authorized signatory this Global Security this Global Security following such of Trustee or decrease or increase Securities Custodian
12 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.10 (Asset Sale) or 4.13 (Change of Control) of the Indenture, check the box: Asset Sale [_] Change of Control [_] If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.10 or 4.13 of the Indenture, state the amount ($1,000 or an integral multiple thereof): $ Date: ____________________________ Your Signature: _____________________________ (Sign exactly as your name appears on the other side of the Security) Signature Guarantee:____________________________________________________________ Signature must be guaranteed by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee EXHIBIT C FORM OF SUPPLEMENTAL INDENTURE Supplemental Indenture (this "Supplemental Indenture"), dated as of , between Guarantor (the "New Guarantor"), a subsidiary of Advance Stores Company, Incorporated (the "Company"), and The Bank of New York, as trustee under the indenture referred to below (the "Trustee"). Capitalized terms used herein and not defined herein shall have the meaning ascribed to them in the Indenture (as defined below). W I T N E S S E T H WHEREAS, the Company has heretofore executed and delivered to the Trustee an indenture (the "Indenture"), dated as of October 31, 2001, providing for the issuance of an aggregate principal amount of $200,000,000 of 10-1/4% Senior Subordinated Notes due 2008 (the "Securities"); WHEREAS, Section 11.05 of the Indenture provides that under certain circumstances the Company may cause, and Section 11.03 of the Indenture provides that under certain circumstances the Company must cause, certain of its subsidiaries to execute and deliver to the Trustee a supplemental indenture pursuant to which such subsidiaries shall unconditionally guarantee all of the Company's Obligations under the Securities pursuant to a Subsidiary Guarantee on the terms and conditions set forth herein; and WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is authorized to execute and deliver this Supplemental Indenture. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the New Guarantor and the Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Securities as follows: 1. CAPITALIZED TERMS. Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture. 2. AGREEMENT TO SUBSIDIARY GUARANTEE. The New Guarantor hereby agrees, jointly and severally with all other Guarantors, to guarantee the Company's Obligations under the Securities and the Indenture on the terms and subject to the conditions set forth in Article 11 of the Indenture and to be bound by all other applicable provisions of the Indenture. 3. NO RECOURSE AGAINST OTHERS. No past, present or future director, officer, employee, incorporator, shareholder or agent of any Guarantor, as such, shall have any liability for any obligations of the Company or any Guarantor under the Securities, any Subsidiary Guarantees, the Indenture or this Supplemental Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Securities. 4. NEW YORK LAW TO GOVERN. The internal law of the State of New York shall govern and be used to construe this Supplemental Indenture. 2 5. COUNTERPARTS. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 6. EFFECT OF HEADINGS. The Section headings herein are for convenience only and shall not affect the construction hereof. 7. THE TRUSTEE. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the correctness of the recitals of fact contained herein, all of which recitals are made solely by the New Guarantor. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed and attested, all as of the date first above written. Dated: _____________________ [Name of New Guarantor], By: ________________________________ Name: Title: Dated: _____________________ The Bank of New York, as Trustee, By: ________________________________ Name: Title: EXHIBIT D Form of Transferee Letter of Representation Advance Stores Company, Incorporated 5673 Airport Road Ruanoke, Virginia 24012 In care of The Bank of New York c/o United States Trust Company of New York 114 West 47th Street New York, New York 10036 Ladies and Gentlemen: This certificate is delivered to request a transfer of $[ ] principal amount of the 10-1/4% Senior Subordinated Notes due 2008 (the "Securities") of Advance Stores Company, Incorporated (the "Company"). Upon transfer, the Securities would be registered in the name of the new beneficial owner as follows: Name:________________________ Address:_____________________ Taxpayer ID Number:__________ The undersigned represents and warrants to you that: 1. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as amended (the "Securities Act")), purchasing for our own account or for the account of such an institutional "accredited investor" at least $250,000 principal amount of the Securities, and we are acquiring the Securities not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act. We have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Securities, and we invest in or purchase securities similar to the Securities in the normal course of our business. We, and any accounts for which we are acting, are each able to bear the economic risk of our or its investment. 2. We understand that the Securities have not been registered under the Securities Act and, unless so registered, may not be sold except as permitted in the following sentence. We agree on our own behalf and on behalf of any investor account for which we are purchasing Securities to offer, sell or otherwise transfer such Securities prior to the date that is two years after the later of the date of original issue and the last date on which the Company or any affiliate of the Company was the owner of such Securities (or any predecessor thereto) (the "Resale Restriction Termination Date") only (a) to the Company, (b) pursuant to a registration statement that has been declared effective under the Securities Act, (c) in a transaction complying with the requirements of Rule 144A under the Securities Act ("Rule 144A"), to a person we reasonably believe is a qualified institutional buyer under Rule 144A (a "QIB") that is purchasing for its own account or for the account of a QIB and to whom notice is given that the transfer is being made in reliance on Rule 144A, (d) pursuant to offers and sales that occur outside the United States within the meaning of Regulation S under the Securities Act, (e) to an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act that is purchasing for its own account or for the account of such an institutional "accredited investor," in each case in a minimum principal amount of Securities of $250,000, or (f) pursuant to any other available exemption from the registration requirements of the Securities Act, subject in each of the foregoing cases to any requirement of law that the disposition of our property or the property of such investor account or accounts be at all times within our or their control and in compliance with any applicable state securities laws. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. If any resale or other transfer of the Securities is proposed to be made pursuant to clause (e) above prior to the Resale Restriction Termination Date, the transferor shall deliver a letter from the transferee substantially in the form of this letter to the Company and the Trustee, which shall provide, among other things, that the transferee is an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act and that it is acquiring such Securities for investment purposes and not for distribution in violation of the Securities Act. Each purchaser acknowledges that the Company and the Trustee reserve the right prior to the offer, sale or other transfer prior to the Resale Restriction Termination Date of the Securities pursuant to clause (d), (e) or (f) above to require the delivery of an opinion of counsel, certifications or other information satisfactory to the Company and the Trustee. TRANSFEREE:________________________, by:_________________________________ EX-4.9 6 dex49.txt REGISTRATION RIGHTS AGMT DATED AS OF 10/31/2001 EXHIBIT 4.9 ADVANCE STORES COMPANY, INCORPORATED $200,000,000 10-1/4% Senior Subordinated Notes due 2008 EXCHANGE AND REGISTRATION RIGHTS AGREEMENT October 31, 2001 J.P. MORGAN SECURITIES INC. CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS INC. c/o J.P. Morgan Securities Inc. 270 Park Avenue, 4th floor New York, New York 10017 Ladies and Gentlemen: Advance Stores Company, Incorporated, a Virginia corporation (the "Company"), proposes to issue and sell to J.P. Morgan Securities Inc. ("JPMorgan") and Credit Suisse First Boston and Lehman Brothers Inc. (together with JPMorgan, the "Initial Purchasers"), upon the terms and subject to the conditions set forth in a purchase agreement dated October 24, 2001 (the "Purchase Agreement"), $200,000,000 aggregate principal amount of its 10-1/4% Senior Subordinated Notes due 2008 (the "Securities") to be jointly and severally guaranteed on a senior subordinated basis by certain of the Company's subsidiaries signatory hereto (the "Guarantors"). Capitalized terms used but not defined herein shall have the meanings given to such terms in the Purchase Agreement. As an inducement to the Initial Purchasers to enter into the Purchase Agreement and in satisfaction of a condition to the obligations of the Initial Purchasers thereunder, the Company and the Guarantors agree with the Initial Purchasers, for the benefit of the holders (including the Initial Purchasers) of the Securities and the Exchange Securities (as defined herein) (collectively, the "Holders"), as follows: 1. Exchange Offer. Unless the Exchange Offer (as defined below) shall not be permitted by applicable law, the Company and the Guarantors shall (i) prepare and, not later than 60 days following the closing date of the Acquisition, file with the Commission a registration statement (the "Exchange Offer Registration Statement") on an appropriate form under the Securities Act with respect to a proposed offer to the Holders of the Securities (the "Exchange Offer") to issue and deliver to such Holders, in exchange for the Securities, a like aggregate principal amount of debt securities of the Company (the "Exchange Securities") that are identical in all material respects to the Securities, except for the transfer restrictions relating to the Securities, (ii) use their reasonable best efforts to cause the Exchange Offer Registration Statement to become effective under the Securities Act no later than 150 days after the closing date of the Acquisition and the Exchange Offer to be consummated no later than 180 days after the closing date of the Acquisition and (iii) keep the Exchange Offer Registration Statement effective for not less than 20 business days (or longer, if required by applicable law) after the date on which notice of the Exchange Offer is mailed to the Holders (such period being called the "Exchange Offer Registration Period"). The Exchange Securities will be issued under the Indenture or an indenture (the "Exchange Securities Indenture") between the Company, the Guarantors and the Trustee or such other bank or trust company that is reasonably satisfactory to the Initial Purchasers, as trustee (the "Exchange Securities Trustee"), such indenture to be identical in all material respects to the Indenture, except for the transfer restrictions relating to the Securities (as described above). 2 Upon the effectiveness of the Exchange Offer Registration Statement, the Company shall promptly commence the Exchange Offer, it being the objective of such Exchange Offer to enable each Holder electing to exchange Securities for Exchange Securities (assuming that such Holder (a) is not an affiliate of the Company or an Exchanging Dealer (as defined herein) not complying with the requirements of the next sentence, (b) is not an Initial Purchaser holding Securities that have, or that are reasonably likely to have, the status of an unsold allotment in an initial distribution, (c) acquires the Exchange Securities in the ordinary course of such Holder's business and (d) has no arrangements or understandings with any person to participate in the distribution of the Exchange Securities) and to trade such Exchange Securities from and after their receipt without any limitations or restrictions under the Securities Act and without material restrictions under the securities laws of the several states of the United States. The Company, the Guarantors, the Initial Purchasers and each Exchanging Dealer acknowledge that, pursuant to current interpretations by the Commission's staff of Section 5 of the Securities Act, each Holder that is a broker-dealer electing to exchange Securities, acquired for its own account as a result of market-making activities or other trading activities, for Exchange Securities (an "Exchanging Dealer"), is required to deliver a prospectus containing substantially the information set forth in Annex A hereto on the cover, in Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section and in Annex C hereto in the "Plan of Distribution" section of such prospectus in connection with a sale of any such Exchange Securities received by such Exchanging Dealer pursuant to the Exchange Offer. If the Company effects the Exchange Offer, it will be entitled to close the Exchange Offer 20 business days (or longer if required by applicable law) after its commencement, provided that the Company has accepted all Securities validly tendered in accordance with the terms of the Exchange Offer. In connection with the Exchange Offer, the Company shall: (a) mail to each Holder a copy of the prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (b) keep the Exchange Offer open for not less than 20 business days (or longer, if required by applicable law) after the date on which notice of the Exchange Offer is mailed to the Holders; (c) utilize the services of a depositary for the Exchange Offer with an address in the Borough of Manhattan, The City of New York; (d) permit Holders to withdraw tendered Securities at any time prior to the close of business, New York City time, on the last business day on which the Exchange Offer shall remain open; and (e) otherwise comply in all respects with all laws that are applicable to the Exchange Offer. As soon as practicable after the close of the Exchange Offer the Company shall: (a) accept for exchange all Securities validly tendered and not validly withdrawn pursuant to the Exchange Offer; (b) deliver to the Trustee for cancelation all Securities so accepted for exchange; and (c) cause the Trustee or the Exchange Securities Trustee, as the case may be, promptly to authenticate and deliver to each Holder Exchange Securities equal in principal amount to the Securities of such Holder so accepted for exchange. 3 The Company and the Guarantors shall use their reasonable best efforts to keep the Exchange Offer Registration Statement effective and to amend and supplement the prospectus contained therein in order to permit such prospectus to be used by all persons subject to the prospectus delivery requirements of the Securities Act for such period of time as such persons must comply with such requirements in order to resell the Exchange Securities; provided that (i) in the case where such prospectus and any amendment or supplement thereto must be delivered by an Exchanging Dealer, such period shall be the lesser of 180 days and the date on which all Exchanging Dealers have sold all Exchange Securities held by them (or such shorter period during which such broker-dealers are required by law to deliver such prospectus and any amendment or supplement thereto) and (ii) the Company shall make such prospectus and any amendment or supplement thereto available to any Exchanging Dealer for use in connection with any resale of any Exchange Securities for a period of not less than 180 days after the consummation of the Exchange Offer (or such shorter period during which such broker-dealers are required by law to deliver such prospectus and any amendment or supplement thereto). The Indenture or the Exchange Securities Indenture, as the case may be, shall provide that the Securities and the Exchange Securities shall vote and consent together on all matters as one class and that none of the Securities or the Exchange Securities will have the right to vote or consent as a separate class on any matter. Interest on each Exchange Security issued pursuant to the Exchange Offer will accrue from the last interest payment date on which interest was paid on the Securities surrendered in exchange therefor or, if no interest has been paid on the Securities, from the date of original issuance of the Securities (the "Issue Date"). Each Holder participating in the Exchange Offer shall be required to represent in writing to the Company that at the time of the consummation of the Exchange Offer (i) any Exchange Securities received by such Holder will be acquired in the ordinary course of business, (ii) such Holder is not engaged in, and does not intend to engage in, and has no arrangements or understanding with any person to participate in the distribution of the Securities or the Exchange Securities within the meaning of the Securities Act and (iii) such Holder is not an affiliate of the Company or, if it is such an affiliate, such Holder will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. Notwithstanding any other provisions hereof, the Company and the Guarantors will ensure that (i) any Exchange Offer Registration Statement and any amendment thereto and any prospectus forming part thereof and any supplement thereto complies in all material respects with the Securities Act and the rules and regulations of the Commission thereunder, (ii) any Exchange Offer Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any prospectus forming part of any Exchange Offer Registration Statement, and any supplement to such prospectus, does not, as of the consummation of the Exchange Offer, include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 2. Shelf Registration. If (i) because of any change in law or applicable interpretations thereof by the Commission's staff the Company is not permitted to effect the Exchange Offer as contemplated by Section 1 hereof, or (ii) any Securities validly tendered pursuant to the Exchange Offer are not exchanged for Exchange Securities within 180 days after the closing date of the Acquisition, or (iii) any Initial Purchaser so requests with respect to Securities not eligible to be exchanged for Exchange Securities in the Exchange Offer and held by it following the consummation of the Exchange Offer, or (iv) any applicable law or interpretations do not permit any Holder to participate in the Exchange Offer, or (v) any Holder that participates in the Exchange Offer does not receive freely transferable Exchange Securities in exchange for tendered Securities and such Holder requests that such Securities be included in 4 a Shelf Registration Statement (as defined below), or (vi) the Company so elects, then the following provisions shall apply: (a) The Company and the Guarantors shall use their reasonable best efforts to file as promptly as practicable (but in no event more than 30 days after so required or requested pursuant to this Section 2) with the Commission, and thereafter shall use their reasonable best efforts to cause to be declared effective, a shelf registration statement on an appropriate form under the Securities Act relating to the offer and sale of the Transfer Restricted Securities (as defined below) by the Holders thereof from time to time in accordance with the methods of distribution set forth in such registration statement (hereafter, a "Shelf Registration Statement" and, together with any Exchange Offer Registration Statement, a "Registration Statement"). (b) The Company and the Guarantors shall use their reasonable best efforts to keep the Shelf Registration Statement continuously effective in order to permit the prospectus forming part thereof to be used by Holders of Transfer Restricted Securities until the expiration of the period referred to in Rule 144(k) under the Securities Act with respect to the Transfer Restricted Securities or such shorter period that will terminate when all the Transfer Restricted Securities covered by the Shelf Registration Statement have been sold pursuant thereto (such period being called the "Shelf Registration Period"). The Company and the Guarantors shall be deemed not to have used their reasonable best efforts to keep the Shelf Registration Statement effective during the requisite period if any of them voluntarily take any action that would result in Holders of Transfer Restricted Securities covered thereby not being able to offer and sell such Transfer Restricted Securities during that period, unless such action is required by applicable law. (c) Notwithstanding any other provisions hereof, the Company and the Guarantors will ensure that (i) any Shelf Registration Statement and any amendment thereto and any prospectus forming part thereof and any supplement thereto complies in all material respects with the Securities Act and the rules and regulations of the Commission thereunder, (ii) any Shelf Registration Statement and any amendment thereto (in either case, other than with respect to information included therein in reliance upon or in conformity with written information furnished to the Company by or on behalf of any Holder specifically for use therein (the "Holders' Information")) does not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any prospectus forming part of any Shelf Registration Statement, and any supplement to such prospectus (in either case, other than with respect to Holders' Information), does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 3. Liquidated Damages. (a) The parties hereto agree that the Holders of Transfer Restricted Securities will suffer damages if the Company and the Guarantors fails to fulfill their obligations under Section 1 or Section 2, as applicable, and that it would not be feasible to ascertain the extent of such damages. Accordingly, if (i) the applicable Registration Statement is not filed with the Commission on or prior to 60 days after the closing date of the Acquisition, (ii) the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, is not declared effective within 150 days after the closing date of the Acquisition (or in the case of a Shelf Registration Statement required to be filed in response to a change in law or the applicable interpretations of Commission's staff, if later, within 45 days after publication of the change in law or interpretation), (iii) the Exchange Offer is not consummated on or prior to 180 days after the closing date of the Acquisition, or (iv) the Shelf Registration Statement is filed and declared effective within 150 days after the closing date of the Acquisition (or in the case of a Shelf Registration Statement required to be filed in response to a 5 change in law or the applicable interpretations of Commission's staff, if later, within 45 days after publication of the change in law or interpretation) but shall thereafter cease to be effective (at any time that the Company and the Guarantors are obligated to maintain the effectiveness thereof) without being succeeded within 30 days by an additional Registration Statement filed and declared effective (each such event referred to in clauses (i) through (iv), a "Registration Default"), the Company and the Guarantors will be jointly and severally obligated to pay liquidated damages to each Holder of Transfer Restricted Securities, during the period of one or more such Registration Defaults, in an amount equal to $ 0.192 per week per $1,000 principal amount of Transfer Restricted Securities held by such Holder until (i) the applicable Registration Statement is filed, (ii) the Exchange Offer Registration Statement is declared effective and the Exchange Offer is consummated, (iii) the Shelf Registration Statement is declared effective or (iv) the Shelf Registration Statement again becomes effective, as the case may be. Following the cure of all Registration Defaults, the accrual of liquidated damages will cease. As used herein, the term "Transfer Restricted Securities" means each Security until (i) the date on which such Security has been exchanged for a freely transferable Exchange Security in the Exchange Offer, (ii) the date on which it has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iii) the date on which it is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act. Notwithstanding anything to the contrary in this Section 3(a), the Company shall not be required to pay liquidated damages to a Holder of Transfer Restricted Securities if such Holder failed to comply with its obligations to make the representations set forth in the second to last paragraph of Section 1 or failed to provide the information required to be provided by it, if any, pursuant to Section 4(n). (b) The Company shall notify the Trustee and the paying agent under the Indenture (the "Paying Agent") immediately upon the happening of each and every Registration Default. The Company and the Guarantors shall pay the liquidated damages due on the Transfer Restricted Securities by depositing with the Paying Agent (which may not be the Company for these purposes), in trust, for the benefit of the Holders thereof, prior to 10:00 a.m., New York City time, on the next interest payment date specified by the Indenture and the Securities, sums sufficient to pay the liquidated damages then due. The liquidated damages due shall be payable on each interest payment date specified by the Indenture and the Securities to the record holder entitled to receive the interest payment to be made on such date. Each obligation to pay liquidated damages shall be deemed to accrue from and including the date of the applicable Registration Default. (c) The parties hereto agree that the liquidated damages provided for in this Section 3 constitute a reasonable estimate of and are intended to constitute the sole damages that will be suffered by Holders of Transfer Restricted Securities by reason of the failure of (i) the Shelf Registration Statement or the Exchange Offer Registration Statement to be filed, (ii) the Shelf Registration Statement to remain effective or (iii) the Exchange Offer Registration Statement to be declared effective and the Exchange Offer to be consummated, in each case to the extent required by this Agreement. 4. Registration Procedures. In connection with any Registration Statement, the following provisions shall apply: (a) The Company shall (i) furnish to each Initial Purchaser, prior to the filing thereof with the Commission, a copy of the Registration Statement and each amendment thereof and each supplement, if any, to the prospectus included therein and shall use its reasonable best efforts to reflect in each such document, when so filed with the Commission, such comments as any Initial Purchaser may reasonably propose; (ii) include the information set forth in Annex A hereto on the cover, in Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section and in Annex C hereto in the "Plan of Distribution" section of the prospectus forming a part of the Exchange Offer Registration Statement, and include the 6 information set forth in Annex D hereto in the Letter of Transmittal delivered pursuant to the Exchange Offer; and (iii) if requested by any Initial Purchaser, include the information required by Items 507 or 508 of Regulation S-K under the Securities Act, as applicable, in the prospectus forming a part of the Exchange Offer Registration Statement. (b) The Company shall advise each Initial Purchaser, each Exchanging Dealer and the Holders (if applicable) and, if requested by any such person, confirm such advice in writing (which advice pursuant to clauses (ii)-(v) hereof shall be accompanied by an instruction to suspend the use of the prospectus until the requisite changes have been made): (i) when any Registration Statement and any amendment thereto has been filed with the Commission and when such Registration Statement or any post-effective amendment thereto has become effective; (ii) of any request by the Commission for amendments or supplements to any Registration Statement or the prospectus included therein or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of any Registration Statement or the initiation of any proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Securities or the Exchange Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (v) of the happening of any event that requires the making of any changes in any Registration Statement or the prospectus included therein in order that the statements therein are not misleading and do not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (c) The Company and the Guarantors will make every reasonable effort to obtain the withdrawal at the earliest possible time of any order suspending the effectiveness of any Registration Statement. (d) The Company will furnish to each Holder of Transfer Restricted Securities included within the coverage of any Shelf Registration Statement, without charge, at least one conformed copy of such Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules and, if any such Holder so requests in writing, all exhibits thereto (including those, if any, incorporated by reference). (e) The Company will, during the Shelf Registration Period, promptly deliver to each Holder of Transfer Restricted Securities included within the coverage of any Shelf Registration Statement, without charge, as many copies of the prospectus (including each preliminary prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents to the use (in accordance with applicable laws) of such prospectus or any amendment or supplement thereto by each of the selling Holders of Transfer Restricted Securities in connection with the offer and sale of the Transfer Restricted Securities covered by such prospectus or any amendment or supplement thereto. 7 (f) The Company will furnish to each Initial Purchaser and each Exchanging Dealer, and to any other Holder who so requests, without charge, at least one conformed copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules and, if any Initial Purchaser or Exchanging Dealer or any such Holder so requests in writing, all exhibits thereto (including those, if any, incorporated by reference). (g) The Company will, during the Exchange Offer Registration Period or the Shelf Registration Period, as applicable, promptly deliver to each Initial Purchaser, each Exchanging Dealer and such other persons that are required to deliver a prospectus following the Exchange Offer, without charge, as many copies of the final prospectus included in the Exchange Offer Registration Statement or the Shelf Registration Statement and any amendment or supplement thereto as such Initial Purchaser, Exchanging Dealer or other persons may reasonably request; and the Company and the Guarantors consent to the use (in accordance with applicable laws) of such prospectus or any amendment or supplement thereto by any such Initial Purchaser, Exchanging Dealer or other persons, as applicable, as aforesaid. (h) Prior to the effective date of any Registration Statement, the Company and the Guarantors will use their reasonable best efforts to register or qualify, or cooperate with the Holders of Securities or Exchange Securities included therein and their respective counsel in connection with the registration or qualification of, such Securities or Exchange Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holder reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the Securities or Exchange Securities covered by such Registration Statement; provided that the Company and the Guarantors will not be required to qualify generally to do business in any jurisdiction where they are not then so qualified or to take any action which would subject them to general service of process or to taxation in any such jurisdiction where they are not then so subject. (i) The Company and the Guarantors will cooperate with the Holders of Securities or Exchange Securities to facilitate the timely preparation and delivery of certificates representing Securities or Exchange Securities to be sold pursuant to any Registration Statement free of any restrictive legends and in such denominations and registered in such names as the Holders thereof may request in writing at least two business days prior to sales of Securities or Exchange Securities pursuant to such Registration Statement. (j) If any event contemplated by Section 4(b)(ii) through (v) occurs during the period for which the Company and the Guarantors are required to maintain an effective Registration Statement, the Company and the Guarantors will promptly prepare and file with the Commission a post- effective amendment to the Registration Statement or a supplement to the related prospectus or file any other required document so that, as thereafter delivered to purchasers of the Securities or Exchange Securities from a Holder, the prospectus will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (k) Not later than the effective date of the applicable Registration Statement, the Company will provide a CUSIP number for the Securities and the Exchange Securities, as the case may be, and provide the applicable trustee with printed certificates for the Securities or the Exchange Securities, as the case may be, in a form eligible for deposit with The Depository Trust Company. 8 (l) The Company and the Guarantors will comply with all applicable rules and regulations of the Commission and the Company will make generally available to its security holders as soon as practicable after the effective date of the applicable Registration Statement a consolidated earning statement satisfying the provisions of Section 11(a) of the Securities Act; provided that in no event shall such earning statement be delivered later than 45 days after the end of a 12-month period (or 90 days, if such period is a fiscal year) beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the applicable Registration Statement, which statement shall cover such 12- month period. (m) The Company and the Guarantors will cause the Indenture or the Exchange Securities Indenture, as the case may be, to be qualified under the Trust Indenture Act as required by applicable law in a timely manner. (n) The Company may require each Holder of Transfer Restricted Securities to be registered pursuant to any Shelf Registration Statement to furnish to the Company such information concerning the Holder and the distribution of such Transfer Restricted Securities as the Company may from time to time reasonably require for inclusion in such Shelf Registration Statement, and the Company may exclude from such registration the Transfer Restricted Securities of any Holder that fails to furnish such information within a reasonable time after receiving such request. (o) In the case of a Shelf Registration Statement, each Holder of Transfer Restricted Securities to be registered pursuant thereto agrees by acquisition of such Transfer Restricted Securities that, upon receipt of any notice from the Company pursuant to Section 4(b)(ii) through (v), such Holder will discontinue disposition of such Transfer Restricted Securities until such Holder's receipt of copies of the supplemental or amended prospectus contemplated by Section 4(j) or until advised in writing (the "Advice") by the Company that the use of the applicable prospectus may be resumed. If the Company shall give any notice under Section 4(b)(ii) through (v) during the period that the Company is required to maintain an effective Registration Statement (the "Effectiveness Period"), such Effectiveness Period shall be extended by the number of days during such period from and including the date of the giving of such notice to and including the date when each seller of Transfer Restricted Securities covered by such Registration Statement shall have received (x) the copies of the supplemental or amended prospectus contemplated by Section 4(j) (if an amended or supplemental prospectus is required) or (y) the Advice (if no amended or supplemental prospectus is required). (p) In the case of a Shelf Registration Statement, the Company and the Guarantors shall enter into such customary agreements (including, if requested, an underwriting agreement in customary form) and take all such other action, if any, as Holders of a majority in aggregate principal amount of the Securities and Exchange Securities being sold or the managing underwriters (if any) shall reasonably request in order to facilitate any disposition of Securities or Exchange Securities pursuant to such Shelf Registration Statement. (q) In the case of a Shelf Registration Statement, the Company shall (i) make reasonably available for inspection by a representative of, and Special Counsel (as defined below) acting for, Holders of a majority in aggregate principal amount of the Securities and Exchange Securities being sold and any underwriter participating in any disposition of Securities or Exchange Securities pursuant to such Shelf Registration Statement, all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries and (ii) use its reasonable best efforts to have its officers, directors, employees, accountants and counsel supply all relevant information reasonably requested by such representative, Special Counsel or any such 9 underwriter (an "Inspector") in connection with such Shelf Registration Statement; provided that if any such information is identified by the Company or any of its subsidiaries as being confidential or proprietary, each person receiving such information shall take such actions as are reasonably necessary to protect the confidentiality of such information to the extent such action is otherwise not inconsistent with, an impairment of or in derogation of the rights and interests of any Inspector, Holder or underwriter. (r) In the case of a Shelf Registration Statement, the Company shall, if requested by Holders of a majority in aggregate principal amount of the Securities and Exchange Securities being sold, their Special Counsel or the managing underwriters (if any) in connection with such Shelf Registration Statement, use its reasonable best efforts to cause (i) its counsel to deliver an opinion relating to the Shelf Registration Statement and the Securities or Exchange Securities, as applicable, in customary form, (ii) its officers to execute and deliver all customary documents and certificates requested by Holders of a majority in aggregate principal amount of the Securities and Exchange Securities being sold, their Special Counsel or the managing underwriters (if any) and (iii) its independent public accountants to provide a comfort letter or letters in customary form, subject to receipt of appropriate documentation as contemplated, and only if permitted, by Statement of Auditing Standards No. 72. 5. Registration Expenses. The Company and the Guarantors will jointly and severally bear all expenses incurred in connection with the performance of its obligations under Sections 1, 2, 3 and 4 and the Company will reimburse the Initial Purchasers and the Holders for the reasonable fees and disbursements of one firm of attorneys (in addition to any local counsel) chosen by the Holders of a majority in aggregate principal amount of the Securities and the Exchange Securities to be sold pursuant to each Registration Statement (the "Special Counsel") acting for the Initial Purchasers or Holders in connection therewith. 6. Indemnification. (a) In the event of a Shelf Registration Statement or in connection with any prospectus delivery pursuant to an Exchange Offer Registration Statement by an Initial Purchaser or Exchanging Dealer, as applicable, the Company and the Guarantors shall jointly and severally indemnify and hold harmless each Holder (including, without limitation, any such Initial Purchaser or any such Exchanging Dealer), its affiliates, their respective officers, directors, employees, representatives and agents, and each person, if any, who controls such Holder within the meaning of the Securities Act or the Exchange Act (collectively referred to for purposes of this Section 6 and Section 7 as a Holder) from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, (including, without limitation, any loss, claim, damage, liability or action relating to purchases and sales of Securities or Exchange Securities), to which that Holder may become subject, whether commenced or threatened, under the Securities Act, the Exchange Act, any other federal or state statutory law or regulation, at common law or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in any such Registration Statement or any prospectus forming part thereof or in any amendment or supplement thereto or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and shall reimburse each Holder promptly upon demand for any legal or other expenses reasonably incurred by that Holder in connection with investigating or defending or preparing to defend against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that in the event it is subsequently determined that the Holder is or was not entitled to such reimbursement, then such Holder shall promptly repay the indemnifying party the full amount of such reimbursement; provided, further, that the Company and the Guarantors shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with any Holders' 10 Information; and provided, further, that with respect to any such untrue statement in or omission from any related preliminary prospectus, the indemnity agreement contained in this Section 6(a) shall not inure to the benefit of any Holder from whom the person asserting any such loss, claim, damage, liability or action received Securities or Exchange Securities to the extent that such loss, claim, damage, liability or action of or with respect to such Holder results from the fact that both (A) a copy of the final prospectus was not sent or given to such person at or prior to the written confirmation of the sale of such Securities or Exchange Securities to such person and (B) the untrue statement in or omission from the related preliminary prospectus was corrected in the final prospectus unless, in either case, such failure to deliver the final prospectus was a result of non-compliance by the Company with Section 4(d), 4(e), 4(f) or 4(g). (b) In the event of a Shelf Registration Statement, each Holder, shall indemnify and hold harmless the Company, its affiliates, their respective officers, directors, employees, representatives and agents, and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act (collectively referred to for purposes of this Section 6(b) and Section 7 as the Company), from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which the Company may become subject, whether commenced or threatened, under the Securities Act, the Exchange Act, any other federal or state statutory law or regulation, at common law or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in any such Registration Statement or any prospectus forming part thereof or in any amendment or supplement thereto or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with any Holders' Information furnished to the Company by such Holder, and shall reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending or preparing to defend against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that in the event it is subsequently determined that the Company is or was not entitled to such reimbursement, then the Company shall promptly repay the indemnifying party the full amount of such reimbursement; provided, further, that no such Holder shall be liable for any indemnity claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of Securities or Exchange Securities pursuant to such Shelf Registration Statement. (c) Promptly after receipt by an indemnified party under this Section 6 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party pursuant to Section 6(a) or 6(b), promptly notify the indemnifying party in writing of the claim or the commencement of that action; provided, however, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 6 except to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure; and provided, further, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 6. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 6 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than the reasonable costs of investigation; provided, however, that an indemnified party shall have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel for the indemnified party will be 11 at the expense of such indemnified party unless (1) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (2) the indemnified party has reasonably concluded (based upon advice of counsel to the indemnified party) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (3) a conflict or potential conflict exists (based upon advice of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (4) the indemnifying party has not in fact employed counsel reasonably satisfactory to the indemnified party to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm of attorneys (in addition to any local counsel) at any one time for all such indemnified party or parties. Each indemnified party, as a condition of the indemnity agreements contained in Sections 6(a) and 6(b), shall use all reasonable efforts to cooperate with the indemnifying party in the defense of any such action or claim. No indemnifying party shall be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with its written consent or if there be a final judgment for the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party (which consent shall not be unreasonably withheld), effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. 7. Contribution. If the indemnification provided for in Section 6 is unavailable or insufficient to hold harmless an indemnified party under Section 6(a) or 6(b), then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company from the offering and sale of the Securities, on the one hand, and by a Holder from receiving Securities or Exchange Securities, as applicable, registered under the Securities Act, on the other, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Guarantors, on the one hand, and such Holder, on the other, with respect to the statements or omissions that resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Guarantors, on the one hand, and a Holder, on the other, with respect to such offering and such sale shall be deemed to be in the same proportion as the total net proceeds from the offering of the Securities (before deducting expenses) received by or on behalf of the Company as set forth in the table on the cover of the Offering Memorandum, on the one hand, bear to the total proceeds received by such Holder with respect to its sale of Securities or Exchange Securities, on the other. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to the Company and the Guarantors or information supplied by the Company and the Guarantors, on the one hand, or to any Holders' Information supplied by such Holder, on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 7 were to be determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to herein. The 12 amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 7 shall be deemed to include, for purposes of this Section 7, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending or preparing to defend any such action or claim. Notwithstanding the provisions of this Section 7, an indemnifying party that is a Holder of Securities or Exchange Securities shall not be required to contribute any amount in excess of the amount by which the total price at which the Securities or Exchange Securities sold by such indemnifying party to any purchaser exceeds the amount of any damages which such indemnifying party has otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 8. Rules 144 and 144A. For so long as the Securities remain outstanding and are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act, the Company and each of the Guarantors will furnish to Holders of the Securities and prospective purchasers of the Securities designated by such Holders, upon the request of such Holders or such prospective purchasers, the information required to be delivered pursuant to Rule 144(d)(4) under the Securities Act, unless the Company is then subject to and in compliance with Section 13 or 15(d) of the Exchange Act. The Company and the Guarantors covenant that they will take such further action as any Holder of Transfer Restricted Securities may reasonably request, all to the extent required from time to time to enable such Holder to sell Transfer Restricted Securities without registration under the Securities Act within the limitation of the exemptions provided by Rules 144 and 144A (including, without limitation, the requirements of Rule 144A(d)(4)). Upon the reasonable written request of any Holder of Transfer Restricted Securities, the Company and the Guarantors shall deliver to such Holder a written statement as to whether they have complied with such requirements. Notwithstanding the foregoing, nothing in this Section 8 shall be deemed to require the Company to register any of its securities pursuant to the Exchange Act. 9. Underwritten Registrations. If any of the Transfer Restricted Securities covered by any Shelf Registration Statement are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the Holders of a majority in aggregate principal amount of such Transfer Restricted Securities included in such offering, subject to the consent of the Company (which shall not be unreasonably withheld or delayed), and such Holders shall be responsible for all underwriting commissions and discounts in connection therewith. No person may participate in any underwritten registration hereunder unless such person (i) agrees to sell such person's Transfer Restricted Securities on the basis reasonably provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and (iii) complies with the relevant provisions of this Agreement, including Section 4(n). 10. Miscellaneous. (a) Joinder of Guarantors. Upon consummation of the Acquisition, any subsidiary of the Company that is formed or acquired after the Issue Date which is required to be a Guarantor under the Indenture shall become a party to this Agreement by executing and delivering a Joinder Agreement to this Agreement in the form attached hereto as Exhibit A. (b) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has agreed thereto in writing and the Company has obtained the written consent of Holders of a majority in aggregate principal amount of the 13 outstanding Securities and the Exchange Securities, taken as a single class. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose Securities or Exchange Securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders may be given by Holders of a majority in aggregate principal amount of the Securities and the Exchange Securities being sold by such Holders pursuant to such Registration Statement. (c) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail, telecopier or air courier guaranteeing next-day delivery: (1) if to a Holder, at the most current address given by such Holder to the Company in accordance with the provisions of this Section 10(c), which address initially is, with respect to each Holder, the address of such Holder maintained by the registrar under the Indenture, with a copy in like manner to JPMorgan, Credit Suisse First Boston and Lehman Brothers Inc.; (2) if to an Initial Purchaser, initially at its address set forth in the Purchase Agreement; and (3) if to the Company, initially at the address of the Company set forth in the Purchase Agreement. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; one business day after being delivered to a next-day air courier; five business days after being deposited in the mail; and when receipt is acknowledged by the recipient's telecopier machine, if sent by telecopier. (d) Successors And Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including without limitation and without the need for an express assignment, subsequent Holders of Transfer Restricted Securities; provided, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Transfer Restricted Securities in violation of the terms hereof or of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Transfer Restricted Securities in any manner, whether by operation of law or otherwise, such Transfer Restricted Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Transfer Restricted Securities such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and, if applicable, the Purchase Agreement, and such person shall be entitled to receive the benefits hereof. (e) Counterparts. This Agreement may be executed in any number of counterparts (which may be delivered in original form or by telecopier) and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) Definition of Terms. For purposes of this Agreement, (a) the term "business day" means any day on which the New York Stock Exchange, Inc. is open for trading, (b) the term "subsidiary" has the meaning set forth in Rule 405 under the Securities Act and (c) except where otherwise expressly provided, the term "affiliate" has the meaning set forth in Rule 405 under the Securities Act. (g) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 14 (h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. (i) Remedies. In the event of a breach by the Company, any Guarantor or by any Holder of any of their obligations under this Agreement, each Holder, the Company or any Guarantor, as the case may be, in addition to being entitled to exercise all rights granted by law, including recovery of damages (other than the recovery of damages for a breach by the Company or any Guarantor of its obligations under Sections 1 or 2 hereof for which liquidated damages have been paid pursuant to Section 3 hereof), will be entitled to specific performance of its rights under this Agreement. The Company, the Guarantors and each Holder agree that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by each such person of any of the provisions of this Agreement and hereby further agree that, in the event of any action for specific performance in respect of such breach, each such person shall waive the defense that a remedy at law would be adequate. (j) No Inconsistent Agreements. The Company and each Guarantor represents, warrants and agrees that (i) it has not entered into, shall not, on or after the date of this Agreement, enter into any agreement that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof, (ii) it has not previously entered into any agreement granting any registration rights, which registration rights remain in effect, with respect to any of its debt securities to any person other than the Registration Rights Agreement dated as of October 31, 2001 by and among the Company, the Guarantors, Nicholas F. Taubman, the Arthur Taubman Trust dated July 13, 1964 and the other parties thereto and (iii) (with respect to the Company) without limiting the generality of the foregoing, without the written consent of the Holders of a majority in aggregate principal amount of the then outstanding Transfer Restricted Securities, it shall not grant to any person the right to request the Company to register any debt securities of the Company under the Securities Act unless the rights so granted are not in conflict or inconsistent with the provisions of this Agreement. (k) No Piggyback on Registrations. Neither the Company nor any of its security holders (other than the Holders of Transfer Restricted Securities in such capacity) shall have the right to include any securities of the Company in any Shelf Registration or Exchange Offer other than Transfer Restricted Securities. (l) Severability. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (m) Notwithstanding any other provision of this Agreement, neither the Company nor any Guarantor shall have any obligation or liability under this Agreement unless and until the Acquisition is consummated. (n) Entire Agreement. This Agreement is intended by the parties hereto as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted with respect to the Transfer 15 Restricted Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 16 Please confirm that the foregoing correctly sets forth the agreement among the Company, the Guarantors and the Initial Purchasers. Very truly yours, ADVANCE STORES COMPANY, INCORPORATED, By: /s/ Jeffrey T. Gray -------------------------- Name: Jeffrey T. Gray Title: Senior Vice President Controller ADVANCE TRUCKING CORPORATION, By: /s/ Jeffrey T. Gray -------------------------- Name: Jeffrey T. Gray Title: Senior Vice President Controller LARALEV, INC., By: /s/ Andrew Panaccione -------------------------- Name: Andrew Panaccione Title: President WESTERN AUTO SUPPLY COMPANY, By: /s/ Jeffrey T. Gray -------------------------- Name: Jeffrey T. Gray Title: Senior Vice President Controller 17 Accepted: J.P. MORGAN SECURITIES INC., on behalf of the Initial Purchasers J.P. Morgan Securities Inc. Credit Suisse First Boston Lehman Brothers Inc. By: /s/ Benjamin Ben-Attar ------------------------------------ Benjamin Ben-Attar Vice President ANNEX A Each broker-dealer that receives Exchange Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Securities received in exchange for Securities where such Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date (as defined herein), it will make this Prospectus available to any broker-dealer for use in connection with any such resale (or such shorter period during which such broker-dealers are required by law to deliver such prospectus and any amendment or supplement thereto). See "Plan of Distribution." ANNEX B Each broker-dealer that receives Exchange Securities for its own account in exchange for Securities, where such Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. See "Plan of Distribution." ANNEX C PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Securities received in exchange for Securities where such Securities were acquired as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date (or such shorter period during which such broker-dealers are required by law to deliver such prospectus and any amendment or supplement thereto), it will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until [ ] 200[ ], all dealers effecting transactions in the Exchange Securities may be required to deliver a prospectus. The Company will not receive any proceeds from any sale of Exchange Securities by broker-dealers. Exchange Securities received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Securities or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such Exchange Securities. Any broker-dealer that resells Exchange Securities that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Securities may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Securities and any commission or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker- dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after the Expiration Date (or such shorter period during which such broker-dealers are required by law to deliver such prospectus and any amendment or supplement thereto) the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer (including the reasonable expenses of one counsel for the Holders of the Securities) other than commissions or concessions of any broker-dealers and will indemnify the Holders of the Securities (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. ANNEX D [_] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: Address: If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of Exchange Securities. If the undersigned is a broker-dealer that will receive Exchange Securities for its own account in exchange for Securities that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Securities; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. EXHIBIT A ADVANCE STORES COMPANY, INCORPORATED $200,000,000 10-1/4% Senior Subordinated Notes due 2008 [Form Of] JOINDER TO THE REGISTRATION RIGHTS AGREEMENT -------------------------------------------- ___, 2001 J.P. Morgan Securities Inc. Credit Suisse First Boston Lehman Brothers Inc. c/o J.P. Morgan Securities Inc. 270 Park Avenue New York, New York 10017 Ladies and Gentlemen: Reference is made to the Exchange and Registration Rights Agreement (the "Registration Rights Agreement") dated October 31, 2001, among Advance Stores Company, Incorporated, a Virginia corporation (the "Company"), Advance Trucking Corporation, a Virginia corporation, Laralev, Inc., a Delaware corporation, and Western Auto Supply Company, a Delaware corporation, and J.P. Morgan Securities Inc., Credit Suisse First Boston and Lehman Brothers Inc. (the "Initial Purchasers") concerning the purchase of the Securities (as defined in the Registration Rights Agreement) from the Company by the several Initial Purchasers. Capitalized terms used herein but not defined herein shall have the meanings assigned to such terms in the Registration Rights Agreement. This is the agreement referred to in Section 10(a) of the Registration Rights Agreement. The Company and each of the Guarantors listed on Schedule I hereto agree that this letter agreement is being executed and delivered in connection with the issue and sale of the Securities pursuant to the Purchase Agreement and to induce the Initial Purchasers to purchase the Securities thereunder and is being executed concurrently with the consummation of the Acquisition. 1. Joinder. Each of the parties hereto hereby agrees to be become ------- bound by the terms, conditions and other provisions of the Registration Rights Agreement with all attendant rights, duties and obligations stated therein, with the same force and effect as if originally named as a Guarantor therein and as if such party executed the Registration Rights Agreement on the date thereof. 