10-Q 1 d10q.txt FORM 10-Q FOR 2ND QUARTER ENDED 7/14/2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 14, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________. Commission file number - 333-56031 ________________ ADVANCE HOLDING CORPORATION (Exact name of registrant as specified in its charter) ________________ Virginia 54-1622754 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5673 Airport Road Roanoke, Virginia 24012 (Address of Principal Executive Offices) (Zip Code) (540) 362-4911 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report). Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of August 15, 2001, the registrant had outstanding 28,321,150 shares of Class A Common Stock, par value $0.01 per share (the only class of common stock of the registrant outstanding). The registrant's Class A Common Stock is not traded in a public market. -------------------------------------------------------------------------------- ADVANCE HOLDING CORPORATION AND SUBSIDIARIES Twelve and Twenty-Eight Week Periods Ended July 14, 2001 TABLE OF CONTENTS

Page ---- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements of Advance Holding Corporation and Subsidiaries: Condensed Consolidated Balance Sheets as of ~~April~~July 2114, 2001 and December 30, 2000..............................................................~~........~~ 1 Condensed Consolidated Statements of Operations for the ~~Sixteen~~Twelve and Twenty-Eight Week Periods Ended ~~April~~July 2114, 2001 and ~~April~~July 2215, 2000................~~...................~~ 2 Condensed Consolidated Statements of Cash Flows for the ~~Sixteen~~Twenty-Eight Week Periods Ended ~~April~~July 2114, 2001 and ~~April~~July 2215, 2000................~~...........~~ 3 Notes to the Condensed Consolidated Financial Statements.......................~~........~~ 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................................~~........~~ 911 Item 3. Quantitative and Qualitative Disclosures About Market Risks....................~~........~~ 1518 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................................. 19 Item 2. Changes in Securities and Use of Proceeds....... ~~16 SIGNATURE~~............................... 19 SIGNATURE............................................................................................ S-1

i Advance Holding Corporation and Subsidiaries Condensed Consolidated Balance Sheets July 14, 2001 and December 30, 2000 (dollars in thousands, except per share data)

~~April~~July 2114, December 30, Assets 2001 2000 ------ -------------- --------------- (unaudited) Current assets: Cash and cash equivalents $ 1619,~~643~~620 $ 18,009 Receivables, net 9490,~~308~~401 80,578 Inventories ~~782~~788,~~619~~773 788,914 Other current assets 1218,~~398~~878 10,274 -------------- --------------- Total current assets ~~905~~917,~~968~~672 897,775 Property and equipment, net of accumulated depreciation of of $~~201~~210,~~038~~776 and $191,897 ~~402~~400,~~658~~973 410,960 Assets held for sale 2223,~~874~~640 25,077 Other assets, net 1822,~~254~~029 22,548 -------------- --------------- $ 1,~~349~~364,~~754~~314 $ 1,356,360 ============== =============== Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Bank overdrafts $ ~~25,452~~- $ 13,599 Current portion of long-term debt ~~5,000~~- 9,985 Accounts payable ~~354~~401,~~598~~039 387,852 Accrued expenses ~~124~~138,~~985~~839 124,962 Other current liabilities 4350,~~002~~770 42,794 -------------- --------------- Total current liabilities ~~553~~590,~~037~~648 579,192 -------------- --------------- Long-term debt ~~593~~554,~~256~~819 576,964 -------------- --------------- Other long-term liabilities 4139,~~388~~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,~~273~~321,~~550~~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 ~~371~~372,~~971~~970 372,169 Other 1,~~562~~396 396 Accumulated deficit (~~211~~195,~~743~~290) (216,577) -------------- --------------- Total stockholders' equity ~~162~~179,~~073~~359 156,271 -------------- --------------- $ 1,~~349~~364,~~754~~314 $ 1,356,360 ============== ===============

The accompanying notes to the condensed consolidated financial statements are an integral part of these balance sheets. 1 Advance Holding Corporation and Subsidiaries Condensed Consolidated Statements of Operations For the Twelve and Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000 (dollars in thousands) (unaudited)

