Advance Auto Parts 2001 Annual Report Download - page 15

24 ADVANCE AUTO PARTS ANNUAL REPORT 2001 ADVANCE AUTO PARTS ANNUAL REPORT 2001 25
after June 30, 2001. SFAS No. 142 is effective for the Company’s 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. For fiscal year 2001, the Company had amortization
expense of approximately $444 related to existing goodwill of $3,251 at
December 29, 2001. Such amortization will be eliminated upon adoption
of SFAS No. 142. Although the Company is currently evaluating the
impact of other provisions of SFAS Nos. 141 and 142, management does
not expect that the adoption of these statements will have a material
impact on its financial position or results of operations.
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
year 2003. The Company does not expect SFAS No. 143 to have a
material impact on its financial position or the results of its operations.
In August 2001, the FASB also issued SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets”. This statement
replaces both SFAS No. 121, “Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ” and
Accounting Principles Board (APB) Opinion No. 30, “Reporting the
Results of Operations—Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions.” SFAS 144 retains the basic
provisions from both SFAS 121 and APB 30 but includes changes to
improve financial reporting and comparability among entities. The
Company will adopt the provisions of SFAS 144 during the first
quarter of fiscal 2002. Management does not expect the adoption of
SFAS No. 144 to have a material impact on the Company’s financial
position or the results of its operations.
Reclassifications
Certain items in the fiscal 2000 and fiscal 1999 financial statements have
been reclassified to conform with the fiscal 2001 presentation.
3. Discount Acquisition
On November 28, 2001, the Company acquired 100% of the outstanding
common stock of Discount Auto Parts, Inc. (“Discount”). Discount’s
shareholders received $7.50 per share in cash plus 0.2577 shares of
Advance common stock for each share of Discount common stock. The
Company issued 4,310 shares of Advance common stock to the former
Discount shareholders, which represented 13.2% of the Company’s total
shares outstanding immediately following the acquisition.
Discount was the fifth largest specialty retailer of automotive parts,
accessories and maintenance items in the United States with 671 stores
in six states, including the leading market position in Florida, with 437
stores. The Discount acquisition further solidified the Company’s
leading market position throughout the Southeast. The Company also
expects to achieve ongoing purchasing savings and savings from the
optimization of the combined distribution networks and the reduction of
overlapping administrative functions as we convert the Discount stores
to Advance stores.
In connection with the Discount acquisition, the Company issued an
additional $200,000 face value of 10.25% senior subordinated notes and
entered into a new senior credit facility that provides for (1) a $180,000
tranche A term loan facility and a $305,000 tranche B term loan facility
and (2) a $160,000 revolving credit facility (including a letter of credit
sub-facility). Upon the closing of the Discount acquisition, the Company
used $485,000 of borrowings under the new senior credit facility and net
proceeds of $185,600 from the sale of the senior subordinated notes to,
among other things, pay the cash portion of the acquisition consideration,
repay all amounts outstanding under the Company’s then-existing credit
facility, repay all outstanding indebtedness of Discount and purchase
Discount’s Gallman distribution facility from the lessor.
In accordance with SFAS No. 141, the acquisition has been accounted
for under the purchase method of accounting and was effective for
accounting purposes on December 2, 2001. Accordingly, the results of
operations of Discount for the period from December 2, 2001, to December
29, 2001, are included in the accompanying consolidated financial
statements. The purchase price has been allocated to the assets acquired and
liabilities assumed based upon estimates of fair values. Such estimates are
preliminary and subject to the finalization of plans to exit certain activities.
Negative goodwill of $75,724, resulting from excess fair value over the
purchase price, was allocated proportionately as a reduction to certain
noncurrent assets, primarily property and equipment. The purchase price
was $480,977, primarily including the issuance of 4,310 shares of Advance
common stock and 575 options to purchase shares of Advance common
stock, cash consideration for $7.50 per share and the “in the money” stock
options of $128,479, repayment of Discount’s existing debt and prepayment
penalties of $204,711 and the purchase of Discount’s Gallman distribution
facility from the lessor for $34,062. The cost assigned to the 4,310 shares of
common stock is $106,025 and was determined based on the market price
of Discount’s common stock on the approximate announcement date of the
acquisition. The cost assigned to the 575 options to purchase common stock
is $1,104 and 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
common stock of $24.60; and (v) expected dividend yield of zero. The
following table summarizes the amounts assigned to assets acquired and
liabilities assumed at the date of the acquisition.