2. Representations, Warranties and Agreements of the Guarantors. ------------------------------------------------------------ Each Guarantor represents and warrants to, and agrees with, the several Initial Purchasers on and as of the date hereof that such Guarantor has the corporate power to execute and deliver this letter agreement and all corporate action required to be taken by it for the due and proper authorization, execution, delivery and performance of this letter agreement and the consummation of the transactions contemplated hereby has been duly and validly taken; this letter agreement has been duly authorized, executed and delivered by such Guarantor and constitutes a valid and legally binding agreement of such Guarantor enforceable against such Guarantor in accordance with its terms. 2 3. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE GOVERNED BY AND ------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 4. Counterparts. This letter agreement may be executed in one or ------------ more counterparts (which may include counterparts delivered by telecopier) and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 5. Amendments. No amendment or waiver of any provision of this ---------- letter agreement, nor any consent or approval to any departure therefrom, shall in any event be effective unless the same shall be in writing and signed by the parties hereto. 6. Headings. The headings herein are inserted for the convenience -------- of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this letter agreement. 3 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us a counterpart hereof, whereupon this letter agreement will become a binding agreement between the Company, the Guarantors party hereto and the several Initial Purchasers in accordance with its terms. Very truly yours, [GUARANTOR] By: --------------------------- Name: Title: Accepted: [ ], 2001 J.P. MORGAN SECURITIES INC. CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS INC. By: J.P. MORGAN SECURITIES INC. By: ----------------------------- Name: Title: EX-4.10 7 dex410.txt REGISTRATION RIGHTS AGMT DATED AS OF 10/31/2001 EXHIBIT 4.10 REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered into as of October 31, 2001, by and among Advance Stores Company, Incorporated, a Virginia corporation (the "Company"), Advance Trucking Corporation, a Virginia corporation ("Advance Trucking"), LARALEV, Inc., a Delaware corporation ("LARALEV") and Western Auto Supply Company, a Delaware corporation ("WA Supply" along with Advance Trucking, LARALEV and WA Supply, collectively, the "Guarantors"), Mozart Investments Inc., a Delaware corporation ("Mozart Investments") and Mozart One L.L.C., a South Dakota limited liability company ("Mozart One") (Mozart Investments and Mozart One collectively, the "Holders"). RECITALS A. WHEREAS, the Holders have purchased certain of the Company's 10-1/4% Senior Subordinated Notes due 2008 (the "Securities"), which are jointly and severally guaranteed on a senior subordinated basis by the Guarantors. B. WHEREAS, the Holders, as affiliates of the Company, may not participate in the registered exchange offer of the Company's 10-1/4% Senior Subordinated Notes due 2008 (the "Notes") available to other purchasers of the Notes. C. WHEREAS, in order to induce the Holders to purchase the Securities, the parties agreed that in lieu of requesting at this time that the Company prepare a shelf registration statement for the registration of the Securities for re-sale to the public, the Company would grant to the Holders one (1) demand registration right that, if exercised, would obligate the Company to prepare a shelf registration statement to register the Securities for re-sale to the public on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing, the mutual covenants contained herein and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. Shelf Registration. ------------------ (a) At any time on or after the date which is 60 days following the closing of the Acquisition, the Holders may make a written request upon the Company for one (1) registration under the Securities Act of 1933, as amended (the "Securities Act"), of all, or any part of, the Securities (a "Shelf Registration"). Upon receipt of the notice of Shelf Registration by Holders of at least 50% of the Securities held as of the date hereof, (the "Initiating Holders"), the Company and the Guarantors shall: (i) promptly give written notice of the Shelf Registration to all other Holders, if any, informing such Holders that the Company will include all the Securities (the "Registrable Securities") on a shelf registration statement (the "Registration Statement") to be filed with the Securities and Exchange Commission (the "Commission"), unless any Holder notifies the Company in writing within 15 days of the Company's mailing of such written notice to the other Holders that such Holder does not wish to include such Securities in the Registration Statement, at which point the Company shall reduce the Registrable Securities by such amount; (ii) prepare and, not later than 60 days following the receipt of the notice of Shelf Registration, file with the Commission the Registration Statement on an appropriate form under the Securities Act relating to the offer and sale of the Registrable Securities from time to time in accordance with the methods of distribution set forth in such shelf registration statement; (iii) cause the Registration Statement to become effective under the Securities Act no later than 150 days after the receipt of the notice of Shelf Registration; and (iv) keep the Registration Statement continuously effective in order to permit the prospectus forming a part thereof to be used by the Holders of Registrable Securities until the earliest to occur of (the "Registration Period") (A) the period when all the Registrable Securities have been sold pursuant to the Registration Statement, or (B) 180 days from the date of initial effectiveness of the Registration Statement. (b) Postponement of Shelf Registration. Notwithstanding anything ---------------------------------- contained in this Section 1 to the contrary, if any request for Shelf --------- Registration is delivered at a time when (i) the Company is involved with or actively pursuing a material acquisition or merger, or a financing transaction, whether or not definitive documents have been executed, or (ii) the filing of a registration statement otherwise would materially and adversely affect the Company (a "Material Event Postponement"), the Company may postpone the filing of the registration statement for an appropriate period (not to exceed 60 days from the date of receipt of the notice of Shelf Registration). In the event of a Material Event Postponement, the Company shall deliver a certificate signed by the President or the Chairman of the Company confirming the Company's reason for postponing the registration and confirming that the Company shall effect such registration as promptly as possible after such reason has been resolved, or when the maximum postponement period has elapsed, as the case may be, and if requested by the Initiating Holders, shall prepare a registration statement during the pendency of such postponement so that the registration statement may be filed promptly thereafter. 2 (c) Notwithstanding any other provisions hereof, the Company and the Guarantors will ensure that (i) the Registration Statement and any amendment thereto and any prospectus forming part thereof and any supplement thereto complies in all material respects with the Securities Act and the rules and regulations of the Commission thereunder, (ii) the Registration Statement and any amendment thereto (in either case, other than with respect to information included therein in reliance upon or in conformity with written information furnished to the Company by or on behalf of any Holder specifically for use therein (the "Holders' Information")) does not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (iii) any prospectus forming part of the Registration Statement, and any supplement to such prospectus (in either case, other than with respect to the Holders' Information), does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 2. Liquidated Damages. ------------------ (a) The parties hereto agree that the Holders of Registrable Securities will suffer damages if the Company and the Guarantors fail to fulfill their obligations under Section 1, and that it would not be feasible to --------- ascertain the extent of such damages. Accordingly, if (i) the Registration Statement is not filed with the Commission on or prior to 60 days after the receipt of the notice of Shelf Registration, (ii) the Registration Statement is not declared effective within 150 days after receipt of the notice of Shelf Registration, or (iii) the Registration Statement is filed and declared effective within 60 days after receipt of the notice of Shelf Registration, but shall thereafter cease to be effective (at any time that the Company and the Guarantors are obligated to maintain the effectiveness thereof) without being succeeded within 30 days by an additional Registration Statement filed and declared effective (each such event referred to in clauses (i) through (iii), a "Registration Default"), the Company and the Guarantors will be jointly and severally obligated to pay liquidated damages to each Holder of Registrable Securities, during the period of one or more such Registration Defaults, in an amount equal to $0.192 per week per $1,000 principal amount of the Registrable Securities held by such Holder until (i) the Registration Statement is filed, (ii) the Registration Statement is declared effective or (iii) the Registration Statement again becomes effective, as the case may be. Following the cure of all Registration Defaults, the accrual of liquidated damages will cease. (b) The Company shall notify the Trustee and the paying agent under the Indenture (the "Paying Agent") immediately upon the happening of each and every Registration Default. The Company and the Guarantors shall pay the liquidated damages due to each Holder of Registrable Securities as provided in Section 2(a) hereof by depositing with the Paying Agent (which may not be the ------------ Company for these purposes), in trust, for the benefit of such Holder thereof, prior to 10:00 a.m., New York City time, on the next interest payment date specified by the Indenture and the Registrable Securities, sums sufficient to pay the liquidated damages then due. The liquidated damages due shall be payable on each interest payment date specified by the 3 Indenture and the Registrable Securities to the record holder entitled to receive the interest payment to be made on such date. Each obligation to pay liquidated damages shall be deemed to accrue from and including the date of the applicable Registration Default. (c) The parties hereto agree that the liquidated damages provided for in this Section 2 constitute a reasonable estimate of and are intended to --------- constitute the sole damages that will be suffered by the Holders of Registrable Securities by reason of the failure of (i) the Registration Statement to be filed, or (ii) the Registration Statement to remain effective, in each case to the extent required by this Agreement. 3. Registration Procedures. In connection with any Registration ----------------------- Statement, the following provisions shall apply: (a) The Company shall furnish to each Holder of Registrable Securities, prior to the filing thereof with the Commission, a copy of the Registration Statement and each amendment thereof and each supplement, if any, to the prospectus included therein. (b) The Company shall advise each Holder of Registrable Securities if applicable and, if requested by any such person, confirm such advice in writing (which advice pursuant to clauses (ii)-(v) hereof shall be accompanied by an instruction to suspend the use of the prospectus until the requisite changes have been made): (i) when any Registration Statement and any amendment thereto has been filed with the Commission and when such Registration Statement or any post-effective amendment thereto has become effective; (ii) of any request by the Commission for amendments or supplements to any Registration Statement or the prospectus included therein or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of any Registration Statement or the initiation of any proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (v) of the happening of any event that requires the making of any changes in any Registration Statement or the prospectus included therein in order that the statements therein are not misleading and do not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. 4 (c) The Company and the Guarantors will make every reasonable effort to obtain the withdrawal at the earliest possible time of any order suspending the effectiveness of any Registration Statement. (d) The Company will furnish to each Holder of Registrable Securities, without charge, at least one conformed copy of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules and, if any such Holder so requests in writing, all exhibits thereto (including those, if any, incorporated by reference). (e) The Company will, during the Registration Period, promptly deliver to each Holder of Registrable Securities, without charge, as many copies of the final prospectus included in the Registration Statement and any amendment or supplement thereto as such Holder or other persons may reasonably request; and the Company and the Guarantors consent to the use (in accordance with applicable laws) of such prospectus or any amendment or supplement thereto by any such Holder or other persons, as applicable, as aforesaid. (f) Prior to the effective date of the Registration Statement, the Company and the Guarantors will use their reasonable best efforts to register or qualify, or cooperate with the Holders of Registrable Securities included therein and their respective counsel in connection with the registration or qualification of, such Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holder reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the Registrable Securities covered by such Registration Statement; provided that the Company and -------- the Guarantors will not be required to qualify generally to do business in any jurisdiction where they are not then so qualified or to take any action which would subject them to general service of process or to taxation in any such jurisdiction where they are not then so subject. (g) The Company and the Guarantors will cooperate with the Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing the Registrable Securities to be sold pursuant to any Registration Statement free of any restrictive legends and in such denominations and registered in such names as the Holders of Registrable Securities thereof may request in writing at least two business days prior to sales of the Registrable Securities pursuant to such Registration Statement. (h) If any event contemplated by Section 3(b)(ii) through (v) occurs ---------------- --- during the period for which the Company and the Guarantors are required to maintain an effective Registration Statement, the Company and the Guarantors will promptly prepare and file with the Commission a post-effective amendment to the Registration Statement or a supplement to the related prospectus or file any other required document so that, as thereafter delivered to purchasers of the Registrable Securities from a Holder, the prospectus will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 5 (i) Not later than the effective date of the applicable Registration Statement, the Company will provide a CUSIP number for the Registrable Securities, and provide the applicable trustee with printed certificates for the Registrable Securities in a form eligible for deposit with The Depository Trust Company. (j) The Company and the Guarantors will comply with all applicable rules and regulations of the Commission, and the Company will make generally available to its security holders as soon as practicable after the effective date of the Registration Statement a consolidated earning statement satisfying the provisions of Section 11(a) of the Securities Act; provided that in no event -------- shall such earning statement be delivered later than 45 days after the end of a 12-month period (or 90 days, if such period is a fiscal year) beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the Registration Statement, which statement shall cover such 12-month period. (k) The Company may require each Holder of Registrable Securities pursuant to any Registration Statement to furnish to the Company such information concerning such Holder and the distribution of such Registrable Securities as the Company may from time to time reasonably require for inclusion in such Registration Statement, and the Company may exclude from such registration the Registrable Securities of any Holder that fails to furnish such information within a reasonable time after receiving such request. (l) Each Holder of Registrable Securities agrees by acquisition of the Securities that, upon receipt of any notice from the Company pursuant to Section 3(b)(ii) through (v), such Holder will discontinue disposition of such --------------- --- Registrable Securities until such Holder's receipt of copies of the supplemental or amended prospectus contemplated by Section 3(h) or until advised in writing ------------ (the "Advice") by the Company that the use of the applicable prospectus may be resumed. If the Company shall give any notice under Section 3(b)(ii) through ---------------- (v) during the period that the Company is required to maintain an effective --- Registration Statement (the "Effectiveness Period"), such Effectiveness Period shall be extended by the number of days during such period from and including the date of the giving of such notice to and including the date when each seller of Registrable Securities covered by such Registration Statement shall have received (i) the copies of the supplemental or amended prospectus contemplated by Section 3(h) (if an amended or supplemental prospectus is required), or (ii) ------------ the Advice (if no amended or supplemental prospectus is required). (m) The Company and the Guarantors shall enter into such customary agreements (including, if requested, an underwriting agreement in customary form) and take all such other action, if any, as the Holders of Registrable Securities or the managing underwriters (if any) shall reasonably request in order to facilitate any disposition of Registrable Securities pursuant to such Registration Statement. (n) The Company shall (i) make reasonably available for inspection by a representative of, and Special Counsel (as defined below) acting for, the Holders of Registrable 6 Securities and any underwriter participating in any disposition of Registrable Securities pursuant to such Registration Statement, all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries and (ii) use its reasonable best efforts to have its officers, directors, employees, accountants and counsel supply all relevant information reasonably requested by such representative, Special Counsel or any such underwriter (an "Inspector") in connection with such Registration Statement; provided that if any such information is identified by the Company of any of its -------- ---- subsidiaries as being confidential or proprietary, each person receiving such information shall take such actions as are reasonably necessary to protect the confidentiality of such information to the extent such action is otherwise not inconsistent with, an impairment of or in derogation of the rights and interests of any Inspector, Holder or underwriter. (o) The Company shall, if requested by the Holders of Registrable Securities and their Special Counsel or the managing underwriters (if any) in connection with the Registration Statement, use its reasonable best efforts to cause (i) its counsel to deliver an opinion relating to the Registration Statement and the Registrable Securities to be included thereunder, in customary form, (ii) its officers to execute and deliver all customary documents and certificates requested by such Holders and their Special Counsel or the managing underwriters (if any) and (iii) its independent public accountants to provide a comfort letter or letters in customary form, subject to receipt of appropriate documentation as contemplated, and only if permitted, by Statement of Auditing Standards No. 72. 4. Registration Expenses. The Company and the Guarantors will jointly --------------------- and severally bear all expenses incurred in connection with the performance of its obligations under Sections 1, 2 and 3 and the Company will reimburse the ------------- - Holders of Registrable Securities for the reasonable fees and disbursements of one firm of attorneys (in addition to any local counsel) chosen by such Holders (the "Special Counsel") acting for such Holders. 5. Indemnification. --------------- (a) The Company and the Guarantors shall jointly and severally indemnify and hold harmless each Holder of Registrable Securities, its affiliates, their respective officers, directors, employees, representatives and agents, and each person, if any, who controls such Holder within the meaning of the Securities Act or the Exchange Act (collectively referred to for purposes of this Section 5 and Section 6 as a Holder) from and against any loss, claim, --------- --------- damage or liability, joint or several, or any action in respect thereof (including, without limitation, any loss, claim, damage, liability or action relating to purchases and sales of Registrable Securities), to which that Holder may become subject, whether commenced or threatened, under the Securities Act, the Exchange Act, any other federal or state statutory law or regulation, at common law or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in any such Registration Statement or any prospectus forming part thereof or in any amendment or supplement thereto or (ii) the omission or alleged omission to state therein a material fact 7 required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and shall reimburse each Holder promptly upon demand for any legal or other expenses reasonably incurred by that Holder in connection with investigating or defending or preparing to defend against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that in the event it -------- ------- is subsequently determined that the Holder is or was not entitled to such reimbursement, then such Holder shall promptly repay the indemnifying party the full amount of such reimbursement; provided, further, that the Company and the --------- ------- Guarantors shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with any Holders' Information; and provided, further, that with respect to any such untrue -------- ------- statement in or omission from any related preliminary prospectus, the indemnity agreement contained in this Section 5(a) shall not inure to the benefit of any ------------ Holder from whom the person asserting any such loss, claim, damage, liability or action received the Registrable Securities to the extent that such loss, claim, damage, liability or action of or with respect to such Holder results from the fact that both (i) a copy of the final prospectus was not sent or given to such person at or prior to the written confirmation of the sale of such Registrable Securities to such person and (ii) the untrue statement in or omission from the related preliminary prospectus was corrected in the final prospectus unless, in either case, such failure to deliver the final prospectus was a result of non- compliance by the Company with Section 3(d) or 3(e). ------------ ---- (b) Each Holder shall indemnify and hold harmless the Company, its affiliates, their respective officers, directors, employees, representatives and agents, and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act (collectively referred to for purposes of this Section 5(b) and Section 6 as the Company), from and against any loss, ------------ --------- claim, damage or liability, joint or several, or any action in respect thereof, to which the Company may become subject, whether commenced or threatened, under the Securities Act, the Exchange Act, any other federal or state statutory law or regulation, at common law or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in any such Registration Statement or any prospectus forming part thereof or in any amendment or supplement thereto or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with any Holders' Information furnished to the Company by a Holder of Registrable Securities, and shall reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending or preparing to defend against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, -------- ------- that in the event it is subsequently determined that the Company is or was not entitled to such reimbursement, then the Company shall promptly repay the indemnifying party the full 8 amount of such reimbursement; provided, further, that no such Holder shall be -------- ------- liable for any indemnity claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of any Registrable Securities pursuant to such Registration Statement. (c) Promptly after receipt by an indemnified party under this Section ------- 5 of notice of any claim or the commencement of any action, the indemnified - party shall, if a claim in respect thereof is to be made against the indemnifying party pursuant to Section 5(a) or 5(b), promptly notify the ------------ ---- indemnifying party in writing of the claim or the commencement of that action; provided, however, that the failure to notify the indemnifying party shall not -------- ------- relieve it from any liability which it may have under this Section 5 except to --------- the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure; and provided, further, that the -------- ------- failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 5. --------- If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 5 for any legal or other expenses --------- subsequently incurred by the indemnified party in connection with the defense thereof other than the reasonable costs of investigation; provided, however, -------- ------- that an indemnified party shall have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel for the indemnified party will be at the expense of such indemnified party unless (1) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (2) the indemnified party has reasonably concluded (based upon advice of counsel to the indemnified party) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (3) a conflict or potential conflict exists (based upon advice of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (4) the indemnifying party has not in fact employed counsel reasonably satisfactory to the indemnified party to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm of attorneys (in addition to any local counsel) at any one time for all such indemnified party or parties. Each indemnified party, as a condition of the indemnity agreements contained in Sections 5(a) and 5(b), shall use all reasonable efforts to ------------- ---- cooperate with the indemnifying party in the defense of any such action or claim. No indemnifying party shall be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with its written consent or if there be a final 9 judgment for the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party (which consent shall not be unreasonably withheld), effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. 6. Contribution. If the indemnification provided for in Section 5 is ------------ --------- unavailable or insufficient to hold harmless an indemnified party under Section ------- 5(a) or 5(b), then each indemnifying party shall, in lieu of indemnifying such ---- ---- indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (a) in such proportion as shall be appropriate to reflect the relative benefits received by the Company from the offering and sale of the Registrable Securities, on the one hand, and by a Holder of Registrable Securities from receiving the Registrable Securities, as applicable, registered under the Registrable Securities Act, on the other, or (b) if the allocation provided by clause (a) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (a) above but also the relative fault of the Company and the Guarantors, on the one hand, and such Holder, on the other, with respect to the statements or omissions that resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Guarantors, on the one hand, and a Holder of Registrable Securities, on the other, with respect to such offering and such sale shall be deemed to be in the same proportion as the total net proceeds from the offering of the Registrable Securities (before deducting expenses) received by or on behalf of the Company as set forth in the table on the cover of the Offering Memorandum, on the one hand, bear to the total proceeds received by such Holder with respect to its sale of the Registrable Securities, on the other. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to the Company and the Guarantors or information supplied by the Company and the Guarantors, on the one hand, or to any Holders' Information supplied by such Holder of Registrable Securities, on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 6 were --------- to be determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 6 shall be deemed to include, for purposes of this Section 6, any --------- --------- legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending or preparing to defend any such action or claim. Notwithstanding the provisions of this Section 6, an --------- indemnifying party that is a Holder of the Registrable Securities shall not be required to contribute any amount in excess of the amount by 10 which the total price at which the Registrable Securities sold by such indemnifying party to any purchaser exceeds the amount of any damages which such indemnifying party has otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 7. Rules 144 and 144A. For so long as the Securities remain outstanding ------------------ and are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act, the Company and each of the Guarantors will furnish to Holders of the Securities and prospective purchasers of the Securities designated by such Holders, upon the request of such Holders or such prospective purchasers, the information required to be delivered pursuant to Rule 144(d)(4) under the Securities Act, unless the Company is then subject to and in compliance with Section 13 or 15(d) of the Exchange Act. The Company and the Guarantors covenant that they will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell the Securities without registration under the Securities Act within the limitation of the exemptions provided by Rules 144 and 144A (including, without limitation, the requirements of Rule 144A(d)(4)). Upon the reasonable written request of any Holder, the Company and the Guarantors shall deliver to such Holder a written statement as to whether they have complied with such requirements. Notwithstanding the foregoing, nothing in this Section 7 shall be --------- deemed to require the Company to register any of its securities pursuant to the Exchange Act. 8. Underwritten Registrations. -------------------------- (a) If any of the Registrable Securities covered by the Registration Statement are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the Company, subject to the consent of the Holders of Registrable Securities (which shall not be unreasonably withheld or delayed), and such Holders shall be responsible for all underwriting commissions and discounts in connection therewith. (b) No person may participate in any underwritten registration hereunder unless such person (i) agrees to sell such person's Registrable Securities on the basis reasonably provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements, and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and (iii) complies with the relevant provisions of this Agreement, including Section 3(k). ------------ 11 9. Miscellaneous. ------------- (a) Waiver of Other Registration Rights. The Holders hereby waive ----------------------------------- all other registration rights the Holders may have pursuant to the Exchange and Registration Rights Agreement dated as of October 31, 2001 by and among J.P. Morgan Securities Inc., Credit Suisse First Boston, Lehman Brothers Inc., the Company and the Guarantors, including without limitation any shelf registration rights pursuant to Section 2 thereunder. (b) Joinder of Guarantors. Upon consummation of the Acquisition, any --------------------- subsidiary of the Company that is formed or acquired after the date hereof which is required to be a Guarantor under the Indenture shall become a party to this Agreement by executing and delivering a Joinder Agreement to this Agreement in the form attached hereto as Exhibit A. --------- (c) Amendments and Waivers. The provisions of this Agreement may not ---------------------- be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has agreed thereto in writing and the Company has obtained the written consent of each Holder. (d) Notices. All notices and other communications provided for or ------- permitted hereunder shall be made in writing by hand-delivery, first-class mail, telecopier or air courier guaranteeing next-day delivery: (i) if to Company, at its principal business address, attention Chief Executive Officer; (ii if to Mozart Investments, 2965 Colonnade Drive, Suite 300, Roanoke, VA 24018, with a copy to Clifford A. Cutchins, IV, Esq., McGuireWoods LLP, 901 E. Cary Street, Richmond, VA 23219; and (ii if to Mozart One, 2965 Colonnade Drive, Suite 300, Roanoke, VA 24018, with a copy to Clifford A. Cutchins, IV, Esq., McGuireWoods LLP, 901 E. Cary Street, Richmond, VA 23219. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; one business day after being delivered to a next-day air courier; five business days after being deposited in the mail; and when receipt is acknowledged by the recipient's telecopier machine, if sent by telecopier. (e) Successors and Assigns. This Agreement shall be binding upon and ---------------------- inure to the benefit of the parties hereto and their respective successors and assigns, including without limitation and without the need for an express assignment, subsequent Holders of Registrable Securities; provided, that nothing -------- herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of th terms hereof or the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Registrable Securities in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all the terms of this Agreement, and by taking and holding such Registrable Securities, including the restriction on sale set forth in this Agreement, such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and 12 provisions of this Agreement and, if applicable, the Purchase Agreement, and such person shall be entitled to receive the benefits hereof. (f) Counterparts. This Agreement may be executed in any number of ------------ counterparts (which may be delivered in original form or by telecopier) and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (g) Definition of Terms. For purposes of this Agreement, (i) the ------------------- term "business day" means any day on which the New York Stock Exchange, Inc. is open for trading, (ii) the term "subsidiary" has the meaning set forth in Rule 405 under the Securities Act, and (iii) except where otherwise expressly provided, the term "affiliate" has the meaning set forth in Rule 405 under the Securities Act. (h) Headings. The headings in this Agreement are for convenience of -------- reference only and shall not limit or otherwise affect the meaning hereof. (i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED ------------- IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. (j) Remedies. In the event of a breach by the Company, any Guarantor -------- or by any Holder of any of their obligations under this Agreement, each Holder, the Company or any Guarantor, as the case may be, in addition to being entitled to exercise all rights granted by law, including recovery of damages (other than the recovery of damages for a breach by the Company or any Guarantor of its obligations under Section 1 hereof for which liquidated damages have been paid --------- pursuant to Section 2 hereof), will be entitled to specific performance of its --------- rights under this Agreement. The Company, the Guarantors and each Holder agree that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by each such person of any of the provisions of this Agreement and hereby further agree that, in the event of any action for specific performance in respect of such breach, each such person shall waive the defense that a remedy at law would be adequate. (k) No Piggyback on Registrations. Neither the Company nor any of ----------------------------- its security holders (other than the Holders of Registrable Securities) shall have the right to include any securities of the Company in any Registration Statement. (l) Severability. The remedies provided herein are cumulative and ------------ not exclusive of any remedies provided by law. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable best efforts to find and employ an alternative means 13 to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (m) Effectiveness Only Upon Consummation of Acquisition. --------------------------------------------------- Notwithstanding any other provision of this Agreement, neither the Company nor any Guarantor shall have any obligation or liability under this Agreement unless and until the Acquisition is consummated. (n) Entire Agreement. This Agreement is intended by the parties ---------------- hereto as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted with respect to the Registrable Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 14 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year herein above first written. ADVANCE STORES COMPANY, INCORPORATED, a Virginia corporation /s/ Jeffrey T. Gray By:______________________________________ Name: Jeffrey T. Gray Title: Senior Vice President Controller ADVANCE TRUCKING CORPORATION, a Virginia corporation /s/ Jeffrey T. Gray By:______________________________________ Name: Jeffrey T. Gray Title: Senior Vice President Controller LARALEV, INC., a Delaware corporation /s/ Andrew Panaccione By:______________________________________ Name: Andrew Panaccione Title: President WESTERN AUTO SUPPLY COMPANY, a Delaware corporation /s/ Jeffrey T. Gray By:______________________________________ Name: Jeffrey T. Gray Title: Senior Vice President Controller MOZART INVESTMENTS INC. By: /s/ ______________________________________ Name: Title: MOZART ONE L.L.C. By: /s/ ______________________________________ Name: Title: EXHIBIT A ADVANCE STORES COMPANY, INCORPORATED JOINDER TO REGISTRATION RIGHTS AGREEMENT ---------------------------------------- __________, 2001 Reference is made to the Registration Rights Agreement dated October __, 2001 (the "Registration Rights Agreement"), among Advance Stores Company, Incorporated, a Virginia corporation (the "Company"), Advance Trucking Corporation, a Virginia corporation, LARALEV, Inc., a Delaware corporation, Western Auto Supply Company, a Delaware corporation, Mozart Investments Inc., a Delaware corporation ("Mozart Investments") and Mozart One L.L.C., a South Dakota limited liability company ("Mozart One" along with Mozart Investments, the "Holders") concerning the granting to Mozart Investments and Mozart One of one (1) shelf registration right. Capitalized terms used herein but not defined herein shall have the meanings assigned to such terms in the Registration Rights Agreement. This is the agreement referred to in Section ------- 9(b) of the Registration Rights Agreement. ---- The Company and each of the Guarantors listed on Schedule I hereto agree ---------- that this letter agreement is being executed and delivered in connection with the issue and sale of the Securities and to induce the Holders to purchase the Securities thereunder and is being executed concurrently in connection with the consummation thereof. 1. Joinder. Each of the parties hereto hereby agrees to be become bound ------- by the terms, conditions and other provisions of the Registration Rights Agreement with all attendant rights, duties and obligations stated therein, with the same force and effect as if originally named as a Guarantor therein and as if such party executed the Registration Rights Agreement on the date thereof. 2. Representations, Warranties and Agreements of the Guarantors. Each ------------------------------------------------------------ Guarantor represents and warrants to, and agrees with, the Holders on and as of the date hereof that such Guarantor has the corporate power to execute and deliver this letter agreement and all corporate action required to be taken by it for the due and proper authorization, execution, delivery and performance of this letter agreement and the consummation of the transactions contemplated hereby has been duly and validly taken; this letter agreement has been duly authorized, executed and delivered by such Guarantor and constitutes a valid and legally binding agreement of such Guarantor enforceable against such Guarantor in accordance with its terms. 3. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE GOVERNED BY AND ------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 4. Counterparts. This letter agreement may be executed in one or more ------------ counterparts (which may include counterparts delivered by telecopier) and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 5. Amendments. No amendment or waiver of any provision of this letter ---------- agreement, nor any consent or approval to any departure therefrom, shall in any event be effective unless the same shall be in writing and signed by the parties hereto. 6. Headings. The headings herein are inserted for the convenience of -------- reference only and are not intended to be part of, or to affect the meaning or interpretation of, this letter agreement. 2 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us a counterpart hereof, whereupon this letter agreement will become a binding agreement between the Company, the Guarantors party hereto and the Holders in accordance with its terms. Very truly yours, [GUARANTOR] By: _______________________________ Name: Title: ACCEPTED: [ ], 2001 MOZART INVESTMENTS INC. By: _________________________ Name: Title: MOZARTS ONE L.L.C. By: _________________________ Name: Title: Schedule I ---------- Guarantors ---------- Advance Trucking Corporation LARALEV, Inc. Western Auto Supply Company EX-8.1 8 dex81.txt OPINION RE TAX MATTERS OF TRENAM KEMKER EXHIBIT 8.1 November 6, 2001 Discount Auto Parts, Inc. 4900 Frontage Road South Lakeland, FL 33815 Ladies and Gentlemen: We have acted as counsel to Discount Auto Parts, Inc. a Florida corporation ("Discount"), in connection with the transactions contemplated by the Agreement and Plan of Merger (the "Merger Agreement") dated as of August 7, 2001, by and among Advance Holding Corporation, a Virginia corporation ("Holding"); Advance Auto Parts, Inc., a Delaware corporation and wholly-owned subsidiary of Holding ("New Holding"); AAP Acquisition Corporation, a Florida corporation and a wholly-owned subsidiary of New Holding ("Merger Sub"); Advance Stores Company, Incorporated, a Virginia corporation and wholly-owned subsidiary of Holding ("ASCI"); and Discount. The terms of the contemplated merger of Merger Sub into Discount (the "Merger"), as well as the contemporaneous merger of Holding into New Holding, the contribution by New Holding of the stock of Discount obtained in the Merger to ASCI immediately following the Merger, and the other transactions contemplated by the parties (collectively, the "Transaction") are set forth in the Merger Agreement and described in the proxy materials for a special meeting of Discount's stockholders (the "Proxy Materials") filed with the Securities and Exchange Commission (the "Commission") on November 6, 2001 as part of the Registration Statement on Form S-4 of New Holding, as amended. Capitalized terms used herein and not otherwise defined have the meanings ascribed to them in the Merger Agreement and in the Proxy Materials. In rendering our opinion, we have examined and relied upon the accuracy and completeness of the facts, information, covenants, statements and representations set forth in the Merger Agreement and the Proxy Materials and such other documents as we have deemed necessary or appropriate. Our opinion is expressly conditioned on, among other things, the accuracy as of the date hereof, and the continuing accuracy of all of such facts, information, covenants, statements, and representations up to and including the Closing Date. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies thereof, and the authenticity of the originals of such latter documents. We have also assumed that the Merger and the other portions of the Transaction will be consummated on the Closing Date in accordance with the terms of the Merger Agreement and as described in the Proxy Materials. In addition, our opinion is expressly conditioned on the following assumptions: Discount Auto Parts, Inc. November 6, 2001 Page 2 1. The managements of Discount, New Holding, and Holding, respectively, do not have knowledge of any agreement, plan, or intention on the part of any stockholder of Discount or Holding to sell, exchange, or otherwise dispose of New Holding stock received by such stockholder in the Transaction. 2. There is no plan or intention for New Holding to issue additional stock following the Transaction, except for issuance of shares under compensatory stock plans and/or stock option plans. 3. Merger Sub was formed shortly prior to the execution of the Merger Agreement exclusively for purposes of effecting the transactions described in the Merger Agreement and has not been engaged in any business activity since its formation. At all times prior to the Merger, New Holding will own all of the outstanding stock of Merger Sub. Merger Sub does not now own and has never owned any assets, and will not own any assets prior to the Closing Date. Merger Sub does not now owe and has never owed any indebtedness or any other obligations to any other person, and will not owe any indebtedness or any other obligations to any other person prior to the Closing Date. 4. New Holding does not now own and has not owned any assets other than the stock in Merger Sub and $1.00 contributed to it upon its formation; and New Holding does not now owe and has never owed any indebtedness or any other obligations to any other person. New Holding will not own any other assets and will not owe any indebtedness or any other obligations to any other person prior to the Closing Date. 5. There is no plan or intention for New Holding or any affiliated corporations to redeem or to reacquire any of the New Holding Common Stock issued pursuant to the Merger or other portions of the Transaction. 6. There is no plan or intention of New Holding or its affiliates (a) to liquidate New Holding, ASCI, or Discount, (b) to merge, to liquidate, or to consolidate New Holding, ASCI, or Discount with or into any other corporation (including, without limitation, any affiliated corporation), other than the merger of Merger Sub with and into Discount and the merger of Holding with and into New Holding, (c) to sell, transfer, distribute, or otherwise dispose of the stock of Discount or ASCI, or their respective subsidiaries, other than to contribute the stock of Discount to ASCI, or (d) to sell, transfer, distribute, or otherwise dispose of any of the assets of Discount or ASCI (other than in the ordinary course of business and other than transfers of assets comprising and/or relating to selected stores and the distribution centers (including trucks, trailers and other transportation assets) to members of the "affiliated group," within the meaning of Section 1504 of the Code, as to which New Holding is the common parent). Discount Auto Parts, Inc. November 6, 2001 Page 3 7. There is no plan or intention of ASCI or its affiliates, following the receipt by ASCI of the Discount stock, (a) to liquidate Discount, (b) to merge, to liquidate, or to consolidate Discount with or into any other corporation (including, without limitation, any affiliated corporation), (c) to sell, transfer, distribute, or otherwise dispose of the stock of Discount, or its subsidiaries, or (d) to sell, transfer, distribute, or otherwise dispose of any of the assets of Discount (other than in the ordinary course of business and other than transfers of assets comprising and/or relating to selected stores and the distribution centers (including trucks, trailers and other transportation assets) to members of the "affiliated group," within the meaning of Section 1504 of the Code, as to which New Holding is the common parent). 8. No stock of New Holding will be issued prior to or in connection with the Transaction for services or for indebtedness or interest on indebtedness. Except as otherwise provided in assumption 2 above, no stock of New Holding will be issued following the Transaction, in any other presently contemplated transaction, for services or for indebtedness or interest on indebtedness. 9. New Holding is not and will not be an "investment company" within the meaning of section 351 of the Code and Treas. Reg. section 1.351-1(c) and is not and will not be a "personal service corporation" within the meaning of section 269A of the Code. In rendering our opinion, we have considered the applicable provisions of the Code, Treasury Regulations promulgated thereunder, pertinent judicial authorities, interpretive rulings of the Internal Revenue Service, and such other authorities as we have deemed appropriate under the circumstances. All such authorities are subject to change, and such changes could apply retroactively. There can be no assurance that the Internal Revenue Service would not challenge the position stated in this opinion. Based upon and subject to the foregoing, we are of the opinion that under current law (1) the transfer of Discount Common Stock by the stockholders of Discount to New Holding pursuant to the Merger in exchange for the Merger Consideration, after taking into consideration the other portions of the Transaction, should constitute a transfer described in section 351 of the Code, and (2) the material U.S. federal income tax consequences should be as follows: a. Discount will not recognize any gain or loss as a result of the Merger. b. A Discount stockholder will recognize gain (but not loss) measured by the lesser of (i) the excess, if any, of (x) the sum of the fair market value (on the Closing Date) of the New Holding Common Stock and the Cash Consideration received by the stockholder pursuant to the Merger over (y) the tax basis of the stockholder's shares of Discount Common Stock surrendered in the Merger and (ii) the Cash Consideration received by the stockholder pursuant to the Merger. Discount Auto Parts, Inc. November 6, 2001 Page 4 Such gain, if any, will be long-term capital gain if the Discount Common Stock surrendered in the Merger was held as a capital asset for more than one year at the time of the consummation of the Merger. c. The aggregate tax bases of the shares of New Holding Common Stock received by a Discount stockholder, including any fractional share deemed to be received, will be the same as the aggregate tax bases of the shares of Discount Common Stock exchanged therefor (i) increased by the gain recognized (as calculated above) and (ii) decreased by the Cash Consideration received. d. The holding period of the shares of New Holding Common Stock received by a Discount stockholder will include the holding period of the shares of Discount Common Stock surrendered therefor if such Discount Common Stock was held by the stockholder as a capital asset. e. A Discount stockholder who receives cash with respect to a fractional share will be treated as having received such fractional share pursuant to the Merger and then as having sold that fractional share in the market for cash. Such a Discount stockholder will recognize gain or loss with respect to such fractional share in an amount equal to the difference between the tax basis allocated to such fractional share and the cash received in respect thereof. Any such gain or loss will be capital gain or loss if such fractional share was held as a capital asset and will constitute long-term capital gain or loss if the holding period of such fractional share (as determined above) exceeded one year. Our opinion is based on existing facts and circumstances and is conditioned on representations to be made on the Closing Date by New Holding, Holding, and Discount consistent with those assumed above. Except as set forth herein, we express no other opinion as to the tax consequences of the Merger or any other portions of the Transaction. This opinion is for your benefit and is not to be used, circulated, quoted, or otherwise referred to for any purpose without our express written consent. We hereby consent to the use of our name in the sections of the Proxy Materials entitled "The Merger - Material U.S. Federal Income Tax Consequences of the Merger" and "Legal Matters" and to the filing of this opinion with the Commission as an exhibit to the Registration Statement on Form S-4 of New Holding, in which the Proxy Materials are included. In giving such consent we do not hereby admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Commission promulgated thereunder. Discount Auto Parts, Inc. November, 2001 Page 5 Very truly yours, TRENAM, KEMKER, SCHARF, BARKIN, FRYE, O'NEILL & MULLIS, PROFESSIONAL ASSOCIATION /s/ Gary I. Teblum By:__________________________________ EX-10.11 9 dex1011.txt FORM OF SR EXEC STOCK OPTION PLAN EXHIBIT 10.11 ADVANCE AUTO PARTS, INC. 2001 SENIOR EXECUTIVE STOCK OPTION PLAN Section 1. Description of Plan. This is the 2001 Senior Executive ------------------- Stock Option Plan, dated November 7, 2001 (the "Plan"), of Advance Auto Parts, Inc., a Delaware corporation (the "Company"). This Plan will provide a means whereby designated employees, directors or consultants of the Company and/or of any directly or indirectly majority or wholly-owned entities of the Company (individually, a "Subsidiary" and collectively, the "Subsidiaries") may purchase shares of common stock, par value $.0001 per share, of the Company (the "Shares"). It is intended that the options under this Plan will either qualify for treatment as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and be designated "Incentive Stock Options" or not qualify for such treatment and be designated "Nonqualified Stock Options." Incentive Stock Options may only be granted to employees. Section 2. Purpose of Plan. The purpose of the Plan and of granting --------------- options (the "Options") to specified persons is to further the growth, development and financial success of the Company and its Subsidiaries by providing additional incentives to their employees, directors or consultants. By assisting such persons in acquiring Shares, the Company can ensure that such persons will themselves benefit directly from the Company's and its Subsidiaries' growth, development and financial success. Section 3. Eligibility. The persons who shall be eligible to receive ----------- grants of Options under the Plan shall be the designated senior executives of the Company and/or its Subsidiaries as determined from time to time by the Board of Directors (the "Board") of the Company. A person who holds an Option is herein referred to as a "Participant," and more than one Option may be granted to any Participant. The aggregate fair market value (determined as of the time an Option is granted) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any participant in any calendar year under this Plan and any other incentive stock option plans (which qualify under Section 422 of the Code) of the Company or any Subsidiary shall not exceed $100,000. Section 4. Administration. -------------- (a) Except as otherwise provided herein, the Plan shall be administered by the Board or, at the Board's option, by a compensation committee thereof from time to time constituted, to whom administration of this Plan has been duly delegated (the Board and such committee, are collectively referred to hereinafter as the "Committee"). Any action of the Board or the Committee with respect to administration of the Plan shall be taken by a majority vote or written consent of its members. Upon the first registration of an equity security of the Company under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to the extent possible and advisable, the Committee may be constituted so as to permit this Plan to comply with Rule 16b-3 promulgated under Section 16 of the Exchange Act and Section 162(m) of the Code. (b) The Committee is authorized and empowered to administer the Plan and, subject to the Plan, including but not limited to Section 19, (i) to ---------- determine the dates upon which Options shall be granted and the terms and conditions thereof in a manner consistent with the Plan, which terms and conditions need not be identical as to the various Options granted; (ii) to interpret the Plan; (iii) to grant Options; (iv) to determine the Participants; (v) to specify the terms of the Options; (vi) to determine the number of Shares which may be purchased; (vii) to determine the fair market value of the Shares; (viii) to accelerate the time during which an Option may be exercised in accordance with the provisions of Section 14 hereof, and to otherwise accelerate ---------- the time during which an Option may be exercised, in each case notwithstanding the provisions in the Option Agreement (as defined in Section 11 hereof) stating ---------- the time during which it may be exercised; (ix) to reissue the Plan and related benefits hereunder as a direct plan of a Subsidiary or Subsidiaries, converting the Options and Shares issued under this Plan to options and shares of such Subsidiary or Subsidiaries, as the case may be; (x) to prescribe, amend and rescind rules relating to the Plan; (xi) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Committee; (xii) to determine the rights and obligations of Participants under the Plan; and (xiii) to make all other determinations deemed necessary or advisable for the administration of the Plan. The interpretation and construction by the Committee of any provision of the Plan or of any Option granted under it shall be final. No member of the Committee shall be liable for any action or determination made with respect to the Plan or any Option granted hereunder. Section 5. Shares Subject to Plan. The aggregate number of Shares for ---------------------- which Options may be granted pursuant to the Plan shall be One Million Six Hundred Fifty Thousand (1,710,000). Such number shall be automatically adjusted for any reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction of the Company. The number of Shares which may be purchased by a Participant upon exercise of each Option shall be determined by the Committee and set forth in each Option Agreement (as such term is defined in Section 11 hereof). Upon the expiration ---------- or termination, in whole or in part, for any reason of an outstanding Option or any portion thereof which shall not have vested or shall not have been exercised in full or in the event that any Shares acquired pursuant to the Plan are reacquired by the Company, (a) any Shares which have not been purchased or (b) the Shares reacquired, as the case may be, shall again become available for the granting of additional Options under the Plan. Section 6. Restrictions on Grants; Vesting of Options. Notwithstanding ------------------------------------------ any other provisions set forth herein or in any Option Agreement, no Options may be granted under the Plan subsequent to ten (10) years from the date hereof. Each Option shall grant the Participant the right to purchase a specified number of Shares at the price determined by the Committee, as set forth in each respective Option Agreement (the "Exercise Price"); provided, however, that if the Participant is a 10% stockholder of the Company (as defined in Section 422(b)(6) of the Code) at the time such Participant is granted an Incentive Stock Option, the Exercise Price shall 2 be not less than 110% of the fair market value of such shares on the date of grant of the Option. Such fair market value shall be determined by the Committee (i) if the Company's securities are traded on a national securities exchange or on the Nasdaq National Market, on the basis of the reported closing sales price on such date or, in the absence of a reported sales price on such date, on the basis of the average of the reported closing bid and ask price on such date, or (ii) in the absence of both a reported sales price and a reported bid and ask price under clause (i), the Committee shall determine such fair market value on the basis of such evidence as it deems appropriate in its sole discretion. The Options shall vest based on longevity of service, targeted goals and/or other schedules established by the Committee, as set forth in each Option Agreement, with respect to the Company and/or its Subsidiaries. In the case of options which vest based on the achievement of targeted goals, the Committee shall determine the performance criteria, the performance measurement period(s) and the schedule of exercisability applicable to each Option or group of Options in a schedule, a copy of which shall be filed with the records of the Committee and attached to each Option Agreement to which the same applies. The performance criteria, the performance measurement period(s), and the schedule of exercisability need not be identical for all Options granted hereunder. Following the conclusion of each applicable performance measurement period, the Committee shall determine, in its sole good faith judgment, the extent, if at all, that each Option subject thereto shall have become exercisable based upon the applicable performance criteria and the schedule of exercisability. To the extent each such Option shall remain nonexercisable following the final performance measurement period because the applicable performance criteria have not been met, it shall, to that extent, automatically terminate and cease to be exercisable to such extent notwithstanding the stated term during which it otherwise may have been exercised. The Committee shall promptly notify each affected Participant of such determination. The Committee may periodically review the performance criteria applicable to any Option or Options and, in its sole good faith judgment, may adjust the same to reflect mergers, acquisitions, asset sales, catastrophes and significant increases in the level of capital expenditures or inventory levels. Section 7. Exercise of Options. Once vested, the Options may be ------------------- exercised by the Participant by giving written notice to the Company specifying the number of Shares to be purchased and accompanied by payment of the full Exercise Price therefor in cash, by check or in such other form of lawful consideration as the Committee may approve from time to time, including without limitation and in the sole discretion of the Committee, the assignment in transfer by the Participant to the Company of outstanding shares of common stock theretofore held by the Participant in a manner intended to comply with the provisions of Rule 16b-3 under the Exchange Act, if applicable. Once vested, the Options may only be exercised by the Participant or in the event of death of the Participant, by the person or persons (including the deceased Participant's estate) to whom the deceased Participant's rights under such Option shall have passed by will or the laws of descent and distribution. Notwithstanding the immediately preceding sentence, in the event of disability (within the meaning of Section 22(e)(3) of the Code) of a Participant, a designee of the Participant (or the legal representative of the Participant if the Participant has no designee) may exercise the Option on behalf of such Participant (provided such Option would have been exercisable by such Participant) until the right to exercise such Option expires, as set forth in such Participant's particular Option Agreement. 