~~Sixteen~~Twelve Week Periods Ended Twenty-Eight Week Periods Ended -------------------------------- ~~April~~---------------------------------- 21July 14, ~~April~~July 2215, July 14, July 15, 2001 2000 2001 2000 ------------- -------------- --------------- -------------- Net sales $ ~~729~~607,~~359~~478 $ ~~677~~557,~~582~~650 $ 1,336,837 $ 1,235,232 Cost of sales, including purchasing and warehousing costs ~~433~~363,~~420~~137 ~~418~~341,~~607~~117 796,557 759,724 ------------- -------------- --------------- -------------- Gross profit ~~295~~244,~~939~~341 ~~258~~216,~~975~~533 540,280 475,508 Selling, general and administrative expenses ~~268~~204,~~260~~101 ~~239~~184,~~791~~284 472,361 424,075 ------------- -------------- --------------- -------------- Operating income 2740,~~679~~240 1932,~~184~~249 67,919 51,433 ------------- -------------- --------------- -------------- Other (expense) income: Interest expense (1913,~~631~~443) (2015,~~766~~835) (33,074) (36,601) Other ~~174~~395 ~~230~~302 569 532 ------------- -------------- --------------- -------------- Total other expense, net (1913,~~457~~048) (2015,~~536~~533) (32,505) (36,069) ------------- -------------- ~~Income~~--------------- ~~(loss)~~-------------- Income before (provision) ~~benefit~~ for income taxes 827,~~222~~192 (116,~~352)~~716 ~~(Provision)~~35,414 ~~benefit~~15,364 Provision for income taxes (310,~~271~~739) ~~396~~(6,335) (14,010) (5,939) ------------- -------------- --------------- -------------- Net income ~~(loss)~~$ 16,453 $ 410,~~951~~381 $ ~~(956)~~21,404 $ 9,425 ============= ============== =============== ==============

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements. 2 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)

~~Sixteen~~Twenty-Eight Week Periods Ended ----------------------------------------- ~~April~~July 2114, ~~April~~July 2215, 2001 2000 -------------------- ------------------- Cash flows from operating activities: Net income ~~(loss)~~ $ 421,~~951~~404 $ ~~(956)~~9,425 Adjustments to reconcile net income ~~(loss)~~ to net cash ~~used~~provided inby operating activities: Depreciation 20and amortization 37,~~856~~069 1934,~~234~~402 Amortization of stock option compensation 1,~~109~~342 ~~352~~600 Amortization of deferred debt issuance costs ~~981~~1,717 ~~992~~1,750 Amortization of bond discount 35,~~292~~855 25,~~887~~173 Amortization of interest on capital lease obligation - 42 Losses on sales of property and equipment, net ~~1,308~~806 ~~310~~215 Impairment of assets held for sale 1,600 - Provision ~~(benefit)~~ for deferred income taxes 18,~~140~~422 ~~(666)~~5,452 Net (increase) decrease in: Receivables, net (138,~~730~~915) (61,~~587)~~706 Inventories 617,~~295~~351 (1517,~~369~~551) Other assets (28,~~792~~952) (16,~~698~~298) Net increase (decrease) ~~increase~~ in: Accounts payable ~~(33~~13,~~254)~~187 2133,~~874~~285 Accrued expenses 417,~~151~~172 (2817,~~141~~308) Other liabilities (345,442) 42,~~248~~411 -------------------- ------------------- Net cash ~~used~~provided inby operating activities (4102,~~127)~~616 (353,~~478)~~304 -------------------- ------------------- Cash flows from investing activities: Purchases of property and equipment (1731,~~627~~048) (1228,~~692~~031) Acquisition, net of cash acquired (21,472) - Proceeds from sales of property and equipment ~~908~~ 1,~~294~~381 2,531 -------------------- ------------------- Net cash used in investing activities (1651,~~719~~139) (1125,~~398~~500) -------------------- ------------------- Cash flows from financing activities: ~~Increase~~Decrease in bank overdrafts 11(13,~~853~~599) 5(2,~~750~~885) (Payment) borrowing of note payable (784) -2,313 Borrowings under credit facilities ~~147~~171,~~300~~400 ~~155~~191,200 Payments on credit facilities (~~138~~208,~~501~~601) (~~157~~233,200) (Repurchases of) proceeds from Class A common stock under the stockholder subscription plan (~~999~~790) 2,~~192~~650 Other ~~611~~ 2,~~160~~508 6,139 -------------------- ------------------- Net cash ~~provided~~used byin financing activities 19(49,~~480~~866) 8(33,~~102~~783) -------------------- ------------------- Net increase (decrease) in cash and cash equivalents (1,~~366)~~611 (65,~~774~~979) Cash and cash equivalents, beginning of period 18,009 22,577 -------------------- ------------------- Cash and cash equivalents, end of period $ 1619,~~643~~620 $ 1516,~~803~~598 ==================== =================== Supplemental cash flow information: Interest paid $ 1723,~~678~~271 $ 2028,~~037~~040 Income taxes paid, ~~113~~net ~~190~~of refunds received 1,241 321 Non-cash transactions: Accrued purchases of property and equipment 54,~~912~~717 12,~~910~~460 Equity transactions under the stockholder subscription and employee stock option plans ~~226~~864 ~~934~~703 Conversion of capital lease obligation - 3,509 ==================== ===================