December 2, 2001
Current assets:
Cash and cash equivalents $ 6,030
Receivables, net 15,591
Inventories 192,402
Other current assets 34,590
Property and equipment 316,784
Assets held for sale 38,546
Other assets (a) 9,269
Total assets acquired 613,212
Current liabilities:
Bank overdrafts (15,470)
Accounts payable (58,852)
Current liabilities (b) (56,828)
Other long-term liabilities (b) (1,085)
Total liabilities assumed (132,235)
Net assets acquired $ 480,977
(a) Includes $1,652 assigned to the Discount trade dress with a useful life
of approximately 3 years.
(b) Includes restructuring liabilities established in purchase accounting of
approximately $11,397 for severance and relocation costs, facility and
other exit costs (Note 4).
Advance Auto Parts, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)
December 29, 2001, December 30, 2000 and January 1, 2000 (in thousands, except per share data and per store data)
Total acquisition costs related to the transaction were approximately $8,804,
of which $1,555 is reflected in accrued liabilities at December 29, 2001.
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition had taken place at the
beginning of the applicable period:
2001 2000
Net sales $ 3,144,694 $ 2,928,036
Net income from continuing operations 26,011 33,858
Net income from continuing operations
per proforma basic share $ 0.80 $ 1.04
Net income from continuing operations
per proforma diluted share $ 0.78 $ 1.03
The proforma amounts give effect to certain adjustments, including
changes in interest expense, depreciation and amortization and related
income tax effects. These amounts are based on certain assumptions and
estimates and do not reflect any benefit from economies, which might be
achieved from combined operations. Additionally, these results include the
non-recurring items separately disclosed in the accompanying
consolidated statements of operations. The proforma results of operations
have been prepared for comparative purposes only and do not purport to
be indicative of the results of operations which actually would have
resulted had the Discount acquisition occurred on the date indicated, or
which may result in the future.
In addition to the acquisition costs, the Company incurred $20,803 of
costs and fees, of which $20,140 has been recorded as deferred debt
issuance costs and $663 as stock issuance costs related to registering
shares in connection with the Discount acquisition.
4. Restructuring and Closed Store 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 mergers and acquisitions, including the
fiscal 1998 merger with Western Auto Supply Company
(“Western”)(“Western Merger”), and the fiscal 2001 acquisitions of
Carport Auto Parts, Inc. (the “Carport Acquisition”) (See Note 8) and
Discount. 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%. Expenses associated with
the ongoing restructuring program are included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations. From time to time these estimates require revisions 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.
Ongoing Restructuring Program
During fiscal 2001, the Company closed three stores included in the fiscal
2000 restructuring activities and made the decision to close or relocate 39
additional stores not meeting profitability objectives, of which 27 have
been closed as of December 29, 2001. The remaining stores will be closed
during fiscal 2002. Additionally, as a result of the Discount acquisition,
the Company decided to close 27 Advance Auto Parts stores that were in
overlapping markets with certain Discount Auto Parts stores. Expenses
associated with restructuring include estimated exit costs of $3,271 and
write-offs of related leasehold improvements of $448. All 27 stores are
scheduled to be closed during the first quarter of fiscal 2002.
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 resources more productively in
other areas of the business. The Company has established restructuring
reserves for the termination of certain team members and exit costs in
connection with the decision to close this facility.
In connection with the Western merger and the Discount acquisition,
the Company assumed the restructuring reserves related to the acquired
operations. As of December 29, 2001, these restructuring reserves relate
primarily to ongoing lease obligations for closed store locations.
A reconciliation of activity with respect to these restructuring accruals
is as follows. Other Exit
Severance Costs Total
Balance, January 2, 1999 $ 682 $ 14,773 $ 15,455
New provisions - 1,307 1,307
Change in estimates - (1,249) (1,249)
Reserves utilized (664) (4,868) (5,532)
Balance, January 1, 2000 18 9,963 9,981
New provisions - 1,768 1,768
Change in estimates - (95) (95)
Reserves utilized (18) (4,848) (4,866)
Balance, December 30, 2000 - 6,788 6,788
New provisions 475 8,285 8,760
Change in estimates - 11 11
Reserves utilized (475) (5,441) (5,916)
Balance, December 29, 2001 $ - $ 9,643 $ 9,643
As of December 29, 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. This liability, along
with those related to mergers and acquisitions, is recorded in accrued
expenses (current portion) and other long-term liabilities (long-term) in the
accompanying consolidated balance sheets.
Restructuring Associated with Mergers and Acquisitions
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 team
members 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 team members of the acquired company. As of December
29, 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.
Advance Auto Parts, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)
December 29, 2001, December 30, 2000 and January 1, 2000 (in thousands, except per share data and per store data)