3 Section 8. Issuance of Shares. The Company's obligation to issue ------------------ Shares upon exercise of an Option is expressly conditioned upon (i) the compliance by the Company with any registration or other qualification obligations with respect to such Shares under any state and/or federal law or rulings and regulations of any government regulatory body, and/or (ii) the making of such investment representations or other representations and undertakings by the Participant (or the Participant's designee legal representative, heir or legatee, as the case may be) in order to comply with the requirements of any exemption from any such registration or other qualification obligations with respect to such Shares which the Company in its sole discretion shall deem necessary or advisable. Such required representations and undertakings may include representations and agreements that such Participant (or the Participant's designee legal representative, heir or legatee): (a) is purchasing such Shares for investment and not with any present intention of selling or otherwise disposing of such Shares in violation of Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations promulgated thereunder; and (b) agrees to have a legend placed upon the face and reverse of any certificates evidencing such Shares setting forth (i) any representations and undertakings which such Participant has given to the Company or a reference thereto, and (ii) that, prior to effecting any sale or other disposition of any such Shares, the Participant must furnish to the Company an opinion of counsel, form and substance satisfactory to the Company and its counsel, to the effect that such sale or disposition will not violate the applicable requirements of state and federal laws and regulatory agencies; provided, however, that any such legend or data entry shall be removed when no longer applicable. The inability of the Company to obtain, from any regulatory body having jurisdiction, authority reasonably deemed by the Company's counsel to be necessary for the lawful issuance and sale of any Shares hereunder shall relieve the Company of any liability in respect of the nonissuance or sale of such Shares as to which such requisite authority shall not have been obtained. Unless otherwise set forth in the Participant's particular Option Agreement or otherwise specified by the Committee in the Option grant or in a subsequent Committee action, any Shares issued by the Company upon exercise of an Option granted hereunder shall be subject to (x) a right of first refusal of the Company with respect to all Shares proposed to be transferred by Participant, (y) certain drag-along rights, as described in Section 11 hereof, and (z) certain other restrictions set forth in each particular Option Agreement. Section 9. Nontransferability. An Option may not be sold, pledged, ------------------ assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution. Any permitted transferee shall be required prior to any transfer of an Option or Shares acquired pursuant to the exercise of an Option to execute a written undertaking to be bound by the provisions of the applicable Option Agreement. Section 10. Adjustments Upon Recapitalization or Reorganization. --------------------------------------------------- Subject to Section 13(b) hereof, if the outstanding shares of the common stock ------------- of the Company are changed into, or exchanged for, a different number or kind of shares or securities of the Company through any capital reorganization or reclassification, or if the number of outstanding shares is changed through a stock split or stock dividend, an appropriate adjustment shall be made by the Committee in the number, kind or exercise price of shares as to which Options may be granted under the Plan. A corresponding adjustment shall likewise be made in the number, kind or exercise price of shares with respect to which unexercised Options have theretofore been granted. 4 Any such adjustment in an outstanding Option, however, shall be made without change in the total price applicable to the unexercised portion of the Option but with a corresponding adjustment in the price for each share covered by the Option. In making such adjustments, or in determining that no such adjustments are necessary, the Committee may rely upon the advice of counsel and accountants to the Company, and the good faith determination of the Committee shall be final, conclusive and binding. No fractional shares of stock shall be issued or issuable under the Plan on account of any such adjustment. Section 11. Option Agreement. Each Option granted under the Plan shall ---------------- be evidenced by a written option agreement (an "Option Agreement") executed by the Company and the Participant which, unless otherwise set forth in the Participant's particular Option Agreement or otherwise specified by the Committee in the Option grant or in a subsequent Committee action, (a) shall contain each of the provisions and agreements herein specifically required to be contained therein; (b) shall contain provisions which give the Company a right of first refusal to purchase any Shares issued pursuant to the exercise of Options granted under the Plan which a Participant proposes to sell; (c) shall contain provisions which give the Company, in connection with any underwritten public offering by the Company of its equity securities, the right to restrict the transfer of any Shares acquired under an Option Agreement for up to 180 days; and (d) shall contain certain "drag-along" rights. The Option Agreement may contain such other terms and conditions as the Committee deems desirable and which are not inconsistent with the Plan, including without limitation the acceleration of vesting of all or any portion of the Option as the Committee may provide. Section 12. Privileges of Stock Ownership. Persons entitled to exercise ----------------------------- any Options granted under this Plan shall have all of the rights or privileges of a stockholder of the Company in respect of any shares of common stock issuable upon exercise of such Option from and after the date of exercise of an Option. No shares shall be issued and delivered upon exercise of any Option unless and until, in the opinion of counsel for the Company, there shall have been full compliance with any applicable registration requirements of the Securities Act, any applicable listing requirements of any national securities exchange or automated quotation system on which the common stock of the Company is then listed or quoted, and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company agrees to take all actions reasonably necessary to comply with all such requirements. The Company agrees that shares of common stock issued upon the exercise of Options shall, at the time of delivery, be validly issued and outstanding, fully paid and nonassessable. The Company covenants and agrees that it will pay, when due and payable, any and all federal and state stamp, original issue, or similar taxes which may be payable in respect of the issue of the Option or of Shares upon the exercise thereof. Section 13. Termination of Options. ---------------------- (a) Each Option granted under the Plan shall set forth a termination date thereof, which shall be not later than seven (7) years (up to ten (10) years if the Committee shall so determine) from the date such Option is granted subject to earlier termination as set forth in 5 Section 6, Section 13(b), or Section 14 hereof, or as otherwise set forth in --------- ------------- ---------- each particular Option Agreement; provided, however, with respect to Incentive Stock Options, such termination shall be not later than five (5) years from the date such Option is granted if the Participant is a 10% stockholder of the Company (as defined in Section 422(b)(6) of the Code) at the time such Option is granted. An Incentive Stock Option shall contain any termination events required by Section 422 of the Code. The termination of employment, or service as a director or consultant, of a Participant for any reason shall not accelerate or otherwise affect the number of Shares which may be purchased upon exercise of an Option; provided, however, that the Option may only be exercised with respect to that number of Shares which could have been purchased under the Option had the Option been exercised by the Participant on the date of such termination. (b) Subject to Section 14 hereof (i) upon the dissolution, liquidation ---------- or sale of all or substantially all of the business, properties and assets of the Company, (ii) upon any reorganization, merger, consolidation, sale or exchange of securities in which the Company does not survive, or (iii) upon any sale, reorganization, merger, consolidation or exchange of securities in which the Company does survive and any of the Company's stockholders have the opportunity to receive cash, securities of another corporation, partnership or limited liability company and/or other property in exchange for their capital stock of the Company, or (iv) upon any acquisition by any person or group (as defined in Section 13d of the Securities Act of 1934) of beneficial ownership of more than fifty percent (50%) of the Company's then outstanding shares of common stock (each of the events described in clauses (i), (ii), (iii) or (iv) is referred to herein individually as an "Extraordinary Event" and collectively as the "Extraordinary Events"), the Plan and each outstanding Option shall terminate, unless the Surviving Entity (defined below) elects to have such Option survive the Extraordinary Event pursuant to the next paragraph. In such event each Participant shall have the right, by giving notice ten (10) days before the effective date of such Extraordinary Event (the "Effective Date"), to exercise on or before the Effective Date, in whole or in part, any unexpired Option issued to the Participant, to the extent that said Option is vested as of the Effective Date and exercisable as of the Effective Date, and otherwise is vested and exercisable pursuant to the provisions of said Option and of Section ------- 6 of the Plan. - In its sole and absolute discretion, the surviving entity (which may be the Company) or the entity that has acquired all or substantially all of the Company's assets (the "Surviving Entity") may, but shall not be so obligated, to permit an Option to survive an Extraordinary Event or tender to any Participant an option or options to purchase shares or equity interests in such Surviving Entity, and such continuing or new option or options shall contain such terms and provisions as shall be required to substantially preserve the rights and benefits of any Option then outstanding under the Plan with any reasonable changes to take into account the circumstances of the Surviving Entity. Section 14. Acceleration of Options. Notwithstanding the provisions of ----------------------- Section 6 or Section 13 hereof, or any provision to the contrary contained in a --------- ---------- particular Option Agreement, the Committee, in its sole discretion, may accelerate the vesting of all or any portion of any Option then outstanding. The decision by the Committee to accelerate an Option or to decline to accelerate an Option shall be final. In the event of the acceleration of the exercisability of 6 Options as the result of a decision by the Committee pursuant to this Section ------- 14, each outstanding Option so accelerated shall be exercisable for a period -- from and after the date of such acceleration and upon such other terms and conditions as the Committee may determine in its sole discretion, provided that such terms and conditions (other than terms and conditions relating solely to the acceleration of exercisability and the related termination of an Option) may not adversely affect the rights of any Participant without the consent of the Participant so adversely affected. Any outstanding Option which has not been exercised by the holder at the end of such period shall terminate automatically at that time. Section 15. Substitute Options. If the Company at any time should ------------------ succeed to the business of another entity through a merger, consolidation, corporate reorganization or exchange, or through the acquisition of stock or assets of such entity or its subsidiaries or otherwise, Options may be granted under the Plan to option holders of such entity or its subsidiaries, in substitution for options to purchase Shares in such entity held by them at the time of succession. The Committee, in its sole and absolute discretion, shall determine the extent to which such substitute Options shall be granted (if at all), the person or persons to receive such substitute Options (who need not be all option holders of such entity), the number of Options to be received by each such person, the exercise price of such Option and the other terms and conditions of such substitute Options. Section 16. Withholding of Taxes. The Company, or a Subsidiary, as the -------------------- case may be, may deduct and withhold from the wages, salary, bonus and other income paid by the Company (or such Subsidiary) to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of any Option, or the sale of the Shares issued to the Participant upon the exercise of an Option, as may be required from time to time under any federal or state tax laws and regulations. This withholding of tax shall be made from the Company's (or such Subsidiary's) concurrent or next payment of wages, salary, bonus or other income to the Participant or by payment to the Company (or such Subsidiary) by the Participant of the required withholding tax, as the Committee may determine; provided, however, that, in the sole discretion of the Committee, the Participant may pay such tax by reducing the number of Shares issued upon exercise of an Option (for which purpose such Shares shall be valued at fair market value as determined in good faith by the Committee based on the fair market value of such Shares determined by the Board, which determination shall be final). Notwithstanding the foregoing, the Company shall not be obligated to issue certificates representing the shares of common stock of the Company to be acquired through the exercise of such Option if such Participant fails to provide the Company with adequate assurance that such Participant will pay such amounts to the Company as herein above required. Participants shall notify the Company in writing of any amounts included as income in the Participants' federal income tax returns in connection with an Option. Section 17. Effectiveness and Termination of the Plan. The Plan shall ----------------------------------------- be effective as of the date on which this Plan is approved by the Board. The Plan shall terminate at the earliest of the time when all Shares which may be issued hereunder have been so issued. However, the Board may, in its sole discretion, terminate the Plan at any prior time. Subject to Section 13 hereof, ---------- no such termination shall in any way affect any Option then outstanding. 7 Section 18. Time of Granting Options. The date of grant of an Option ------------------------ shall, for all purposes, be the date on which the Board makes the determination granting such an Option. Notice of the determination shall be given to each Participant to whom an Option is so granted within a reasonable time after the date of such grant. Section 19. Amendment of Plan. Subject to Section 14, the Committee may ----------------- ---------- make such amendments to the Plan as it shall deem advisable. Subject to Section ------- 14, no amendment shall in any way adversely affect any Option then outstanding, -- without the consent of the Participant so adversely affected. Section 20. Transfers and Leaves of Absence. For purposes of the Plan, ------------------------------- (a) a transfer of a Participant's employment, without an intervening period, between the Company and a Subsidiary (or vice versa) or between Subsidiaries shall not be deemed a termination of employment and (b) a Participant who is granted in writing a leave of absence shall be deemed to have remained in the employ of the Company (or a Subsidiary, whichever is applicable) during such leave of absence. Section 21. No Obligation to Exercise Option. The granting of an Option -------------------------------- shall impose no obligation on the Participant to exercise such Option. Section 22. Indemnification. In addition to such other rights of --------------- indemnification as they may have as members of the Board of Directors, the members of the Committee shall be indemnified by the Company to the fullest extent permitted by law against the reasonable expenses, including attorney's fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Option granted thereunder, and against all amounts paid by them in satisfaction of a judgment in any such action, suit or proceeding except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee member is not entitled to indemnification under applicable law; provided, however, that within sixty (60) days after institution of any such action, suit or proceeding such Committee member shall in writing offer the Company the opportunity, at the Company's expense to handle and defend the same, and such Committee member shall cooperate with and assist the Company in the defense of any such action, suit or proceeding. The Company shall not be obligated to indemnify any Committee member with regard to any settlement of any action, suit or proceeding of which the Company did not consent to in writing prior to such settlement. Section 23. Governing Law. The Plan and any Option granted pursuant to ------------- the Plan shall be construed under and governed by the laws of the State of Delaware without regard to conflict of law provisions thereof. Section 24. Not an Employment or Consulting Agreement. Nothing ----------------------------------------- contained in the Plan or in any Option Agreement shall confer, intend to confer or imply any rights of employment or rights to continued employment by the Company or any Subsidiary in favor of any Participant or limit the ability of the Company or any Subsidiary to terminate, with or 8 without cause, in its sole and absolute discretion, the employment of any Participant, subject to the terms of any written employment to which a Participant is a party. In addition, nothing contained in the Plan or in any Option Agreement shall preclude any lawful action by the Company or the Board. 9 EX-10.12 10 dex1012.txt FORM OF SR EXEC STOCK OPTION AGMT EXHIBIT 10.12 ADVANCE AUTO PARTS, INC. 2001 SENIOR EXECUTIVE STOCK OPTION AGREEMENT THIS 2001 SENIOR EXECUTIVE STOCK OPTION AGREEMENT (this "Agreement") is --------- entered into as of _____________ by and between Advance Auto Parts, Inc., a Delaware corporation (the "Company"), and ____________ ("Optionee"), pursuant to ------- -------- the Advance Auto Parts, Inc. 2001 Senior Executive Stock Option Plan (the "Plan"). All capitalized terms not otherwise defined herein shall have the ---- meanings set forth in the Plan. R E C I T A L S: - - - - - - - - A. Optionee is a senior executive of the Company and/or of a direct or indirect subsidiary of the Company (individually, a "Subsidiary" and ---------- collectively, the "Subsidiaries") and the Company considers it desirable to give ------------ Optionee an added incentive to advance the Company's and the Subsidiaries' interests. B. The Committee has determined to grant Optionee the right to purchase shares of common stock of the Company pursuant to the terms and conditions of this Agreement and the Plan. A G R E E M E N T: - - - - - - - - - NOW, THEREFORE, in consideration of the covenants hereinafter set forth, the parties agree as follows: 1. Options; Number of Shares. The Company hereby grants to Optionee the ------------------------- right to purchase (the "Options") up to ___________________ (________) shares ------- (the "Shares") of common stock, par value $.0001 per share, of the Company at ------ the price per share of $_____ (the "Purchase Price"). The Options and the right to purchase all or any portion of the Shares are subject to the terms and conditions stated in this Agreement and in the Plan, including, without limitation, the provisions of Section 4, Section 6, Section --------- --------- ------- 10, Section 13(b), Section 14 and Section 19 of the Plan and Section 3 and -- ------------- ---------- ---------- --------- Section 4 hereof. Upon exercise of an Option and payment of the Purchase Price, --------- Optionee shall become a stockholder of the Company, with all rights and privileges of a stockholder of the Company in respect of any shares of common stock of the Company issuable upon such exercise. It is intended that the Options will not qualify for treatment as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). ---- 2. Exercise Criteria. The Options shall become exercisable, in whole or ----------------- in part, over time as set forth on Schedule A attached hereto. The Options are ---------- Fixed Price Service Options. 3. Term of Agreement. Except for the rights conferred upon the Company ----------------- pursuant to Section 7 below, the Options, and Optionee's right to exercise the Options, shall terminate when the first of the following occurs: (a) termination of the Options pursuant to Section 6, Section 13 or --------- ---------- Section 14 of the Plan or Section 2 hereof; ---------- --------- (b) the expiration of seven (7) years from the date hereof; (c) ninety (90) days after the date of termination of Optionee's employment or other relationship with the Company and all of the Subsidiaries, unless such termination results from Optionee's death or disability (within the meaning of Section 22(e)(3) of the Code, or Optionee dies within ninety (90) days after the date of termination of Optionee's employment or other relationship with the Company and all of the Subsidiaries, in which case this Agreement and the Option shall terminate one hundred twenty (120) days after the date of termination of Optionee's employment or other relationship with the Company and all of the Subsidiaries; or (d) on the date of termination of Optionee's employment or other relationship with the Company and all of the Subsidiaries if such termination was for cause (as determined in good faith by the Board of Directors of the Company (the "Board")). ----- 4. Termination of Employment or Other Relationship. The termination for ----------------------------------------------- any reason of Optionee's employment or other relationship with the Company and all of the Subsidiaries shall not accelerate the vesting of the Options. The Options may only be exercised with respect to that number of Shares which could have been made under the Options had such Options been exercised by Optionee on the date of such termination. 5. Death of Optionee; No Assignment. The rights of Optionee under this -------------------------------- Agreement may not be assigned or transferred except by will, by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by such Optionee; provided, however, that in the event of disability (within the meaning of Section 22(e)(3) of the Code) of Optionee, a designee of Optionee (or the Optionee's legal representative if Optionee has not designated anyone) may exercise the Options on behalf of Optionee (provided the Options would have been exercisable by Optionee) until the right to exercise the Options expires pursuant to Section 3 hereof. Any attempt to sell, pledge, assign, --------- hypothecate, transfer or otherwise dispose of the Options in contravention of this Agreement or the Plan shall be void. If Optionee should die while Optionee is engaged in an employment relationship with the Company and/or any Subsidiary or within ninety (90) days after termination of such relationship, and provided Optionee's rights hereunder shall have vested, in whole or in part, pursuant to Section 2 hereof, Optionee's designee, legal representative, or legatee, the --------- successor trustee of Optionee's inter vivos trust or the person who acquired the right to exercise the Options by reason of the death of Optionee (individually, a "Successor") shall succeed to Optionee's rights under this Agreement. After --------- the death of Optionee, only a Successor may exercise the Options. 2 6. Exercise of Options. No option granted under this Agreement shall be ------------------- exercisable until it has vested. On or after the vesting of the Options in accordance with Section 2 hereof and until termination of the Options in --------- accordance with Section 3 hereof, the Options may be exercised by Optionee (or --------- such other person specified in Section 5 hereof) to the extent exercisable as --------- determined under Section 2 hereof, upon delivery of the following to the Company --------- at its principal executive offices (the date such delivery occurs is hereinafter referred to as, the "Exercise Date"): (a) a written notice of exercise which identifies this Agreement, the type of Option to be exercised, and states the number of Shares to be purchased (which shall be no fewer than 100 Shares unless the number of Shares remaining available for purchase hereunder is less than 100 Shares and the entire remainder of the Option is being exercised); (b) a check, cash or any combination thereof in the amount of the aggregate Purchase Price (or payment of the aggregate Purchase Price in such other form of lawful consideration as the Committee may approve from time to time under the provisions of Section 7 of the Plan); (c) a check or cash in the amount reasonably requested by the Company to satisfy the Company's withholding obligations under federal, state or other applicable tax laws with respect to the taxable income, if any, recognized by Optionee in connection with the exercise, in whole or in part, of the Options (unless the Company and Optionee shall have made other arrangements for deductions or withholding from Optionee's wages, bonus or other income paid to Optionee by the Company or any Subsidiary, provided, however, such arrangements must satisfy the requirements of all applicable tax laws); (d) a written representation and undertaking, in such form and substance as the Company may require, that the Shares underlying the Option are being acquired by Optionee for Optionee's personal account, for investment purposes only, and not with a view to the distribution, resale or other disposition thereof; (e) a written representation and undertaking, in such form and substance as the Company may require, setting forth the investment intent of Optionee, or a Successor, as the case may be, and such other agreements, representations and undertakings as described in the Plan, including an acknowledgment that Optionee has reviewed the memorandum regarding Section 83(b) of the Internal Revenue Code of 1986, as amended, attached hereto as Exhibit A; --------- and (f) such further acts as may be necessary to register Optionee as a stockholder of the Company. 3 7. Restriction on Transfer of Shares; Right of First Refusal; Drag Along --------------------------------------------------------------------- Rights. ------ (a) Restriction on Transfer of the Shares. ------------------------------------- (i) Except as otherwise provided herein, Optionee may not sell, transfer, assign, pledge, hypothecate or otherwise dispose of (collectively, "Transfer") any of the Shares, or any right, title or interest therein prior to the fifth anniversary of the Closing Date and, thereafter, any Transfer must be in compliance with Section 7 and Section 9 hereof. Any purported Transfer or --------- --------- Transfers (including involuntary Transfers initiated by operation of legal process) of any of the Shares or any right, title or interest therein, except in strict compliance with the terms and conditions of this Agreement, shall be null and void. (ii) Permitted Transfers. Optionee may, at any time or ------------------- times, Transfer any or all of the Shares: (a) inter vivos to Optionee's spouse or issue, a trust for their benefit, or pursuant to any will or testamentary trust; or (b) upon Optionee's death, to any person in accordance with the laws of descent and/or testamentary distribution (such persons described in clauses (a) and (b) hereof are collectively referred to herein as "Permitted --------- Transferees"). Notwithstanding the foregoing, Shares shall not be Transferred ----------- until the Permitted Transferee executes a valid undertaking, in form and substance reasonably satisfactory to the Company, to the effect that the Permitted Transferee and the Shares so Transferred shall thereafter remain subject to all of the provisions of this Agreement, as though the Permitted Transferee were a party to this Agreement, bound in every respect in the same way as Optionee. Transfers made in accordance with this clause (ii) shall not ------- be subject to the provisions of Section 7(b) of this Agreement. --------- (b) Right of First Refusal. ---------------------- (i) Sales; Notice. At any time on or after the fifth anniversary ------------- of this Agreement, Optionee may transfer for cash (and only for such form of consideration) any or all of the Shares to any third party subject to the provisions of this Section 7 and Section 10(b), provided that this Section 7(b) --------- ------------- --------- shall not apply to any Transfers that constitute a Public Market Sale. Prior to any such intended Transfer, Optionee shall first give at least thirty (30) days' advance written notice (the "Notice") to the Company specifying (i) Optionee's ------ bona fide intention to sell such Shares; (ii) the name(s) and address(es) of the proposed transferee(s); (iii) the number of Shares Optionee proposes to Transfer (individually, an "Offered Share," and collectively, the "Offered Shares"); (iv) ------------- -------------- the price for which Optionee proposes to Transfer each Offered Share (the "Proposed Purchase Price"); (v) such evidence as the Company may reasonably ----------------------- request to demonstrate the ability of the proposed transferee(s) to pay the Proposed Purchase Price; and (vi) all other material terms and conditions of the proposed transfer. (ii) Election by the Company. Within twenty (20) days after ----------------------- receipt of the Notice, the Company may elect to purchase any or all of the Offered Shares at the price and on the terms and conditions set forth in the Notice by delivery of written notice of such election to Optionee, specifying a day, which shall not be more than twenty (20) days after such notice is delivered, on or before which Optionee shall surrender (if Optionee has not already done so) the 4 certificate or certificates representing the Offered Shares (duly endorsed in blank for transfer) at the administrative office of the Company. Within twenty (20) days after delivery of such notice to Optionee, the Company shall deliver to Optionee a check, payable to Optionee or to such person as Optionee shall request, in the amount equal to the product of the Proposed Purchase Price multiplied by the number of Offered Shares (the "First Refusal Price") in ------------------- exchange for the Offered Shares. If Optionee fails to so surrender such certificate or certificates on or before such date, from and after such date the Offered Shares shall be deemed to be no longer outstanding, and Optionee shall cease to be a Shareholder with respect to such Shares and shall have no rights with respect thereto except only the right to receive payment of the First Refusal Price, without interest, upon surrender of the certificate or certificates therefor (duly endorsed in blank for Transfer). Notwithstanding the foregoing, if any Outstanding Amount (as defined in that certain Senior Executive Stock Subscription Agreement by and between the Company and the Optionee dated __________) is owed to the Company by Optionee, the First Refusal Price shall be reduced (to an amount not less than zero) by such Outstanding Amount, which reduction shall be specified in reasonable detail in the Company's written notice of election to purchase the Offered Shares. If the Company does not elect to purchase all of the Offered Shares, Optionee shall be entitled to Transfer the Offered Shares to the transferee(s) named in the Notice at the Proposed Purchase Price, or at a higher price, and on the terms and conditions set forth in the Notice; provided, however, that such Transfer must be consummated within ninety (90) days after the date of the Notice and any proposed Transfer after such ninety (90) day period may be made only by again complying with the procedures set forth in this Section 7(b). This right of ------------ first refusal shall terminate upon an underwritten public offering of Common Stock by the Company registered under the Act (as defined below) (other than an offering registered on Form S-4 or Form S-8 or any substitute for such forms) resulting in gross proceeds to the Company in excess of $25 million (an "Initial ------- Public Offering"). --------------- (c) Obligation to Sell Shares. If FS Equity Partners IV, L.P., a ------------------------- Delaware limited partnership ("FSEP IV"), finds a third-party buyer for all the ------- shares of common stock of the Company held by it (whether such sale is by way of purchase, exchange, merger or other form of transaction), upon the request of FSEP IV, Optionee shall sell all of Optionee's Shares for the same per share consideration (which may be less than the exercise price for any Share) and otherwise on the same terms and conditions as apply to such FSEP IV sale. In addition, FSEP IV may require Optionee to Transfer this Option to such buyer for the same per share consideration (less the then aggregate Purchase Price of this Option) and otherwise pursuant to the terms and conditions applicable to FSEP IV for the sale of its shares of common stock. In the event the per share consideration for the common stock is less than the Purchase Price applicable at the time a binding agreement with respect to such transaction is entered into, this Option shall be canceled without payment to Optionee. Optionee hereby consents to any sale, transfer, reorganization, exchange, merger, combination or other form of transaction covered under this Section 7(c) and agrees to execute ------------ such agreements, powers of attorney, voting proxies or other documents and instruments as may be necessary or desirable to consummate such sale, transfer, reorganization, exchange, merger, combination or other form of transaction. Optionee further agrees to timely take such other actions as FSEP IV may reasonably request in connection with the approval of the consummation of such sale, transfer, reorganization, exchange, merger, combination or other form of transaction, including voting as a stockholder to approve any such 5 sale, transfer, reorganization, exchange, merger, combination or other form of transaction and waiving any appraisal rights Optionee may have in connection therewith. The obligations of Optionee pursuant to this Section shall be binding on any transferee of this Option (other than a transferee in a Public Market Sale, as defined below), and Optionee (and any of his transferees) shall obtain and deliver to the Company and FSEP IV prior to any Transfers (other than Transfers constituting a Public Market Sale) a written commitment, in form and substance satisfactory to the Company and FSEP IV, from a subsequent transferee to be bound by such provisions. The term "Public Market Sale" means a sale of ------------------ Common Stock after the Company's shares of common stock are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended, which is made pursuant to Rule 144 promulgated under the Act or which is made pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission. Any Transfer effected in violation of this provision shall be void. Optionee's obligations pursuant to this Section, and the obligations of any such transferee, shall survive the expiration or non-vesting of any portion of the Options. 8. Tag Along Rights. If FSEP IV finds a third-party buyer (other than a ---------------- buyer that is an investment fund or partnership affiliated with FSEP IV, a general or limited partner of FSEP IV, or, for the period ending one year from the date hereof, an unaffiliated institutional investor or merchant banking firm (each, an "FS Permitted Transferee") or is a transferee in a Public Market ----------------------- Sale), for all or part of the shares of Common Stock held by FSEP IV (whether such sale is by way of purchase, exchange, merger or other form of transaction), the Purchaser shall have the right to sell, on the terms set forth in a written notice (the "Offering Notice") delivered by FSEP IV to the Optionee describing --------------- the terms of the proposed sale (including the minimum sale price for the shares of Common stock that FSEP IV plans to sell), that amount of the Shares he then owns which constitute the same percentage of his Shares as the percentage of Common Stock sold by FSEP IV. Each such right shall be exercisable by delivering written notice to FSEP IV within 15 days after receipt of the Offering Notice. Failure to exercise such right within such 15-day period shall be regarded as a waiver of such rights. The obligations of FSEP IV under this Section 8 shall terminate upon an Initial Public Offering. 9. Repurchase Option Upon Termination. ---------------------------------- (a) In the event that Optionee's employment or other relationship with the Company and all of its Subsidiaries terminates for any reason (including, without limitation, by reason of Optionee's death, disability, retirement, voluntary resignation or dismissal by the Company or any of its Subsidiaries, with or without cause), the Company shall have the option (the "Repurchase ---------- Option") to purchase from Optionee all or any portion of the Shares acquired by ------ Optionee pursuant to this Option Agreement for a period of six (6) months after the effective date of such termination (the effective date of termination is hereinafter referred to as the "Termination Date"); provided, however, that such ---------------- six-month period shall be extended to a date 10 days after the six-month anniversary of the date on which Optionee purchased any Shares pursuant to this Option Agreement after the Termination Date. (b) The purchase price (the "Repurchase Price") for each Share to be ---------------- purchased pursuant to the Repurchase Option shall equal (a) the greater of the applicable exercise 6 price of such Share and Book Value (as defined herein) if the Termination Date occurs within the two (2) year period commencing on the date hereof and (b) the greater of the applicable exercise price of such Share and Fair Market Value (as defined herein) thereof (subject to adjustment as set forth herein) thereafter after the initial two (2) year period described previously in subsection (a) hereof. The "Book Value" of a Share shall equal $16.82 per Share (subject to ---------- adjustment as set forth in Section 9(c) below) plus the net income or minus the --------- net loss per share to the end of the fiscal quarter immediately preceding the Termination Date, as determined by the Board, acting in good faith and based upon the books and records of the Company prepared in accordance with generally accepted accounting principles consistently applied. The "Fair Market Value" of ----------------- a Share shall be the fair market value of a Share as of the Termination Date, as determined by the Board, acting in good faith and based upon the best available evidence, which determination shall be final and binding. (c) The Repurchase Price for any Shares to be purchased pursuant to the Repurchase Option shall be increased or decreased appropriately to reflect any distribution of stock or other securities of the Company or any successor or assign of the Company which is made in respect of, in exchange for or in substitution of the Shares by reason of any split, reverse split, combination, recapitalization, reclassification, merger, consolidation or otherwise. (d) The Repurchase Option shall be exercised by the Company by delivery to Optionee, within the six-month period specified above, of (a) a written notice specifying the number of Shares to be purchased and (b) a day, which shall not be more than 30 days after the date such notice is delivered, on or before which Optionee shall surrender the certificate or certificates representing the Shares to be purchased pursuant to the Repurchase Option (duly endorsed in blank for Transfer) at the principal office of the Company in exchange for a check, payable to Optionee, in the amount equal to the Repurchase Price, calculated as provided in this Section 9, multiplied by the number of the --------- Shares to be purchased. If Optionee fails to so surrender such certificate or certificates on or before such date, from and after such date the Shares which the Company elected to repurchase shall be deemed to be no longer outstanding, and Optionee shall cease to be a stockholder with respect to such Shares and shall have no rights with respect thereto except only the right to receive payment of the Repurchase Price, without interest, upon surrender of the certificate or certificates therefor (duly endorsed in blank for Transfer). (e) This Repurchase Option shall terminate upon an Initial Public Offering. 10. Representations and Warranties of Optionee. ------------------------------------------ (a) Optionee represents and warrants that the Options are being acquired by Optionee for Optionee's personal account, for investment purposes only, and not with a view to the distribution, resale or other disposition thereof. (b) Optionee acknowledges that the Company may issue Shares upon the exercise of the Options without registering such securities under the Securities Act of 1933, as amended (the "Act"), on the basis of certain exemptions from --- such registration requirements. 7 Accordingly, Optionee agrees that Optionee's exercise of the Options may be expressly conditioned upon Optionee's delivery to the Company of such representations and undertakings as the Company may reasonably require in order to secure the availability of such exemptions, including a representation that Optionee is acquiring the Shares for investment and not with a present intention of selling or otherwise disposing of such Shares. Optionee acknowledges that, because Shares received upon exercise of an Option may be unregistered, Optionee may be required to hold the Shares indefinitely unless they are subsequently registered for resale under the Act or an exemption from such registration requirements is available. (c) Optionee acknowledges receipt of this Agreement granting the Options, and the Plan, and understands that all rights and liabilities connected with the Options are set forth herein and in the Plan. 11. No Rights as a Stockholder. Optionee shall have no rights as a -------------------------- stockholder of any shares of common stock of the Company covered by the Options until the Exercise Date and entry evidencing such ownership is made in the stock transfer books of the Company. Except as may be provided under Section 10 of ---------- the Plan, the Company will make no adjustment for dividends (ordinary or extraordinary whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the Exercise Date. 12. Limitation of Company's Liability for Nonissuance. Inability of the ------------------------------------------------- Company to obtain, from any regulatory body having jurisdiction, authority reasonably deemed by the Company's counsel to be necessary for the lawful issuance and sale of any Shares hereunder and under the Plan shall relieve the Company of any liability in respect of the nonissuance or sale of such Shares as to which such requisite authority shall not have been obtained. 13. This Agreement Subject to Plan. This Agreement is made under the ------------------------------ provisions of the Plan and shall be interpreted in a manner consistent with it. To the extent that any provision in this Agreement is inconsistent with the Plan, the provisions of the Plan shall control. The interpretation of the Committee of any provision of the Plan, the Options or this Agreement, and any determination with respect thereto or hereto by the Committee, shall be binding on all parties. 14. Restrictive Legends. Optionee hereby acknowledges that federal ------------------- securities laws and the securities laws of the state in which Optionee resides or works may require the placement of certain restrictive legends upon the Shares issued upon exercise of the Options, and Optionee hereby consents to the placing of any such legends upon certificates evidencing the Shares as the Company, or its counsel, may reasonably deem necessary; however, that any such legend or legends shall be removed when no longer applicable. Any and all certificates now or hereafter issued evidencing the Shares shall have endorsed upon them a legend substantially as follows: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS UPON TRANSFER AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT IN ACCORDANCE WITH THE 8 TERMS AND CONDITIONS OF THAT CERTAIN OPTION AGREEMENT DATED AS OF ______________, BY AND BETWEEN ADVANCE AUTO PARTS, INC., A DELAWARE CORPORATION, AND THE ORIGINAL PURCHASER HEREOF, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF ADVANCE AUTO PARTS, INC." 15. Notices. Except as otherwise provided herein, all notices, requests, ------- demands and other communications under this Agreement shall be in writing, and if by telegram or telecopy, shall be deemed to have been validly served, given or delivered when sent, or if by personal delivery or messenger or courier service, shall be deemed to have been validly served, given or delivered upon actual delivery (but in no event may notice be given by deposit in the United States mail), at the following addresses, telephone and facsimile numbers (or such other address(es), telephone and facsimile numbers a party may designate for itself by like notice): If to the Company: Advance Auto Parts, Inc. c/o Freeman Spogli & Co. Incorporated 599 Lexington Avenue, Suite 1800 New York, New York 10022 Attention: John M. Roth Telephone: (212) 758-2555 Telecopy: (212) 758-7499 If to Optionee: _____________________ _____________________ _____________________ 16. Not an Employment Agreement. Nothing contained in this Agreement --------------------------- shall confer, intend to confer or imply any rights to an employment relationship or rights to a continued employment relationship with the Company and/or any Subsidiary in favor of Optionee or limit the ability of the Company and/or any Subsidiary to terminate, with or without cause, in its sole and absolute discretion, the employment relationship with Optionee, subject to the terms of any written employment agreement to which Optionee is a party. 17. Governing Law. This Agreement shall be construed under and governed ------------- by the laws of the State of Delaware without regard to the conflict of law provisions thereof. 18. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original and both of which together shall be deemed one Agreement. 9 19. Amendments. This Agreement may be amended only by a written agreement ---------- executed by both of the parties hereto and by FSEP IV. 20. Recapitalizations or Exchanges Affecting the Company's Capital. The -------------------------------------------------------------- provisions of this Agreement shall apply to any and all stock or other securities of the Company or any successor or assign of the Company, which may be issued in respect of, in exchange for or in substitution of, the Shares by reason of any split, reverse split, recapitalization, reclassification, combination, merger, consolidation or otherwise, and such Shares or other securities shall be encompassed within the term "Shares" for purposes of this Agreement. 21. Disclosure. The Company shall have no duty or obligation to ---------- affirmatively disclose to Optionee, and Optionee shall have no right to be advised of, any material information regarding the Company or any of its Subsidiaries at any time prior to, upon or in connection with the Company's repurchase of the Shares under this Agreement at the cessation or termination of Optionee's employment with the Company and/or any of its Subsidiaries. 22. Successors and Assigns. The Company may assign with absolute ---------------------- discretion any or all of its rights and/or obligations and/or delegate any of its duties under this Agreement to any of its affiliates, successors and/or assigns and this Agreement shall inure to the benefit of, and be binding upon, such respective affiliates, successors and/or assigns of the Company in the same manner and to the same extent as if such affiliates, successors and/or assigns were original parties hereto. Without limiting the foregoing, the Company may assign the Repurchase Option and/or the right of first refusal provided for in Section 9 and Section 7(b) of this Agreement, respectively, to any of its affiliates, successors and/or assigns. FSEP IV may assign its rights under Section 7(c) to any FS Permitted Transferee or to a purchaser of shares of ------------ common stock then owned by FSEP IV. For purposes of this Agreement, the term "Shares" shall include shares of capital stock or other securities of the Company or any successor or assign of the Company, which are issued in respect of, in exchange for or in substitution of the Shares by reason of any split, reverse split, recapitalization, reclassification, combination, merger, exchange or consolidation. Unless specifically provided herein to the contrary, Optionee may not assign any or all of its rights and/or obligations and/or delegate any or all its duties under this Agreement without the prior written consent of the Company and FSEP IV. Upon an assignment of any or all of Optionee's rights and/or obligations and/or a delegation of any or all of its duties under this Agreement in accordance with the terms of this Agreement, this Agreement shall inure to the benefit of, and be binding upon, Optionee's respective affiliates, successors and/or assigns in the same manner and to the same extent as if such affiliates, successors and/or assigns were original parties hereto. 10 IN WITNESS WHEREOF, the Company and Optionee have executed this Agreement as of the date first above written. THE COMPANY: Advance Auto Parts, Inc., a Delaware corporation By: _________________________________ Name: Title: OPTIONEE: ________________________________________ Name: 11 SCHEDULE A VESTING SCHEDULE (FIXED PRICE SERVICE OPTIONS) ---------------------------------------------- The Fixed Price Service Options granted pursuant to this Agreement shall vest and become exercisable in equal, annual installments of _____% of the aggregate number of Fixed Price Service Options granted on each anniversary date of this Agreement for fiscal years ending _____, _____ and _____. Such vesting installments shall be cumulative, such that the Fixed Price Service Options may be exercised as to any or all Shares covered by an installment at any time or times after that installment becomes exercisable and until the Fixed Price Service Options expire or terminate under this Agreement or otherwise. 12 EX-10.13 11 dex1013.txt FORM OF EXEC STOCK OPTION PLAN EXHIBIT 10.13 ADVANCE AUTO PARTS, INC. 2001 EXECUTIVE STOCK OPTION PLAN Section 1. Description of Plan. This is the 2001 Executive Stock Option ------------------- Plan, dated November 7, 2001 (the "Plan"), of Advance Auto Parts, Inc., a Delaware corporation (the "Company"). This Plan will provide a means whereby designated employees, directors or consultants of the Company and/or of any directly or indirectly majority or wholly-owned entities of the Company (individually, a "Subsidiary" and collectively, the "Subsidiaries") may purchase shares of common stock, par value $.0001 per share, of the Company (the "Shares"). It is intended that the options under this Plan will either qualify for treatment as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and be designated "Incentive Stock Options" or not qualify for such treatment and be designated "Nonqualified Stock Options." Incentive Stock Options may only be granted to employees. Section 2. Purpose of Plan. The purpose of the Plan and of granting --------------- options (the "Options") to specified persons is to further the growth, development and financial success of the Company and its Subsidiaries by providing additional incentives to their employees, directors or consultants. By assisting such persons in acquiring Shares, the Company can ensure that such persons will themselves benefit directly from the Company's and its Subsidiaries' growth, development and financial success. Section 3. Eligibility. The persons who shall be eligible to receive ----------- grants of Options under the Plan shall be the designated employees, directors or consultants of the Company and/or its Subsidiaries as determined from time to time by the Board of Directors (the "Board") of the Company. A person who holds an Option is herein referred to as a "Participant," and more than one Option may be granted to any Participant. The aggregate fair market value (determined as of the time an Option is granted) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any participant in any calendar year under this Plan and any other incentive stock option plans (which qualify under Section 422 of the Code) of the Company or any Subsidiary shall not exceed $100,000. Section 4. Administration. -------------- (a) Except as otherwise provided herein, the Plan shall be administered by the Board or, at the Board's option, by a compensation committee thereof from time to time constituted, to whom administration of this Plan has been duly delegated (the Board and such committee, are collectively referred to hereinafter as the "Committee"). Any action of the Board or the Committee with respect to administration of the Plan shall be taken by a majority vote or written consent of its members. Upon the first registration of an equity security of the Company under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to the extent possible and advisable, the Committee may be constituted so as to permit this Plan to comply with Rule 16b-3 promulgated under Section 16 of the Exchange Act and Section 162(m) of the Code. (b) The Committee is authorized and empowered to administer the Plan and, subject to the Plan, including but not limited to Section 19, (i) to ---------- determine the dates upon which Options shall be granted and the terms and conditions thereof in a manner consistent with the Plan, which terms and conditions need not be identical as to the various Options granted; (ii) to interpret the Plan; (iii) to grant Options; (iv) to determine the Participants; (v) to specify the terms of the Options; (vi) to determine the number of Shares which may be purchased; (vii) to determine the fair market value of the Shares; (viii) to accelerate the time during which an Option may be exercised in accordance with the provisions of Section 14 hereof, and to otherwise accelerate ---------- the time during which an Option may be exercised, in each case notwithstanding the provisions in the Option Agreement (as defined in Section 11 hereof) stating ---------- the time during which it may be exercised; (ix) to reissue the Plan and related benefits hereunder as a direct plan of a Subsidiary or Subsidiaries, converting the Options and Shares issued under this Plan to options and shares of such Subsidiary or Subsidiaries, as the case may be; (x) to prescribe, amend and rescind rules relating to the Plan; (xi) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Committee; (xii) to determine the rights and obligations of Participants under the Plan; and (xiii) to make all other determinations deemed necessary or advisable for the administration of the Plan. The interpretation and construction by the Committee of any provision of the Plan or of any Option granted under it shall be final. No member of the Committee shall be liable for any action or determination made with respect to the Plan or any Option granted hereunder. Section 5. Shares Subject to Plan. The aggregate number of Shares for ---------------------- which Options may be granted pursuant to the Plan shall be Three Million Six Hundred Thousand (3,600,000). Such number shall be automatically adjusted for any reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction of the Company. The number of Shares which may be purchased by a Participant upon exercise of each Option shall be determined by the Committee and set forth in each Option Agreement (as such term is defined in Section 11 hereof). Upon the expiration ---------- or termination, in whole or in part, for any reason of an outstanding Option or any portion thereof which shall not have vested or shall not have been exercised in full or in the event that any Shares acquired pursuant to the Plan are reacquired by the Company, (a) any Shares which have not been purchased or (b) the Shares reacquired, as the case may be, shall again become available for the granting of additional Options under the Plan. Section 6. Restrictions on Grants; Vesting of Options. Notwithstanding ------------------------------------------ any other provisions set forth herein or in any Option Agreement, no Options may be granted under the Plan subsequent to ten (10) years from the date hereof. Each Option shall grant the Participant the right to purchase a specified number of Shares at the price determined by the Committee, as set forth in each respective Option Agreement (the "Exercise Price"); provided, however, that if the Participant is a 10% stockholder of the Company (as defined in Section 422(b)(6) of the Code) at the time such Participant is granted an Incentive Stock Option, the Exercise Price shall 2 be not less than 110% of the fair market value of such shares on the date of grant of the Option. Such fair market value shall be determined by the Committee (i) if the Company's securities are traded on a national securities exchange or on the Nasdaq National Market, on the basis of the reported closing sales price on such date or, in the absence of a reported sales price on such date, on the basis of the average of the reported closing bid and ask price on such date, or (ii) in the absence of both a reported sales price and a reported bid and ask price under clause (i), the Committee shall determine such fair market value on the basis of such evidence as it deems appropriate in its sole discretion. The Options shall vest based on longevity of service, targeted goals and/or other schedules established by the Committee, as set forth in each Option Agreement, with respect to the Company and/or its Subsidiaries. In the case of options which vest based on the achievement of targeted goals, the Committee shall determine the performance criteria, the performance measurement period(s) and the schedule of exercisability applicable to each Option or group of Options in a schedule, a copy of which shall be filed with the records of the Committee and attached to each Option Agreement to which the same applies. The performance criteria, the performance measurement period(s), and the schedule of exercisability need not be identical for all Options granted hereunder. Following the conclusion of each applicable performance measurement period, the Committee shall determine, in its sole good faith judgment, the extent, if at all, that each Option subject thereto shall have become exercisable based upon the applicable performance criteria and the schedule of exercisability. To the extent each such Option shall remain nonexercisable following the final performance measurement period because the applicable performance criteria have not been met, it shall, to that extent, automatically terminate and cease to be exercisable to such extent notwithstanding the stated term during which it otherwise may have been exercised. The Committee shall promptly notify each affected Participant of such determination. The Committee may periodically review the performance criteria applicable to any Option or Options and, in its sole good faith judgment, may adjust the same to reflect mergers, acquisitions, asset sales, catastrophes and significant increases in the level of capital expenditures or inventory levels. Section 7. Exercise of Options. Once vested, the Options may be exercised ------------------- by the Participant by giving written notice to the Company specifying the number of Shares to be purchased and accompanied by payment of the full Exercise Price therefor in cash, by check or in such other form of lawful consideration as the Committee may approve from time to time, including without limitation and in the sole discretion of the Committee, the assignment in transfer by the Participant to the Company of outstanding shares of common stock theretofore held by the Participant in a manner intended to comply with the provisions of Rule 16b-3 under the Exchange Act, if applicable. Once vested, the Options may only be exercised by the Participant or in the event of death of the Participant, by the person or persons (including the deceased Participant's estate) to whom the deceased Participant's rights under such Option shall have passed by will or the laws of descent and distribution. Notwithstanding the immediately preceding sentence, in the event of disability (within the meaning of Section 22(e)(3) of the Code) of a Participant, a designee of the Participant (or the legal representative of the Participant if the Participant has no designee) may exercise the Option on behalf of such Participant (provided such Option would have been exercisable by such Participant) until the right to exercise such Option expires, as set forth in such Participant's particular Option Agreement. 