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements. 3 Advance Holding Corporation and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and 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 twelve and 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 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 4 Advance Holding Corporation and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000 (dollars in thousands) December 31, 2001. SFAS No. 142 is effective immediately for goodwill and intangibles acquired after June 30, 2001. Although the Company is currently evaluating the impact of SFAS Nos. 141 and 142, management does not expect that the adoption of these statements will have a material impact on existing goodwill or intangibles. For the twelve and twenty-eight week periods 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. Reclassifications Certain 2000 amounts have been reclassified to conform with their 2001 presentation. 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 5 Advance Holding Corporation and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000 (dollars in thousands) 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. A reconciliation of activity with respect to these restructuring accruals is as follows: Other Exit Costs ---------- Balance, December 30, 2000 $ 6,788 New provisions 3,275 Change in estimates 179 Reserves utilized (2,469) --------- Balance, July 14, 2001 (unaudited) $ 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: 6 Advance Holding Corporation and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000 (dollars in thousands) Other Exit Severance Costs ------------- -------------- Balance, December 30, 2000 $ - $ 3,797 Purchase accounting adjustments 837 1,715 Reserves utilized (705) (1,015) ------------- -------------- Balance, July 14, 2001 (unaudited) $ 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. 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 twelve and 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:

~~Sixteen~~Twelve ~~Weeks~~Week Periods Ended ~~Advance~~Twenty-Eight ~~April~~Week ~~21,~~Periods ~~2001~~Ended ~~(unaudited) Holding Retail Wholesale Eliminations Totals~~ --------------------------------------- --------------------------------------~~-------------------------------------~~ ~~Net~~July ~~sales $ - $ 688~~14,~~786~~ $July 4015,~~573~~ $July ~~- $ 729~~14,~~359~~ ~~(Loss)~~July ~~income before benefit (provision) for income taxes (3~~15,~~330)~~ ~~13,599~~2001 ~~(2,047)~~2000 -2001 ~~8,222 Segment assets (a) 11,304 1,306,309 49,382 (17,241) 1,349,754 Sixteen Weeks Ended Advance April 22,~~ 2000 ~~(unaudited) Holding Retail Wholesale Eliminations Totals~~ ------------------- ------------------- ------------------ ------------------ (unaudited) (unaudited) (unaudited) (unaudited) Net sales to Sears $ 1,856 $ 1,890 $ 3,879 $ 3,976 Credit card fees expense 93 100 194 228 July 14, December 30, 2001 2000 ------------------ ------------------~~----~~ ~~Net~~(unaudited) ~~sales~~Receivables $from -Sears $ ~~630,390~~702 $ ~~47,192 $ - $ 677,582 (Loss) income before benefit (provision) for income taxes (2,885)~~ 3,~~401~~160 ~~(1,868)~~Payables -to ~~(1,352)~~Sears ~~Segment assets (a) 14,409~~ 1,~~282,907~~220 ~~83,757 (22,748)~~ 1,~~358,325~~321

8. Segment and Related Information: 7 Advance Holding Corporation and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000 (dollars in thousands) 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 twelve and twenty-eight weeks ended July 15, 2000 have been restated to reflect this new structure. 8 Advance Holding Corporation and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and Twenty-Eight Week Periods Ended July 14, 2001 and July 15, 2000 (dollars in thousands) The accounting policies of the consolidated company have been consistently applied to the reportable segments listed below.