3 Section 8. Issuance of Shares. The Company's obligation to issue Shares ------------------ upon exercise of an Option is expressly conditioned upon (i) the compliance by the Company with any registration or other qualification obligations with respect to such Shares under any state and/or federal law or rulings and regulations of any government regulatory body, and/or (ii) the making of such investment representations or other representations and undertakings by the Participant (or the Participant's designee legal representative, heir or legatee, as the case may be) in order to comply with the requirements of any exemption from any such registration or other qualification obligations with respect to such Shares which the Company in its sole discretion shall deem necessary or advisable. Such required representations and undertakings may include representations and agreements that such Participant (or the Participant's designee legal representative, heir or legatee): (a) is purchasing such Shares for investment and not with any present intention of selling or otherwise disposing of such Shares in violation of Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations promulgated thereunder; and (b) agrees to have a legend placed upon the face and reverse of any certificates evidencing such Shares setting forth (i) any representations and undertakings which such Participant has given to the Company or a reference thereto, and (ii) that, prior to effecting any sale or other disposition of any such Shares, the Participant must furnish to the Company an opinion of counsel, form and substance satisfactory to the Company and its counsel, to the effect that such sale or disposition will not violate the applicable requirements of state and federal laws and regulatory agencies; provided, however, that any such legend or data entry shall be removed when no longer applicable. The inability of the Company to obtain, from any regulatory body having jurisdiction, authority reasonably deemed by the Company's counsel to be necessary for the lawful issuance and sale of any Shares hereunder shall relieve the Company of any liability in respect of the nonissuance or sale of such Shares as to which such requisite authority shall not have been obtained. Unless otherwise set forth in the Participant's particular Option Agreement or otherwise specified by the Committee in the Option grant or in a subsequent Committee action, any Shares issued by the Company upon exercise of an Option granted hereunder shall be subject to (x) a right of first refusal of the Company with respect to all Shares proposed to be transferred by Participant, (y) certain drag-along rights, as described in Section 11 hereof, and (z) certain other restrictions set forth in each particular Option Agreement. Section 9. Nontransferability. An Option may not be sold, pledged, ------------------ assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution. Any permitted transferee shall be required prior to any transfer of an Option or Shares acquired pursuant to the exercise of an Option to execute a written undertaking to be bound by the provisions of the applicable Option Agreement. Section 10. Adjustments Upon Recapitalization or Reorganization. Subject to --------------------------------------------------- Section 13(b) hereof, if the outstanding shares of the common stock of the ---------- Company are changed into, or exchanged for, a different number or kind of shares or securities of the Company through any capital reorganization or reclassification, or if the number of outstanding shares is changed through a stock split or stock dividend, an appropriate adjustment shall be made by the Committee in the number, kind or exercise price of shares as to which Options may be granted under the Plan. A corresponding adjustment shall likewise be made in the number, kind or exercise price of shares with respect to which unexercised Options have theretofore been granted. 4 Any such adjustment in an outstanding Option, however, shall be made without change in the total price applicable to the unexercised portion of the Option but with a corresponding adjustment in the price for each share covered by the Option. In making such adjustments, or in determining that no such adjustments are necessary, the Committee may rely upon the advice of counsel and accountants to the Company, and the good faith determination of the Committee shall be final, conclusive and binding. No fractional shares of stock shall be issued or issuable under the Plan on account of any such adjustment. Section 11. Option Agreement. Each Option granted under the Plan shall ---------------- be evidenced by a written option agreement (an "Option Agreement") executed by the Company and the Participant which, unless otherwise set forth in the Participant's particular Option Agreement or otherwise specified by the Committee in the Option grant or in a subsequent Committee action, (a) shall contain each of the provisions and agreements herein specifically required to be contained therein; (b) shall contain provisions which give the Company a right of first refusal to purchase any Shares issued pursuant to the exercise of Options granted under the Plan which a Participant proposes to sell; (c) shall contain provisions which give the Company, in connection with any underwritten public offering by the Company of its equity securities, the right to restrict the transfer of any Shares acquired under an Option Agreement for up to 180 days; and (d) shall contain certain "drag-along" rights. The Option Agreement may contain such other terms and conditions as the Committee deems desirable and which are not inconsistent with the Plan. Section 12. Privileges of Stock Ownership. Persons entitled to exercise ----------------------------- any Options granted under this Plan shall have all of the rights or privileges of a stockholder of the Company in respect of any shares of common stock issuable upon exercise of such Option from and after the date of exercise of an Option. No shares shall be issued and delivered upon exercise of any Option unless and until, in the opinion of counsel for the Company, there shall have been full compliance with any applicable registration requirements of the Securities Act, any applicable listing requirements of any national securities exchange or automated quotation system on which the common stock of the Company is then listed or quoted, and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company agrees to take all actions reasonably necessary to comply with all such requirements. The Company agrees that shares of common stock issued upon the exercise of Options shall, at the time of delivery, be validly issued and outstanding, fully paid and nonassessable. The Company covenants and agrees that it will pay, when due and payable, any and all federal and state stamp, original issue, or similar taxes which may be payable in respect of the issue of the Option or of Shares upon the exercise thereof. Section 13. Termination of Options. ---------------------- (a) Each Option granted under the Plan shall set forth a termination date thereof, which shall be not later than seven (7) years (up to ten (10) years if the Committee shall so determine) from the date such Option is granted subject to earlier termination as set forth in Section 6, Section 13(b), --------- ------------- or Section 14 hereof, or as otherwise set forth in each particular Option ---------- Agreement; provided, however, with respect to Incentive Stock Options, such termination shall 5 be not later than five (5) years from the date such Option is granted if the Participant is a 10% stockholder of the Company (as defined in Section 422(b)(6) of the Code) at the time such Option is granted. An Incentive Stock Option shall contain any termination events required by Section 422 of the Code. The termination of employment, or service as a director or consultant, of a Participant for any reason shall not accelerate or otherwise affect the number of Shares which may be purchased upon exercise of an Option; provided, however, that the Option may only be exercised with respect to that number of Shares which could have been purchased under the Option had the Option been exercised by the Participant on the date of such termination. (b) Subject to Section 14 hereof (i) upon the dissolution, ---------- liquidation or sale of all or substantially all of the business, properties and assets of the Company, (ii) upon any reorganization, merger, consolidation, sale or exchange of securities in which the Company does not survive, or (iii) upon any sale, reorganization, merger, consolidation or exchange of securities in which the Company does survive and any of the Company's stockholders have the opportunity to receive cash, securities of another corporation, partnership or limited liability company and/or other property in exchange for their capital stock of the Company, or (iv) upon any acquisition by any person or group (as defined in Section 13d of the Securities Act of 1934) of beneficial ownership of more than fifty percent (50%) of the Company's then outstanding shares of common stock (each of the events described in clauses (i), (ii), (iii) or (iv) is referred to herein individually as an "Extraordinary Event" and collectively as the "Extraordinary Events"), the Plan and each outstanding Option shall terminate, unless the Surviving Entity (defined below) elects to have such Option survive the Extraordinary Event pursuant to the next paragraph. In such event each Participant shall have the right, by giving notice ten (10) days before the effective date of such Extraordinary Event (the "Effective Date"), to exercise on or before the Effective Date, in whole or in part, any unexpired Option issued to the Participant, to the extent that said Option is vested as of the Effective Date and exercisable as of the Effective Date, and otherwise is vested and exercisable pursuant to the provisions of said Option and of Section ------- 6 of the Plan. - In its sole and absolute discretion, the surviving entity (which may be the Company) or the entity that has acquired all or substantially all of the Company's assets (the "Surviving Entity") may, but shall not be so obligated, to permit an Option to survive an Extraordinary Event or tender to any Participant an option or options to purchase shares or equity interests in such Surviving Entity, and such continuing or new option or options shall contain such terms and provisions as shall be required to substantially preserve the rights and benefits of any Option then outstanding under the Plan with any reasonable changes to take into account the circumstances of the Surviving Entity. Section 14. Acceleration of Options. Notwithstanding the provisions of ----------------------- Section 6 or Section 13 hereof, or any provision to the contrary contained in a --------- ---------- particular Option Agreement, the Committee, in its sole discretion, may accelerate the vesting of all or any portion of any Option then outstanding. The decision by the Committee to accelerate an Option or to decline to accelerate an Option shall be final. In the event of the acceleration of the exercisability of Options as the result of a decision by the Committee pursuant to this Section 14, each outstanding Option so accelerated shall be exercisable ---------- for a period from and after the date of 6 such acceleration and upon such other terms and conditions as the Committee may determine in its sole discretion, provided that such terms and conditions (other than terms and conditions relating solely to the acceleration of exercisability and the related termination of an Option) may not adversely affect the rights of any Participant without the consent of the Participant so adversely affected. Any outstanding Option which has not been exercised by the holder at the end of such period shall terminate automatically at that time. Section 15. Substitute Options. If the Company at any time should succeed ------------------ to the business of another entity through a merger, consolidation, corporate reorganization or exchange, or through the acquisition of stock or assets of such entity or its subsidiaries or otherwise, Options may be granted under the Plan to option holders of such entity or its subsidiaries, in substitution for options to purchase Shares in such entity held by them at the time of succession. The Committee, in its sole and absolute discretion, shall determine the extent to which such substitute Options shall be granted (if at all), the person or persons to receive such substitute Options (who need not be all option holders of such entity), the number of Options to be received by each such person, the exercise price of such Option and the other terms and conditions of such substitute Options. Section 16. Withholding of Taxes. The Company, or a Subsidiary, as the -------------------- case may be, may deduct and withhold from the wages, salary, bonus and other income paid by the Company (or such Subsidiary) to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of any Option, or the sale of the Shares issued to the Participant upon the exercise of an Option, as may be required from time to time under any federal or state tax laws and regulations. This withholding of tax shall be made from the Company's (or such Subsidiary's) concurrent or next payment of wages, salary, bonus or other income to the Participant or by payment to the Company (or such Subsidiary) by the Participant of the required withholding tax, as the Committee may determine; provided, however, that, in the sole discretion of the Committee, the Participant may pay such tax by reducing the number of Shares issued upon exercise of an Option (for which purpose such Shares shall be valued at fair market value as determined in good faith by the Committee based on the fair market value of such Shares determined by the Board, which determination shall be final). Notwithstanding the foregoing, the Company shall not be obligated to issue certificates representing the shares of common stock of the Company to be acquired through the exercise of such Option if such Participant fails to provide the Company with adequate assurance that such Participant will pay such amounts to the Company as herein above required. Participants shall notify the Company in writing of any amounts included as income in the Participants' federal income tax returns in connection with an Option. Section 17. Effectiveness and Termination of the Plan. The Plan shall be ----------------------------------------- effective as of the date on which this Plan is approved by the Board. The Plan shall terminate at the earliest of the time when all Shares which may be issued hereunder have been so issued. However, the Board may, in its sole discretion, terminate the Plan at any prior time. Subject to Section 13 hereof, no such ---------- termination shall in any way affect any Option then outstanding. 7 Section 18. Time of Granting Options. The date of grant of an Option ------------------------ shall, for all purposes, be the date on which the Board makes the determination granting such an Option. Notice of the determination shall be given to each Participant to whom an Option is so granted within a reasonable time after the date of such grant. Section 19. Amendment of Plan. Subject to Section 14, the Committee may ----------------- ---------- make such amendments to the Plan as it shall deem advisable. Subject to Section ------- 14, no amendment shall in any way adversely affect any Option then outstanding, -- without the consent of the Participant so adversely affected. Section 20. Transfers and Leaves of Absence. For purposes of the Plan, ------------------------------- (a) a transfer of a Participant's employment, without an intervening period, between the Company and a Subsidiary (or vice versa) or between Subsidiaries shall not be deemed a termination of employment and (b) a Participant who is granted in writing a leave of absence shall be deemed to have remained in the employ of the Company (or a Subsidiary, whichever is applicable) during such leave of absence. Section 21. No Obligation to Exercise Option. The granting of an Option -------------------------------- shall impose no obligation on the Participant to exercise such Option. Section 22. Indemnification. In addition to such other rights of --------------- indemnification as they may have as members of the Board of Directors, the members of the Committee shall be indemnified by the Company to the fullest extent permitted by law against the reasonable expenses, including attorney's fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Option granted thereunder, and against all amounts paid by them in satisfaction of a judgment in any such action, suit or proceeding except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee member is not entitled to indemnification under applicable law; provided, however, that within sixty (60) days after institution of any such action, suit or proceeding such Committee member shall in writing offer the Company the opportunity, at the Company's expense to handle and defend the same, and such Committee member shall cooperate with and assist the Company in the defense of any such action, suit or proceeding. The Company shall not be obligated to indemnify any Committee member with regard to any settlement of any action, suit or proceeding of which the Company did not consent to in writing prior to such settlement. Section 23. Governing Law. The Plan and any Option granted pursuant to ------------- the Plan shall be construed under and governed by the laws of the State of Delaware without regard to conflict of law provisions thereof. Section 24. Not an Employment or Consulting Agreement. Nothing contained in ----------------------------------------- the Plan or in any Option Agreement shall confer, intend to confer or imply any rights of employment or rights to continued employment by the Company or any Subsidiary in favor of any Participant or limit the ability of the Company or any Subsidiary to terminate, with or 8 without cause, in its sole and absolute discretion, the employment of any Participant, subject to the terms of any written employment to which a Participant is a party. In addition, nothing contained in the Plan or in any Option Agreement shall preclude any lawful action by the Company or the Board. 9 EX-10.14 12 dex1014.txt FORM OF SR EXEC STOCK SUBSCRIPTION PLAN EXHIBIT 10.14 ADVANCE AUTO PARTS, INC. 2001 SENIOR EXECUTIVE STOCK SUBSCRIPTION PLAN Section 1. Description of Plan. This is the 2001 Senior Executive ------------------- Stock Subscription Plan, dated November 7, 2001 (the "Plan"), of Advance Auto Parts, Inc., a Delaware corporation (the "Company"). Under the Plan, certain directors, officers, key employees and consultants of the Company or any of the directly or indirectly owned subsidiaries of the Company (individually, a "Subsidiary," and collectively, the "Subsidiaries"), to be selected as set forth below, may be issued shares of the Common Stock, $.0001 par value per share, of the Company (the "Common Stock"). Section 2. Purpose of Plan. The purpose of the Plan and the issuance --------------- and sale of the shares of Common Stock to specified persons is to further the growth, development and financial success of the Company and the Subsidiaries by providing additional incentives to certain directors, officers, key employees and consultants. By assisting such persons in acquiring shares of Common Stock, the Company can ensure that such persons will themselves benefit directly from the Company's and the Subsidiaries' growth, development and financial success. Section 3. Eligibility. The persons who shall be eligible to receive ----------- shares of Common Stock under the Plan shall be the senior executive officers of the Company and the Subsidiaries (each, a "Participant"). Section 4. Administration. The Plan shall be administered by the -------------- Company's Board of Directors (the "Board") or, at the Board's option, by a compensation committee established by the Board (the Board and such committee, the "Committee") who shall be empowered to interpret and administer the Plan in its sole discretion. Section 5. Shares Subject to the Plan. The number of shares of Common -------------------------- Stock which may be issued pursuant to the Plan shall not exceed 475,000 subject to adjustment to reflect any distribution of shares of capital stock or other securities of the Company or any successor or assign of the Company which is made in respect of, in exchange for or in substitution of the shares of Common Stock by reason of any stock dividend, stock split, reverse split, combination, recapitalization, reclassification, merger, consolidation or otherwise. In the event that any shares of Common Stock issued pursuant to the Plan are reacquired by the Company, such shares of Common Stock shall again become available for issuance under the Plan. Section 6. Issuance of Shares of Common Stock. The Company's obligation ---------------------------------- to issue shares of Common Stock pursuant to the Plan is expressly conditioned upon the completion by the Company of any registration or other qualification of such shares of Common Stock under any state and/or federal law or rulings and regulations of any government regulatory body and the making of such investment representations or other representations and undertakings by a Participant (or such person's legal representative, heir or legatee, as the case may be) in order to comply with the requirements of any exemption from any such registration or other qualification of such shares of Common Stock which the Company in its sole discretion shall deem necessary or advisable. Section 7. Stock Subscription Agreement. The shares of Common Stock ---------------------------- issued and sold pursuant to the Plan shall be evidenced by a written stock subscription agreement (the "Stock Subscription Agreement"). The Stock Subscription Agreement shall contain such terms and conditions as the Committee deems desirable and which are not inconsistent with the Plan. Section 8. Withholding of Taxes. The Company or a Subsidiary, as the -------------------- case may be, may deduct and withhold from the wages, salary, bonus and other income paid by the Company or such Subsidiary to a Participant the requisite tax upon the amount of taxable income, if any, recognized by such person in connection with the issuance of shares of Common Stock, as may be required from time to time under any federal or state tax laws and regulations. This withholding of tax shall be made from the Company's (or such Subsidiary's) concurrent or next payment of wages, salary, bonus or other income to a Participant or by payment to the Company (or such Subsidiary) by the such person of the required withholding tax, as the Committee may determine. Section 9. Effectiveness and Termination of Plan. The Plan shall be ------------------------------------- effective on the date on which it is adopted by the Board and the Board may in its sole discretion terminate the Plan at any time. Section 10. Amendment of Plan. The Committee may make such amendments ----------------- to the Plan and, with the consent of each Participant affected, to the terms and conditions of the Stock Subscription Agreement as it shall deem advisable. Section 11. Indemnification. In addition to such other rights of --------------- indemnification as they may have as directors, the members of the Board and the Committee shall be indemnified by the Company against the reasonable expenses, including attorneys' fees actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal thereof, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, and against all amounts paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Board or Committee member is liable for negligence or misconduct in the performance of his or her duties; provided that within 60 days after institution of any such action, suit or proceeding such Board or Committee member shall in writing offer the Company the opportunity, at the Company's expense, to handle and defend the same. Section 12. Governing Law. The Plan shall be construed under and governed ------------- by the laws of the State of Delaware without regard to conflict of law provisions thereof. Section 13. Not an Employment or Other Agreement. Nothing contained in ------------------------------------ the Plan or in any Stock Subscription Agreement shall confer, intend to confer or imply any rights of 2 employment or rights to any other relationship or rights to continued employment by, or rights to a continued relationship with, the Company or any Subsidiary in favor of any Participant or limit the ability of the Company or any Subsidiary to terminate, with or without cause, in its sole and absolute discretion, the employment of, or relationship with, any Participant subject to the terms of any written employment or other agreement to which a Participant is a party. 3 EX-10.15 13 dex1015.txt FORM OF SR EXEC STOCK SUBSCRIPTION AGMT EXHIBIT 10.15 ADVANCE AUTO PARTS, INC. 2001 STOCK OPTION AGREEMENT THIS 2001 STOCK OPTION AGREEMENT (this "Agreement") is entered into as of ______________, 2001 by and between Advance Auto Parts, Inc., a Delaware corporation (the "Company"), and ____________ ("Optionee"), pursuant to the Advance Auto Parts, Inc. 2001 Executive Stock Option Plan (the "Plan"). All capitalized terms not otherwise defined herein shall have the meanings set forth in the Plan. R E C I T A L S: - - - - - - - - A. Optionee is an employee of the Company and/or of a direct or indirect subsidiary of the Company (individually, a "Subsidiary" and collectively, the "Subsidiaries") and the Company considers it desirable to give Optionee an added incentive to advance the Company's and the Subsidiaries' interests. B. The Committee has determined to grant Optionee the right to purchase shares of common stock of the Company pursuant to the terms and conditions of this Agreement and the Plan. A G R E E M E N T: - - - - - - - - - NOW, THEREFORE, in consideration of the covenants hereinafter set forth, the parties agree as follows: 1. Options; Number of Shares. The Company hereby grants to Optionee the ------------------------- right to purchase (the "Options") up to ____________________ (______) shares (the "Shares") of common stock, par value $.0001 per share, of the Company at the following prices per share (the "Purchase Price"): (a) Options to purchase ____________________ (_____) Shares at a price equal to ____________ ($_____) per share (the "Fixed Price Service Options"); (b) Options to purchase ________________________ (______) Shares at a price equal to the amount set forth opposite the date of exercise of the Option on Schedule A attached hereto (the "Variable Price Service Options"); and ---------- (c) Options to purchase ________________________ (_______) Shares at a price equal to _____________ ($______) per share (the "Performance Options"). The Fixed Price Service Options, the Variable Price Service Options and the Performance Options are sometimes hereinafter collectively referred to as the "Options" and individually as an "Option." The Options and the right to purchase all or any portion of the Shares are subject to the terms and conditions stated in this Agreement and in the Plan, including, without limitation, the provisions of Section 4, Section 6, Section 10, Section 13(b), --------- --------- ---------- ------------- Section 14 and Section 19 of the Plan and Section 3 and Section 4 hereof. Upon ---------- ---------- --------- --------- exercise of an Option and payment of the Purchase Price, Optionee shall become a stockholder of the Company, with all rights and privileges of a stockholder of the Company in respect of any shares of common stock of the Company issuable upon such exercise. It is intended that the Options will not qualify for treatment as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Exercise Criteria. The Variable Price Service Options shall become ----------------- exercisable as set forth on Schedule A. The Fixed Price Service Options shall ---------- become exercisable, in whole or in part, over time as set forth on Schedule B ---------- attached hereto. The Performance Options shall become exercisable, in whole or in part, as set forth on Schedule C attached hereto. ---------- 3. Term of Agreement. Except for the rights conferred upon the Company ----------------- pursuant to Section 7 below, the Options, and Optionee's right to exercise the Options, shall terminate when the first of the following occurs: (a) termination of the Options pursuant to Section 6, Section 13 or --------- ---------- Section 14 of the Plan or Section 2 hereof; ---------- --------- (b) the expiration of seven (7) years from the date hereof; (c) ninety (90) days after the date of termination of Optionee's employment or other relationship with the Company and all of the Subsidiaries, unless such termination results from Optionee's death or disability (within the meaning of Section 22(e)(3) of the Code, or Optionee dies within ninety (90) days after the date of termination of Optionee's employment or other relationship with the Company and all of the Subsidiaries, in which case this Agreement and the Option shall terminate one hundred twenty (120) days after the date of termination of Optionee's employment or other relationship with the Company and all of the Subsidiaries; or (d) on the date of termination of Optionee's employment or other relationship with the Company and all of the Subsidiaries if such termination was for cause (as determined in good faith by the Board of Directors of the Company (the "Board")). 4. Termination of Employment or Other Relationship. The termination for ----------------------------------------------- any reason of Optionee's employment or other relationship with the Company and all of the Subsidiaries shall not accelerate the vesting of the Options. The Options may only be exercised with respect to that number of Shares which could have been made under the Options had such Options been exercised by Optionee on the date of such termination. 2 5. Death of Optionee; No Assignment. The rights of Optionee under this -------------------------------- Agreement may not be assigned or transferred except by will, by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by such Optionee; provided, however, that in the event of disability (within the meaning of Section 22(e)(3) of the Code) of Optionee, a designee of Optionee (or the Optionee's legal representative if Optionee has not designated anyone) may exercise the Options on behalf of Optionee (provided the Options would have been exercisable by Optionee) until the right to exercise the Options expires pursuant to Section 3 hereof. Any attempt to sell, pledge, assign, --------- hypothecate, transfer or otherwise dispose of the Options in contravention of this Agreement or the Plan shall be void. If Optionee should die while Optionee is engaged in an employment relationship with the Company and/or any Subsidiary or within ninety (90) days after termination of such relationship, and provided Optionee's rights hereunder shall have vested, in whole or in part, pursuant to Section 2 hereof, Optionee's designee, legal representative, or legatee, the --------- successor trustee of Optionee's inter vivos trust or the person who acquired the right to exercise the Options by reason of the death of Optionee (individually, a "Successor") shall succeed to Optionee's rights under this Agreement. After the death of Optionee, only a Successor may exercise the Options. 6. Exercise of Options. No option granted under this Agreement shall be ------------------- exercisable until it has vested. On or after the vesting of the Options in accordance with Section 2 hereof and until termination of the Options in --------- accordance with Section 3 hereof, the Options may be exercised by Optionee (or --------- such other person specified in Section 5 hereof) to the extent exercisable as --------- determined under Section 2 hereof, upon delivery of the following to the Company --------- at its principal executive offices (the date such delivery occurs is hereinafter referred to as, the "Exercise Date"): (a) a written notice of exercise which identifies this Agreement, the type of Option to be exercised, and states the number of Shares to be purchased (which shall be no less than 100 Shares unless the number of Shares remaining available for purchase hereunder is less than 100 Shares and the entire remainder of the Option is being exercised); (b) a check, cash or any combination thereof in the amount of the aggregate Purchase Price (or payment of the aggregate Purchase Price in such other form of lawful consideration as the Committee may approve from time to time under the provisions of Section 7 of the Plan); (c) a check or cash in the amount reasonably requested by the Company to satisfy the Company's withholding obligations under federal, state or other applicable tax laws with respect to the taxable income, if any, recognized by Optionee in connection with the exercise, in whole or in part, of the Options (unless the Company and Optionee shall have made other arrangements for deductions or withholding from Optionee's wages, bonus or other income paid to Optionee by the Company or any Subsidiary, provided, however, such arrangements must satisfy the requirements of all applicable tax laws); (d) a written representation and undertaking, in such form and substance as the Company may require, that the Shares underlying the Option are being acquired by Optionee 3 for Optionee's personal account, for investment purposes only, and not with a view to the distribution, resale or other disposition thereof; (e) a written representation and undertaking, in such form and substance as the Company may require, setting forth the investment intent of Optionee, or a Successor, as the case may be, and such other agreements, representations and undertakings as described in the Plan, including an acknowledgment that Optionee has reviewed the memorandum regarding Section 83(b) of the Internal Revenue Code of 1986, as amended, attached hereto as Exhibit A; --------- and (f) such further acts as may be necessary to register Optionee as a stockholder of the Company. 7. Restriction on Transfer of Shares; Right of First Refusal; Drag Along --------------------------------------------------------------------- Rights. ------ (a) Restriction on Transfer of the Shares. ------------------------------------- (i) Except as otherwise provided herein, Optionee may not sell, transfer, assign, pledge, hypothecate or otherwise dispose of (collectively, "Transfer") any of the Shares, or any right, title or interest therein prior to the fifth anniversary of the Closing Date and, thereafter, any Transfer must be in compliance with Section 7 and Section 9 hereof. Any purported Transfer or --------- --------- Transfers (including involuntary Transfers initiated by operation of legal process) of any of the Shares or any right, title or interest therein, except in strict compliance with the terms and conditions of this Agreement, shall be null and void. (ii) Permitted Transfers. Optionee may, at any time or times, ------------------- Transfer any or all of the Shares: (a) inter vivos to Optionee's spouse or issue, a trust for their benefit, or pursuant to any will or testamentary trust; or (b) upon Optionee's death, to any person in accordance with the laws of descent and/or testamentary distribution (such persons described in clauses (a) and (b) hereof are collectively referred to herein as "Permitted Transferees"). Notwithstanding the foregoing, Shares shall not be Transferred until the Permitted Transferee executes a valid undertaking, in form and substance reasonably satisfactory to the Company, to the effect that the Permitted Transferee and the Shares so Transferred shall thereafter remain subject to all of the provisions of this Agreement (including the Repurchase Option), as though the Permitted Transferee were a party to this Agreement, bound in every respect in the same way as Optionee. Transfers made in accordance with this clause (ii) ------- shall not be subject to the provisions of Section 7(b) of this Agreement. --------- (b) Right of First Refusal. ---------------------- (i) Sales; Notice. At any time on or after the fifth ------------- anniversary of this Agreement, Optionee may transfer for cash (and only for such form of consideration) any or all of the Shares to any third party ("Transfer") subject to the provisions of this Section 7 and Section 10(b), provided that this Section 7(b) shall not apply to any transfers that constitute a Public Market Sale (as defined below). Prior to any such intended Transfer, Optionee shall first 4 give at least thirty (30) days' advance written notice (the "Notice") to the Company specifying (i) Optionee's bona fide intention to sell such Shares; (ii) the name(s) and address(es) of the proposed transferee(s); (iii) the number of Shares Optionee proposes to Transfer (individually, an "Offered Share," and collectively, the "Offered Shares"); (iv) the price for which Optionee proposes to Transfer each Offered Share (the "Proposed Purchase Price"); (v) such evidence as the Company may reasonably request to demonstrate the ability of the proposed transferee(s) to pay the Proposed Purchase Price; and (vi) all other material terms and conditions of the proposed transfer. (ii) Election by the Company. Within twenty (20) days after ----------------------- receipt of the Notice, the Company may elect to purchase any or all of the Offered Shares at the price and on the terms and conditions set forth in the Notice by delivery of written notice of such election to Optionee, specifying a day, which shall not be more than twenty (20) days after such notice is delivered, on or before which Optionee shall surrender (if Optionee has not already done so) the certificate or certificates representing the Offered Shares (duly endorsed in blank for transfer) at the administrative office of the Company. Within twenty (20) days after delivery of such notice to Optionee, the Company shall deliver to Optionee a check, payable to Optionee or to such person as Optionee shall request, in the amount equal to the product of the Proposed Purchase Price multiplied by the number of Offered Shares (the "First Refusal Price") in exchange for the Offered Shares. If Optionee fails to so surrender such certificate or certificates on or before such date, from and after such date the Offered Shares shall be deemed to be no longer outstanding, and Optionee shall cease to be a Shareholder with respect to such Shares and shall have no rights with respect thereto except only the right to receive payment of the First Refusal Price, without interest, upon surrender of the certificate or certificates therefor (duly endorsed in blank for Transfer). Notwithstanding the foregoing, if any Outstanding Amount (as defined in that certain Stock Subscription Agreement between the Company and the Optionee dated __________) is owed to the Company by Optionee, the First Refusal Price shall be reduced (to an amount not less than zero) by such Outstanding Amount, which reduction shall be specified in reasonable detail in the Company's written notice of election to purchase the Offered Shares. If the Company does not elect to purchase all of the Offered Shares, Optionee shall be entitled to Transfer the Offered Shares to the transferee(s) named in the Notice at the Proposed Purchase Price, or at a higher price, and on the terms and conditions set forth in the Notice; provided, however, that such Transfer must be consummated within ninety (90) days after the date of the Notice and any proposed Transfer after such ninety (90) day period may be made only by again complying with the procedures set forth in this Section 7(b). This right of first refusal shall terminate upon an underwritten ------------ public offering of Common Stock by the Company registered under the Act (as defined below) (other than an offering registered on Form S-4 or Form S-8 or any substitute for such forms) resulting in gross proceeds to the Company in excess of $25 million (an "Initial Public Offering"). (c) Obligation to Sell Shares. If FS Equity Partners IV, L.P., a ------------------------- Delaware limited partnership ("FSEP IV"), finds a third-party buyer for all the shares of common stock of the Company held by it (whether such sale is by way of purchase, exchange, merger or other form of transaction), upon the request of FSEP IV, Optionee shall sell all of Optionee's Shares for the same per share consideration (which may be less than the exercise price for any Share) 5 and otherwise on the same terms and conditions as apply to a FSEP IV sale. In addition, FSEP IV may require Optionee to Transfer this Option to such buyer for the same per share consideration (less the then aggregate Purchase Price of this Option) and otherwise pursuant to the terms and conditions applicable to FSEP IV for the sale of its shares of common stock. In the event the per share consideration for the common stock is less than the Purchase Price applicable at the time a binding agreement with respect to such transaction is entered into, this Option shall be canceled without payment to Optionee. Optionee hereby consents to any sale, transfer, reorganization, exchange, merger, combination or other form of transaction covered under this Section 7(c) and agrees to execute such agreements, powers of attorney, voting proxies or other documents and instruments as may be necessary or desirable to consummate such sale, transfer, reorganization, exchange, merger, combination or other form of transaction. Optionee further agrees to timely take such other actions as FSEP IV may reasonably request in connection with the approval of the consummation of such sale, transfer, reorganization, exchange, merger, combination or other form of transaction, including voting as a stockholder to approve any such sale, transfer, reorganization, exchange, merger, combination or other form of transaction and waiving any appraisal rights Optionee may have in connection therewith. The obligations of Optionee pursuant to this Section shall be binding on any transferee of this Option (other than a transferee in a Public Market Sale, as defined below), and Optionee (and any of his transferees) shall obtain and deliver to the Company and FSEP IV prior to any Transfers (other than Transfers constituting a Public Market Sale) a written commitment, in form and substance satisfactory to the Company and FSEP IV, from a subsequent transferee to be bound by such provisions. The term "Public Market Sale" means a sale of common stock after the Company's shares of common stock are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended, which is made pursuant to Rule 144 promulgated under the Act or which is made pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission. Any Transfer effected in violation of this provision shall be void. Optionee's obligations pursuant to this Section, and the obligations of any such transferee, shall survive the expiration or non-vesting of any portion of the Options. 8. Tag Along Rights. If FSEP IV finds a third-party buyer (other than a ---------------- buyer that is an investment fund or partnership affiliated with FSEP IV, a general or limited partner of FSEP IV, or, for the period ending one year from the date hereof, an unaffiliated institutional investor or merchant banking firm (each, a "FS Permitted Transferee") or is a transferee in a Public Market Sale), for all or part of the shares of Common Stock held by FSEP IV (whether such sale is by way of purchase, exchange, merger or other form of transaction), the Purchaser shall have the right to sell, on the terms set forth in a written notice (the "Offering Notice") delivered by FSEP IV to the Optionee describing the terms of the proposed sale (including the minimum sale price for the shares of Common stock that FSEP IV plans to sell), that amount of the Shares he then owns which constitute the same percentage of his Shares as the percentage of Common Stock sold by FSEP IV. Each such right shall be exercisable by delivering written notice to FSEP IV within 15 days after receipt of the Offering Notice. Failure to exercise such right within such 15-day period shall be regarded as a waiver of such rights. The obligations of FSEP IV under this Section 8 shall terminate upon an Initial Public Offering. 6 9. Repurchase Option Upon Termination. ---------------------------------- (a) In the event that Optionee's employment or other relationship with the Company and all of its Subsidiaries terminates for any reason (including, without limitation, by reason of Optionee's death, disability, retirement, voluntary resignation or dismissal by the Company or any of its Subsidiaries, with or without cause), the Company shall have the option (the "Repurchase Option") to purchase from Optionee all or any portion of the Shares acquired by Optionee pursuant to this Option Agreement for a period of six (6) months after the effective date of such termination (the effective date of termination is hereinafter referred to as the "Termination Date"); provided, however, that such six-month period shall be extended to a date 10 days after the six-month anniversary of the date on which Optionee purchased any Shares pursuant to this Option Agreement after the Termination Date. (b) The purchase price (the "Repurchase Price") for each Share to be purchased pursuant to the Repurchase Option shall equal (a) the greater of the applicable exercise price of such Share and Book Value (as defined herein) if the Termination Date occurs within the two (2) year period commencing on the date hereof and (b) the greater of the applicable exercise price of such Share and Fair Market Value (as defined herein) thereof (subject to adjustment as set forth herein) thereafter after the initial two (2) year period described previously in subsection (a) hereof. The "Book Value" of a Share shall equal $10.00 per Share (subject to adjustment as set forth in Section 9(c) below) plus the net income or minus the net loss per share to the end of the fiscal quarter immediately preceding the Termination Date, as determined by the Board, acting in good faith and based upon the books and records of the Company prepared in accordance with generally accepted accounting principles consistently applied. The "Fair Market Value" of a Share shall be the fair market value of a Share as of the Termination Date, as determined by the Board, acting in good faith and based upon the best available evidence, which determination shall be final and binding. (c) The Repurchase Price for any Shares to be purchased pursuant to the Repurchase Option shall be increased or decreased appropriately to reflect any distribution of stock or other securities of the Company or any successor or assign of the Company which is made in respect of, in exchange for or in substitution of the Shares by reason of any split, reverse split, combination, recapitalization, reclassification, merger, consolidation or otherwise. (d) The Repurchase Option shall be exercised by the Company by delivery to Optionee, within the six-month period specified above, of (a) a written notice specifying the number of Shares to be purchased and (b) a day, which shall not be more than 30 days after the date such notice is delivered, on or before which Optionee shall surrender the certificate or certificates representing the Shares to be purchased pursuant to the Repurchase Option (duly endorsed in blank for Transfer) at the principal office of the Company in exchange for a check, payable to Optionee, in the amount equal to the Repurchase Price, calculated as provided in this Section 9, multiplied by the number of the Shares to be purchased. If Optionee fails to so surrender such certificate or certificates on or before such date, from and after such date the Shares which the Company elected to repurchase shall be deemed to be no longer outstanding, and Optionee shall cease to be a stockholder with respect to such Shares and shall have no rights 7 with respect thereto except only the right to receive payment of the Repurchase Price, without interest, upon surrender of the certificate or certificates therefor (duly endorsed in blank for Transfer). (e) This Repurchase Option shall terminate upon an Initial Public Offering. 10. Representations and Warranties of Optionee. ------------------------------------------ (a) Optionee represents and warrants that the Options are being acquired by Optionee for Optionee's personal account, for investment purposes only, and not with a view to the distribution, resale or other disposition thereof. (b) Optionee acknowledges that the Company may issue Shares upon the exercise of the Options without registering such securities under the Securities Act of 1933, as amended (the "Act"), on the basis of certain exemptions from such registration requirements. Accordingly, Optionee agrees that Optionee's exercise of the Options may be expressly conditioned upon Optionee's delivery to the Company of such representations and undertakings as the Company may reasonably require in order to secure the availability of such exemptions, including a representation that Optionee is acquiring the Shares for investment and not with a present intention of selling or otherwise disposing of such Shares. Optionee acknowledges that, because Shares received upon exercise of an Option may be unregistered, Optionee may be required to hold the Shares indefinitely unless they are subsequently registered for resale under the Act or an exemption from such registration requirements is available. (c) Optionee acknowledges receipt of this Agreement granting the Options, and the Plan, and understands that all rights and liabilities connected with the Options are set forth herein and in the Plan. 11. No Rights as a Stockholder. Optionee shall have no rights as a -------------------------- stockholder of any shares of common stock of the Company covered by the Options until the Exercise Date and entry evidencing such ownership is made in the stock transfer books of the Company. Except as my be provided under Section 10 of the ---------- Plan, the Company will make no adjustment for dividends (ordinary or extraordinary whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the Exercise Date. 12. Limitation of Company's Liability for Nonissuance. Inability of the ------------------------------------------------- Company to obtain, from any regulatory body having jurisdiction, authority reasonably deemed by the Company's counsel to be necessary for the lawful issuance and sale of any Shares hereunder and under the Plan shall relieve the Company of any liability in respect of the nonissuance or sale of such Shares as to which such requisite authority shall not have been obtained. 13. This Agreement Subject to Plan. This Agreement is made under the ------------------------------ provisions of the Plan and shall be interpreted in a manner consistent with it. To the extent that any provision in this Agreement is inconsistent with the Plan, the provisions of the Plan shall control. The 8 interpretation of the Committee of any provision of the Plan, the Options or this Agreement, and any determination with respect thereto or hereto by the Committee, shall be binding on all parties. 14. Restrictive Legends. Optionee hereby acknowledges that federal ------------------- securities laws and the securities laws of the state in which Optionee resides or works may require the placement of certain restrictive legends upon the Shares issued upon exercise of the Options, and Optionee hereby consents to the placing of any such legends upon certificates evidencing the Shares as the Company, or its counsel, may reasonably deem necessary; provided, however, that any such legend or legends shall be removed when no longer applicable. Any and all certificates now or hereafter issued evidencing the Shares shall have endorsed upon them a legend substantially as follows: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS UPON TRANSFER AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THAT CERTAIN OPTION AGREEMENT DATED AS OF APRIL 15, 1998, BY AND BETWEEN ADVANCE AUTO PARTS, INC., A DELAWARE CORPORATION, AND THE ORIGINAL PURCHASER HEREOF, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF ADVANCE AUTO PARTS, INC." 15. Notices. Except as otherwise provided herein, all notices, requests, ------- demands and other communications under this Agreement shall be in writing, and if by telegram or telecopy, shall be deemed to have been validly served, given or delivered when sent, or if by personal delivery or messenger or courier service, shall be deemed to have been validly served, given or delivered upon actual delivery (but in no event may notice be given by deposit in the United States mail), at the following addresses, telephone and facsimile numbers (or such other address(es), telephone and facsimile numbers a party may designate for itself by like notice): If to the Company: Advance Auto Parts, Inc. c/o Freeman Spogli & Co. Incorporated 599 Lexington Avenue, Suite 1800 New York, New York 10022 Attention: John M. Roth Telephone: (212) 758-2555 Telecopy: (212) 758-7499 9 If to Optionee: ___________________________ ___________________________ ___________________________ 16. Not an Employment Agreement. Nothing contained in this Agreement --------------------------- shall confer, intend to confer or imply any rights to an employment relationship or rights to a continued employment relationship with the Company and/or any Subsidiary in favor of Optionee or limit the ability of the Company and/or any Subsidiary to terminate, with or without cause, in its sole and absolute discretion, the employment relationship with Optionee, subject to the terms of any written employment agreement to which Optionee is a party. 17. Governing Law. This Agreement shall be construed under and governed ------------- by the laws of the State of Delaware without regard to the conflict of law provisions thereof. 18. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original and both of which together shall be deemed one Agreement. 19. Amendments. This Agreement may be amended only by a written agreement ---------- executed by both of the parties hereto and by FSEP IV. 20. Recapitalizations or Exchanges Affecting the Company's Capital. The -------------------------------------------------------------- provisions of this Agreement shall apply to any and all stock or other securities of the Company or any successor or assign of the Company, which may be issued in respect of, in exchange for or in substitution of, the Shares by reason of any split, reverse split, recapitalization, reclassification, combination, merger, consolidation or otherwise, and such Shares or other securities shall be encompassed within the term "Shares" for purposes of this Agreement. 21. Disclosure. The Company shall have no duty or obligation to ---------- affirmatively disclose to Optionee, and Optionee shall have no right to be advised of, any material information regarding the Company or any of its Subsidiaries at any time prior to, upon or in connection with the Company's repurchase of the Shares under this Agreement at the cessation or termination of Optionee's employment with the Company and/or any of its Subsidiaries. 22. Successors and Assigns. The Company may assign with absolute ---------------------- discretion any or all of its rights and/or obligations and/or delegate any of its duties under this Agreement to any of its affiliates, successors and/or assigns and this Agreement shall inure to the benefit of, and be binding upon, such respective affiliates, successors and/or assigns of the Company in the same manner and to the same extent as if such affiliates, successors and/or assigns were original parties hereto. Without limiting the foregoing, the Company may assign the Repurchase Option and/or the right of first refusal provided for in Section 9 and Section 7(b) of this Agreement, respectively, to any of its --------- --------- affiliates, successors and/or assigns. FSEP IV may assign its rights under Section 7(c) to any FS Permitted Transferee or to a purchaser of shares of ------------ common stock then owned by FSEP IV. For purposes of this Agreement, the term "Shares" shall include shares 10 of capital stock or other securities of the Company or any successor or assign of the Company, which are issued in respect of, in exchange for or in substitution of the Shares by reason of any split, reverse split, recapitalization, reclassification, combination, merger, exchange or consolidation. Unless specifically provided herein to the contrary, Optionee may not assign any or all of its rights and/or obligations and/or delegate any or all its duties under this Agreement without the prior written consent of the Company and FSEP IV. Upon an assignment of any or all of Optionee's rights and/or obligations and/or a delegation of any or all of its duties under this Agreement in accordance with the terms of this Agreement, this Agreement shall inure to the benefit of, and be binding upon, Optionee's respective affiliates, successors and/or assigns in the same manner and to the same extent as if such affiliates, successors and/or assigns were original parties hereto. 11 IN WITNESS WHEREOF, the Company and Optionee have executed this Agreement as of the date first above written. THE COMPANY: Advance Auto Parts, Inc., a Delaware corporation By: ____________________________________________ Name: Title: OPTIONEE: _________________________________________________ Name: 12 SCHEDULE A EXERCISE PRICE (VARIABLE PRICE SERVICE OPTIONS) ----------------------------------------------- The Variable Price Service Options granted pursuant to this Agreement shall become exercisable in equal, annual installments of ___% of the aggregate number of Variable Price Service Options granted on _____________ and ______________, and when exercised shall be exercised at the price as set forth in the table below based on the date the Purchase Price (as defined) is received by the Company with a notice of exercise. Such vesting installments shall be cumulative, such that the Variable Price Service Options may be exercised as to any or all Shares covered by an installment at any time or times after that installment becomes exercisable and until the Variable Price Service Options expire or terminate under this Agreement or otherwise.
Date of Exercise Exercise Price ---------------- --------------
13 SCHEDULE B VESTING SCHEDULE (FIXED PRICE SERVICE OPTIONS) ---------------------------------------------- The Fixed Price Service Options granted pursuant to this Agreement shall vest and become exercisable in equal, annual installments of ____% of the aggregate number of Fixed Price Service Options granted on each anniversary date of this Agreement for fiscal years ending ____, ____ and ____. Such vesting installments shall be cumulative, such that the Fixed Price Service Options may be exercised as to any or all Shares covered by an installment at any time or times after that installment becomes exercisable and until the Fixed Price Service Options expire or terminate under this Agreement or otherwise. 14 SCHEDULE C VESTING SCHEDULE (PERFORMANCE OPTIONS) -------------------------------------- All Performance Options granted pursuant to this Agreement shall vest and become exercisable in equal annual installments of ___% of the aggregate number of Performance Options granted on each of December 31, ____, ____, ____ and ____, if, and only if, (i) Optionee is employed by the Company at that date; --------------- (ii) the Company has completed an initial public offering or an Extraordinary Event (as defined in the Plan); and (iii) the Performance Criteria set forth --- below are achieved (and only to the extent achieved as calculated below). I. Annual Awards ------------- To determine whether and to what extent the Performance Criteria have been achieved, the first four Measurement Periods shall be the _____ fiscal years of the Company beginning with fiscal year ____ and ending with fiscal year ____. The Performance Criteria for such Measurement Periods shall be the target levels of earnings before interest, taxes, depreciation and amortization for the Company ("EBITDA") depicted on the following chart. For each fiscal year in which the EBITDA that the Company achieves (the "Actual EBITDA") equals or exceeds the Maximum EBITDA for such year, the Option shall become exercisable with respect to ___% of the Shares (the "Annual Maximum"). For each year in which the Actual EBITDA equals the Minimum EBITDA for such fiscal year, the Option shall become exercisable with respect to ____% of the Shares. For each year in which the Actual EBITDA is more than the Minimum EBITDA for such fiscal year and less than the Maximum EBITDA for such fiscal year, the Option shall become exercisable with respect to the percentage portion of the Annual Maximum determined by the following formula: Actual EBITDA - Minimum EBITDA 10% + 90% x -------------------------------------------- Maximum EBITDA - Minimum EBITDA E.g., if the Company achieved an Annual EBITDA of $80.1 million for fiscal year 2001, the Option would become exercisable with respect to _____% of the Shares.) Except as provided herein below, no portion of the Option shall become exercisable with respect to any year in which the Company fails to achieve the Minimum EBITDA. The Minimum EBITDA and Maximum EBITDA for the Measurement Periods are:
Year Minimum EBITDA Maximum EBITDA ---- -------------- --------------
15 II. Cumulative Award ---------------- The final Measurement Period shall be the _____ year period that terminates at the end of the Company's fiscal year ____. The Performance Criteria for such period shall be the cumulative actual EBITDA achieved by the Company during such period (the "Cumulative EBITDA"). If the Cumulative EBITDA is equal to or greater than $_____ million, then the Option shall become exercisable in full, regardless of the extent to which the Option has become fully exercisable due to the achievement of annual target levels of EBITDA. If, at the end of fiscal year _____, the Cumulative EBITDA is equal to $_____ million, then the Option shall become exercisable with respect to a percentage equal to the difference of (i) ___% minus (ii) the total percentage of the Option exercisable under the calculation made under Section I (the Annual Awards). If the Cumulative EBITDA is more than $_____ million and less than $_____ million, then the Option shall become exercisable with respect to the percentage portion of the Option equal to the difference of: Cumulative EBITDA - $_____ million minus (ii) the total percentage of the Option (i) __% + __% x ------------------------------ exercisable under Section I $ ____ million In no event shall any calculation under this Section II result in any portion of any Option that previously vested under Section I to become unvested. To the extent that all or a portion of the Option does not become exercisable based on the above calculation with respect to Cumulative EBITDA, it shall to that extent automatically terminate and cease to be exercisable notwithstanding the stated term during which it otherwise may have been exercised. The Committee shall determine the extent to which the Company has achieved the performance criteria set forth above following the conclusion of each measurement period and, consequently, the extent, if at all, that the Option has become exercisable. The performance criteria set forth above may be modified from time to time as set forth in Section 6 of the Plan. To the extent the --------- Option is not exercisable at the conclusion of the final measurement period, it shall to that extent automatically terminate and cease to be exercisable notwithstanding the stated term during which it otherwise may have been exercised. 16 EX-10.16 14 dex1016.txt FORM OF EMPLOYEE STOCK SUBSCRIPTION PLAN EXHIBIT 10.16 ADVANCE AUTO PARTS, INC. 2001 EMPLOYEE STOCK SUBSCRIPTION PLAN Section 1. Description of Plan. This is the 2001 Employee Stock ------------------- Subscription Plan, dated November 7, 2001 (the "Plan") of Advance Auto Parts, Inc., a Delaware corporation (the "Company"). Under the Plan, certain directors, officers, key employees and consultants of the Company or any of the directly or indirectly owned subsidiaries of the Company (individually, a "Subsidiary," and collectively, the "Subsidiaries"), to be selected as set forth below, may be issued shares of the Common Stock, par value $.0001 per share, of the Company (the "Common Stock"). Section 2. Purpose of Plan. The purpose of the Plan and the issuance --------------- and sale of the shares of Common Stock to specified persons is to further the growth, development and financial success of the Company and the Subsidiaries by providing additional incentives to certain directors, officers, key employees and consultants. By assisting such persons in acquiring shares of Common Stock, the Company can ensure that such persons will themselves benefit directly from the Company's and the Subsidiaries' growth, development and financial success. Section 3. Eligibility. The persons who shall be eligible to receive ----------- shares of Common Stock under the Plan shall be the directors who are designated as "independent" members of the company's Board of Directors (the "Board") and the officers, key employees and consultants of the Company and the Subsidiaries, including those directors of the Company and the Subsidiaries who are also officers, key employees and/or consultants (each, a "Participant"). Section 4. Administration. The Plan shall be administered by the Board -------------- or, at the Board's option, by a compensation committee established by the Board (the Board and such committee, the "Committee") who shall be empowered to interpret and administer the Plan in its sole discretion. Section 5. Shares Subject to the Plan. The number of shares of Common -------------------------- Stock which may be issued pursuant to the Plan shall not exceed 520,000 subject to adjustment to reflect any distribution of shares of capital stock or other securities of the Company or any successor or assign of the Company which is made in respect of, in exchange for or in substitution of the shares of Common Stock by reason of any stock dividend, stock split, reverse split, combination, recapitalization, reclassification, merger, consolidation or otherwise. In the event that any shares of Common Stock issued pursuant to the Plan are reacquired by the Company, such shares of Common Stock shall again become available for issuance under the Plan. Section 6. Issuance of Shares of Common Stock. The Company's ---------------------------------- obligation to issue shares of Common Stock pursuant to the Plan is expressly conditioned upon the completion by the Company of any registration or other qualification of such shares of Common Stock under any state and/or federal law or rulings and regulations of any government regulatory body and the making of such investment representations or other representations and undertakings by a Participant (or such person's legal representative, heir or legatee, as the case may be) in order to comply with the requirements of any exemption from any such registration or other qualification of such shares of Common Stock which the Company in its sole discretion shall deem necessary or advisable. Section 7. Stock Subscription Agreement. The shares of Common Stock ---------------------------- issued and sold pursuant to the Plan shall be evidenced by a written stock subscription agreement (the "Stock Subscription Agreement"). The Stock Subscription Agreement shall contain such terms and conditions as the Committee deems desirable and which are not inconsistent with the Plan. Section 8. Withholding of Taxes. The Company or a Subsidiary, as the -------------------- case may be, may deduct and withhold from the wages, salary, bonus and other income paid by the Company or such Subsidiary to a Participant the requisite tax upon the amount of taxable income, if any, recognized by such person in connection with the issuance of shares of Common Stock, as may be required from time to time under any federal or state tax laws and regulations. This withholding of tax shall be made from the Company's (or such Subsidiary's) concurrent or next payment of wages, salary, bonus or other income to a Participant or by payment to the Company (or such Subsidiary) by the such person of the required withholding tax, as the Committee may determine. Section 9. Effectiveness and Termination of Plan. The Plan shall be ------------------------------------- effective on the date on which it is adopted by the Board and the Board may in its sole discretion terminate the Plan at any time. Section 10. Amendment of Plan. The Committee may make such amendments ----------------- to the Plan and, with the consent of each Participant affected, to the terms and conditions of the Stock Subscription Agreement as it shall deem advisable. Section 11. Indemnification. In addition to such other rights of ---------------- indemnification as they may have as directors, the members of the Board and the Committee shall be indemnified by the Company against the reasonable expenses, including attorneys' fees actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal thereof, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, and against all amounts paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Board or Committee member is liable for negligence or misconduct in the performance of his or her duties; provided that within 60 days after institution of any such action, suit or proceeding such Board or Committee member shall in writing offer the Company the opportunity, at the Company's expense, to handle and defend the same. Section 12. Governing Law. The Plan shall be construed under and ------------- governed by the laws of the State of Delaware without regard to conflict of law provisions thereof. 2 Section 13. Not an Employment or Other Agreement. Nothing contained in ------------------------------------ the Plan or in any Stock Subscription Agreement shall confer, intend to confer or imply any rights of employment or rights to any other relationship or rights to continued employment by, or rights to a continued relationship with, the Company or any Subsidiary in favor of any Participant or limit the ability of the Company or any Subsidiary to terminate, with or without cause, in its sole and absolute discretion, the employment of, or relationship with, any Participant subject to the terms of any written employment or other agreement to which a Participant is a party. 3 EX-10.17 15 dex1017.txt FORM OF EMPLOYEE STOCK SUBSCRIPTION AGMT EXHIBIT 10.17 ADVANCE AUTO PARTS, INC. STOCK SUBSCRIPTION AGREEMENT THIS STOCK SUBSCRIPTION AGREEMENT (this "Agreement") is made and entered into as of ___________, 2001, by and between Advance Auto Parts, Inc., a Delaware corporation (the "Company"), and _________________ ("Purchaser"). R E C I T A L S: --------------- A. The Company now desires to sell to Purchaser, who is an employee of the Company and/or any directly or indirectly majority or wholly-owned entities of the Company (individually, a "Subsidiary" and collectively, the "Subsidiaries"), and Purchaser desires to purchase from the Company, Shares (as hereinafter defined) of the Company, subject to the terms and conditions set forth in this Agreement. The date on which such sale and purchase occur shall be referred to herein as the "Closing Date." B. In order to induce the Company to sell the Shares to the Purchaser, Purchaser agrees to hold such shares subject to the restrictions and interests created by this Agreement. A G R E E M E N T: ----------------- NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and conditions contained herein, the parties agree as follows: 1. Sales and Purchase of Shares. The Company hereby agrees to sell to ---------------------------- Purchaser, subject to the conditions and restrictions contained in this Agreement, and Purchaser hereby agrees to purchase from the Company, _______________ (________) shares of common stock, par value $.0001 per share (individually, a "Share," and collectively, the "Shares"), of the Company, at a price of $______ per Share, for an aggregate purchase price of _______________ _____________ ($________) (the "Purchase Price"). The Purchase Price shall be payable by delivery of (a) cash or Purchaser's check in the amount of ______________________________ ($_______), and (b) a secured promissory note of Purchaser issued to the Company (in the form attached hereto as Exhibit A) for --------- ___________________ ($_______) of the Purchase Price due five (5) years from the effective date hereof (the "Note"). Payment of all amounts owed under the Note and compliance by Purchaser with the terms and conditions of this Agreement and the Pledge Agreement (as hereinafter defined) shall be secured by a pledge of the Shares, in conjunction with which Purchaser shall execute a Stock Pledge Agreement in the form attached hereto as Exhibit B (the "Pledge Agreement"). --------- Purchaser shall deliver the cash or check, the Note and the Pledge Agreement to the Company prior to the Closing Date, each dated as of the Closing Date. In connection with the purchase of Shares hereunder, Purchaser acknowledges that he or she has reviewed the memorandum regarding Section 83(b) of the Internal Revenue Code of 1986, as amended, attached hereto as Exhibit C. --------- 2. Restriction on Transfer of the Shares. Except as otherwise provided ------------------------------------- herein, Purchaser may not sell, transfer, assign, pledge, hypothecate or otherwise dispose of (collectively, "Transfer") any of the Shares, or any right, title or interest therein prior to the fifth anniversary of the Closing Date and, thereafter, any Transfer must be in compliance with Section 4 and Section 9 --------- --------- hereof. All Transfers also must comply with Section 6 of the Pledge Agreement. --------- Any purported Transfer or Transfers (including involuntary Transfers initiated by operation of legal process) of any of the Shares or any right, title or interest therein, except in strict compliance with the terms and conditions of this Agreement, shall be null and void. 3. Repurchase Option Upon Termination. ---------------------------------- (a) In the event that Purchaser's employment or other relationship with the Company and all of its Subsidiaries terminates for any reason (including, without limitation, by reason of Purchaser's death, disability, retirement, voluntary resignation or dismissal by the Company or any of its Subsidiaries, with or without cause), the Company shall have the option (the "Repurchase Option") to purchase from Purchaser all or any portion of the Shares acquired by Purchaser under this Agreement for a period of six (6) months after the effective date of such termination (the effective date of termination is hereinafter referred to as the "Termination Date"). (b) The purchase price (the "Repurchase Price") for each Share to be purchased pursuant to the Repurchase Option shall equal (a) the greater of Purchase Price and Book Value (as defined herein) if the Termination Date occurs within the two (2) year period commencing on the date hereof and (b) the greater of the Purchase Price and the Fair Market Value (as defined herein) thereof (subject to adjustment as set forth herein) thereafter. The "Book Value" of a Share shall equal $10.00 per Share (subject to adjustment as set forth in Section 3(c)) plus the net income or minus the net loss per share to the end of the fiscal quarter immediately preceding the Termination Date, as determined by the Board, acting in good faith and based upon the books and records of the Company prepared in accordance with generally accepted accounting principles consistently applied, which determination shall be final and binding. The "Fair Market Value" of a Share shall be the fair market value of a Share as of the Termination Date, as determined by the Board of Directors of the Company, acting in good faith and based upon the best available evidence, which determination shall be final and binding. (c) The Repurchase Price for any Shares to be purchased pursuant to the Repurchase Option shall be increased or decreased appropriately to reflect any distribution of stock or other securities of the Company or any successor or assign of the Company which is made in respect of, in exchange for or in substitution of the Shares by reason of any split, reverse split, combination, recapitalization, reclassification, merger, consolidation or otherwise. (d) The Repurchase Option shall be exercised by the Company by delivery to Purchaser, within the six-month period specified above, of a written notice specifying (a) the 2 number of Shares to be purchased and (b) a day, which shall not be more than 30 days after the date such notice is delivered, on or before which Purchaser shall surrender the certificate or certificates representing the Shares to be purchased pursuant to the Repurchase Option (duly endorsed in blank for Transfer) at the principal office of the Company in exchange for a check, payable to Purchaser in the amount equal to the Repurchase Price, calculated as provided in this Section 3, multiplied by the number of the Shares to be purchased. If Purchaser fails to so surrender such certificate or certificates on or before such date, from and after such date the Shares which the Company elected to repurchase shall be deemed to be no longer outstanding, and Purchaser shall cease to be a stockholder with respect to such Shares and shall have no rights with respect thereto except only the right to receive payment of the Repurchase Price, without interest, upon surrender of the certificate or certificates therefor (duly endorsed in blank for Transfer). Notwithstanding the foregoing in this Section 3(d), in the event any principal, interest, fees, expenses or other amounts due on or in connection with the Note (the "Outstanding Amount") are owed to the Company by Purchaser, the Repurchase Price for the number of the Shares to be repurchased hereunder shall be reduced (to an amount not less than zero) by such Outstanding Amount, which reduction shall be specified in reasonable detail in the Company's written notice of election to exercise the Repurchase Option. If the Outstanding Amount exceeds the Repurchase Price for the number of the Shares to be repurchased, Purchaser shall remain obligated and liable to the Company for the unpaid balance thereof. (e) This Repurchase Option shall terminate upon an underwritten public offering of common stock by the Company registered under the Act (as defined below) (other than an offering registered on Form S-4 or Form S-8 or any substitute for such forms) resulting in gross proceeds to the Company in excess of $25 million (an "Initial Public Offering"). 4. Right of First Refusal. ---------------------- (a) Sales; Notice. At any time on or after the fifth anniversary of ------------- the Closing Date, Purchaser may Transfer for cash (and only for such form of consideration) any or all of the Shares to any third party subject to the provisions of Section 4, Section 7(c), Section 9 and Section 11(a) hereof (other --------- ------------ --------- ---------- than any Transfer that constitutes a Public Market Sale (as defined below)), and subject to Section 6 of the Pledge Agreement. Prior to any such intended Transfer, Purchaser shall first give at least thirty (30) days' advance written notice (the "Notice") to the Company specifying (i) Purchaser's bona fide intention to sell such Shares; (ii) the name(s) and address(es) of the proposed transferee(s); (iii) the number of Shares Purchaser proposes to Transfer (individually, an "Offered Share," and collectively, the "Offered Shares"); (iv) the price for which Purchaser proposes to Transfer each Offered Share (the "Proposed Purchase Price"); (v) such evidence as the Company may reasonably request to demonstrate the ability of the proposed transferee(s) to pay the Proposed Purchase Price; and (vi) all other material terms and conditions of the proposed transfer. (b) Election by the Company. Within twenty (20) days after receipt of ----------------------- the Notice, the Company may elect to purchase any or all of the Offered Shares at the price and on 3 the terms and conditions set forth in the Notice by delivery of written notice of such election to Purchaser, specifying a day, which shall not be more than twenty (20) days after such notice is delivered, on or before which Purchaser shall surrender (if Purchaser has not already done so) the certificate or certificates representing the Offered Shares (duly endorsed in blank for transfer) at the administrative office of the Company. Within twenty (20) days after delivery of such notice to Purchaser, the Company shall deliver to Purchaser a check, payable to Purchaser or to such person as Purchaser shall request, in the amount equal to the product of the Proposed Purchase Price multiplied by the number of Offered Shares (the "First Refusal Price") in exchange for the Offered Shares. If Purchaser fails to so surrender such certificate or certificates on or before such date, from and after such date the Offered Shares shall be deemed to be no longer outstanding, and Purchaser shall cease to be a Shareholder with respect to such Shares and shall have no rights with respect thereto except only the right to receive payment of the First Refusal Price, without interest, upon surrender of the certificate or certificates therefor (duly endorsed in blank for Transfer). Notwithstanding the foregoing, if any Outstanding Amount is owed to the Company by Purchaser, the First Refusal Price shall be reduced (to an amount not less than zero) by such Outstanding Amount, which reduction shall be specified in reasonable detail in the Company's written notice of election to purchase the Offered Shares. If the Company does not elect to purchase all of the Offered Shares, Purchaser shall be entitled to Transfer the Offered Shares, subject to Section 9 of this Agreement --------- and Section 6 of the Pledge Agreement, to the transferee(s) named in the Notice at the Proposed Purchase Price, or at a higher price, and on the terms and conditions set forth in the Notice; provided, however, that such Transfer must be consummated within ninety (90) days after the date of the Notice and any proposed Transfer after such ninety (90) day period may be made only by again complying with the procedures set forth in this Section 4. This right of first --------- refusal terminates upon an Initial Public Offering. 5. Permitted Transfers. Subject to and upon full compliance with Section ------------------- ------- 6 of the Pledge Agreement, Purchaser may, at any time or times, transfer any or - all of the Shares: (a) inter vivos to Purchaser's spouse or issue, a trust for their benefit, or pursuant to any will or testamentary trust; or (b) upon Purchaser's death, to any person in accordance with the laws of descent and/or testamentary distribution (such persons described in clauses (a) and (b) hereof are collectively referred to herein as "Permitted Transferees"). Notwithstanding the foregoing in this Section 5, Shares shall not be Transferred --------- pursuant to this Section 5 until the Permitted Transferee executes a valid --------- undertaking, in form and substance reasonably satisfactory to the Company, to the effect that the Permitted Transferee and the Shares so Transferred shall thereafter remain subject to all of the provisions of this Agreement (including the Repurchase Option) and the Pledge Agreement, as though the Permitted Transferee were a party to this Agreement and the Pledge Agreement, bound in every respect in the same way as Purchaser. Transfers made in accordance with this Section 5 shall not be subject to the --------- provisions of Section 4 of this Agreement. --------- 4 6. Security for Performance. The Company and Purchaser hereby ------------------------ acknowledge (a) that Purchaser has agreed to pledge the Shares to secure the payment of all obligations existing under the Note whether for principal, interest, fees, expenses or otherwise and/or to ensure Purchaser's compliance with the terms and conditions of this Agreement and the Pledge Agreement and (b) that in connection with such pledge, Purchaser shall enter into the Pledge Agreement as of the Closing Date requiring that the certificates evidencing the Shares (the "Certificates") be held by the Company as security for the payment of all obligations existing under the Note, whether for principal, interest, fees, expenses or otherwise, and for Purchaser's compliance with the terms and conditions of this Agreement and the Pledge Agreement. Subject to compliance with the terms and conditions of this Agreement and of the Pledge Agreement, Purchaser shall exercise all rights and privileges of the registered holder of the Shares held by the Company pursuant to the Pledge Agreement and shall be entitled to receive any dividend or other distribution thereon. 7. Investment Representations. Purchaser represents and warrants to the -------------------------- Company as follows: (a) Purchaser's Own Account. Purchaser is acquiring the Shares for ----------------------- Purchaser's own account and not with a view to or for sale in connection with any distribution of the Shares. (b) Access to Information. Purchaser (i) is familiar with the --------------------- business of the Company and its Subsidiaries; (ii) has had an opportunity to discuss with representatives of the Company and its Subsidiaries the condition of and prospects for the continued operation and financing of the Company and its Subsidiaries and such other matters as Purchaser has deemed appropriate in considering whether to invest in the Shares; and (iii) has been provided access to all available information about the Company and its Subsidiaries reasonably requested by Purchaser. (c) Shares Not Registered. Purchaser understands that the Shares have --------------------- not been registered under the Act or registered or qualified under the securities laws of any state and that Purchaser may not Transfer the Shares unless they are subsequently registered under the Act and registered or qualified under applicable state securities laws, or unless an exemption is available which permits Transfers without such registration and qualification. 8. Partial Termination. This Agreement shall terminate with respect to ------------------- those Shares which are (a) acquired by the Company pursuant to Section 3(b) ------------ hereof upon such acquisition; or (b) acquired by the Company pursuant to Section ------- 4 hereof, upon such acquisition. - 5 9. Obligation to Sell Securities. ----------------------------- (a) If FS Equity Partners IV, L.P., a Delaware limited partnership, ("FSEP IV") finds a third-party buyer for all shares of common stock of the Company held by it (whether such sale is by way of purchase, exchange, merger or other form of transaction), upon the request of FSEP IV, the Purchaser shall sell all of Purchaser's Shares for the same per share consideration (which may be less than the Purchase Price per share paid by Purchaser), and otherwise pursuant to the terms and conditions applicable to the FSEP IV for the sale of its shares of its common stock of the Company. (b) Purchaser hereby consents to any sale, transfer, reorganization, exchange, merger, combination or other form of transaction described in Section ------- 9(a) and agrees to execute such agreements, powers of attorney, voting proxies ---- or other documents and instruments as may be necessary or desirable to consummate such sale, transfer, reorganization, exchange, merger, combination or other form of transaction. Purchaser further agrees to timely take such other actions as FSEP IV may reasonably request in connection with the approval of the consummation of such sale, transfer, reorganization, exchange, merger, combination or other form of transaction, including voting as a stockholder to approve any such sale, transfer, reorganization, exchange, merger, combination or other form of transaction and waiving any appraisal rights that Purchaser may have in connection therewith. (c) The obligations of Purchaser pursuant to this Section 9 shall be --------- binding on any transferee (other than a transferee in a Public Market Sale, as defined below) of any of the Shares and Purchaser and any of his transferees shall obtain and deliver to FSEP IV a written commitment to be bound by such provisions from a subsequent transferee prior to any Transfer (other than Transfers constituting a Public Market Sale). The Purchaser's obligations pursuant to this Section 9, and the obligations of any such transferee, shall --------- survive the partial termination of this Agreement pursuant to Section 8 hereof. --------- Any transfer effected in violation of this provision shall be void. The term "Public Market Sale" means any sale of common stock of the Company after the Company's shares of common stock are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended, which is made pursuant to Rule 144 promulgated under the Securities Act or which is made pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission. 10. Tag Along Rights. If FSEP IV finds a third-party buyer (other than a ---------------- buyer that is an investment fund or partnership affiliated with FSEP IV, a general or limited partner of FSEP IV, or, for the period ending one year from the date hereof, an unaffiliated institutional investor or merchant banking firm (each, a "FS Permitted Transferee") or is a transferee in a Public Market Sale), for all or part of the shares of common stock held by FSEP IV (whether such sale is by way of purchase, exchange, merger or other form of transaction), the Purchaser shall have the right to sell, on the terms set forth in a written notice (the "Offering Notice") delivered by FSEP IV to the Purchaser describing the terms of the proposed sale (including the minimum sale price for the shares of Common stock that FSEP IV plans to sell), that amount of the Shares he then owns which constitute the same percentage of his Shares as the 6 percentage of common stock sold by FSEP IV. Each such right shall be exercisable by delivering written notice to FSEP IV within 15 days after receipt of the Offering Notice. Failure to exercise such right within such 15-day period shall be regarded as a waiver of such rights. The obligations of FSEP IV under this Section 10 shall terminate upon an Initial Public Offering. 11. Miscellaneous. ------------- (a) Legends on Certificates. Any and all certificates now or ----------------------- hereafter issued evidencing the Shares shall have endorsed upon them a legend substantially as follows: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS UPON TRANSFER AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THAT CERTAIN STOCK PURCHASE AGREEMENT DATED AS OF ________________, BY AND BETWEEN ADVANCE AUTO PARTS, INC., A DELAWARE CORPORATION, AND THE ORIGINAL PURCHASER HEREOF, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF ADVANCE AUTO PARTS, INC." Such certificates shall also bear such legends and shall be subject to such restrictions on transfer as may be necessary to comply with all applicable federal and state securities laws and regulations. (b) Further Assurances. Each party hereto agrees to perform any ------------------ further acts and execute and deliver any documents which may be reasonably necessary to carry out the intent of this Agreement. (c) Notices. Except as otherwise provided herein, all notices, ------- requests, demands and other communications under this Agreement shall be in writing, and if by telegram or telecopy, shall be deemed to have been validly served, given or delivered when sent, or if by personal delivery or messenger or courier service, or by registered or certified mail, shall be deemed to have been validly served, given or delivered upon actual delivery, at the following addresses, telephone and facsimile numbers (or such other address(es), telephone and facsimile numbers a party may designate for itself by like notice): 7 If to the Company: Advance Auto Parts, Inc. c/o Freeman Spogli & Co. Incorporated 599 Lexington Avenue, Suite 1800 New York, New York 10022 Attention: John M. Roth Telephone: (212) 758-2555 Telecopy: (212) 758-7499 If to Purchaser: --------------------------------------- --------------------------------------- --------------------------------------- (d) Amendments. This Agreement may be amended only by a written ---------- agreement executed by both of the parties hereto and by FSEP IV. (e) Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of Delaware. (f) Disputes. In the event of any dispute among the parties arising -------- out of this Agreement, the prevailing party shall be entitled to recover from the nonprevailing party the reasonable expenses of the prevailing party including, without limitation, reasonable attorneys' fees. (g) Entire Agreement. This Agreement constitutes the entire ---------------- agreement and understanding among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating hereto. (h) Recapitalizations or Exchanges Affecting the Company's Capital. -------------------------------------------------------------- The provisions of this Agreement shall apply to any and all stock or other securities of the Company or any successor or assign of the Company, which may be issued in respect of, in exchange for or in substitution of, the Shares by reason of any split, reverse split, recapitalization, reclassification, combination, merger, consolidation or otherwise, and such Shares or other securities shall be encompassed within the term "Shares" for purposes of this Agreement and the Pledge Agreement. (i) No Rights as an Employee. Nothing in this Agreement shall affect ------------------------ in any manner whatsoever the rights of the Company or any of its Subsidiaries to terminate Purchaser's employment for any reason, with or without cause, subject to the terms and conditions of any employment agreement to which Purchaser may be a party. 8 (j) Disclosure. The Company shall have no duty or obligation to ---------- affirmatively disclose to Purchaser, and Purchaser shall have no right to be advised of, any material information regarding the Company or any of its Subsidiaries at any time prior to, upon or in connection with the Company's repurchase of the Shares under this Agreement at the cessation or termination of Purchaser's employment with the Company and/or any of its Subsidiaries. (k) Successors and Assigns. The Company may assign with absolute ---------------------- discretion any or all of its rights and/or obligations and/or delegate any of its duties under this Agreement to any of its affiliates, successors and/or assigns and this Agreement shall inure to the benefit of, and be binding upon, such respective affiliates, successors and/or assigns of the Company in the same manner and to the same extent as if such affiliates, successors and/or assigns were original parties hereto. Without limiting the foregoing, the Company may assign the Repurchase Option and/or the right of first refusal provided for in Section 3 and Section 4 of this Agreement, respectively, to any of its --------- --------- affiliates, successors and/or assigns. FSEP IV may assign its rights under Section 9 to any FS Permitted Transferee or to a purchaser of shares of common --------- stock then owned by FSEP IV. For purposes of this Agreement, the term "Shares" shall include shares of capital stock or other securities of the Company or any successor or assign of the Company, which are issued in respect of, in exchange for or in substitution of the Shares by reason of any split, reverse split, recapitalization, reclassification, combination, merger, exchange or consolidation. Unless specifically provided herein to the contrary, Purchaser may not assign any or all of its rights and/or obligations and/or delegate any or all its duties under this Agreement without the prior written consent of the Company and FSEP IV. Upon an assignment of any or all of Purchaser's rights and/or obligations and/or a delegation of any or all of its duties under this Agreement in accordance with the terms of this Agreement, this Agreement shall inure to the benefit of, and be binding upon, Purchaser's respective affiliates, successors and/or assigns in the same manner and to the same extent as if such affiliates, successors and/or assigns were original parties hereto. (l) Headings. Introductory headings at the beginning of each section -------- and subsection of this Agreement are solely for the convenience of the parties and shall not be deemed to be a limitation upon or description of the contents of any such section and subsection of this Agreement. (m) Counterparts. This Agreement may be executed in two counterparts, ------------ each of which shall be deemed an original and both of which, when taken together, shall constitute one and the same agreement. 9 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. THE COMPANY: Advance Auto Parts, Inc., a Delaware corporation By: -------------------------------------- Name: Title: PURCHASER: ----------------------------------------- Name: 10 EXHIBIT A SECURED PROMISSORY NOTE $__________ [DATE] FOR VALUE RECEIVED, the undersigned ________________________ ("Borrower") hereby promises to pay to the order of Advance Auto Parts, Inc., a Delaware corporation ("Payee"), the principal sum of ________________________ ($_______) together with interest on the unpaid balance of such principal amount from the date hereof at the rate of interest equal to the rate of interest reported by The Wall Street Journal as the "prime rate," as it may change from time to time. Any change in the interest rate to be paid on this Promissory Note resulting from a change in the prime rate shall be effective as of the date of such change. Accrued interest to be paid on this Secured Promissory Note (this "Promissory Note") shall be payable in arrears commencing on _________________ (with respect to interest accrued through the preceding December 31) and continuing on each succeeding __________ thereafter with respect to interest accrued during the previous year ending December 31 until this Note is paid in full. The principal balance of, and all accrued and unpaid interest on, this Promissory Note shall be payable in full by Borrower on that date which is ________ (__) years from the date hereof. Payments of principal and interest on this Promissory Note shall be made in legal tender of the United States of America and shall be made at such place as Payee shall have designated to Borrower (and may be made by payroll deduction by mutual consent of Payor and Payee). If the date set for any payment of principal or interest on this Promissory Note is a Saturday, Sunday or legal holiday, then such payment shall be due on the next succeeding business day. As of the date hereof, Borrower has purchased certain shares of common stock of the Company, par value $.0001 per share (the "Shares") of the Payee pursuant to the terms of that certain Advance Auto Parts, Inc. Stock Subscription Agreement (the "Stock Subscription Agreement") dated on even date herewith, by and between Payee and Borrower. Payment of this Promissory Note shall be secured by the Shares as provided in that certain Stock Pledge Agreement of even date herewith by and between Payee and Borrower (the "Pledge Agreement"). The principal balance of, and accrued and unpaid interest on, this Promissory Note may be prepaid at any time, in whole or in part, without premium or penalty. Any such prepayment shall be first applied to the payment of any accrued and unpaid interest and then to the unpaid balance of the principal amount. In the event of a Transfer (as defined in the Stock Subscription Agreement) by Borrower (or Permitted Transferees (as defined in the Stock Subscription Agreement)) of Shares to anyone (other than to a Permitted Transferee), Borrower shall pay the principal balance of, and accrued but unpaid interest on, this Promissory Note in accordance with the provisions of Section 6 --------- of the Pledge Agreement. 11 In the event Borrower shall (i) cease to be an employee of the Company or its Subsidiaries; (ii) fail to make complete payment of any installment of accrued interest under this Promissory Note on the date such installment of accrued interest is due (but Payee shall give Borrower notice of nonpayment and at least five (5) days to cure such nonpayment); (iii) fail to make complete payment of principal when due under this Promissory Note; (iv) fail to make the prepayment of principal and accrued interest on this Promissory Note upon a sale of Shares as required by the fourth paragraph hereof; or (v) commit a material breach of or default under the Stock Subscription Agreement or the Pledge Agreement, Payee may accelerate this Promissory Note and declare the entire unpaid principal amount of this Promissory Note and all accrued and unpaid interest hereon to be immediately due and payable and, thereupon, the unpaid principal amount and all such accrued and unpaid interest shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind (all of which are hereby expressly waived by Borrower). The failure of Payee to accelerate this Promissory Note shall not constitute a waiver of any of Payee's rights under this Promissory Note as long as Borrower's default under this Promissory Note or breach of or default under the Stock Subscription Agreement or the Pledge Agreement continues. The provisions of this Promissory Note shall be governed by and construed in accordance with the laws of the State of Delaware without regard to the conflicts of law rules thereof. In the event that Payee is required to take any action to collect or otherwise enforce payment of this Promissory Note, Borrower agrees to pay such reasonable attorneys' fees, court costs and other expenses as Payee may incur as a result thereof, whether or not suit is commenced. The terms and provisions of this Note shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and the successors and assigns of Payee and any assignee or transferee of this Note. In the event of such transfer or assignment, the rights and privileges conferred upon Payee shall automatically extend to and be vested in such assignee or transferee, all subject to the terms and conditions hereof. Borrower's obligations, rights or any interest hereunder may not be delegated or assigned without the written consent of Payee. All notices, requests, demands or other communications under this Promissory Note shall be delivered in accordance with the provisions of Section 11(c) of the Stock Subscription Agreement to the address(es) set forth therein. 12 IN WITNESS WHEREOF, this Promissory Note has been duly executed and delivered by Borrower on the date first above written. BORROWER: ----------------------------------------- Name: 13 EXHIBIT B STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT (this "Pledge Agreement") is made as of ______________, between __________________ as pledgor ("Pledgor"), and Advance Auto Parts, Inc., a Delaware corporation, as pledgee ("Pledgee"). R E C I T A L S: - - - - - - - - A. Pursuant to that certain Stock Purchase Agreement of even date herewith (the "Purchase Agreement") by and between Pledgee and Pledgor, Pledgor was issued $_____ __________________ (_______) shares (the "Shares") of common stock, par value $.0001 per share, of Pledgee in exchange for an aggregate purchase price of $________. B. Pursuant to the terms of the Stock Subscription Agreement and that certain Secured Promissory Note in the amount of $__________ of even date herewith delivered by Pledgor to Pledgee (the "Note"), Pledgor has agreed to make payments of principal and interest to Pledgee as provided in the Note. C. Pursuant to the terms of the Purchase Agreement and the Note, Pledgor is required to execute this Pledge Agreement to secure payment in full of all obligations under the Note, whether for principal, interest, fees, expenses or otherwise and to ensure compliance with the terms and conditions of the Purchase Agreement and this Pledge Agreement. A G R E E M E N T: - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and conditions contained herein, the parties hereto agree as follows: 1. Grant of Security Interest in the Shares. Pledgor hereby grants ---------------------------------------- to Pledgee a security interest in the Shares, pledges and hypothecates the Shares to Pledgee, and deposits the certificates evidencing the Shares (the "Certificates") with Pledgee as collateral security for the payment by Pledgor of all obligations existing under the Note, whether for principal, interest, fees, expenses or otherwise, and the satisfaction of all obligations of Pledgor under the Purchase Agreement and this Pledge Agreement. The Certificates, together with one or more stock assignments duly executed in blank with signatures appropriately guaranteed or witnessed, are being delivered herewith to Pledgee, to be retained by Pledgee as the pledgeholder for the Shares. 14 2. Representation and Warranty of Pledgor. Pledgor represents and -------------------------------------- warrants to Pledgee that the Shares are free and clear of all claims, mortgages, pledges, liens and other encumbrances of any nature whatsoever, except (a) the liens and restrictions set forth herein and in the Note and (b) any restrictions upon sale and distribution imposed by the Securities Act of 1933, as amended (the "Act"), applicable state securities laws, and the Purchase Agreement. 3. Voting of Shares. So long as there shall exist no Event of ---------------- Default (as hereinafter defined), Pledgor shall be entitled to exercise, as Pledgor deems proper but in a manner not inconsistent with the terms hereof, Pledgor's rights to voting power with respect to the Shares. Pledgee, and not Pledgor, shall be entitled to vote the Shares at any time that there exists an Event of Default. 4. Dividends. So long as there shall exist no Event of Default, --------- Pledgor shall be entitled to receive any dividend (ordinary or extraordinary, whether paid in cash, stock or property) or other distribution with respect to the Shares. If there exists an Event of Default, such dividend or other distribution shall be delivered to Pledgee to be held as additional collateral security under this Pledge Agreement. 5. Pledgee's Duties. So long as Pledgee exercises reasonable care ---------------- with respect to the Shares in its possession, Pledgee shall have no liability for any loss or damage to such Shares, and in no event shall Pledgee have liability for any diminution in value of the Shares occasioned by economic or market conditions or events. Pledgee shall be deemed to have exercised reasonable care within the meaning of the preceding sentence if the Shares in its possession are accorded treatment substantially equal to that which Pledgee accords its own property, it being understood that Pledgee shall not have any responsibility under this Pledge Agreement for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to the Shares, whether or not Pledgee has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against any person or entity with respect to the Shares. 6. Release from Pledge, Transfers to Permitted Transferees. In the ------------------------------------------------------- event of a purchase by Pledgee of any or all of the Shares pursuant to Section 3 of the Purchase Agreement, such Shares shall be released from this Pledge Agreement. Pledgor hereby authorizes and directs Pledgee, upon receipt by Pledgor of payment pursuant to Section 3 of the Purchase Agreement, to complete and execute the stock assignment or stock assignments delivered herewith to effectuate such Transfer. No Shares may be Transferred (as defined in the Purchase Agreement) (except as set forth in the next sentence), unless Pledgor has made payment to Pledgee of all unpaid obligations existing under the Note (whether or not then due and payable), whether for principal, interest, fees, expenses or otherwise and all unsatisfied obligations of Pledgor under the Purchase Agreement and this Pledge Agreement. In the event of a Transfer pursuant to Section 5 of the Purchase Agreement, the Pledgor authorizes the --------- pledgee to cause the certificate or certificates evidencing the Shares to be reissued in the name of the Permitted Transferee (as defined in the Purchase Agreement) or Transferees; provided, however, that (a) the Shares shall continue to be subject to this Pledge Agreement and the Permitted Transferees shall execute an undertaking agreeing to be bound by this Pledge Agreement in accordance with Section 5 of the --------- 15 Purchase Agreement, (b) the reissued certificate or certificates shall continue to be held by the Pledgee pursuant hereto, and (c) the Permitted Transferee or Transferees shall execute and deliver to the Pledgee stock assignments in blank with respect to the Shares. Upon receipt by Pledgee of the payment as required by this paragraph, the Shares shall be released from this Pledge Agreement. 