~~Sixteen~~Twelve Week Periods Ended ~~(dollars in thousands) (unaudited)~~ -------------------------- ~~April 21, April 22, 2001 2000~~ --------- ------------------------------------------- ~~Net~~Advance ~~sales~~July ~~$ 729~~14,~~359~~ $2001 ~~677,582~~(unaudited) ~~Cost~~Holding ofRetail ~~sales~~Wholesale ~~433,420~~Eliminations ~~418,607~~Totals --------- --------------------------------------------------------------------------------------------------------- ~~Gross~~Net ~~profit~~sales ~~295~~$ - $ 586,~~939~~796 ~~258~~$ 20,~~975~~682 ~~Selling~~$ - $ 607,478 ~~general~~(Loss) ~~and~~income ~~administrative~~before ~~expenses~~benefit ~~266~~(provision) for income taxes (2,~~664~~578) ~~238~~29,~~968~~631 ~~Non~~139 -~~cash~~ ~~and~~27,192 ~~other~~Segment ~~employee~~assets ~~compensation~~(a) 12,670 1,~~596~~325,165 ~~823~~43,696 (17,217) 1,364,314 Advance July 15, 2000 (unaudited) Holding Retail Wholesale Eliminations Totals --------- --------------------------------------------------------------------------------------------------------- ~~Operating~~Net ~~income~~sales 27$ - $ 529,~~679~~920 19$ 27,~~184~~730 ~~Interest~~$ ~~expense~~- ~~(19~~$ 557,~~631)~~650 (~~20,766~~Loss) ~~Other~~ income, ~~net~~before ~~174~~benefit ~~230~~ (~~Provision~~provision) ~~benefit~~ for income taxes (32,~~271~~264) ~~396~~20,190 ~~---------~~(1,210) -~~--------~~ ~~Net~~16,716 ~~income~~Segment assets (~~loss~~a) $15,648 41,~~951~~294,571 $64,112 (~~956~~24,018) ~~=========~~1,350,313 ~~=========~~Twenty-Eight ~~Sixteen~~ Week Periods Ended ~~(unaudited)~~ -------------------------- ~~April 21, April 22, 2001 2000~~ --------- --------- ~~Net sales 100.0% 100.0% Cost of sales 59.4 61.8~~ --------- ------------------------- ~~Gross~~Advance ~~profit~~July ~~40.6 38.2 Selling~~14, ~~general~~2001 ~~and~~(unaudited) ~~administrative~~Holding ~~expenses~~Retail ~~36.6~~Wholesale ~~35.3~~Eliminations ~~Non-cash~~Totals ~~and other employee compensation 0.2 0.1~~ --------- --------------------------------------------------------------------------------------------------------- ~~Operating~~Net sales $ - $ 1,275,582 $ 61,255 $ - $ 1,336,837 (Loss) income ~~3.8~~before ~~2.8~~benefit ~~Interest~~(provision) ~~expense~~for income taxes (~~2.7~~5,908) 43,230 (3.1,908) ~~Other~~- ~~income~~35,414 ~~net~~Segment ~~0.0~~assets ~~0.0~~(a) 12,670 1,325,165 43,696 (~~Provision~~17,217) ~~benefit~~1,364,314 ~~for~~Advance ~~income~~July ~~taxes~~15, 2000 (~~0.4~~unaudited) ~~0.1~~Holding Retail Wholesale Eliminations Totals --------- --------------------------------------------------------------------------------------------------------- Net sales $ - $ 1,160,310 $ 74,922 $ - $ 1,235,232 (Loss) income before benefit (~~loss~~provision) ~~0.7%~~for income taxes (~~0.2~~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. 9 Advance Holding Corporation and Subsidiaries Notes to the Condensed Consolidated Financial Statements For the Twelve and 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 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. 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 results of operations. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Advance Holding Corporation ("Holding") conducts all of its operations through its wholly owned subsidiary, Advance Stores Company, Incorporated and its subsidiaries (the "Company"). The Company was formed in 1929. In the 1980's, the Company sharpened its marketing focus to target sales of automotive parts and accessories to "do-it-yourself" ("DIY") customers and accelerated its growth strategy. From the 1980's through the present, the Company has grown significantly through new store openings, strategic acquisitions and a merger with Western Auto Supply Company (the "Western Merger"). Additionally, in 1996, the Company began to aggressively expand its sales to "do-it-for-me" ("DIFM") customers by implementing a commercial delivery program that supplies parts and accessories to third party automotive service and repair providers. As of July 14, 2001, the Company had 1,765 stores in 38 states, Puerto Rico and the Virgin Islands operating under the "Advance Auto Parts" and "Western Auto" trade names (the "Retail" segment). Advance Auto Parts is the second largest retailer of automotive parts and accessories in the United States and, based on store count, the Company believes it is the largest retailer in a majority of its markets. The Western Auto stores (the "Service Stores") included in the Retail segment offer home and garden merchandise in addition to automotive parts, accessories and service. The Company also operates a wholesale distribution network which includes distribution services of automotive parts and accessories and home and garden merchandise to approximately 470 independently owned dealer stores in 48 states operating under the "Western Auto" trade name (the "Wholesale" segment). The Company continually monitors store performance, which results in closing certain store locations not meeting profitability objectives. During the twenty-eight weeks ended July 14, 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, 18 of which were closed or relocated as of July 14, 2001. On April 23, 2001, the Company completed its acquisition of Carport Auto Parts, Inc. ("Carport"). The acquisition included a net 30 retail stores located in Alabama and Mississippi, and substantially all of the assets used in Carport's operation. This acquisition makes the Company the largest retailer of automotive parts in the Alabama and Mississippi markets. Upon the close of the acquisition, the Company made the decision to close 21 Carport stores not expected to meet long-term profitability objectives. The remaining Carport locations have been converted to the Advance Auto Parts store format, which included a physical conversion, merchandise conversion and information systems conversion. The acquisition has been accounted for under the purchase method of accounting. On August 7, 2001, Holding signed a definitive agreement to acquire Discount Auto Parts, Inc. ("Discount") in a merger transaction. 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 stock. Accordingly, upon consummation of the merger, Discount shareholders will own approximately 13% of the total shares outstanding of the combined company. Holding will file a registration statement covering the shares issued to Discount's 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. Together, the combined company will operate over 2,400 stores and anticipates generating over $3.0 billion in revenues and $273.0 million in EBITDA. The combined company expects approximately $30.0 million in purchasing, distribution and other expense savings allowing it to reach its estimated EBITDA goals. The merger, subject to certain regulatory filings and approvals, will be accounted for under the purchase method of accounting. The following discussion of the consolidated historical results of operations and financial condition of Holding should be read in conjunction with the unaudited condensed consolidated financial statements of Holding and the notes thereto included elsewhere in this Form 10-Q. Holding's first quarter consists of 16 weeks and its other three quarters consist of 12 weeks. 11 Forward-Looking Statements This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this quarterly report contain certain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. These statements include without limitation the words "believes," "anticipates," "estimates," "intends," "expects," and words of similar import. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Holding and the Company or the retail industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These potential risks and uncertainties include, among others, the following: general economic and business conditions; Holding's and the Company's substantial leverage and debt service obligations; restrictive loan covenants on Holding's and the Company's ability to pursue its business strategies; changes in business strategy or development plans; competition; weather conditions; extent of the market demand for auto parts; availability of inventory supply; unexpected fluctuation in merchandise costs; adequacy and perception of customer service, product quality and defect experience; availability of and ability to take advantage of vendor pricing programs and incentives; rate of new store openings; cannibalization of store sites; mix and types of merchandise sold; governmental regulation of products; new store development; performance of information systems; effectiveness of deliveries from distribution centers; ability to hire, train and retain qualified employees and environmental risks. Forward-looking statements regarding revenues, expenses, cash flows and liquidity are particularly subject to a variety of assumptions, some or all of which may not be realized. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. Holding disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 12 Results of Operations The following tables set forth the statement of operations data for Holding expressed in dollars and as a percentage of net sales for the periods indicated.