7. Sale of Collateral. Upon the occurrence of any Event of Default, ------------------ Pledgee shall have all the rights and remedies of a secured party under the applicable Uniform Commercial Code and also may, without notice, except as specified below, at its option, sell all or any part of the Shares, for cash, note or other property upon credit for future delivery or upon such other terms as Pledgee may deem commercially reasonable. Upon such sale, Pledgee, unless prohibited by a provision of any applicable statute, may purchase all or any part of the Shares being sold, free from and discharged of all trusts, claims, rights of redemption and equities of Pledgor. If the proceeds of any sale of the Shares shall be insufficient to pay all amounts due under the Notes and satisfy the obligations of Pledgor under the Purchase Agreement and this Pledge Agreement, including collection costs and expenses of such sale, Pledgor shall remain obligated and liable for any deficiency with respect thereto. If, at any time when Pledgee shall determine to exercise its rights to sell all or any part of the Shares pursuant to this Section 7, such Shares, or the part thereof to be --------- sold, shall not be effectively registered under the Act as then in effect or any similar statute then in force, subject to the provisions of Section 9 hereof, --------- Pledgee, in its sole and absolute discretion, is hereby expressly authorized to sell such Shares, or any part thereof, by private sale in such manner and under such circumstances as Pledgee may deem necessary or advisable in order that such sale may be effectuated legally without such registration. Without limiting the generality of the foregoing, Pledgee, in its sole and absolute discretion, may approach and negotiate with a restricted number of potential purchasers to effectuate such sale or restrict such sale to a purchaser or purchasers who shall represent and agree that such purchaser or purchasers are purchasing for its or their own account, for investment only, and not with a view to the distribution or sale of such Shares or any part thereof. Any sale conducted in the manner described in the foregoing sentence shall be deemed to be a sale conducted in a commercially reasonable manner within the meaning of the applicable Uniform Commercial Code, and Pledgor hereby consents and agrees that Pledgee shall incur no responsibility or liability for selling all or any part of the Shares at a price which is not unreasonably low, notwithstanding the possibility that a substantially higher price might be realized if the sale were public. Pledgee shall not be obligated to make any sale of the Shares regardless of notice of sale having been given. Pledgee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and any such sale may, without further notice, be made at the time and place to which it was so adjourned. 8. Redemption of Collateral. Notwithstanding any other provision of ------------------------ this Pledge Agreement, upon the occurrence of an Event of Default, Pledgee shall give Pledgor written notice of the time and place of any public sale or of the time on or after which any private sale or other Transfer is to be made at least five (5) days before the date fixed for any public sale or before the day on or after which any private sale or other Transfer is to be made. Pledgor agrees that, to the extent notice of sale shall be required by law, such five (5) days' notice shall constitute reasonable notification. This notice shall also specify the aggregate outstanding 16 monetary obligations of the Pledgor to Pledgee at the date of such notice (the "Total Obligation"). At any time during such five-day period, Pledgor shall have the right to redeem the Shares by the payment by certified or bank cashier's check of an amount equal to the Total Obligation. 9. Events of Default. At the option of Pledgee, the principal ----------------- balance of the Note and all accrued and unpaid interest thereon, and all other obligations of Pledgor to Pledgee thereunder, under the Purchase Agreement and hereunder, shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind (all of which are hereby expressly waived by Pledgor), upon the occurrence of any of the events set forth below (individually, an "Event of Default"): (a) Pledgor shall cease to be an employee of the Company or its subsidiaries; (b) Pledgor shall fail to make complete payment of any installment of accrued interest under the Note on the date such installment of accrued interest is due, after being given notice and an opportunity of at least five (5) days to cure such nonpayment; (c) Pledgor shall fail to make complete payment of principal when due under the Note; (d) Pledgor shall fail to make the prepayment of principal and accrued interest on the Note as required by the fourth paragraph of the Note; or (e) Pledgor shall commit a breach of or default under the Purchase Agreement or this Pledge Agreement. 10. Termination. This Pledge Agreement shall terminate only upon (a) ----------- payment to Pledgee of all unpaid obligations existing under the Note, whether for principal, interest, fees, expenses or otherwise and all unsatisfied obligations of Pledgor under the Purchase Agreement and this Pledge Agreement, and (b) upon termination of the Purchase Agreement and all obligations thereunder with respect to all Shares. Upon termination of this Pledge Agreement, Pledgor shall be entitled to the return of the Certificates then held by Pledgee and any other collateral security then held by Pledgee pursuant to Section 4 of this Pledge Agreement. --------- 11. Cumulation of Remedies; Waiver of Rights. The remedies provided ---------------------------------------- herein in favor of Pledgee shall not be deemed exclusive but shall be cumulative and shall be in addition to all of the remedies in favor of Pledgee existing at law or in equity. Nothing in this Pledge Agreement shall require Pledgee to proceed against or exhaust its remedies against the Shares before proceeding against Pledgor or executing against any other security or collateral securing performance of Pledgor's obligations to Pledgee under the Note, the Purchase Agreement or this Pledge Agreement. No delay on the part of Pledgee in exercising any of its 17 options, powers or rights, or the partial or single exercise thereof, shall constitute a waiver thereof. 12. Execution of Endorsements, Assignments, Etc. Upon the occurrence ------------------------------------------- of an Event of Default, Pledgee shall have the right for and in the name, place and stead of Pledgor to execute endorsements, assignments or other instruments of conveyance or transfer with respect to all or any of the Shares and any other shares of the capital stock of Pledgee or other property which is held by Pledgee as collateral security pursuant to this Pledge Agreement. 13. Miscellaneous. ------------- (a) Further Assurances; Changes in Capitalization. Each party --------------------------------------------- hereto agrees to perform any further acts and execute and deliver any documents which may be reasonably necessary to carry out the intent of this Pledge Agreement. The provisions of this Pledge Agreement shall apply to any and all stock or other securities of the Pledgee or any successor or assign of the Pledgee, which may be issued in respect of, in exchange for or in substitution of, the Shares by reason of any split, reverse split, recapitalization, reclassification, combination, merger, consolidation or otherwise, and such Shares or other securities shall be encompassed within the term "Shares" for purposes of this Pledge Agreement and the Pledgee shall have a security interest in all such securities on the same terms set forth in this Pledge Agreement. (b) Notice. Except as otherwise provided herein, all notices, ------ requests, demands and other communications under this Pledge Agreement shall be in writing, and if by telegram or telecopy, shall be deemed to have been validly served, given or delivered when sent, or if by personal delivery or messenger or courier service, or by registered or certified mail, shall be deemed to have been validly served, given or delivered upon actual delivery, at the following addresses, telephone and facsimile numbers (or such other address(es), telephone and facsimile numbers a party may designate for itself by like notice): If to Pledgee: Advance Auto Parts, Inc. c/o Freeman Spogli & Co. Incorporated 599 Lexington Avenue, Suite 1800 New York, New York 10022 Attention: John M. Roth Telephone: (212) 758-2555 Telecopy: (212) 758-7499 If to Pledgor: -------------------------------------- -------------------------------------- -------------------------------------- 18 (c) Amendments. This Pledge Agreement may be amended only by a ---------- written agreement executed by the parties hereto. (d) Governing Law. This Pledge Agreement shall be governed by ------------- and construed in accordance with the laws of the State of Delaware. (e) Disputes. In the event of any dispute between the parties -------- arising out of this Pledge Agreement, the prevailing party shall be entitled to recover from the nonprevailing party the reasonable expenses of the prevailing party including, without limitation, reasonable attorneys' fees. (f) Entire Agreement. This Pledge Agreement constitutes the ---------------- entire agreement and understanding among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating hereto. (g) Successors and Assigns. Pledgee shall have the right to ---------------------- assign with absolute discretion any or all of its rights and/or obligations and/or delegate any or all of its duties under this Pledge Agreement to any of its affiliates, successors and/or assigns, including, without limitation (i) to any of its banks or lending institutions as collateral security, or (ii) to any entity succeeding the Pledgee by merger, consolidation or acquisition of all or substantially all of the Pledgee's assets, and this Pledge Agreement shall inure to the benefit of, and be binding upon, such respective affiliates, successors and/or assigns of Pledgee in the same manner and to the same extent as if such affiliates, successors and/or assigns were original parties hereto. Unless specifically provided herein to the contrary, Pledgor may not assign any or all of its rights and/or obligations and/or delegate any or all of its duties under this Pledge Agreement without the prior written consent of Pledgee. Upon an assignment of any or all of Pledgor's rights and/or obligations and/or a delegation of any or all of its duties under this Pledge Agreement in accordance with the terms of this Pledge Agreement, this Pledge Agreement shall inure to the benefit of, and be binding upon, Pledgor's respective affiliates, successors and/or assigns in the same manner and to the same extent as if such affiliates, successors and/or assigns were original parties hereto. (h) Headings. Introductory headings at the beginning of each -------- section and subsection of this Pledge Agreement are solely for the convenience of the parties and shall not be deemed to be a limitation upon or description of the contents of any such section and subsection of this Pledge Agreement. (i) Counterparts. This Pledge Agreement may be executed in two ------------ counterparts, each of which shall be deemed an original and both of which, when taken together, shall constitute one and the same Pledge Agreement. 19 IN WITNESS WHEREOF, the parties hereto have duly executed this Pledge Agreement as of the day and year first above written. PLEDGEE: Advance Auto Parts, Inc., a Delaware corporation By: --------------------------------------- Name: Title: PLEDGOR: ------------------------------------------ Name: 20 EX-10.38 16 dex1038.txt PROMISSORY NOTE DATED 9/20/01 EXHIBIT 10.38 ADVANCE STORES COMPANY, INCORPORATED SECURED PROMISSORY NOTE $1,300,000.00 September 20, 2001 FOR VALUE RECEIVED, the undersigned Garnett E. Smith ("Borrower") hereby promises to pay to the order of Advance Stores Company, Incorporated, a Virginia Corporation ("Payee"), the principal sum of One Million, Three Hundred Thousand Dollars ($1,300,000.00) together with interest on the unpaid balance of such principal amount from the date hereof at the rate of interest equal to the rate of interest reported by The Wall Street Journal as the "prime rate," as it may change from time to time. Any change in the interest rate to be paid on this Promissory Note resulting from a change in the prime rate shall be effective as of the date of such change. Accrued interest to be paid on this Secured Promissory Note (this "Promissory Note") shall be payable in arrears commencing on March 1, 2002 (with respect to interest accrued through the preceding December 31) and continuing on each succeeding March 1 thereafter with respect to interest accrued during the previous year ending December 31 until this Note is paid in full. The principal balance of, and all accrued and unpaid interest on, this Promissory Note shall be payable in full by Borrower on that date which is five (5) years from the date hereof. Payments of principal and interest on this Promissory Note shall be made in legal tender of the United States of America and shall be made at such place as Payee shall have designated to Borrower (and may be made by payroll deduction by mutual consent of Payor and Payee). If the date set for any payment of principal or interest on this Promissory Note is a Saturday, Sunday or legal holiday, then such payment shall be due on the next succeeding business day. As of the date hereof, Borrower has purchased certain shares of common stock, par value $0.01 per share (the "Shares"), of the Payee pursuant to the terms of that certain Advance Holding Corporation Stock Subscription Agreement (the "Stock Subscription Agreement") dated April 15, 1998, by and between Advance Holding Corporation and Borrower. Payment of this Promissory Note shall be secured by the Shares as provided in that certain Stock Pledge Agreement of even date herewith by and between Payee and Borrower (the "Pledge Agreement"). The principal balance of, and accrued and unpaid interest on, this Promissory Note may be prepaid at any time, in whole or in part, without premium or penalty. Any such prepayment shall be first applied to the payment of any accrued and unpaid interest and then to the unpaid balance of the principal amount. In the event of a Transfer (as defined in the Stock Subscription Agreement) by Borrower (or Permitted Transferees (as defined in the Stock Subscription Agreement)) of Shares to anyone (other than to a Permitted Transferee), Borrower shall pay the principal balance of, and accrued but unpaid interest on, this Promissory Note in accordance with the provisions of Section 6 --------- of the Pledge Agreement. -1- In the event Borrower shall (i) fail to make complete payment of any installment of accrued interest under this Promissory Note on the date such installment of accrued interest is due (but Payee shall give Borrower notice of nonpayment and at least five (5) days to cure such nonpayment); (ii) fail to make complete payment of principal when due under this Promissory Note; (iii) fail to make the prepayment of principal and accrued interest on this Promissory Note upon a sale of Shares as required by the fourth paragraph hereof; or (iv) commit a material breach of or default under the Stock Subscription Agreement or the Pledge Agreement, Payee may accelerate this Promissory Note and declare the entire unpaid principal amount of this Promissory Note and all accrued and unpaid interest hereon to be immediately due and payable and, thereupon, the unpaid principal amount and all such accrued and unpaid interest shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind (all of which are hereby expressly waived by Borrower). The failure of Payee to accelerate this Promissory Note shall not constitute a waiver of any of Payee's rights under this Promissory Note as long as Borrower's default under this Promissory Note or breach of or default under the Stock Subscription Agreement or the Pledge Agreement continues. The provisions of this Promissory Note shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia without regard to the conflicts of law rules thereof. In the event that Payee is required to take any action to collect or otherwise enforce payment of this Promissory Note, Borrower agrees to pay such reasonable attorneys' fees, court costs and other expenses as Payee may incur as a result thereof, whether or not suit is commenced. The terms and provisions of this Promissory Note shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and the successors and assigns of Payee and any assignee or transferee of this Promissory Note. In the event of such transfer or assignment, the rights and privileges conferred upon Payee shall automatically extend to and be vested in such assignee or transferee, all subject to the terms and conditions hereof. Borrower's obligations, rights or any interest hereunder may not be delegated or assigned without the written consent of Payee. All notices, requests, demands or other communications under this Promissory Note shall be delivered in accordance with the provisions of Section ------- 13(b) of the Pledge Agreement to the address(es) set forth therein. -- IN WITNESS WHEREOF, this Promissory Note has been duly executed and delivered by Borrower on the date first above written. BORROWER: /s/ Garnett E. Smith _______________________________________ Garnett E. Smith -2- EX-10.39 17 dex1039.txt FORM OF STOCK OPTION AGMT EXHIBIT 10.39 ADVANCE STORES COMPANY, INCORPORATED STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT (this "Pledge Agreement") is made as of September 20, 2001, between Garnett E. Smith as pledgor ("Pledgor"), and Advance Stores Company, Incorporated, a Virginia corporation, as pledgee ("Pledgee"). R E C I T A L S: - - - - - - - - A. Pursuant to that certain Stock Purchase Agreement dated April 15, 1998 (the "Purchase Agreement") by and between Pledgee and Pledgor, Pledgor was issued 250,000 shares (the "Shares") of common stock, $0.01 par value per share of Pledgee in exchange for an aggregate purchase price of $2,500,000.00. B. Pursuant to the terms of the Purchase Agreement and that certain Secured Promissory Note in the amount of $1,300,000.00 of even date herewith delivered by Pledgor to Pledgee (the "Note"), Pledgor has agreed to make payments of principal and interest to Pledgee as provided in the Note. C. Pursuant to the terms of the Purchase Agreement and the Note, Pledgor is required to execute this Pledge Agreement to secure payment in full of all obligations under the Note, whether for principal, interest, fees, expenses or otherwise and to ensure compliance with the terms and conditions of the Purchase Agreement and this Pledge Agreement. A G R E E M E N T: - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and conditions contained herein, the parties hereto agree as follows: 1. Grant of Security Interest in the Shares. Pledgor hereby grants ---------------------------------------- to Pledgee a security interest in the Shares, pledges and hypothecates the Shares to Pledgee, and deposits the certificates evidencing the Shares (the "Certificates") with Pledgee as collateral security for the payment by Pledgor of all obligations existing under the Note, whether for principal, interest, fees, expenses or otherwise, and the satisfaction of all obligations of Pledgor under the Purchase Agreement and this Pledge Agreement. The Certificates, together with one or more stock assignments duly executed in blank with signatures appropriately guaranteed or witnessed, are being delivered herewith to Pledgee, to be retained by Pledgee as the pledgeholder for the Shares. 2. Representation and Warranty of Pledgor. Pledgor represents and -------------------------------------- warrants to Pledgee that the Shares are free and clear of all claims, mortgages, pledges, liens and other encumbrances of any nature whatsoever, except (a) the liens and restrictions set forth herein and in the Note, and (b) any restrictions upon sale and distribution imposed by the Securities Act of 1933, as amended (the "Act"), applicable state securities laws, and the Purchase Agreement. 3. Voting of Shares. So long as there shall exist no Event of ---------------- Default (as hereinafter defined), Pledgor shall be entitled to exercise, as Pledgor deems proper but in a manner not inconsistent with the terms hereof, Pledgor's rights to voting power with respect to the Shares. Pledgee, and not Pledgor, shall be entitled to vote the Shares at any time that there exists an Event of Default. 4. Dividends. So long as there shall exist no Event of Default, --------- Pledgor shall be entitled to receive any dividend (ordinary or extraordinary, whether paid in cash, stock or property) or other distribution with respect to the Shares. If there exists an Event of Default, such dividend or other distribution shall be delivered to Pledgee to be held as additional collateral security under this Pledge Agreement. 5. Pledgee's Duties. So long as Pledgee exercises reasonable care ---------------- with respect to the Shares in its possession, Pledgee shall have no liability for any loss or damage to such Shares, and in no event shall Pledgee have liability for any diminution in value of the Shares occasioned by economic or market conditions or events. Pledgee shall be deemed to have exercised reasonable care within the meaning of the preceding sentence if the Shares in its possession are accorded treatment substantially equal to that which Pledgee accords its own property, it being understood that Pledgee shall not have any responsibility under this Pledge Agreement for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to the Shares, whether or not Pledgee has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against any person or entity with respect to the Shares. 6. Release from Pledge; Transfers to Permitted Transferees. In the ------------------------------------------------------- event of a purchase by Pledgee of any or all of the Shares pursuant to Section 3 --------- of the Purchase Agreement, such Shares shall be released from this Pledge Agreement. Pledgor hereby authorizes and directs Pledgee, upon receipt by Pledgor of payment pursuant to Section 3 of the Purchase Agreement, to complete --------- and execute the stock assignment or stock assignments delivered herewith to effectuate such Transfer. No Shares may be Transferred (as defined in the Purchase Agreement) (except as set forth in the next sentence), unless Pledgor has made payment to Pledgee of all unpaid obligations existing under the Note (whether or not then due and payable), whether for principal, interest, fees, expenses or otherwise and all unsatisfied obligations of Pledgor under the Purchase Agreement and this Pledge Agreement. In the event of a Transfer pursuant to Section 5 of the --------- Purchase Agreement, the Pledgor authorizes the Pledgee to cause the certificate or certificates evidencing the Shares to be reissued in the name of the Permitted Transferee (as defined in the Purchase Agreement) or Transferees; provided, however, that (a) the Shares shall continue to be subject to this Agreement and the Permitted Transferees shall execute an undertaking agreeing to be bound by this Agreement in accordance with Section 5 --------- of the Purchase Agreement; (b) the reissued certificate or certificates shall continue to be held by the Pledgee pursuant hereto; and (c) the Permitted Transferee or Transferees shall execute and deliver to the Pledgee stock assignments in blank with respect to the Shares. Upon receipt by Pledgee of the payment as required by this paragraph, the Shares shall be released from this Pledge Agreement. 7. Sale of Collateral. Upon the occurrence of any Event of Default ------------------ (as defined in Section 9 hereof), Pledgee shall have all the rights and remedies --------- of a secured party under the applicable Uniform Commercial Code and also may, without notice, except as specified below, at its option, sell all or any part of the Shares, for cash, note or other property upon credit for future delivery or upon such other terms as Pledgee may deem commercially reasonable. Upon such sale, Pledgee, unless prohibited by a provision of any applicable statute, may purchase all or any part of the Shares being sold, free from and discharged of all trusts, claims, rights of redemption and equities of Pledgor. If the proceeds of any sale of the Shares shall be insufficient to pay all amounts due under the Notes and satisfy the obligations of Pledgor under the Purchase Agreement and this Pledge Agreement, including collection costs and expenses of such sale, Pledgor shall remain obligated and liable for any deficiency with respect thereto. If, at any time when Pledgee shall determine to exercise its rights to sell all or any part of the Shares pursuant to this Section 7, such --------- Shares, or the part thereof to be sold, shall not be effectively registered under the Act as then in effect or any similar statute then in force, subject to the provisions of Section 9 hereof, Pledgee, in its sole and absolute --------- discretion, is hereby expressly authorized to sell such Shares, or any part thereof, by private sale in such manner and under such circumstances as Pledgee may deem necessary or advisable in order that such sale may be effectuated legally without such registration. Without limiting the generality of the foregoing, Pledgee, in its sole and absolute discretion, may approach and negotiate with a restricted number of potential purchasers to effectuate such sale or restrict such sale to a purchaser or purchasers who shall represent and agree that such purchaser or purchasers are purchasing for its or their own account, for investment only, and not with a view to the distribution or sale of such Shares or any part thereof. Any sale conducted in the manner described in the foregoing sentence shall be deemed to be a sale conducted in a commercially reasonable manner within the meaning of the applicable Uniform Commercial Code, and Pledgor hereby consents and agrees that Pledgee shall incur no responsibility or liability for selling all or any part of the Shares at a price which is not unreasonably low, notwithstanding the possibility that a substantially higher price might be realized if the sale were public. Pledgee shall not be obligated to make any sale of the Shares regardless of notice of sale having been given. Pledgee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and any such sale may, without further notice, be made at the time and place to which it was so adjourned. 8. Redemption of Collateral. Notwithstanding any other provision of ------------------------ this Pledge Agreement, upon the occurrence of an Event of Default, Pledgee shall give Pledgor written notice of the time and place of any public sale or of the time on or after which any private sale or other Transfer is to be made at least five (5) days before the date fixed for any public sale or before the day on or after which any private sale or other Transfer is to be made. Pledgor agrees that, to the extent notice of sale shall be required by law, such five (5) days' notice shall constitute reasonable notification. This notice shall also specify the aggregate outstanding monetary obligations of the Pledgor to Pledgee at the date of such notice (the "Total Obligation"). At any time during such five (5) day period, Pledgor shall have the right to redeem the Shares by the payment by certified or bank cashier's check of an amount equal to the Total Obligation. 9. Events of Default. At the option of Pledgee, the principal ----------------- balance of the Note and all accrued and unpaid interest thereon, and all other obligations of Pledgor to Pledgee thereunder, under the Purchase Agreement and hereunder, shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind (all of which are hereby expressly waived by Pledgor), upon the occurrence of any of the events set forth below (individually, an "Event of Default"): (a) Pledgor shall fail to make complete payment of any installment of accrued interest under the Note on the date such installment of accrued interest is due, after being given notice and an opportunity of at least five (5) days to cure such nonpayment; (b) Pledgor shall fail to make complete payment of principal when due under the Note; (c) Pledgor shall fail to make the prepayment of principal and accrued interest on the Note as required by the fourth paragraph of the Note; or (d) Pledgor shall commit a breach of or default under the Purchase Agreement or this Pledge Agreement. 10. Termination. This Pledge Agreement shall terminate only upon (a) ----------- payment to Pledgee of all unpaid obligations existing under the Note, whether for principal, interest, fees, expenses or otherwise and all unsatisfied obligations of Pledgor under the Purchase Agreement and this Pledge Agreement, and (b) termination of the Purchase Agreement and all obligations thereunder with respect to all Shares. Upon termination of this Pledge Agreement, Pledgor shall be entitled to the return of the Certificates then held by Pledgee and any other collateral security then held by Pledgee pursuant to Section 4 of this --------- Pledge Agreement. 11. Cumulation of Remedies; Waiver of Rights. The remedies provided ---------------------------------------- herein in favor of Pledgee shall not be deemed exclusive but shall be cumulative and shall be in addition to all of the remedies in favor of Pledgee existing at law or in equity. Nothing in this Pledge Agreement shall require Pledgee to proceed against or exhaust its remedies against the Shares before proceeding against Pledgor or executing against any other security or collateral securing performance of Pledgor's obligations to Pledgee under the Note, the Purchase Agreement or this Pledge Agreement. No delay on the part of Pledgee in exercising any of its options, powers or rights, or the partial or single exercise thereof, shall constitute a waiver thereof. 12. Execution of Endorsements, Assignments, Etc. Upon the occurrence ------------------------------------------- of an Event of Default, Pledgee shall have the right for and in the name, place and stead of Pledgor to execute endorsements, assignments or other instruments of conveyance or transfer with respect to all or any of the Shares and any other shares of the capital stock of Pledgee or other property which is held by Pledgee as collateral security pursuant to this Pledge Agreement. 13. Miscellaneous. ------------- (a) Further Assurances; Changes in Capitalization. Each party --------------------------------------------- hereto agrees to perform any further acts and execute and deliver any documents which may be reasonably necessary to carry out the intent of this Pledge Agreement. The provisions of this Pledge Agreement shall apply to any and all stock or other securities of the Pledgee or any successor or assign of the Pledgee, which may be issued in respect of, in exchange for or in substitution of, the Shares by reason of any split, reverse split, recapitalization, reclassification, combination, merger, consolidation or otherwise, and such Shares or other securities shall be encompassed within the term "Shares" for purposes of this Pledge Agreement and the Pledgee shall have a security interest in all such securities on the same terms set forth in this Pledge Agreement. (b) Notice. Except as otherwise provided herein, all notices, ------ requests, demands and other communications under this Agreement shall be in writing, and if by telegram or telecopy, shall be deemed to have been validly served, given or delivered when sent, or if by personal delivery or messenger or courier service, or by registered or certified mail, shall be deemed to have been validly served, given or delivered upon actual delivery, at the following addresses, telephone and facsimile numbers (or such other address(es), telephone and facsimile numbers a party may designate for itself by like notice): If to Pledgee: Advance Stores Company, Incorporated c/o Freeman Spogli & Co. Incorporated 599 Lexington Avenue, Suite 1800 New York, New York 10022 Attention: John M. Roth Telephone: (212) 758-2555 Telecopy: (212) 758-7499 If to Pledgor: Garnett E. Smith 1994 Merriman Way Moneta, Virginia 24121 Telephone: (540) 721-8057 (c) Amendments. This Pledge Agreement may be amended only by a ---------- written agreement executed by the parties hereto. (d) Governing Law. This Pledge Agreement shall be governed by ------------- and construed in accordance with the laws of the Commonwealth of Virginia. (e) Disputes. In the event of any dispute between the parties -------- arising out of this Pledge Agreement, the prevailing party shall be entitled to recover from the nonprevailing party the reasonable expenses of the prevailing party including, without limitation, reasonable attorneys' fees. (f) Entire Agreement. This Pledge Agreement constitutes the ---------------- entire agreement and understanding among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating hereto. (g) Successors and Assigns. Pledgee shall have the right to ---------------------- assign with absolute discretion any or all of its rights and/or obligations and/or delegate any or all of its duties under this Agreement to any of its affiliates, successors and/or assigns, including, without limitation (i) to any of its banks or lending institutions as collateral security, or (ii) to any entity succeeding the Pledgee by merger, consolidation or acquisition of all or substantially all of the Pledgee's assets, and this Agreement shall inure to the benefit of, and be binding upon, such respective affiliates, successors and/or assigns of Pledgee in the same manner and to the same extent as if such affiliates, successors and/or assigns were original parties hereto. Unless specifically provided herein to the contrary, Pledgor may not assign any or all of its rights and/or obligations and/or delegate any or all of its duties under this Pledge Agreement without the prior written consent of Pledgee. Upon an assignment of any or all of Pledgor's rights and/or obligations and/or a delegation of any or all of its duties under this Pledge Agreement in accordance with the terms of this Pledge Agreement, this Pledge Agreement shall inure to the benefit of, and be binding upon, Pledgor's respective affiliates, successors and/or assigns in the same manner and to the same extent as if such affiliates, successors and/or assigns were original parties hereto. (h) Headings. Introductory headings at the beginning of each -------- section and subsection of this Pledge Agreement are solely for the convenience of the parties and shall not be deemed to be a limitation upon or description of the contents of any such section and subsection of this Pledge Agreement. (i) Counterparts. This Agreement may be executed in two ------------ counterparts, each of which shall be deemed an original and both of which, when taken together, shall constitute one and the same Pledge Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Pledge Agreement as of the day and year first above written. PLEDGEE: Advance Stores Company, Incorporated, a Virginia corporation By: /s/ Lawrence P. Castellani --------------------------- Lawrence P. Castellani Chief Executive Officer PLEDGOR: /s/ Garnett E. Smith -------------------- Garnett E. Smith EX-10.40 18 dex1040.txt FORM OF STOCK OPTION AGMT/CONVERTED OPTIONS EXHIBIT 10.40 ADVANCE AUTO PARTS, INC. 2001 STOCK OPTION AGREEMENT THIS 2001 STOCK OPTION AGREEMENT (this "Agreement") is entered into as of ______________, 2001 by and between Advance Auto Parts, Inc., a Delaware corporation (the "Company"), and ____________ ("Optionee"), pursuant to the Advance Auto Parts, Inc. 2001 Executive Stock Option Plan (the "Plan"). All capitalized terms not otherwise defined herein shall have the meanings set forth in the Plan. R E C I T A L S: - - - - - - - - A. Pursuant to an Agreement and Plan of Merger dated as of August 7, 2001 (the "Merger Agreement") by and among the Company, Advance Holding Corporation, Advance Stores Company, Incorporated, AAP Acquisition Corporation ("Merger Sub") and Discount Auto Parts, Inc. ("Discount"), Merger Sub merged with and into Discount, and Discount continued as the surviving corporation in the merger. B. Pursuant to the Merger Agreement, each option to purchase common stock of Discount with a per share exercise price equal to or greater than $15.00 per share (a "Fully Converted Option") was converted at the effective time into an option to acquire shares of the Company's common stock, on substantially the same terms and conditions as were applicable under such Fully Converted Option. C. Pursuant to the Merger Agreement, as soon as practicable after the Effective Time, the Company agreed to deliver to each holder of a Fully Converted Option a stock option agreement issued under the Plan, and the parties intend this Agreement to evidence Optionee's rights in such Fully Converted Option. A G R E E M E N T: - - - - - - - - - NOW, THEREFORE, in consideration of the covenants hereinafter set forth, the parties agree as follows: 1. Options; Number of Shares. The Company hereby confirms the Optionee's ------------------------- right to purchase and, to the extent necessary, reconfirm the grant to Optionee of the right to purchase (the "Options") up to ____________________ (______) shares (the "Shares") of common stock, par value $.0001 per share, of the Company at the per share price of $____ (the "Purchase Price"). The Options and the right to purchase all or any portion of the Shares are subject to the terms and conditions stated in this Agreement and in the Plan, including, without limitation, the provisions of Section 4, Section 10, Section 13(b), Section 14 and Section 19 of the Plan --------- ---------- ------------- ---------- ---------- and Section 3 hereof. Upon exercise of an Option and payment of the Purchase --------- Price, Optionee shall become a stockholder of the Company, with all rights and privileges of a stockholder of the Company in respect of any shares of common stock of the Company issuable upon such exercise. It is intended that the Options will not qualify for treatment as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Exercise Criteria. The Options are fully exercisable, and may be ----------------- exercised in whole or in part, as provided in Section 5 hereof, at any time --------- prior to the termination of the Options. 3. Term of Agreement. The Options, and Optionee's right to exercise the ----------------- Options, shall terminate when the first of the following occurs: (a) termination of the Options pursuant to Section 13 or Section 14 of ---------- ---------- the Plan; (b) [Termination date of Discount option] (with the period from the date of this Agreement to the date specified in this Section 3(b) referred to ------------ herein as the "Remaining Exercise Period"); (c) if the employment of Optionee (by the Company and all of the Subsidiaries) is terminated for any reason specified in the following clauses, the Option shall immediately terminate and become void to the extent that it then remains unexercised: (1) Optionee is discharged for dishonesty, or because he or she violated any material provision of any employment or other agreement between him or her and the Company or a Subsidiary; (2) Optionee voluntarily resigns or terminates his or her employment with the Company or a Subsidiary under or followed by such circumstances as would constitute a breach of any material provision of any employment or other agreement between him or her and the Company or the Subsidiary; (3) Optionee has committed an act of dishonesty not discovered by the Company or a Subsidiary prior to the cessation of his or her employment but that would have resulted in his or her discharge if discovered prior to such date; (4) Optionee, either before or after cessation of his or her employment with the Company or a Subsidiary, without the written consent of his or her employer or former employer, uses (except for the benefit of his or her employer or former employer) or discloses to any other person any confidential information relating to the continuation or proposed continuation of his or her employer's or former employer's business or any trade secrets of the Company or a Subsidiary obtained as a result of or in connection with such employment; or (5) Optionee, either before or after the cessation of his or her employment with the Company or a Subsidiary, without the written consent of his or her employer or former employer, directly or indirectly, gives advice to, or serves as an employee, director, officer, partner or trustee of, or in any similar capacity with, or otherwise directly or indirectly participates in the management, operation or control of, or has any direct or indirect financial interest in, any corporation, partnership or other organization that directly or indirectly competes in any respect with the Company or any Subsidiary; 2 (d) If the employment of Optionee (by the Company and all of the Subsidiaries) is terminated for a reason other than the reasons set forth in Section 3(c) hereof, excluding the death of Optionee, the Option may be --------- exercised at any time within three (3) months after such termination of employment; provided, however, if Optionee terminates employment because of disability (within the meaning of Section 22(c)(3) of the Code) or dies during such three-month period, the Option may be exercised within one (1) year after termination of employment by Optionee or, in the case of death, by the personal representative of Optionee or by any person or persons acquiring the Option directly from Optionee by bequest or inheritance; provided further, however, that in no event shall the Option be exercisable at any time after the Remaining Exercise Period; and (e) If Optionee dies while employed by the Company or a Subsidiary, the Option may be exercised within one (1) year after Optionee's death by the personal representative of Optionee or by any person or persons acquiring the Option directly from Optionee by bequest or inheritance; provided, however, that in no event shall the Option be exercisable at any time after the Remaining Exercise Period. 4. Death of Optionee; No Assignment. The rights of Optionee under this -------------------------------- Agreement may not be assigned or transferred except by will, by the laws of descent or distribution, and may be exercised during the lifetime of Optionee only by such Optionee; provided, however, that in the event of disability (within the meaning of Section 22(e)(3) of the Code) of Optionee, a designee of Optionee (or the Optionee's legal representative if Optionee has not designated anyone) may exercise the Options on behalf of Optionee (provided the Options would have been exercisable by Optionee) until the right to exercise the Options expires pursuant to Section 3 hereof. Any attempt to sell, pledge, assign, --------- hypothecate, transfer or otherwise dispose of the Options in contravention of this Agreement or the Plan shall be void. If Optionee should die while Optionee is engaged in an employment relationship with the Company and/or any Subsidiary or within ninety (90) days after termination of such relationship, Optionee's designee, legal representative, or legatee, the successor trustee of Optionee's inter vivos trust or the person who acquired the right to exercise the Options by reason of the death of Optionee (individually, a "Successor") shall succeed to Optionee's rights under this Agreement. After the death of Optionee, only a Successor may exercise the Options. 5. Exercise of Options. Until termination of the Options in accordance ------------------- with Section 3 hereof, the Options may be exercised by Optionee (or such other --------- person specified in Section 4 hereof) upon delivery of the following to the --------- Company at its principal executive offices (the date such delivery occurs is hereinafter referred to as, the "Exercise Date"): (a) a written notice of exercise which identifies this Agreement, the type of Option to be exercised, and states the number of Shares to be purchased (which shall be no less than 100 Shares unless the number of Shares remaining available for purchase hereunder is less than 100 Shares and the entire remainder of the Option is being exercised); (b) a check, cash or any combination thereof in the amount of the aggregate Purchase Price (or payment of the aggregate Purchase Price in such other form of lawful 3 consideration as the Committee may approve from time to time under the provisions of Section 7 of the Plan); --------- (c) a check or cash in the amount reasonably requested by the Company to satisfy the Company's withholding obligations under federal, state or other applicable tax laws with respect to the taxable income, if any, recognized by Optionee in connection with the exercise, in whole or in part, of the Options (unless the Company and Optionee shall have made other arrangements for deductions or withholding from Optionee's wages, bonus or other income paid to Optionee by the Company or any Subsidiary, provided, however, such arrangements must satisfy the requirements of all applicable tax laws); (d) a written representation and undertaking, in such form and substance as the Company may require, that the Shares underlying the Option are being acquired by Optionee for Optionee's personal account, for investment purposes only, and not with a view to the distribution, resale or other disposition thereof; (e) a written representation and undertaking, in such form and substance as the Company may require, setting forth the investment intent of Optionee, or a Successor, as the case may be, and such other agreements, representations and undertakings as described in the Plan; and (f) such further acts as may be necessary to register Optionee as a stockholder of the Company. 6. Representations and Warranties of Optionee. ------------------------------------------ (a) Optionee represents and warrants that the Options were acquired by Optionee for Optionee's personal account, for investment purposes only, and not with a view to the distribution, resale or other disposition thereof. (b) Optionee acknowledges that in the event the Company is unable to register the issuance of the Shares upon the exercise of the Options under the Securities Act of 1933, as amended (the "Act"), Optionee agrees that Optionee's exercise of the Options may be expressly conditioned upon Optionee's delivery to the Company of such representations and undertakings as the Company may reasonably require in order to secure the availability of such exemptions, including a representation that Optionee is acquiring the Shares for investment and not with a present intention of selling or otherwise disposing of such Shares. Optionee acknowledges that, because Shares received upon exercise of an Option may be unregistered, Optionee may be required to hold the Shares indefinitely unless they are subsequently registered for resale under the Act or an exemption from such registration requirements is available. (c) Optionee acknowledges receipt of this Agreement granting the Options, and the Plan, and understands that all rights and liabilities connected with the Options are set forth herein and in the Plan. 4 7. No Rights as a Stockholder. Optionee shall have no rights as a -------------------------- stockholder of any shares of common stock of the Company covered by the Options until the Exercise Date and entry evidencing such ownership is made in the stock transfer books of the Company. Except as my be provided under Section 10 of the ---------- Plan, the Company will make no adjustment for dividends (ordinary or extraordinary whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the Exercise Date. 8. Limitation of Company's Liability for Nonissuance. Inability of the ------------------------------------------------- Company to obtain, from any regulatory body having jurisdiction, authority reasonably deemed by the Company's counsel to be necessary for the lawful issuance and sale of any Shares hereunder and under the Plan shall relieve the Company of any liability in respect of the nonissuance or sale of such Shares as to which such requisite authority shall not have been obtained. 9. This Agreement Subject to Plan. This Agreement is made under the ------------------------------ provisions of the Plan and shall be interpreted in a manner consistent with it. To the extent that any provision in this Agreement is inconsistent with the Plan, the provisions of the Plan shall control. The interpretation of the Committee of any provision of the Plan, the Options or this Agreement, and any determination with respect thereto or hereto by the Committee, shall be binding on all parties. 10. Restrictive Legends. Optionee hereby acknowledges that, in the event ------------------- the Company is unable to register the issuance of the Shares upon the exercise of the Options, federal securities laws and the securities laws of the state in which Optionee resides or works may require the placement of certain restrictive legends upon the Shares issued upon exercise of the Options, and Optionee hereby consents to the placing of any such legends upon certificates evidencing the Shares as the Company, or its counsel, may reasonably deem necessary; provided, however, that any such legend or legends shall be removed when no longer applicable. In such event, any and all certificates now or hereafter issued evidencing the Shares shall have endorsed upon them a legend substantially as follows: "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND NEITHER THESE SECURITIES, NOR ANY INTEREST THEREIN, MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR (ii) AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, SUCH EXEMPTION TO BE EVIDENCED BY SUCH DOCUMENTATION AS THE ISSUER MAY REASONABLY REQUEST." 5 11. Notices. Except as otherwise provided herein, all notices, requests, ------- demands and other communications under this Agreement shall be in writing and shall be deemed given when received if delivered personally, on the next business day if sent by overnight courier for next business day delivery (providing proof of delivery), when confirmation is received, if sent by facsimile or in 5 business days if sent by U.S. registered or certified mail, postage prepaid (return receipt requested) to the other party at the following addresses (or at such other address for a party as shall be specified by like notice): If to the Company: Advance Auto Parts, Inc. 5673 Airport Road Roanoke, VA 24012 Attention: General Counsel Telephone: (540) 362-4911 Telecopy: (540) With copy to: Advance Auto Parts, Inc. 5673 Airport Road Roanoke, VA 24012 Attention: Vice President, Finance Telephone: (540) 362-4911 Telecopy: (540) If to Optionee: ---------------------------------- ---------------------------------- ---------------------------------- 12. Not an Employment Agreement. Nothing contained in this Agreement --------------------------- shall confer, intend to confer or imply any rights to an employment relationship or rights to a continued employment relationship with the Company and/or any Subsidiary in favor of Optionee or limit the ability of the Company and/or any Subsidiary to terminate, with or without cause, in its sole and absolute discretion, the employment relationship with Optionee, subject to the terms of any written employment agreement to which Optionee is a party. 13. Governing Law. This Agreement shall be construed under and governed ------------- by the laws of the State of Delaware without regard to the conflict of law provisions thereof. 14. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original and both of which together shall be deemed one Agreement. 6 15. Amendments. This Agreement may be amended only by a written agreement ---------- executed by both of the parties hereto. 16. Recapitalizations or Exchanges Affecting the Company's Capital. The -------------------------------------------------------------- provisions of this Agreement shall apply to any and all stock or other securities of the Company or any successor or assign of the Company, which may be issued in respect of, in exchange for or in substitution of, the Shares by reason of any split, reverse split, recapitalization, reclassification, combination, merger, consolidation or otherwise, and such Shares or other securities shall be encompassed within the term "Shares" for purposes of this Agreement. 17. Disclosure. The Company shall have no duty or obligation to ---------- affirmatively disclose to Optionee, and Optionee shall have no right to be advised of, any material information regarding the Company or any of its Subsidiaries at any time prior to, upon or in connection with the Company's repurchase of the Shares under this Agreement at the cessation or termination of Optionee's employment with the Company and/or any of its Subsidiaries. 