~~Fair~~Twelve ~~Fiscal~~Week ~~Fiscal~~Periods ~~Fiscal~~Ended ~~Fiscal~~Twenty-Eight ~~Fiscal~~Week ~~Market~~Periods ~~2001~~Ended ~~2002~~(dollars ~~2003~~in ~~2004~~thousands) ~~2005~~(dollars ~~Thereafter~~in ~~Total~~thousands) ~~Value~~(unaudited) (unaudited) -------- ------- ------- ------------ ---------------------------------------- July 14, July 15, July 14, July 15, 2001 2000 2001 2000 -------------- -------------- ------------------- ~~Long~~-~~term~~--------------- ~~debt:~~Net ~~(dollars~~sales in$ ~~thousands)~~607,478 ~~Fixed~~$ ~~rate............................~~557,650 $ -1,336,837 $ -1,235,232 $Cost -of $sales 363,137 341,117 796,557 759,724 -------------- $-------------- ------------------- ~~$281~~---------------- Gross profit 244,~~450~~341 $216,533 ~~281~~540,~~450~~280 $475,508 ~~222~~Selling,~~003~~ ~~Weighted~~general ~~average~~and ~~interest~~administrative ~~rate.....................~~expenses 203,502 183,682 470,166 422,650 Non-cash and other employee compensation 599 602 2,195 1,425 -------------- -------------- ------------------- ---------------- ~~11.3%~~Operating ~~11.3%~~income ~~Variable~~40,240 ~~rate.........................~~32,249 $67,919 351,~~000~~433 $Interest 14expense (13,~~000~~443) $(15,835) 4(33,~~000~~074) $(36,601) ~~232~~Other income,~~711~~ $net 60395 302 569 532 Provision for income taxes (10,~~000~~739) $(6,335) 27(14,~~588~~010) (5,939) -------------- -------------- ------------------- ---------------- Net income $ ~~341~~16,~~299~~453 $ ~~341~~10,~~299~~381 ~~Weighted~~$ ~~average~~21,404 ~~interest~~$ ~~rate.....................~~9,425 ~~6.2%~~============== ~~6.8%~~============== ~~7.7%~~=================== ~~8.4% 8.6% 8.6% 7.1%~~================