18. Successors. The Company may assign with absolute discretion any or ---------- all of its rights and/or obligations and/or delegate any of its duties under this Agreement to any of its successors and this Agreement shall inure to the benefit of, and be binding upon, such respective successors of the Company in the same manner and to the same extent as if such successors were original parties hereto. For purposes of this Agreement, the term "Shares" shall include shares of capital stock or other securities of the Company or any successor of the Company, which are issued in respect of, in exchange for or in substitution of the Shares by reason of any split, reverse split, recapitalization, reclassification, combination, merger, exchange or consolidation. Unless specifically provided herein to the contrary, Optionee may not assign any or all of its rights and/or obligations and/or delegate any or all its duties under this Agreement without the prior written consent of the Company. Upon an assignment of any or all of Optionee's rights and/or obligations and/or a delegation of any or all of its duties under this Agreement in accordance with the terms of this Agreement, this Agreement shall inure to the benefit of, and be binding upon, Optionee's respective affiliates, successors and/or assigns in the same manner and to the same extent as if such affiliates, successors and/or assigns were original parties hereto. 19. Issuance of Shares. Notwithstanding the provisions of Sections 8 and ------------------ ---------- 11 of the Plan, no Shares issued by the Company upon exercise of the Options -- shall be subject to any right of first refusal of the Company with respect to the Shares, any drag along rights, including any of the drag along rights described in Section 11 of the Plan, or any right of the Company, in connection ---------- with any underwritten public offering by the Company of its equity securities, to restrict the transfer of any Shares acquired under this Agreement for any period of time. 7 IN WITNESS WHEREOF, the Company and Optionee have executed this Agreement as of the date first above written. THE COMPANY: Advance Auto Parts, Inc., a Delaware corporation By: ---------------------------------------- Name: Title: OPTIONEE: -------------------------------------------- Name: 8 EX-10.41 19 dex1041.txt PURCHASE AGREEMENT DATED 10/31/01 EXHIBIT 10.41 ADVANCE STORES COMPANY, INCORPORATED $200,000,000 10-1/4% Senior Subordinated Notes due 2008 Purchase Agreement ------------------ October 24, 2001 J.P. Morgan Securities Inc. As Representative of the several Initial Purchasers listed in Schedule 1 hereto c/o J.P. Morgan Securities Inc. 270 Park Avenue New York, New York 10017 Ladies and Gentlemen: Advance Stores Company, Incorporated, a Virginia corporation (the "Company"), proposes to issue and sell to the several Initial Purchasers listed in Schedule 1 hereto (the "Initial Purchasers"), for whom you are acting as representative (the "Representative"), $200,000,000 principal amount of its 10- 1/4% Senior Subordinated Notes due 2008 (the "Securities"). The Securities will be issued pursuant to an Indenture to be dated as of October 31, 2001 (the "Indenture"), initially among the Company, Advance Trucking Corporation, a Virginia corporation, LARALEV, INC., a Delaware corporation and Western Auto Supply Company, a Delaware corporation (collectively, the "Guarantors") and The Bank of New York, as trustee (the "Trustee"), and will be guaranteed on an unsecured senior subordinated basis by each of the Guarantors (the "Guarantees"). The Securities will be sold to the Initial Purchasers without being registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon an exemption therefrom. The Company has prepared a preliminary offering memorandum dated October 10, 2001 (the "Preliminary Offering Memorandum") and will prepare an offering memorandum dated the date hereof (the "Offering Memorandum") setting forth information concerning the Company and the Securities. Copies of the Preliminary Offering Memorandum have been, and copies of the Offering Memorandum will be, delivered by the Company to the Initial Purchasers pursuant to the terms of this Agreement. The Company hereby confirms that it has authorized the use (in accordance with applicable laws) of the Preliminary Offering Memorandum and the Offering Memorandum in connection with the offering and resale of the Securities by the Initial Purchasers in the manner contemplated by this Agreement. The Securities are being issued and sold in connection with the Company's acquisition (the "Acquisition") of Discount Auto Parts, Inc. ("Discount") pursuant to the Agreement and Plan of Merger dated as of August 7, 2001 (the "Merger Agreement"), among Advance Holding Corporation ("Holding"), Advance Auto Parts, Inc., AAP Acquisition Corporation, the Company and Discount. For the purposes of this Agreement, the transactions contemplated by the Merger Agreement and the other transactions described in the Offering Memorandum under the caption "The Transactions" are referred to herein as the "Transactions". Upon consummation of the Transactions, Discount will become a wholly-owned subsidiary of the Company. The net proceeds of the offering of the Securities will be used to fund a portion of the purchase price for the Acquisition. The Acquisition is expected to be consummated following the Closing Date (as defined in Section 2). Prior to the consummation of the Acquisition, the net proceeds of the offering of the Securities, after deducting the Initial Purchasers' discount, will be held in escrow pending the consummation of the Acquisition. On or prior to the Closing Date, the Company will execute an Escrow Agreement, substantially in the form attached hereto as Exhibit A (the "Escrow Agreement"), and will deposit with The Bank of New York, as escrow agent (the "Escrow Agent"), the net proceeds of the offering of the Securities, together with an additional amount in Cash Equivalents or Treasury Securities (as each such term is defined in the Escrow Agreement) such that the escrowed funds (the "Escrowed Funds") are in an amount sufficient to redeem the Securities in cash at a redemption price equal to 101% of the issue price of the Securities plus accrued and unpaid interest thereon to January 15, 2002, in the event that (a) in the sole judgment of the Company, the Acquisition will not be consummated on or prior to December 31, 2001 or (b) the Acquisition is not consummated on or prior to December 31, 2001. The Escrow Agreement shall provide that the Escrowed Funds shall only be withdrawn and paid out pursuant to the terms of the Escrow Agreement. Upon consummation of the Acquisition, any subsidiary of the Company that is formed or acquired after the Closing Date which is required to be a Guarantor under the Indenture will enter into a joinder to this Agreement, the form of which is attached hereto as Exhibit B (the "Joinder to the Purchase Agreement"), pursuant to which it will become party to this Agreement. Holders of the Securities (including the Initial Purchasers and their direct and indirect transferees) will be entitled to the benefits of an Exchange and Registration Rights Agreement, substantially in the form attached hereto as Exhibit C (the "Registration Rights Agreement"), pursuant to which the Company and the Guarantors will agree to file one or more registration statements with the Securities and Exchange 2 Commission (the "Commission") providing for the registration under the Securities Act of the Securities or the Exchange Securities referred to in (and as defined in) the Registration Rights Agreement. Upon consummation of the Acquisition, any subsidiary of the Company that is formed or acquired after the Closing Date which is required to be a Guarantor under the Indenture will enter into a joinder to the Registration Rights Agreement, the form of which is attached to the Registration Rights Agreement (the "Joinder to the Registration Rights Agreement"), pursuant to which it will become party to the Registration Rights Agreement. The Company hereby confirms its agreement with the several Initial Purchasers concerning the purchase and resale of the Securities, as follows: 1. Purchase and Resale of the Securities. (a) The Company, on the basis of ------------------------------------- the representations, warranties and agreements set forth herein, agrees to issue and sell the Securities to the several Initial Purchasers as provided in this Agreement, and each Initial Purchaser, on the basis of the representations, warranties and agreements set forth herein and subject to the conditions set forth herein, agrees to purchase from the Company, severally and not jointly, the principal amount of Securities set forth opposite such Initial Purchaser's name in Schedule 1 hereto at a price equal to 90.018% of the principal amount ------ thereof plus accrued interest, if any, from October 15, 2001 to the date of payment and delivery. The Company will not be obligated to deliver any of the Securities except upon payment for all the Securities to be purchased as provided herein. (b) The Company understands that the Initial Purchasers intend to offer the Securities for resale on the terms set forth in the Offering Memorandum. Each Initial Purchaser, severally and not jointly, represents, warrants and agrees that: (i) neither it nor any of its affiliates is acquiring the Securities with any intention of offering or selling any of the Securities in a transaction that would violate the Securities Act; (ii) neither it nor any of its affiliates has solicited offers for, or offered or sold, and neither it nor any of its affiliates will solicit offers for, or offer or sell, the Securities by means of any form of general solicitation or general advertising within the meaning of Rule 502(c) of Regulation D under the Securities Act ("Regulation D") or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act; and 3 (iii) neither it nor any of its affiliates has solicited offers for, or offered or sold, and neither it nor any of its affiliates will solicit offers for, or offer or sell, the Securities as part of their initial offering except: (A) within the United States to persons whom it reasonably believes to be qualified institutional buyers, as defined in Rule 144A under the Securities Act ("Rule 144A"), in transactions pursuant to Rule 144A, and in connection with each such sale, it has taken or will take reasonable steps to ensure that the purchaser of the Securities is aware that such sale is being made in reliance on Rule 144A, except in the case of the sale to Mozart One, L.L.C. ("Mozart One"), wholly- owned by the Arthur Taubman Trust Dated July 13, 1964 and an affiliate of the Company, of $3,000,000 principal amount of Securities and the sale to Mozart Investments Inc. ("Mozart Investments"), wholly-owned by Nicholas F. Taubman and an affiliate of the Company, of $3,000,000 principal amount of Securities (which will be sold pursuant to another exemption from registration under the Securities Act); or (B) in accordance with the restrictions set forth in Annex A hereto. (c) Each Initial Purchaser acknowledges and agrees that the Company and, for purposes of the opinions to be delivered to the Initial Purchasers pursuant to Sections 5(f) and 5(g), counsel for the Company and for the Initial Purchasers, respectively, may rely upon the accuracy of the representations and warranties of the Initial Purchasers and their compliance with their agreements contained in paragraph (b) above (including Annex A hereto), and each Initial Purchaser hereby consents to such reliance. (d) The Company acknowledges and agrees that the Initial Purchasers may offer and sell Securities to or through any affiliate of an Initial Purchaser and that any such affiliate may offer and sell Securities purchased by it to or through any Initial Purchaser. 2. Payment and Delivery. (a) Payment for and delivery of the Securities -------------------- will be made at the offices of Cravath, Swaine & Moore at 10:00 A.M., New York City time, on October 31, 2001, or at such other time on the same or such other date, not later than the fifth Business Day thereafter, as the Representative and the Company may agree upon in writing. The time and date of such payment and delivery is referred to herein as the "Closing Date". As used herein, the term "Business Day" means any day other than a day on which banks are permitted or required to be closed in New York city. 4 (b) Payment for the Securities shall be made by wire transfer in immediately available funds to the account specified by the Company to the Representative against delivery to the nominee of The Depository Trust Company, for the account of the Initial Purchasers, of one or more global notes representing the Securities (collectively, the "Global Note"), with any transfer taxes payable in connection with the sale of the Securities duly paid by the Company. The Global Note will be made available for inspection by the Representative not later than 1:00 P.M., New York City time, on the Business Day prior to the Closing Date. 3. Representations and Warranties of the Company and the Guarantors. The ---------------------------------------------------------------- Company and the Guarantors jointly and severally represent and warrant to each Initial Purchaser that: (a) Offering Memorandum. The Preliminary Offering Memorandum, as of its date, did not, and the Offering Memorandum, in the form first used by the Initial Purchasers to confirm sales of the Securities and on the Closing Date, will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the -------- Company and the Guarantors make no representation or warranty with respect to (i) pricing terms and other financial terms intentionally left blank in the Preliminary Offering Memorandum or (ii) any statements or omissions made in reliance upon and in conformity with information relating to any Initial Purchaser furnished to the Company in writing by such Initial Purchaser through the Representative expressly for use in the Preliminary Offering Memorandum and the Offering Memorandum. (b) Financial Statements. The financial statements and the related notes thereto included in the Preliminary Offering Memorandum and the Offering Memorandum present fairly, in all material respects, the respective consolidated financial positions of (i) the Company and its subsidiaries and (ii) Discount and its subsidiaries, as applicable, as of the dates indicated and the results of their operations and the changes in their cash flows for the periods specified, except that such financial statements that are unaudited were or are subject to normal and recurring year-end adjustments; such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis, except with respect to such financial statements of Discount, as discussed in Ernst & Young LLP's accompanying report of independent certified public accountants dated June 29, 2001 and with respect to such financial statements that are unaudited, except as may be indicated in note 1 to the condensed consolidated financial statements of the Company and note 1 to the condensed consolidated financial statements of Discount in the Preliminary Offering Memorandum and the Offering Memorandum; and the pro forma --- ----- financial information and the related notes thereto included in the Preliminary Offering Memorandum and the Offering Memorandum are based upon good faith estimates and assumptions believed by the Company (as of the date of the Preliminary Offering 5 Memorandum and the Offering Memorandum, as applicable) to have been reasonable; and the assumptions underlying such pro forma financial information are set --- ----- forth in the Preliminary Offering Memorandum and the Offering Memorandum. (c) No Material Adverse Change. Since the date of the most recent financial statements of the Company and of Discount, as applicable, included in the Preliminary Offering Memorandum and the Offering Memorandum, exclusive of any amendments or supplements thereto subsequent to the date of this Agreement, (i) there has not been any change in the capital stock or long-term debt of the Company or any of its subsidiaries, or any dividend or distribution of any kind declared, paid or made by the Company or any of its subsidiaries on any class of capital stock, or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, business, properties, management, financial position, stockholders' equity, results of operations or prospects of the Company and its subsidiaries or of Discount and its subsidiaries that is material for the Company and its subsidiaries taken as a whole, after giving effect to the Transactions; (ii) neither the Company nor any of its subsidiaries, nor Discount nor any of its subsidiaries, has entered into any transaction or agreement that is material to the Company and its subsidiaries taken as a whole (whether or not in the ordinary course of business) or incurred any liability or obligation, direct or contingent, that is material to the Company and its subsidiaries taken as a whole (other than in the ordinary course of business), in each case after giving effect to the Transactions, except as disclosed in the Preliminary Offering Memorandum and the Offering Memorandum; and (iii) neither the Company nor any of its subsidiaries, nor Discount nor any of its subsidiaries, has sustained any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or any action, order or decree of any court or arbitrator or governmental or regulatory authority, except in each case that would not, individually or in the aggregate, have a Material Adverse Effect (as defined below), or as otherwise specifically disclosed in the Preliminary Offering Memorandum and the Offering Memorandum or any subsequent amendment or supplement thereto. (d) Incorporation and Good Standing. The Company and each of its subsidiaries and Discount and each of its subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation, are duly qualified to do business and are in good standing as foreign corporations in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, and have all corporate power and authority necessary to own or hold their respective properties and to conduct the businesses in which they are engaged, except where the failure to be so qualified or have such power or authority would not, individually or in the aggregate, have a material adverse effect on the general affairs, business, properties, management, financial position, stockholders' equity, results of operations or prospects of the Company and its subsidiaries taken as a whole, after giving effect to the 6 Transactions, or on the performance by the Company of its obligations under the Securities (a "Material Adverse Effect"). (e) Capitalization. The Company has an authorized capitalization as set forth in the Preliminary Offering Memorandum and the Offering Memorandum under the heading "Capitalization"; and all the outstanding shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and nonassessable and are owned directly or indirectly by the Company, free and clear of any lien, charge, encumbrance, security interest, restriction on voting or transfer or any other claim of any third party, other than as discussed in the Offering Memorandum (including the pledge of such shares under (i) the Company's Credit Agreement dated as of April 15, 1998, as amended and restated as of October 19, 1998, as amended, supplemented or otherwise modified from time to time, among Holding, the Company, the lenders party thereto and The Chase Manhattan Bank, as administrative agent (the "Existing Credit Agreement") and (ii) the Company's Credit Agreement to be entered into among Holding, the Company, the lenders party thereto, The Chase Manhattan Bank, as administrative agent, Credit Suisse First Boston and Lehman Commercial Paper Inc., as co-syndication agents, concurrently with the Acquisition (the "Senior Credit Agreement")). (f) Due Authorization. The Company and each of the Guarantors have full right, power and authority to execute and deliver this Agreement, the Joinder to the Purchase Agreement, the Securities, the Indenture (including each Guarantee set forth therein), the Exchange Securities, the Registration Rights Agreement, the Joinder to the Registration Rights Agreement and the Escrow Agreement (collectively, the "Transaction Documents") and to perform their respective obligations hereunder and thereunder; and all action (corporate and other) required to be taken for the due and proper authorization, execution and delivery of each of the Transaction Documents and the consummation of the transactions contemplated thereby have been duly and validly taken. (g) The Indenture. The Indenture has been duly authorized by the Company and each of the Guarantors and, when duly executed and delivered in accordance with its terms by each of the parties thereto, will constitute a valid and legally binding agreement of the Company and each of the Guarantors enforceable against the Company and each of the Guarantors in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability (collectively, the "Enforceability Exceptions"); and on the Closing Date, the Indenture will conform in all material respects to the requirements of the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and the rules and regulations of the Commission applicable to an indenture that is qualified thereunder. A supplemental indenture to the Indenture will be duly authorized by each Guarantor party thereto and, when duly executed and delivered in accordance with its terms by each of 7 the parties thereto, will constitute a valid and legally binding agreement of each of the Guarantors party thereto enforceable against each of the Guarantors party thereto in accordance with its terms, subject to the Enforceability Exceptions. (h) The Securities and the Guarantees. The Securities have been duly authorized by the Company and, when duly executed, authenticated, issued and delivered as provided in the Indenture and paid for as provided herein, will be duly and validly issued and outstanding and will constitute valid and legally binding obligations of the Company enforceable against the Company in accordance with their terms, subject to the Enforceability Exceptions, and will be entitled to the benefits of the Indenture; and the Guarantees have been duly authorized by each of the Guarantors and, when the Securities have been duly executed, authenticated, issued and delivered as provided in the Indenture and paid for as provided herein, will be valid and legally binding obligations of each of the Guarantors, enforceable against each of the Guarantors in accordance with their terms, subject to the Enforceability Exceptions, and will be entitled to the benefits of the Indenture. (i) The Exchange Securities. On the Closing Date, the Exchange Securities (including the related guarantees) will have been duly authorized by the Company and each of the Guarantors and, when duly executed, authenticated, issued and delivered as contemplated by the Registration Rights Agreement, will be duly and validly issued and outstanding and will constitute valid and legally binding obligations of the Company, as issuer, and each of the Guarantors, as guarantor, enforceable against the Company and each of the Guarantors in accordance with their terms, subject to the Enforceability Exceptions, and will be entitled to the benefits of the Indenture. (j) Purchase Agreement. This Agreement has been duly authorized, executed and delivered by the Company and each of the Guarantors party hereto and constitutes a valid and legally binding agreement of the Company and each of the Guarantors enforceable against the Company and each of the Guarantors in accordance with its terms, subject to the Enforceability Exceptions, and except that rights to indemnity and contribution may be limited by applicable law and public policy. (k) Registration Rights Agreement. The Registration Rights Agreement has been duly authorized by the Company and each of the Guarantors and, when duly executed and delivered in accordance with its terms by each of the parties thereto, will constitute a valid and legally binding agreement of the Company and each of the Guarantors enforceable against the Company and each of the Guarantors in accordance with its terms, subject to the Enforceability Exceptions, and except that rights to indemnity and contribution may be limited by applicable law and public policy. (l) The Joinder to the Purchase Agreement. The Joinder to the Purchase Agreement, when duly executed and delivered in accordance with its terms by each of the parties thereto, will constitute a valid and legally binding agreement of each of the 8 Guarantors party thereto enforceable against each of the Guarantors party thereto in accordance with its terms, subject to the Enforceability Exceptions. (m) The Joinder to the Registration Rights Agreement. The Joinder to the Registration Rights Agreement, when duly executed and delivered in accordance with its terms by each of the parties thereto, will constitute a valid and legally binding agreement of each of the Guarantors party thereto enforceable against each of the Guarantors party thereto in accordance with its terms, subject to the Enforceability Exceptions. (n) The Escrow Agreement. The Escrow Agreement has been duly authorized by the Company and, when duly executed and delivered in accordance with its terms by each of the parties thereto, will constitute a valid and legally binding agreement of the Company enforceable against the Company in accordance with its terms, subject to the Enforceability Exceptions. (o) Descriptions of Transaction Documents. Each Transaction Document conforms in all material respects to the description thereof contained in the Preliminary Offering Memorandum and the Offering Memorandum. (p) No Violation or Default. Neither the Company nor any of its subsidiaries, nor Discount nor any of its subsidiaries, is (i) in violation of its charter or by-laws; (ii) in default in any material respect, and no event has occurred that, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries or Discount or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or Discount or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries or Discount or any of its subsidiaries is subject; or (iii) in violation in any material respect of any law or statute or any judgment, order or regulation of any court or arbitrator or governmental or regulatory authority to which it or its property or assets may be subject, except, in the case of clauses (ii) and (iii) above, for any such default or violation that would not, individually or in the aggregate, have a Material Adverse Effect. (q) No Conflicts With Existing Instruments; No Consents Required. The execution, delivery and performance by the Company and each of the Guarantors of each of the Transaction Documents to which each is a party, the issuance and sale of the Securities and compliance by the Company and each of the Guarantors with the terms thereof and the consummation of the transactions contemplated by the Transaction Documents will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, any indenture, mortgage, deed of trust, 9 loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will any such action result in any violation of the provisions of the charter or by-laws of the Company or any of its subsidiaries or any law or statute or any judgment, order or regulation of any court or arbitrator or governmental or regulatory authority having jurisdiction over the Company or any of its subsidiaries or any of their respective properties or assets, except for any of the foregoing that would not, individually or in the aggregate, result in a Material Adverse Effect; and no consent, approval, authorization, order, registration or qualification of or with any such court or arbitrator or governmental or regulatory authority is required for the execution, delivery and performance by the Company and each of the Guarantors of each of the Transaction Documents to which each is a party, the issuance and sale of the Securities and compliance by the Company and each of the Guarantors with the terms thereof and the consummation of the transactions contemplated by the Transaction Documents, except for such consents, approvals, authorizations, orders and registrations or qualifications as may be required (i) under applicable state securities laws in connection with the purchase and resale of the Securities by the Initial Purchasers and (ii) with respect to the Exchange Securities under the Securities Act, the Trust Indenture Act and applicable state securities laws as contemplated by the Registration Rights Agreement. (r) Legal Proceedings. Except as specifically described in the Preliminary Offering Memorandum and the Offering Memorandum, there are no legal, governmental or regulatory investigations, actions, suits or proceedings pending to which the Company or any of its subsidiaries or Discount or any of its subsidiaries is or may be a party or to which any property of the Company or any of its subsidiaries or Discount or any of its subsidiaries is or may be the subject that, individually or in the aggregate, if determined adversely to the Company or any of its subsidiaries or Discount or any of its subsidiaries, could reasonably be expected to have a Material Adverse Effect; and to the knowledge of the Company and each of the Guarantors, no such investigations, actions, suits or proceedings are threatened or contemplated by any governmental or regulatory authority or threatened by others. (s) Independent Accountants. Arthur Andersen LLP, who have certified certain financial statements of the Company and its subsidiaries, and Ernst & Young LLP, who have certified certain financial statements of Discount and its subsidiaries, are independent public accountants with respect to the Company and its subsidiaries and Discount and its subsidiaries, respectively, within the meaning of Rule 101 of the Code of Professional Conduct of the American Institute of Certified Public Accountants and its interpretations and rulings thereunder. (t) Title to Real and Personal Property. The Company and its subsidiaries and Discount and its subsidiaries have good and marketable title in fee simple to, or have valid rights to lease or otherwise use, all items of real and personal property that 10 are material to the respective businesses of the Company and its subsidiaries and Discount and its subsidiaries, in each case free and clear of all liens, encumbrances, claims and defects and imperfections of title except those that (i) do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiaries or Discount and its subsidiaries, (ii) have been or will be granted pursuant to the Existing Credit Agreement or the Senior Credit Agreement or (iii) could not reasonably be expected, individually or in the aggregate, to have a Ma terial Adverse Effect. (u) Title to Intellectual Property. The Company and its subsidiaries own or possess adequate rights to use all material patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses and know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) currently employed by them in connection with their respective businesses; and the Company and its subsidiaries have not received any notice of any claim of conflict with, any such rights of others, which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect. (v) Investment Company Act. Neither the Company nor any of its subsidiaries is, and after giving effect to the offering and sale of the Securities and the application of the proceeds thereof as described in the Preliminary Offering Memorandum and the Offering Memorandum none of them will be, an "investment company" or an entity "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations of the Commission thereunder (collectively, "Investment Company Act"). (w) Taxes. The Company and its subsidiaries have paid all material federal, state, local and foreign taxes and filed all material tax returns required to be paid or filed through the date hereof other than those filings being contested in good faith; and except as otherwise specifically disclosed in the Preliminary Offering Memorandum and the Offering Memorandum, there is no material tax deficiency that has been, or could reasonably be expected to be, asserted against the Company or any of its subsidiaries. (x) Licenses and Permits. The Company and its subsidiaries and Discount and its subsidiaries possess all licenses, certificates, permits and other authorizations issued by, and have made all declarations and filings with, the appropriate federal, state, local or foreign governmental or regulatory authorities that are necessary for the ownership or lease of their respective properties or the conduct of their respective businesses as described in the Preliminary Offering Memorandum and the Offering Memorandum, except where the failure to possess or make the same would not, individually or in the aggregate, have a Material Adverse Effect; and except as specifically described in the Preliminary Offering Memorandum and the Offering Memorandum, neither the Company nor any of its subsidiaries nor Discount nor any of 11 its subsidiaries has received notice of any revocation or modification of any such license, certificate, permit or authorization or has any reason to believe that any such license, certificate, permit or authorization will not be renewed in the ordinary course, except for any such revocation, modification or non- renewal that would not, individually or in the aggregate, have a Material Adverse Effect. (y) Material Agreements. Schedule 2 to this Agreement lists (i) all material agreements (within the meaning of Item 601(b)(10) of Regulation S-K under the Exchange Act), after giving effect to the Transactions to which the Company or any of its subsidiaries or Discount and its subsidiaries is a party or by which the Company or any of its subsidiaries or Discount and its subsidiaries is bound or to which any of the properties or assets of the Company or any of its subsidiaries or Discount and its subsidiaries is subject and (ii) all agreements and instruments required to be filed under Items 601(b)(2) and (4) of Regulation S-K. (z) No Labor Disputes. No labor disturbance by or material dispute with employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company and each of the Guarantors, is contemplated or threatened. (aa) Compliance With Environmental Laws. The Company and its subsidiaries and Discount and its subsidiaries (i) are in compliance with any and all applicable federal, state, local and foreign laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (collectively, "Environmental Laws"), and none of them has received notice of any outstanding violations of any Environmental Laws; (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses; and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except in clauses (i), (ii) or (iii) for any such failure to comply, or to receive required permits, licenses or approvals as would not, individually or in the aggregate, have a Material Adverse Effect. (bb) Compliance With ERISA. Each employee benefit plan, within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), that is maintained, administered or contributed to by the Company or any of its affiliates for employees or former employees of the Company and its affiliates has been maintained in compliance with its terms and the requirements of any applicable statutes, orders, rules and regulations, including but not limited to ERISA and the Internal Revenue Code of 1986, as amended (the "Code"), except for any such failure to comply as would not, individually or in the aggregate, have a Material Adverse Effect. No prohibited transaction, within the meaning of Section 406 of ERISA or Section 4975 of the Code, has occurred with respect to any such plan excluding transactions effected pursuant to a statutory or administrative exemption. For each such plan that is subject to the funding rules of Section 412 of the Code or Section 302 of ERISA, no 12 "accumulated funding deficiency" as defined in Section 412 of the Code has been incurred, whether or not waived, and the fair market value of the assets of each such plan (excluding for these purposes accrued but unpaid contributions) exceeds the present value of all benefits accrued under such plan determined using reasonable actuarial assumptions. (cc) Accounting Controls. The Company and its subsidiaries maintain systems of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (dd) Insurance. The Company and its subsidiaries have insurance covering their respective properties, operations, personnel and businesses, which insurance is in amounts and insures against such losses and risks as are adequate in the reasonable judgment of the Company to protect the Company and its subsidiaries and their respective businesses; and neither the Company nor any of its subsidiaries has (i) received notice from any insurer or agent of such insurer that capital improvements or other expenditures are required or necessary to be made in order to continue such insurance or (ii) any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage at reasonable cost from similar insurers as may be necessary to continue its business. (ee) No Unlawful Payments. Neither the Company nor any of its subsidiaries nor, to the best knowledge of the Company and each of the Guarantors, any director, officer, agent, employee or other person associated with or acting on behalf of the Company or any of its subsidiaries has (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977; or (iv) made any bribe, unlawful rebate, payoff, influence payment, kickback or other unlawful payment. (ff) Margin Rules. Neither the issuance, sale and delivery of the Securities nor the application of the proceeds thereof by the Company as described in the Preliminary Offering Memorandum and the Offering Memorandum will violate Regulation T, U or X of the Board of Governors of the Federal Reserve System or any other regulation of such Board of Governors. 13 (gg) Solvency. On and immediately after the Closing Date and immediately after the consummation of the Acquisition, the Company (after giving effect to the issuance of the Securities and the other Transactions) will be Solvent. As used in this paragraph, the term "Company" means, with respect to a particular date, the Company and its subsidiaries as of such date, taken as a whole and the term "Solvent" means, with respect to a particular date, that on such date (i) the present fair market value (or present fair saleable value) of the assets of the Company is not less than the total amount required to pay the liabilities of the Company on its total existing debts and liabilities (including contingent liabilities) as they become absolute and matured; (ii) the Company is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and commitments as they mature and become due in the normal course of business; (iii) assuming consummation of the issuance of the Securities as contemplated by this Agreement and the Offering Memorandum, the Company is not incurring debts or liabilities beyond its ability to pay as such debts and liabilities mature; and (iv) the Company is not engaged in any business or transaction, and does not propose to engage in any business or transaction, for which its property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which the Company is engaged; and (v) the Company is not a defendant in any civil action that would result in a judgment that the Company is or would become unable to satisfy. (hh) No Broker's Fees. Neither the Company nor any of its subsidiaries is a party to any contract, agreement or understanding with any person (other than this Agreement) that would give rise to a valid claim against the Company or any of its subsidiaries or any Initial Purchaser for a brokerage commission, finder's fee or like payment in connection with the offering and sale of the Securities. (ii) Rule 144A Eligibility. The Securities satisfy the eligibility requirements of Rule 144A(d)(3) under the Securities Act, and each of the Preliminary Offering Memorandum and the Offering Memorandum, as of its respective date, contains or will contain all the information that, if requested by a prospective purchaser of the Securities, would be required to be provided to such prospective purchaser pursuant to Rule 144A(d)(4) under the Securities Act. (jj) No Integration. Neither the Company nor any of its affiliates (as defined in Rule 501 (b) of Regulation D) has, directly or through any agent, sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act), that is or will be integrated with the sale of the Securities in a manner that would require registration of the Securities under the Securities Act. (kk) No General Solicitation or Directed Selling Efforts. None of the Company or any of its affiliates or any other person acting on its or their behalf (other than the Initial Purchasers and their affiliates, as to whom the Company makes no representation) has (i) solicited offers for, or offered or sold, the Securities by means of 14 any form of general solicitation or general advertising within the meaning of Rule 502(c) of Regulation D or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act or (ii) engaged in any directed selling efforts within the meaning of Regulation S under the Securities Act ("Regulation S"), and all such persons have complied with the offering restrictions requirement of Regulation S. (ll) Securities Law Exemptions. Assuming the accuracy of the representations and warranties of the Initial Purchasers contained in Section 1(b) (including Annex A hereto) and their compliance with their agreements set forth therein, it is not necessary, in connection with the issuance and sale of the Securities to the Initial Purchasers and the offer, resale and delivery of the Securities by the Initial Purchasers in the manner contemplated by this Agreement and the Offering Memorandum, to register the Securities under the Securities Act or to qualify the Indenture under the Trust Indenture Act. (mm) No Stabilization. Neither the Company nor any of the Guarantors has taken, directly or indirectly, any action designed to or that could reasonably be expected to cause or result in any stabilization or manipulation of the price of the Securities. (nn) Forward-Looking Statements. Each forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21 E of the Exchange Act) contained in the Preliminary Offering Memorandum and the Offering Memorandum has been made or reaffirmed upon good faith estimates and assumptions believed by the Company (as of the date of the Preliminary Offering Memorandum and the Offering Memorandum, as applicable) to have been reasonable. (oo) Each of Mozart Investments and Mozart One is an "accredited investor" within the meaning of Rule 501 (a)(1), (2), (3) or (7) under the Securities Act. 4. Further Agreements of the Company and the Guarantors. The Company and ---------------------------------------------------- each of the Guarantors jointly and severally covenant and agree with each Initial Purchaser that: (a) Delivery of Copies. The Company will deliver to the Initial Purchasers as many copies of the Preliminary Offering Memorandum and the Offering Memorandum (including all amendments and supplements thereto) as the Representative may reasonably request. (b) Amendments or Supplements. Before distributing any amendment or supplement to the Preliminary Offering Memorandum or the Offering Memorandum, the Company will furnish to the Representative a copy of the proposed amendment or supplement for review and will not distribute any such proposed amendment or supplement to which the Representative reasonably objects promptly after being advised. 15 (c) Notice to the Representative. The Company will advise the Representative promptly, and confirm such advice in writing, (i) of the issuance by any governmental or regulatory authority of any order preventing or suspending the use of the Preliminary Offering Memorandum or the Offering Memorandum or the initiation or threatening of any proceeding for that purpose; (ii) of the occurrence of any event at any time prior to the completion of the initial offering of the Securities as a result of which the Offering Memorandum as then amended or supplemented would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing when the Offering Memorandum is delivered to a purchaser, not misleading; and (iii) of the receipt by the Company of any notice with respect to any suspension of the qualification of the Securities for offer and sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and the Company will use its reasonable best efforts to prevent the issuance of any such order preventing or suspending the use of the Preliminary Offering Memorandum or the Offering Memorandum or suspending any such qualification of the Securities and, if issued, will obtain as soon as reasonably possible the withdrawal thereof. (d) Ongoing Compliance of the Offering Memorandum. If at any time prior to the completion of the initial offering of the Securities (i) any event shall occur or condition shall exist as a result of which it is necessary to amend or supplement the Offering Memorandum in order to make the statements therein, in the light of the circumstances when the Offering Memorandum is delivered to a purchaser, not misleading or (ii) it is necessary to amend or supplement the Offering Memorandum to comply with law, the Company will immediately notify the Initial Purchasers thereof and promptly prepare and, subject to paragraph (b) above, furnish to the Initial Purchasers such amendments or supplements to the Offering Memorandum as may be necessary so that the statements in the Offering Memorandum as so amended or supplemented will not, in the light of the circumstances existing when the Offering Memorandum is delivered to a purchaser, be misleading or so that the Offering Memorandum will comply with law. (e) Blue Sky Compliance. The Company will cooperate with the Initial Purchasers to qualify the Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Representative shall reasonably request and will continue such qualifications in effect so long as may be reasonably required for the offering and resale of the Securities; provided that neither the Company nor any of the Guarantors shall be required to (i) qualify as a foreign corporation or other entity or as a dealer in securities in any such jurisdiction where it would not otherwise be required to so qualify or (ii) file any general consent to service of process in any such jurisdiction if it is not so subject. (f) Clear Market. During the period from the date hereof through and including the date that is 45 days after the Closing Date, the Company and each of the 16 Guarantors will not, without the prior written consent of the Representative, offer, sell or contract to sell any debt securities (other than the Securities) issued or guaranteed by the Company or any of the Guarantors and having a tenor of more than one year. (g) Use of Proceeds. The Company will apply the net proceeds from the sale of the Securities as described in the Preliminary Offering Memorandum and the Offering Memorandum. (h) Supplying Information. For so long as the Securities remain outstanding and are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act, the Company and each of the Guarantors will furnish to holders of the Securities and prospective purchasers of the Securities designated by such holders, upon the request of such holders or such prospective purchasers, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act, unless the Company is then subject to and in compliance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (i) PORTAL and DTC. The Company will assist the Initial Purchasers in arranging for the Securities to be designated Private Offerings, Resales and Trading through Automated Linkages ("PORTAL") Market securities in accordance with the rules and regulations adopted by the National Association of Securities Dealers, Inc. ("NASD") relating to trading in the PORTAL Market and for the Securities to be eligible for clearance and settlement through The Depository Trust Company ("DTC"). (j) No Resales by the Company. Until the issuance of the Exchange Securities, the Company will not, and will not permit any of its affiliates (as defined in Rule 144 under the Securities Act) to, resell any of the Securities that have been acquired by any of them, except for Securities purchased by the Company or any of its affiliates and resold in a transaction registered under the Securities Act. (k) No Integration. Neither the Company nor any of its affiliates will, directly or through any agent, sell, offer for sale, solicit offers to buy or otherwise negotiate in respect of, any security (as defined in the Securities Act), that is or will be integrated with the sale of the Securities in a manner that would require registration of the Securities under the Securities Act. (I) No General Solicitation or Directed Selling Efforts. None of the Company or any of its affiliates or any other person acting on its or their behalf will (i) solicit offers for, or offer or sell, the Securities by means of any form of general solicitation or general advertising within the meaning of Rule 502(c) of Regulation D or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act or (ii) engage in any directed selling efforts within the meaning of Regulation S, and all such persons will comply with the offering restrictions requirement of Regulation S. 17 (m) No Stabilization. Neither the Company nor any of the Guarantors will take, directly or indirectly, any action designed to or that could reasonably be expected to cause or result in any stabilization or manipulation of the price of the Securities. (n) Joinder of Guarantors. Upon consummation of the Acquisition, any subsidiary of the Company that is formed or acquired after the Closing Date which is required to be a Guarantor under the Indenture shall become a party to (i) this Agreement by executing and delivering a Joinder to the Purchase Agreement, (ii) the Registration Rights Agreement by executing and delivering a Joinder to the Registration Rights Agreement and (iii) the Indenture by executing and delivering a supplemental indenture, the form of which is attached to the Indenture (the "Supplemental Indenture"). (o) Guarantors' Opinion. Upon the consummation of the Acquisition, the Company shall cause its counsel, Riordan & McKinzie, a professional law corporation, or other counsel reasonably acceptable to the Representative, to furnish to the Initial Purchasers its written opinion substantially to the effect set forth in Annex C hereto. (p) Guarantors' Certificates. Upon the consummation of the Acquisition, the Company shall cause each of its subsidiaries that is formed or acquired after the Closing Date which is required to be a Guarantor under the Indenture to deliver to the Initial Purchasers a secretary's certificate reasonably satisfactory to the Initial Purchasers which shall include the following documents with respect to such subsidiary: (i) certificates of incorporation or due formation, (ii) by-laws, (iii) resolutions and (iv) certificates of valid existence and good standing and/or due qualifications to do business as a foreign corporation in such jurisdictions as the Initial Purchasers may reasonably request. (q) Solvency Letter. Upon consummation of the Acquisition, the Representative shall have received a solvency letter, in form and substance reasonably satisfactory to the Representative, from Valuation Research Corporation, with respect to the solvency of the Company and its consolidated subsidiaries after giving effect to the Transactions. 