Net sales consist primarily of comparable store net sales, new store net sales, Service Store net sales, net sales for Wholesale and finance charges on installment sales. Comparable store net sales is calculated based on the change in net sales starting once a store has been opened for thirteen complete accounting periods (each period represents four weeks). Relocations are included in comparable store net sales from the original date of opening. Holding currently does not included the Service Stores in the comparable store net sales calculation. Holding's cost of sales includes merchandise costs and warehouse and distribution expenses as well as service labor costs for the Service Stores. Gross profit as a percentage of net sales may be affected by variations in Holding's product mix, price changes in response to competitive factors and fluctuations in merchandise costs and vendor programs. The Company seeks to avoid fluctuation in merchandise costs by entering into long-term purchasing agreements with vendors in exchange for pricing certainty, but there can be no assurance such measures will in fact mitigate the effect of fluctuations in merchandise costs on gross profits. 13 Selling, general and administrative expenses are comprised of store payroll, store occupancy, net advertising expenses, depreciation and amortization, other store expenses and general and administrative expenses, including salaries and related benefits of corporate employees, administrative office expenses, data processing, professional expenses and other related expenses. Twelve Weeks Ended July 14, 2001 Compared to Twelve Weeks Ended July 15, 2000 Net sales for the twelve weeks ended July 14, 2001 were $607.5 million, an increase of $49.8 million or 8.9% over net sales for the twelve weeks ended July 15, 2000. Net sales for the Retail segment increased $56.9 million or 10.7%. The net sales increase for the Retail segment was due to an increase in the comparable store sales and contributions from new stores opened within the last year. The comparable store sales increase of 6.8% was primarily a result of growth in both the DIY and DIFM market segments. Comparable store sales increased 3.0% for the twelve weeks ended July 15, 2000 as compared to the comparable period of fiscal 1999. Net sales for the Wholesale segment decreased $7.0 million or 25.4% reflecting the continued decline of this segment due to increased competition coupled with a decline in the number of independently owned dealer stores. During the twelve weeks ended July 14, 2001, the Company opened 38 new stores, relocated five stores and closed six stores, bringing the total retail stores to 1,765. During the second quarter of fiscal 2001, the Company increased the total number of stores participating in its commercial delivery program to 1,200 through the addition of a net seven programs, resulting from the Carport acquisition. Gross profit for the twelve weeks ended July 14, 2001 was $244.3 million or 40.2% of net sales, as compared to $216.5 million or 38.8% of net sales in the twelve weeks ended July 15, 2000. The increase in gross profit is a result of a positive shift in product mix, lower inventory shrinkage, leveraging of logistic costs and a decline in the net sales of the lower margin Wholesale segment. The gross profit for the Retail segment was $241.0 million or 41.1% of net sales for the twelve week period ended July 14, 2001, as compared to $213.6 million or 40.3% of net sales for the twelve week period ended July 15, 2000. Selling, general and administrative expenses, before non-cash and other employee compensation, increased to $203.5 million or 33.5% of net sales for the twelve week period ended July 14, 2001, from $183.7 million or 32.9% of net sales for the twelve week period ended July 15, 2000. The increase in selling, general and administrative expenses is attributable to the investment in store personnel and the continued sales decline in the Wholesale segment, which carries lower selling, general and administrative expenses as a percentage of sales compared to the Retail segment. EBITDA (operating income plus depreciation and amortization), as adjusted for non-cash and other employee compensation, was $57.1 million in the twelve week period ended July 14, 2001 or 9.4% of net sales, as compared to $48.0 million or 8.6% of net sales in the twelve 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. Holding's method for calculating EBITDA may differ from similarly titled measures reported by other companies. Management believes certain one-time expenses, expenses associated with merger integration and non-cash and other employee compensation should be eliminated from the EBITDA calculation to evaluate the operating performance of the Company. Interest expense for the twelve week period ended July 14, 2001 was $13.4 million or 2.2% of net sales, as compared to $15.8 million or 2.8% of net sales for the twelve week period ended July 15, 2000. Interest expense decreased as a result of an overall reduction in average borrowings and a significant decrease in interest rates for the twelve week period ended July 14, 2001 as compared to the twelve week period ended July 15, 2000. Income tax expense for the twelve weeks ended July 14, 2001 was $10.7 million compared to $6.3 million in the twelve weeks ended July 15, 2000. This increase was primarily due to the increase in income before taxes for the twelve weeks ended July 14, 2001 as compared to the twelve weeks ended July 15, 2000. Holding recorded net income of $16.5 million for the twelve week period ended July 14, 2001, as compared to $10.4 million for the twelve week period ended July 15, 2000. As a percentage of sales, net income for the twelve week period ended July 14, 2001 was 2.7% as compared to 1.9% for the twelve week period ended July 14 15, 2000. 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 opened within the last year. The comparable sales increase of 6.2% was primarily a result of growth in both the DIY and DIFM customer base, as well as the continued maturation of new stores. Comparable store sales increased 3.7% for the twenty-eight weeks ended July 15, 2000 as compared to the comparable period of 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. During the twenty-eight weeks ended July 14, 2001, the Company opened 53 new stores, relocated nine stores and closed 17 stores, bringing the total retail stores to 1,765. The Company has 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 positive shift in product mix, lower inventory shrinkage, leveraging of logistic costs and a decline in the net sales of the lower margin Wholesale segment. 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 closed store expenses associated with the decision to close certain store locations not meeting profitability objectives and the write down of an administrative facility obtained in the Western Merger totaling $5.1 million. Additionally, as a percentage of sales, the increase in selling, general and administrative expenses is attributable to the investment in store personnel 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. Holding's method for calculating EBITDA may differ from similarly titled measures reported by other companies. Management believes certain one-time expenses, expenses associated with merger integration and non-cash and other employee compensation should be eliminated from the EBITDA calculation to evaluate the operating performance of the Company. Interest expense for the 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 year 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, Holding recorded net income of $21.4 million for the twenty-eight week 15 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. Liquidity and Capital Resources As a holding company, Holding relies on dividends from the Company as its primary source of liquidity. Holding does not have and in the future may not have any assets other than the capital stock of the Company. The ability of the Company to pay cash dividends to Holding when required is restricted by law and the terms of the Company's debt instruments, including the Credit Facility and the Senior Subordinated Notes (see below). No assurance can be made that the Company will be able to pay cash dividends to Holding when required to redeem the Debentures (see below). Holding and the Company believe they will have sufficient liquidity to fund their debt service obligations and implement its growth strategy over the next twelve months. As of July 14, 2001, Holding and the Company had outstanding indebtedness consisting of $90.0 million of Senior Discount Debentures (the "Debentures"), $169.5 million of Senior Subordinated Notes (the "Senior Subordinated Notes"), borrowings of $285.3 million under the bank credit facility (the "Credit Facility") and $10.0 million of indebtedness under the McDuffie County Development Authority Taxable Industrial Bonds ("IRB"). The loans under the Credit Facility are secured by a first priority security interest in substantially all tangible and intangible assets of the Company. Amounts available to the Company under portions of the Credit Facility are subject to a borrowing base formula, which is based on certain percentages of the Company's inventories, and certain debt covenants. The Company was in compliance with the above covenants under the Credit Facility as of July 14, 2001. As of July 14, 2001, $107.7 million was available under these facilities. The Company intends to use borrowings under the revolver, as well as internally generated funds, for store expansion and funding of working capital, including funding of the restructuring program. The Company's primary capital requirements have been the funding of its continued store expansion program, store relocations and remodels, inventory requirements, the construction and upgrading of distribution centers, the development and implementation of proprietary information systems, the Western Merger and the Carport acquisition. The Company has financed its growth through a combination of internally generated funds, borrowings under the Credit Facility and issuances of equity. Additionally, the Company expects to meet the capital requirements of the Discount merger though refinancing the Credit Facility. The Company's new Advance Auto Parts stores require capital expenditures of approximately $120,000 per store and an inventory investment of approximately $300,000 per store, a portion of which is held at a distribution facility. A substantial portion of these inventories is financed through vendor payables. Pre-opening expenses, consisting primarily of store set-up costs and training of new store employees, average approximately $25,000 per store and are expensed when incurred. The Company expects to open approximately 115 to 130 new stores through internal growth or strategic acquisitions during fiscal 2001, of which 53 have been opened or acquired as of July 14, 2001. Historically, the Company has negotiated extended payment terms from suppliers to help finance inventory growth, and the Company believes that it will be able to continue financing much of its inventory growth through such extended payment terms. The Company anticipates that inventory levels will continue to increase primarily as a result of new store openings and increased SKU levels. As a result of the Western Merger and the Carport acquisition, the Company closed certain Advance Auto Parts stores in overlapping markets or stores not meeting profitability objectives. As part of normal operations, the Company will continue to review store performance and close additional stores not meeting profitability objectives. The Western Merger and Carport acquisition also resulted in restructuring reserves recorded in purchase accounting for the closure of certain stores, severance and relocation costs and other facility exit costs. As of July 14, 2001, these reserves had a remaining balance of $12.4 million. In addition, the Company assumed certain restructuring and deferred compensation liabilities previously recorded by Western Auto Supply Company. 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 16 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. 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 a net increase in working capital and other. Net cash used for investing activities was $51.1 million and was comprised of net 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 Credit Facilities. Seasonality The Company's business is somewhat seasonal in nature, with the highest sales occurring in the spring and summer months. In addition, the Company's business is affected by weather conditions. While unusually heavy precipitation tends to soften sales as elective maintenance is deferred during such periods, extremely hot and cold weather tends to enhance sales by causing parts to fail. 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Holding currently utilizes no material derivative financial instruments that expose it to significant market risk. Holding is exposed to cash flow and fair value risk due to changes in interest rates with respect to its long-term debt. While Holding cannot predict the impact that interest rate movements will have on its debt, exposure to rate changes is managed through the use of fixed and variable rate debt. Holding's exposure to interest rate risk decreased during the first and second quarters of fiscal 2001 due to decreased interest rates and reduced variable rate debt. Holding's fixed rate debt consists primarily of outstanding balances on the Debentures and Senior Subordinated Notes. Holding's variable rate debt relates to borrowings under the Credit Facility and the IRB. 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 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.