5. Conditions of Initial Purchasers' Obligations. The obligation of each ---------------------------------------------- Initial Purchaser to purchase Securities on the Closing Date as provided herein is subject to the performance by the Company and each of the Guarantors of their respective obligations hereunder and to the following additional conditions: (a) Representations and Warranties. The representations and warranties of the Company and the Guarantors contained herein shall be true and correct on the date hereof and on and as of the Closing Date; the statements of the Company, the Guarantors and their respective officers made in any certificates delivered pursuant to 18 this Agreement shall be true and correct on and as of the Closing Date; and the Company and the Guarantors shall have complied with all agreements and all conditions to be performed or satisfied on their part hereunder at or prior to the Closing Date. (b) No Downgrading. Subsequent to the execution and delivery of this Agreement, (i) no downgrading shall have occurred in the rating accorded the Securities or any other debt securities or preferred stock issued or guaranteed by the Company or any of the Guarantors by any "nationally recognized statistical rating organization", as such term is defined by the Commission for purposes of Rule 436(g)(2) under the Securities Act; and (ii) no such organization shall have publicly announced that it has under surveillance or review (other than an announcement with positive implications of a possible upgrading) its rating of the Securities or of any other debt securities or preferred stock issued or guaranteed by the Company or any of the Guarantors. (c) No Material Adverse Change. Subsequent to the execution and delivery of this Agreement, no event or condition of a type described in Section 3(c) hereof shall have occurred or shall exist, which event or condition is not described in the Offering Memorandum (prior to any amendment or supplement thereto subsequent to the date hereof) and the effect of which in the reasonable judgment of the Representative makes it impracticable or inadvisable to proceed with the offering, resale and delivery of the Securities on the Closing Date on the terms and in the manner contemplated by this Agreement and the Offering Memorandum. (d) Officer's Certificate. The Representative shall have received on and as of the Closing Date a certificate of an executive officer of the Company and of each Guarantor who has specific knowledge of the Company's or such Guarantor's financial matters and is reasonably satisfactory to the Representative (i) confirming that such officer has carefully reviewed the Offering Memorandum, and that to such officer's knowledge, the representations stated in Section 3(a) hereof is true and correct and (ii) to the effect set forth in paragraphs (a) through (c) above. (e) Comfort Letters. On the date of this Agreement and on the Closing Date, Arthur Andersen LLP shall have furnished to the Representative, at the request of the Company, letters, dated the respective dates of delivery thereof and addressed to the Initial Purchasers, in form and substance reasonably satisfactory to the Representative, containing statements and information of the type customarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information relating to the Company and its subsidiaries and the pro forma financial information and the related notes contained in the Preliminary Offering Memorandum and the Offering Memorandum. On the date of this Agreement and on the Closing Date, Ernst & Young LLP shall have furnished to the Representative, at the request of the Company, letters, dated the respective dates of delivery thereof and 19 addressed to the Initial Purchasers, in form and substance reasonably satisfactory to the Representative, containing statements and information of the type customarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information relating to Discount and its subsidiaries contained in the Preliminary Offering Memorandum and the Offering Memorandum. (f) Opinion of Counsel for the Company. Riordan & McKinzie, a professional law corporation, counsel for the Company, and other counsel reasonably acceptable to the Representative, shall have furnished to the Representative, at the request of the Company, their written opinion, dated the Closing Date and addressed to the Initial Purchasers, in form and substance reasonably satisfactory to the Representative, substantially to the effect set forth in Annex B hereto. (g) Opinion of Counsel for the Initial Purchasers. The Representative shall have received on and as of the Closing Date an opinion of Cravath, Swaine & Moore, counsel for the Initial Purchasers, with respect to such matters as the Representative may reasonably request, and such counsel shall have received such documents and information as they may reasonably request to enable them to pass upon such matters. (h) No Legal Impediment to Issuance. No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any governmental or regulatory authority that would, as of the Closing Date, prevent the issuance or sale of the Securities; and no injunction or order of any federal, state or foreign court shall have been issued that would, as of the Closing Date, prevent the issuance or sale of the Securities. (i) Good Standing. The Representative shall have received on and as of the Closing Date satisfactory evidence of the good standing of the Company and its subsidiaries in their respective jurisdictions of incorporation and their good standing as foreign corporations in such other jurisdictions as the Representative may reasonably request, in each case in writing or any standard form of telecommunication, from the appropriate governmental authorities of such jurisdictions. (j) Registration Rights Agreement. The Initial Purchasers shall have received a counterpart of the Registration Rights Agreement that shall have been executed and delivered by a duly authorized officer of the Company and each of the Guarantors. (k) Indenture. The Initial Purchasers shall have received a counterpart of the Indenture that shall have been executed and delivered by a duly authorized officer of the Company, each of the Guarantors and the Trustee. (l) PORTAL and DTC. The Securities shall have been approved by the NASD for trading in the PORTAL Market and shall be eligible for clearance and settlement through DTC. 20 (m) Additional Documents. On or prior to the Closing Date, the Company and the Guarantors shall have furnished to the Representative such further certificates and documents as the Representative may reasonably request. (n) Escrow Agreement. The Initial Purchasers shall have received a counterpart of the Escrow Agreement that shall have been executed and delivered by a duly authorized officer of the Company and each of the Guarantors. (o) Consent to the Credit Agreement. The Representative shall have received an executed copy of the Consent dated as of September 17, 2001, to the Company's Existing Credit Agreement, which Consent shall be in full force and effect. All opinions, letters, certificates and evidence mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Initial Purchasers. 6. Indemnification and Contribution. -------------------------------- (a) Indemnification of the Initial Purchasers. The Company and each of the Guarantors jointly and severally agree to indemnify and hold harmless each Initial Purchaser, its affiliates and each person, if any, who controls such Initial Purchaser within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, legal fees and other expenses reasonably incurred in connection with any suit, action or proceeding or any claim asserted), joint or several, caused by any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Offering Memorandum or the Offering Memorandum (or any amendment or supplement thereto), or caused by any omission or alleged omission to state therein a material fact or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with any information relating to any Initial Purchaser furnished to the Company in writing by such Initial Purchaser through the Representative expressly for use therein; provided, that with respect to any -------- such untrue statement in or omission from the Preliminary Offering Memorandum, the indemnity agreement contained in this paragraph (a) shall not inure to the benefit of any Initial Purchaser to the extent that the sale to the person asserting any such loss, claim, damage or liability was an initial resale by such Initial Purchaser and any such loss, claim, damage or liability of or with respect to such Initial Purchaser results from the fact that both (i) a copy of the Offering Memorandum (with any supplements or amendments thereto) was not sent or given to such person at or prior to the written confirmation of the sale of such Securities to such person and (ii) the untrue statement in or omission from such Preliminary Offering Memorandum was 21 corrected in the Offering Memorandum (including any supplement or amendment thereto) unless, in either case, such failure to deliver the Offering Memorandum was a result of non-compliance by the Company with the provisions of Section 4 hereof. (b) Indemnification of the Company. Each Initial Purchaser agrees, severally and not jointly, to indemnify and hold harmless the Company, each of the Guarantors and their respective directors and officers and each person, if any, who controls the Company or any of the Guarantors within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the indemnity set forth in paragraph (a) above, but only with respect to any losses, claims, damages or liabilities caused by any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with any information relating to such Initial Purchaser furnished to the Company in writing by such Initial Purchaser through the Representative expressly for use in the Preliminary Offering Memorandum and the Offering Memorandum (or any amendment or supplement thereto). (c) Notice and Procedures. If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any person in respect of which indemnification may be sought pursuant to either paragraph (a) or (b) above, such person (the "Indemnified Person") shall promptly notify the person against whom such indemnification may be sought (the "Indemnifying Person") in writing; provided that the failure to --------- notify the Indemnifying Person shall not relieve it from any liability that it may have under this Section 6 except to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure; and provided, further, that the failure to notify the Indemnifying -------- ------- Person shall not relieve it from any liability that it may have to an Indemnified Person otherwise than under this Section 6. If any such proceeding shall be brought or asserted against an Indemnified Person and it shall have notified the Indemnifying Person thereof, the Indemnifying Person shall retain counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person and any others entitled to indemnification pursuant to this Section 6 that the Indemnifying Person may designate in such proceeding and shall pay the fees and expenses of such counsel related to such proceeding. In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the contrary; (ii) the Indemnifying Person has failed within a reasonable time to retain counsel reasonably satisfactory to the Indemnified Person; (iii) the Indemnified Person shall have reasonably concluded (based upon advice of counsel to the Indemnified Person) that there may be legal defenses available to it that are different from or in addition to those available to the Indemnifying Person; or (iv) the named parties in any such proceeding (including any impleaded parties) include both the Indemnifying Person and the Indemnified Person and the Indemnified Person shall have reasonably concluded (based upon advice of counsel to the Indemnified Person) that representation of both 22 parties by the same counsel would be inappropriate due to an actual or potential conflict of interests between them. It is understood and agreed that the Indemnifying Person shall not, in connection with any proceeding or related proceeding in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be reimbursed as they are incurred. Any such separate firm for any Initial Purchaser, its affiliates and any control persons of such Initial Purchaser shall be designated in writing by J.P. Morgan Securities Inc. and any such separate firm for the Company, the Guarantors and any control persons of the Company and the Guarantors shall be designated in writing by the Company. The Indemnifying Person shall not be liable for any settlement of any proceeding effected without its written consent (which consent shall not be unreasonably withheld), but if settled with such consent or if there be a final judgment for the plaintiff, the Indemnifying Person agrees to indemnify each Indemnified Person from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an Indemnified Person shall have requested that an Indemnifying Person reimburse the Indemnified Person for fees and expenses of counsel as contemplated by this paragraph, the Indemnifying Person shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by the Indemnifying Person of such request and (ii) the Indemnifying Person shall not have reimbursed the Indemnified Person in accordance with such request prior to the date of such settlement. No Indemnifying Person shall, without the written consent of the Indemnified Person (which consent shall not be unreasonably withheld), effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party and indemnification could have been sought hereunder by such Indemnified Person, unless such settlement (i) includes an unconditional release of such Indemnified Person from all liability on claims that are the subject matter of such proceeding and (ii) does not include any statement as to or any admission of fault, culpability or a failure to act by or on behalf of any Indemnified Person. (d) Contribution. If the indemnification provided for in paragraphs (a) and (b) above is unavailable to an Indemnified Person or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under such paragraph, in lieu of indemnifying such Indemnified Person thereunder, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Guarantors on the one hand and the Initial Purchasers on the other from the offering of the Securities or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Company and the Guarantors on the one hand and the Initial Purchasers on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant 23 equitable considerations. The relative benefits received by the Company and the Guarantors on the one hand and the Initial Purchasers on the other shall be deemed to be in the same respective proportions as the net proceeds (before deducting expenses) received by the Company from the sale of the Securities and the total discounts and commissions received by the Initial Purchasers in connection therewith, as provided in this Agreement, bear to the aggregate offering price of the Securities. The relative fault of the Company and the Guarantors on the one hand and the Initial Purchasers on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or any Guarantor or by the Initial Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) Limitation on Liability. The Company, the Guarantors and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 6 were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages and liabilities referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Person in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 6, in no event shall an Initial Purchaser be required to contribute any amount in excess of the amount by which the total discounts and commissions received by such Initial Purchaser with respect to the offering of the Securities exceeds the amount of any damages that such Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11 (f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Initial Purchasers' obligations to contribute pursuant to this Section 6 are several in proportion to their respective purchase obligations hereunder and not joint. (f) Non-Exclusive Remedies. The remedies provided for in this Section 6 are not exclusive and shall not limit any rights or remedies that may otherwise be available to any Indemnified Person at law or in equity. 7. Termination. This Agreement may be terminated in the absolute ----------- discretion of the Representative, by notice to the Company, if after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by any of the New York Stock Exchange, the American Stock Exchange or the over-the- counter market; (ii) trading of any securities issued or guaranteed by the Company or any of the Guarantors shall have been 24 suspended on any exchange or in any over-the-counter market; (iii) a general moratorium on commercial banking activities shall have been declared by federal or New York State authorities; or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis, either within or outside the United States, that in the judgment of the Representative is material and adverse and makes it impracticable or inadvisable to proceed with the offer, sale or delivery of the Securities on the terms and in the manner contemplated by this Agreement and the Offering Memorandum. 8. Defaulting Initial Purchaser. (a) If, on the Closing Date, any Initial ---------------------------- Purchaser defaults on its obligation to purchase the Securities that it has agreed to purchase hereunder, the non-defaulting Initial Purchasers may in their discretion arrange for the purchase of such Securities by other persons satisfactory to the Company on the terms contained in this Agreement. If, within 36 hours after any such default by any Initial Purchaser, the non-defaulting Initial Purchasers do not arrange for the purchase of such Securities, then the Company shall be entitled to a further period of 36 hours within which to procure other persons satisfactory to the non-defaulting Initial Purchasers to purchase such Securities on such terms. If other persons become obligated or agree to purchase the Securities of a defaulting Initial Purchaser, either the non-defaulting Initial Purchasers or the Company may postpone the Closing Date for up to five full Business Days in order to effect any changes that in the opinion of counsel for the Company or counsel for the Initial Purchasers may be necessary in the Offering Memorandum or in any other document or arrangement, and the Company agrees to promptly prepare any amendment or supplement to the Offering Memorandum that effects any such changes. As used in this Agreement, the term "Initial Purchaser" includes, for all purposes of this Agreement unless the context otherwise requires, any person not listed in Schedule 1 hereto that, pursuant to this Section 8, purchases Securities that a defaulting Initial Purchaser agreed but failed to purchase. (b) If, after giving effect to any arrangements for the purchase of the Securities of a defaulting Initial Purchaser or Initial Purchasers by the non- defaulting Initial Purchasers and the Company as provided in paragraph (a) above, the aggregate principal amount of such Securities that remains unpurchased does not exceed one-eleventh of the aggregate principal amount of all the Securities, then the Company shall have the right to require each non- defaulting Initial Purchaser to purchase the principal amount of Securities that such Initial Purchaser agreed to purchase hereunder plus such Initial Purchaser's pro rata share (based on the principal amount of Securities that such Initial Purchaser agreed to purchase hereunder) of the Securities of such defaulting Initial Purchaser or Initial Purchasers for which such arrangements have not been made. (c) If, after giving effect to any arrangements for the purchase of the Securities of a defaulting Initial Purchaser or Initial Purchasers by the non- defaulting Initial Purchasers and the Company as provided in paragraph (a) above, the aggregate 25 principal amount of such Securities that remains unpurchased exceeds one- eleventh of the aggregate principal amount of all the Securities, or if the Company shall not exercise the right described in paragraph (b) above, then this Agreement shall terminate without liability on the part of the non-defaulting Initial Purchasers, the Company or the Guarantors, except that the Company and each of the Guarantors will continue to be liable for the payment of expenses as set forth in Section 9 hereof and except that the provisions of Section 6 hereof shall not terminate and shall remain in effect. (d) Nothing contained herein shall relieve a defaulting Initial Purchaser of any liability it may have to the Company, the Guarantors or any non- defaulting Initial Purchaser for damages caused by its default. 9. Payment of Expenses. (a) Whether or not the transactions contemplated ------------------- by this Agreement are consummated or this Agreement is terminated, the Company and each of the Guarantors jointly and severally agree to pay or cause to be paid all costs and expenses incident to the performance of their respective obligations hereunder, including without limitation, (i) the costs incident to the authorization, issuance, sale, preparation and delivery of the Securities and any taxes payable in that connection; (ii) the costs incident to the preparation and printing of the Preliminary Offering Memorandum and the Offering Memorandum (including any amendment or supplement thereto) and the distribution thereof to the Initial Purchasers; (iii) the costs of reproducing and distributing each of the Transaction Documents; (iv) the fees and expenses of the Company's and the Guarantors' counsel and independent accountants; (v) the fees and expenses incurred in connection with the registration or qualification and determination of eligibility for investment of the Securities under the laws of such jurisdictions as the Representative may designate and the preparation, printing and distribution of a Blue Sky Memorandum (including the related fees and expenses of counsel for the Initial Purchasers); (vi) any fees charged by rating agencies for rating the Securities; (vii) the fees and expenses of the Trustee and any paying agent (including related fees and expenses of any counsel to such parties); (viii) all expenses and application fees incurred in connection with the application for the inclusion of the Securities on the PORTAL Market and the approval of the Securities for book-entry transfer by DTC; and (ix) all expenses incurred by the Company in connection with any "road show" presentation to potential investors. (b) If (i) this Agreement is terminated pursuant to Section 7, (ii) the Company for any reason fails to tender the Securities for delivery to the Initial Purchasers or (iii) the Initial Purchasers decline to purchase the Securities for any reason permitted under this Agreement, the Company and each of the Guarantors jointly and severally agrees to reimburse the Initial Purchasers for all out-of-pocket costs and expenses (including the fees and expenses of their counsel) reasonably incurred by the Initial Purchasers in connection with this Agreement and the offering contemplated hereby. 26 10. Persons Entitled to Benefit of Agreement. This Agreement shall inure ---------------------------------------- to the benefit of and be binding upon the Company, the Guarantors and any controlling persons referred to herein, the Initial Purchasers, their respective affiliates and any controlling persons referred to herein, and their respective successors. Nothing in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. No purchaser of Securities from any Initial Purchaser shall be deemed to be a successor merely by reason of such purchase. 11. Survival. The respective indemnities, rights of contribution, -------- representations, warranties and agreements of the Company, the Guarantors and the Initial Purchasers contained in this Agreement or made by or on behalf of the Company, the Guarantors or the Initial Purchasers pursuant to this Agreement or any certificate delivered pursuant hereto shall survive the delivery of and payment for the Securities and shall remain in full force and effect, regardless of any termination of this Agreement or any investigation made by or on behalf of the Company, the Guarantors or the Initial Purchasers. 12. Initial Purchasers' Information. The Company, the Guarantors and the ------------------------------- Initial Purchasers acknowledge and agree that the only information relating to any Initial Purchaser that has been furnished to the Company in writing by any Initial Purchaser through the Representative expressly for use in the Preliminary Offering Memorandum and the Offering Memorandum (or any amendment or supplement thereto) consists of the following: (i) the last paragraph on the front cover page concerning the terms of the offering by the Initial Purchasers; and (ii) the statements concerning the Initial Purchasers contained in the third, eighth, tenth and eleventh paragraphs under the heading "Plan of Distribution". 13. Miscellaneous. (a) Authority of the Representative. Any action by the ------------- Initial Purchasers hereunder may be taken by J.P. Morgan Securities Inc. on behalf of the Initial Purchasers, and any such action taken by J.P. Morgan Securities Inc. shall be binding upon the Initial Purchasers. (b) Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted and confirmed by any standard form of telecommunication. Notices to the Initial Purchasers shall be given to the Representative c/o J.P. Morgan Securities Inc., 270 Park Avenue, New York, New York 10017 (fax: (212) 270-0994; Attention: Gerry Murray). Notices to the Company and the Guarantors shall be given to them at Advance Stores Company, Incorporated, 5673 Airport Road, Roanoke, Virginia 24012 (fax: (540) 561-1448; Attention: Eric M. Margolin). (c) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 27 (d) Counterparts. This Agreement may be signed in counterparts (which may include counterparts delivered by any standard form of telecommunication), each of which shall be an original and all of which together shall constitute one and the same instrument. (e) Amendments or Waivers. No amendment or waiver of any provision of this Agreement, nor any consent or approval to any departure therefrom, shall in any event be effective unless the same shall be in writing and signed by the parties hereto. (f) Headings. The headings herein are included for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. 28 If the foregoing is in accordance with your understanding, please indicate your acceptance of this Agreement by signing in the space provided below. Very truly yours, ADVANCE STORES COMPANY, INCORPORATED, By /s/ Jeffrey T. Gray ------------------------ Name: Jeffrey T. Gray Title: Senior Vice President Controller ADVANCE TRUCKING CORPORATION, By /s/ Jeffrey T. Gray ----------------------- Name: Jeffrey T. Gray Title: Senior Vice President Controller LARALEV, INC., By /s/ Andrew Panaccione ------------------------ Name: Andrew Panaccione Title: President WESTERN AUTO SUPPLY COMPANY, By /s/ Jeffrey T. Gray ------------------------ Name: Jeffrey T. Gray Title: Senior Vice President Controller 29 Accepted: October 24, 2001 J.P. MORGAN SECURITIES INC. For itself and on behalf of the several Initial Purchasers listed in Schedule 1 hereto. By /s/ Benjamin Ben-Attar -------------------------------- Vice President 30 Schedule 1 Initial Purchasers Principal Amount ------------------ ---------------- J.P. Morgan Securities Inc. $100,000,000 Credit Suisse First Boston $ 50,000,000 Lehman Brothers Inc. $ 50,000,000 ---------------- Total $200,000,000 Schedule 2 Material Agreements of Advance Stores Company, Incorporated ----------------------------------------------------------- 1. Amended and Restated Credit Agreement dated as of October 19, 1998 among Advance Holding Corporation ("Holding"), Advance Stores Company, Incorporated (the "Company"), the lenders party thereto, The Chase Manhattan Bank ("Chase"), Chase Securities Inc., DLJ Capital Funding, Inc. and First Union National Bank. 2. Pledge Agreement dated as of April 15, 1998, as amended and restated as of November 2, 1998, among the Company, Holding, the Subsidiary Pledgors listed therein and Chase, as collateral agent. 3. Guarantee Agreement dated as of April 15, 1998, as amended and restated as of November 2, 1998, among Holding, the Subsidiary Guarantors listed therein and Chase, as collateral agent. 4. Indemnity, Subrogation and Contribution Agreement dated as of April 15, 1998, as amended and restated as of November 2, 1998, among the Company, Holding, the Guarantors listed therein and Chase, as collateral agent. 5. Security Agreement dated as of April 15, 1998, as amended and restated as of November 2, 1998, among the Company, Holding, the Subsidiary Guarantors listed therein and Chase, as collateral agent. 6. Lease Agreement dated as of March 16, 1995 between Ki, L.C. and the Company for the Company's headquarters located at 5673 Airport Road, Roanoke, Virginia, as amended. 7. Lease Agreement dated as of January 1, 1997 between Nicholas F. Taubman and the Company for the distribution center located at 1835 Blue Hills Drive, N.E., Roanoke, Virginia, as amended. 8. Trust Indenture dated as of December 1, 1997 among McDuffie County Development Authority, First Union National Bank, as trustee, and Branch Banking and Trust Company, as credit facility trustee, relating to the $10,000,000 Taxable Industrial Development Revenue Bonds (Advance Stores Company, Incorporated Project) Series 1997 (the "IRB"). 9. Lease Agreement dated as of December 1, 1997 between Development Authority of McDuffie County and the Company relating to the IRB. 10. Letter of Credit and Reimbursement Agreement dated as of December 1, 1997 among the Company, Holding and First Union National Bank relating to the IRB. 11. Holding 1998 Senior Executive Stock Option Plan. 12. Form of Holding 1998 Senior Executive Stock Option Agreement. 13. Holding 1998 Executive Stock Option Plan. 14. Form of Holding 1998 Stock Option Agreement. 15. Holding 1998 Senior Executive Stock Subscription Plan. 16. Form of Holding Senior Executive Stock Subscription Agreement. 17. Holding 1998 Employee Stock Subscription Plan. 18. Form of Holding Employee Stock Subscription Agreement. 19. Form of Secured Promissory Note. 20. Form of Stock Pledge Agreement. 21. Form of Employment and Non-Competition Agreement between Childs, Cox, Gearheart, Gerald, Gray, Gregory, Hale, Helms, Jeter, Knighten, Kyle, Livesay, McDaniel, Miley, Quinn, Richardson, Smith, Turner and Williams and the Company (one-year agreement). 22. Form of Employment and Non-Competition Agreement between Bigoney, Buskirk, Felts, Fralin, Haan, Klasing, Reid, Stevens, Vaughn, Wade, Weatherly and Wirth and the Company (two-year agreement). 23. Form of Indemnity Agreement between certain directors of Holding (other than Nicholas F. Taubman) and Holding. 24. Form of Consulting and Non-Competition Agreement among Nicholas F. Taubman, Holding and the Company. 25. Indemnity Agreement dated as of April 15, 1998 between Nicholas F. Taubman and Holding. 26. Option Agreement dated as of April 15, 1998 between Nicholas F. Taubman and Holding. 27. Option Agreement dated as of April 15, 1998 between Arthur Taubman Trust dated July 13, 1968 and Holding. 2 28. Form of Employment and Non-Competition Agreement among Garnett E. Smith, Holding and the Company. 29. Form of Series B Debenture. 30. First Amendment dated as of June 30, 1999, to the Credit Agreement dated as of April 15, 1998 as amended and restated as of October 19, 1998, among Holding, the Company, the lenders party thereto and Chase, as administrative agent. 31. Supplement No. 1 dated as of June 30, 1999, to the Guarantee Agreement dated as of April 15, 1998 as amended and restated as of November 2, 1998, among Holding, the Subsidiary Guarantors listed therein and Chase, as collateral agent. 32. Supplement No. 1 dated as of June 30, 1999, to the Pledge Agreement dated as of April 15, 1998 as amended and restated as of November 2, 1998, among the Company, Holding, the Subsidiary Pledgors listed therein and Chase, as collateral agent. 33. Supplement No. 1 dated as of June 30, 1999, to the Security Agreement dated as of April 15, 1998 as amended and restated as of November 2, 1998, among the Company, Holding, the Subsidiary Guarantors listed therein and Chase, as collateral agent. 34. Supplement No. 1 dated as of June 30, 1999, to the Indemnity, Subrogation and Contribution Agreement dated as of April 15, 1998 as amended and restated as of November 2, 1998 among the Company, Holding, the Guarantors listed therein and Chase, as collateral agent. 35. Employment and Noncompetition Agreement dated as of February 1, 2000 among the Company, Holding and Lawrence P. Castellani. 36. Senior Executive Stock Subscription Agreement dated as of February 1, 2000, between Holding and Lawrence P. Castellani. 37. Restricted Stock Agreement dated as of February 1, 2000, between Holding and Lawrence P. Castellani. 38. Second Amendment and Consent, dated as of December 1, 1999, to the Credit Agreement dated as of April 15, 1998, among Holding, the Company, the lenders party thereto and Chase, as Administrative Agent. 3 39. Third Amendment, dated as of February 11, 2000, to the Credit Amendment dated as of April 15, 1998, among Holding, the Company and Chase, as Administrative Agent. 40. Amended and Restated Stockholders Agreement dated November 2, 1998 among FS Equity Parts IV., L.P., Ripplewood Partners, L.P., Ripplewood Advance Auto Parts Employee Fund I L.L.C., Nicholas F. Taubman, The Arthur Taubman Trust dated July 13, 1964, WA Holding Co. and Holding (including the Terms of the Registration Rights of Common Stock). 41. Indenture dated as of April 15, 1998 between Holding and United States Trust Company of New York, as Trustee, with respect to the 12.875% Senior Discount Debentures due 2009 (including the form of 12.875% Senior Discount Debenture due 2009). 42. Indenture dated as of April 15, 1998 among the Company, LARALEV, INC., as guarantor, and United States Trust Company of New York, as Trustee, with respect to the 10.25% Senior Subordinated Notes due 2008 (including the form of 10.25% Senior Subordinated Note due 1008). 43. Supplemental Indenture dated as of November 2, 1998 between Western Auto and United States Trust Company of New York, as trustee. 44. Agreement and Plan of Merger dated as of August 7, 2001 among Holding, Advance Auto Parts, Inc., the Company, AAP Acquisition Corporation and Discount Auto Parts, Inc. 45. Agreement and Plan of Merger date as of August 7, 2001 among Holding and Advance Auto Parts, Inc. 46. Irrevocable proxy and Voting Agreement Dated as of August 7, 2001 among Holding, the Company, Fontaine Industries Limited Partnership, the Peter J. Fontaine Revocable Trust and Peter J. Fontaine. 47. Stock Option Agreement dated as of August 7, 2001 among Holding, the Company, Fontaine Industries Limited Partnership, the Peter J. Fontaine Revocable Trust and Peter J. Fontaine. 4 Material Agreements of Discount Auto Parts, Inc. ------------------------------------------------ 1. Revolving Credit Agreement dated as of July 29, 1999 by and among Discount Auto Parts, Inc. ("Discount") and SunTrust Bank, Central Florida, National Association, individually and as Administrative Agent, SunTrust Equitable Securities Corporation, as Arranger and Book Manager, Bank of America, N.A., individually and as Syndication Agent, The First National Bank of Chicago, individually and as Documentation Agent, SouthTrust Bank, National Association, Amsouth Bank, First Union National Bank, Banque Nationale de Paris, Regions Bank, and Hibernia National Bank. 2. First Amendment to Revolving Credit Agreement dated as of January 12, 2000 by and among Discount, the Lenders, and SunTrust Bank. 3. Second Amendment to Revolving Credit Agreement dated as of August 29, 2000 by and among Discount, the Lenders, and SunTrust Bank. 4. Amendment and Restatement of the Discount Auto Parts Team Members' Profit Sharing Plan and Trust dated May 31, 1994. 5. Discount Supplemental Executive Profit Sharing Plan. 6. First Amendment and Restatement of the Discount Supplemental Executive Profit Sharing Plan. 7. Incentive compensation plans for Peter J. Fontaine, C. Michael Moore, Michael D. Harrah, Clement A. Bottino, David C. Viele and C. Roy Martin for fiscal year 2002. 8. Discount 1992 Stock Option Plan. 9. Discount Amended and Restated 1992 Team Member Stock Purchase Plan. 10 Discount Non-Employee Directors' Stock Option Plan. 11. First Amendment to Discount Non-Employee Directors' Stock Option Plan. 12. Discount Amended and Restated 1995 Stock Option Plan. 13. 1999 Amendment to the Discount Amended and Restated 1995 Stock Option Plan 5 14. Indemnification Agreements for Peter J. Fontaine, William C. Perkins, and E.E. Wardlow. 15. Indemnification Agreement for David P. Walling. 16. Indemnification Agreement for Charles W. Webster, Jr. 17. Indemnification Agreements for Clement A. Bottino, Michael D. Harrah, Thomas Merk and David C. Viele. 18. Indemnification Agreement for Donald W. Olson. 19. Change of Control Employment Agreement with William C. Perkins dated January 17, 2000. 20. Change of Control Employment Agreement with C. Michael Moore dated January 17, 2000. 21. First Amendment to Change of Control Employment Agreement with C. Michael Moore dated March 17, 2001. 22. Second Amendment to Change of Control Employment Agreement with C. Michael Moore dated July 3, 2001. 23. Form of Change of Control Employment Agreement with each of Clement Bottino, Don Casey, Michael D. Harrah, David Viele and Steven Joiner. 24. Form of Change of Control Employment Agreement with C. Roy Martin. 25. Stock Option Agreement with Steven C. Bair dated March 1, 2000. 26. Stock Option Agreement with William C. Perkins dated January 18, 2001. 27. Stock Option Agreement with William C. Perkins dated January 18, 2001. 28. Severance Protection and Change of Control Benefits Program. 29. Agreement and General Release with Steven C. Bair dated March 1, 2000. 30. Agreement and General Release with William C. Perkins dated January 17, 2001. 6 31. Form of Master Agreement dated as of May 30, 2000 among Discount, Discount Auto Parts Distribution Center, Inc., Atlantic Financial Group, Ltd., SunTrust Bank and others with Appendix A. 32. First Amendment to Master Agreement between Atlantic Financial Group, Ltd. and Discount Auto Parts Distribution Center, Inc. and others dated August 29, 2000. 33. Second Amendment to Master Agreement between Atlantic Financial Group, Ltd. and Discount Auto Parts Distribution Center, Inc. and others dated February 16, 2001. 34. Form of Master Lease Agreement dated as of May 30, 2000 between Atlantic Financial Group, Ltd. and Discount Auto Parts Distribution Center, Inc. and others. 35. Form of Mississippi Lease Supplement and Memorandum of Lease effective as of May 30, 2000 between Atlantic Financial Group, Ltd. And Discount Auto Parts Distribution Center, Inc. 36. Form of Guaranty Agreement from Discount dated as of May 30, 2000. 37. Form of Master Lease between DAPPER Properties I, II and III, LLC and Discount Auto Parts, Inc. dated as of February 27, 2001. 38. Form of Sale-Leaseback Agreement between DAPPER Properties I, II and III, LLC and Discount dated as of February 27, 2001. 39. Agreement and Plan of Recapitalization dated August 20, 1992. 40. Agreement and Plan of Merger dated as of August 7, 2001 among Discount Holding, the Company, Advance Auto Parts, Inc., and AAP Acquisition Corporation. 41. Amended and Restated Articles of Incorporation of Discount, as amended. 42. Amended and Restated Bylaws of Discount. 43. Note Agreement dated as of October 30, 1989 between Discount and Massachusetts Mutual Life Insurance Company. 44. Amendment Agreement to Note Agreement effective as of August 26, 1992 between Discount and Massachusetts Mutual Life Insurance Company. 7 45. Note Purchase Agreement dated as of July 15, 1997 between Discount and the Identified Purchasers. 46. Stockholder Rights Agreement dated as of November 21, 2000, between Discount and ChaseMellon Shareholders Services, L.L.C. (now known as Mellon Investor Services LLC). 47. Amendment No. 1, dated as of August 7, 2001, to the Stockholder Rights Agreement dated as of November 21, 2000, between Discount and Mellon Investor Services LLC (formerly known as ChaseMellon Shareholder Services, L.L.C.). 48. Form of Certificate for Common Stock of Discount. 8 ANNEX A Restrictions on Offers and Sales Outside the United States ---------------------------------------------------------- In connection with offers and sales of Securities outside the United States: (a) Each Initial Purchaser acknowledges that the Securities have not been registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except pursuant to an exemption from, or in transactions not subject to, the registration requirements of the Securities Act. (b) Each Initial Purchaser, severally and not jointly, represents, warrants and agrees that: (i) Such Initial Purchaser has offered and sold the Securities, and will offer and sell the Securities, (A) as part of their distribution at any time and (B) otherwise until 40 days after the later of the commencement of the offering of the Securities and the Closing Date, only in accordance with Regulation S under the Securities Act ("Regulation S") or Rule 144A or any other available exemption from registration under the Securities Act. (ii) None of such Initial Purchaser or any of its affiliates or any other person acting on its or their behalf has engaged or will engage in any directed selling efforts with respect to the Securities, and all such persons have complied and will comply with the offering restrictions requirement of Regulation S. (iii) At or prior to the confirmation of sale of any Securities sold in reliance on Regulation S, such Initial Purchaser will have sent to each distributor, dealer or other person receiving a selling concession, fee or other remuneration that purchase Securities from it during the distribution compliance period a confirmation or notice to substantially the following effect: "The Securities covered hereby have not been registered under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering of the Securities and the date of original issuance of the Securities, except in accordance with Regulation S or Rule 144A or any other available exemption from registration under the Securities Act. Terms used above have the meanings given to them by Regulation S." (iv) Such Initial Purchaser has not and will not enter into any contractual arrangement with any distributor with respect to the distribution of the Securities, except with its affiliates or with the prior written consent of the Company. Terms used in paragraph (a) and this paragraph (b) have the meanings given to them by Regulation S. (c) Each Initial Purchaser, severally and not jointly, represents, warrants and agrees that (i) it has not offered or sold and prior to the date six months after the Closing Date will not offer or sell any Securities to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 and the Public Offers of Securities Regulations 1995 with respect to anything done by it in relation to the Securities in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issue of the Securities to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such document may otherwise lawfully be issued or passed on. (d) Each Initial Purchaser acknowledges that no action has been or will be taken by the Company that would permit a public offering of the Securities, or possession or distribution of the Preliminary Offering Memorandum, the Offering Memorandum or any other offering or publicity material relating to the Securities, in any country or jurisdiction where action for that purpose is required. 2 ANNEX B [Opinion of Counsel for the Company in form and substance reasonably satisfactory to the Representative] ANNEX C [Opinion of Counsel for the New Guarantors in form and substance reasonably satisfactory to the Representative] Exhibit A [Form of Escrow Agreement] Exhibit B ADVANCE STORES COMPANY, INCORPORATED $200,000,000 10-1/4% Senior Subordinated Notes due 2008 [Form Of] JOINDER TO THE PURCHASE AGREEMENT --------------------------------- ________, 2001 J.P. Morgan Securities Inc. Credit Suisse First Boston Lehman Brothers Inc. c/o J.P. Morgan Securities Inc. 270 Park Avenue New York, New York 10017 Ladies and Gentlemen: Reference is made to the Purchase Agreement (the "Purchase Agreement") ------------------ dated October 24, 2001, initially among Advance Stores Company, Incorporated, a Virginia corporation (the "Company"), Advance Trucking Corporation, LARALEV, INC. and Western Auto Supply Company (collectively, the "Guarantors") and J.P. Morgan Securities Inc., Credit Suisse First Boston and Lehman Brothers Inc. (the "Initial Purchasers") concerning the purchase of the Securities (as defined in the Purchase Agreement) from the Company by the several Initial Purchasers. Capitalized terms used herein but not defined herein shall have the meanings assigned to such terms in the Purchase Agreement. This is the agreement referred to in Section 4(n) of the Purchase Agreement. The Company and each of the Guarantors listed on Schedule I hereto agree that this letter agreement is being executed and delivered in connection with the issue and sale of the Securities pursuant to the Purchase Agreement and to induce the Initial Purchasers to purchase the Securities thereunder and is being executed concurrently with the consummation of the Acquisition. 1. Joinder. Each of the parties hereto hereby agrees to become bound ------- by the terms, conditions and other provisions of the Purchase Agreement with all attendant rights, duties and obligations stated therein, with the same force and effect as if originally named as a Guarantor therein and as if such party executed the Purchase Agreement on the date thereof. 2. Representations, Warranties and Agreements of the Guarantors. ------------------------------------------------------------ Each of the Guarantors represent and warrant to, and agree with, the several Initial Purchasers on and as of the date hereof that: (a) such Guarantor has the corporate power to execute and deliver this letter agreement and all corporate action required to be taken by each of them for the due and proper authorization, execution, delivery and performance of this letter agreement and the consummation of the transactions contemplated hereby has been duly and validly taken; this letter agreement has been duly authorized, executed and delivered by such Guarantor. (b) the representations, warranties and agreements of such Guarantor set forth in Section 3 of the Purchase Agreement are true and correct on and as of the date hereof. 3. GOVERNING LAW. THIS LETTER AGREEMENT SHALL BE GOVERNED BY AND ------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 4. Counterparts. This letter agreement may be executed in one or ------------ more counterparts (which may include counterparts delivered by telecopier) and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 5. Amendments. No amendment or waiver of any provision of this ---------- letter agreement, nor any consent or approval to any departure therefrom, shall in any event be effective unless the same shall be in writing and signed by the parties hereto. 6. Headings. The headings herein are inserted for the convenience -------- of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this letter agreement. 2 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us a counterpart hereof, whereupon this letter agreement will become a binding agreement between the Company, the Guarantors party hereto and the several Initial Purchasers in accordance with its terms. Very truly yours, [GUARANTOR] By: ________________________ Name: Title: Accepted: [ ], 2001 J.P. MORGAN SECURITIES INC. CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS INC. By: J.P. MORGAN SECURITIES INC. By: _____________________________ Title: 3 Exhibit C [Form of Registration Rights Agreement] EX-11.1 20 dex111.txt STATEMENT RE COMPUTATION OF PER SHARE EARNINGS Exhibit 11.1 Advance Auto Parts, Inc. Schedule of Computation of Net Earnings Per Share (in thousands, except per share amounts) Advance Holding Historical:
Twenty-Eight Week Periods Ended Fiscal Year --------------------- ------------------------------------------------------------- July 15, July 14, 1996 1997 1998 1999 2000 2000 2001 -------- -------- -------- -------- -------- -------- -------- Net Earnings $21,264 $21,287 $(2,182) $(25,326) $19,559 $ 9,425 $21,404 Basic weighted average shares: Common shares outstanding 24,288 24,288 18,606 28,269 28,296 28,295 28,285 Dilutive effect of stock options - - 154 283 315 215 475 -------- -------- -------- -------- -------- -------- -------- Diluted weighted average shares 24,288 24,288 18,760 28,552 28,611 28,510 28,760 ======== ======== ======== ======== ======== ======== ======== Basic earnings per share $ 0.88 $ 0.88 $ (0.12) $ (0.90) $ 0.69 $ 0.33 $ 0.76 ======== ======== ======== ======== ======== ======== ======== Diluted earnings per share $ 0.88 $ 0.88 $ (0.12) $ (0.89) $ 0.68 $ 0.33 $ 0.74 ======== ======== ======== ======== ======== ======== ======== Pro Forma: Advance Holding Historical Twelve Months Fiscal Year Ended Six Months Ended Ended July 14, 2001 December 30, 2000 July 14, 2001 ------------------- ----------------- ---------------- Net Earnings $28,605 $16,626 $21,404 Basic weighted average shares: Common shares outstanding 28,290 28,296 28,285 Dilutive effect of stock options 456 315 475 ------------------- ----------------- ---------------- Diluted weighted average shares 28,746 28,611 28,760 =================== ================= ================ Basic earnings per share $ 1.01 $ 0.59 $ 0.76 =================== ================= ================ Diluted earnings per share $ 1.00 $ 0.58 $ 0.74 =================== ================= ================ Discount Historical Twelve Months Fiscal Year Ended Six Months Ended Ended July 14, 2001 December 30, 2000 July 14, 2001 ------------------- ----------------- ---------------- Net Earnings $19,290 $18,773 $14,700 Basic weighted average shares: Common shares outstanding 16,704 16,698 16,707 Dilutive effect of stock options 42 - 85 ------------------- ----------------- ---------------- Diluted weighted average shares 16,746 16,698 16,792 ------------------- ----------------- ---------------- Basic earnings per share $ 1.15 $ 1.12 $ 0.88 =================== ================= ================ Diluted earnings per share $ 1.15 $ 1.12 $ 0.88 =================== ================= ================ Pro Forma Twelve Months Fiscal Year Ended Six Months Ended Ended July 14, 2001 December 30, 2000 July 14, 2001 ------------------- ----------------- ---------------- Net Earnings $43,114 $33,857 $31,223 Basic weighted average shares: Common shares outstanding 32,590 32,596 32,585 Dilutive effect of stock options 455 315 475 ------------------- ----------------- ---------------- Diluted weighted average shares 33,045 32,911 33,060 =================== ================= ================ Basic earnings per share $ 1.32 $ 1.04 $ 0.96 =================== ================= ================ Diluted earnings per share $ 1.30 $ 1.03 $ 0.94 =================== ================= ================
EX-23.3 21 dex233.txt CONSENT OF ARTHUR ANDERSEN L.L.P. EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report and to all references to our Firm included in or made a part of this registration statement. /s/ Arthur Andersen LLP Greensboro, North Carolina November 5, 2001 EX-23.4 22 dex234.txt CONSENT OF ERNST & YOUNG L.L.P. EXHIBIT 23.4 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated June 29, 2001, with respect to the consolidated financial statements of Discount Auto Parts, Inc., included in Amendment No. 2 to the Registration Statement (Form S-4, No. 333-68858) and the related Proxy Statement and Prospectus of Advance Auto Parts, Inc., for the registration of 4,305,632 shares of its common stock. /s/ Ernst & Young LLP Tampa, Florida November 5, 2001