18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In March 2000, the Company was notified that it was 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 litigation 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 cannot be ascertained at this time. The Company is also involved in various other claims, lawsuits and environmental issues arising in the normal course of business. The damages claimed against the Company in some of these proceedings are substantial. Although the final outcome of these legal matters cannot be determined, based on the facts presently known, it is management's opinion that the final outcome of such claims and lawsuits will not have a material, adverse effect on the Company's financial position or future results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS During second quarter, Holding issued and sold 47,600 shares of its Class A common stock, $0.01 par value per share (the "Shares"), a price per share of $21.00 or an aggregate purchase price of $999,600 to certain employees of the Company (the "Purchasers"). Holding offered and sold the Shares pursuant to the Advance Holding Corporation 1998 Employee Stock Subscription Plan, as amended (the "Plan"), which Holding filed as an exhibit to its Registration Statement on Form S-4, effective October 30, 1998 (Registration No. 333-56013). As consideration for the Shares, Holding received $500,000 in cash, and $499,600 in the form of secured promissory notes, the payment of which are secured by individual stock pledge agreements with the Purchasers. The issuance of the Shares were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Rule 701 which exempts certain offers and sales of securities pursuant to certain compensatory benefit plans. The Plan is a compensatory benefit plan within the meaning of Rule 701 and the aggregate amount of securities sold by Holding in reliance on Rule 701 during the applicable period has not exceeded 15% of the outstanding amount of Class A common stock. 19 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADVANCE HOLDING CORPORATION, a Virginia corporation August 15, 2001 By: /s/ Jimmie L. Wade ______________________________________ Jimmie L. Wade President and Chief Financial Officer (as principal executive and accounting officer) S-1

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