<PAGE>
 
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                                 UNITED STATES

                      SECURITIES AND EXCHANGE COMMISSION



                                   FORM 10-K

(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                   For the fiscal year ended January 2, 1999

                                      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                        24012
              Roanoke, Virginia                      (Zip Code)
   (Address of Principal Executive Offices)
 
                                (540) 362-4911
             (Registrant's telephone number, including area code)
 
 
       Securities Registered Pursuant to Section 12(b) of the Act:  None
 
       Securities Registered Pursuant to Section 12(g) of the Act:  None

 
     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 
    ---    ---

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]  Not Applicable.


     As of April 2, 1999, the registrant had outstanding 28,261,900 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.


 Aggregate market value of the registrant's voting and nonvoting Class A Common
 Stock:  Not Applicable.


                  Documents Incorporated by Reference:  None

================================================================================
<PAGE>
 
                                    PART I

     This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27-A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended.  These
statements include without limitation the words "believes," "anticipates,"
"estimates," "intends," "expects," and words of similar import.  All statements
other than statements of historical fact included in statements under "Item 1.
Business," "Item 2. Properties," "Item 3. Legal Proceedings" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation" include forward-looking information and may reflect certain
judgements by management. 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
automotive aftermarket 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, but are
not limited to, those identified in Holding's Registration Statement on Form S-
4, as amended, effective October 30, 1998.  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.


Item 1.        Business.


General


     Advance Holding Corporation ("Holding") conducts all of its operations
through its wholly owned subsidiary, Advance Stores Company, Incorporated (the
"Company"). The Company is the second largest specialty retailer of automotive
parts and accessories in the United States.  As of January 2, 1999, the Company
had 1,567 stores in 39 states, Puerto Rico and the U.S. Virgin Islands operating
under the "Advance Auto Parts," "Parts America" and "Western Auto" names.  In
addition, the Company supplies approximately 740 stores in 48 states through the
Western Auto dealer network.  In fiscal 1996, 1997 and 1998 (prior to the
Western Auto Merger in November 1998, described below), 100% of the Company's
total revenues were derived from the retail sale of automotive parts and
services.


     The Company was formed in 1929.  In the 1980s, 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 1980s
through the present, the Company has grown significantly through new store
openings and strategic acquisitions.  In 1996, the Company began to aggressively
expand its sales to "do-it-for-me" ("DIFM") customers by implementing a
commercial delivery program which supplies parts and accessories to third party
automotive service and repair providers.


Recapitalization


     In April 1998, Holding consummated its recapitalization (the
"Recapitalization").  See Note 3 to "Item 8. Financial Statements" for a
detailed discussion of the Recapitalization.


Western Auto Merger


     On November 2, 1998, Western Auto Supply Company merged into Advance
Acquisition Corporation ("AAC"), a subsidiary of the Company (the "Western Auto
Merger"). At the time of the Western Auto Merger, AAC changed its name to
Western Auto Supply Company ("Western Auto"). References to Western Auto Supply
Company refer to the entity prior to the Western Auto Merger. As consideration
in the Western Auto Merger, the Company issued to Sears, Roebuck and Co.
("Sears"), the parent company of Western Auto Supply Company, 11,474,606 shares
of Common Stock of Holding (the "Holding Common Stock") representing
approximately 40.6% of the outstanding Holding Common Stock, paid Sears $175.0
million in cash and made a commitment to Sears to share in a portion of losses
incurred by Sears with respect to certain related credit card portfolios, not to
exceed $10.0 million. Certain existing stockholders of Holding invested an
additional $70.0 million in equity to fund a portion of the cash purchase price,
the remainder of which was funded through additional borrowings under the
Company's Credit Facility (the "Credit Facility") and cash on hand.

                                       1
<PAGE>
 
     Immediately prior to the Western Auto Merger, Western Auto Supply Company
operated 612 auto parts stores in the United States under the "Parts America"
name.  The Parts America stores are similar to the Advance Auto Parts stores in
terms of size, format and product offerings.  In addition, Western Auto Supply
Company operated 38 auto parts and service stores in Puerto Rico and the U.S.
Virgin Islands and one store in each of California and Hawaii under the "Western
Auto" name (the "Service Stores").  The Service Stores offer automotive parts
and accessories as well as service, repairs, tires and certain non-automotive
goods.  Western Auto Supply Company also supplied approximately 740 Western Auto
dealer stores in 48 states.  Western Auto Supply Company supplied its stores and
dealers through four distribution centers.

     As a result of the Western Auto Merger, the Company intends to close
certain Parts America and Advance Auto Parts stores in overlapping areas.  As of
January 2, 1999, 52 Parts America stores and 31 Advance Auto Parts stores have
been closed or identified to be closed.  In addition, the Company anticipates
that additional stores will be closed in fiscal 1999.



     The Company plans to convert the remaining Parts America stores to Advance
Auto Parts stores (the "Parts America Conversion").  The Parts America
Conversion will change certain merchandise lines (the "Merchandise Conversion"),
store level management information systems (the "MIS Conversion"), and the
format and name of the Parts America stores to conform with the Advance Auto
Parts stores. The Merchandise Conversion will align the in-store inventory with
the Advance Auto Parts stores and is expected to be completed by the end of the
first quarter of 1999. The MIS Conversion will replace the current Parts America
store level systems with Advance Auto Parts store level systems. The Company
expects to complete the MIS Conversion by the end of the second quarter of 1999.
The format and name changes will occur with the actual physical conversion of
Parts America stores into Advance Auto Parts stores (the "Physical Conversion").
The Company expects to complete the Physical Conversion of the Parts America
stores by the end of fiscal 1999. The Company initiated the Parts America
Conversion in the fourth quarter of 1998. The Company does not plan to convert
the Service Stores as part of the Parts America Conversion.


Store Operations

     The retail store is the focal point of the Company's operations.  The
Company's stores generally are located in or adjacent to good visibility, high
traffic strip shopping centers.  Domestic stores generally range in size from
5,000 to 10,000 square feet, averaging approximately 8,000 square feet, and
currently stock between 16,000 and 21,000 stock keeping units ("SKUs").  In
addition, approximately 95,000 SKUs that are not stocked at the store level are
available on a next or same day basis to virtually all domestic stores through
the Company's PDQ(R) network.  The Puerto Rico and Virgin Islands stores average
approximately 15,800 square feet.  The Company's stores are divided into six
regions which are supervised by a Regional Vice President who is supported by
District Assistant Vice Presidents.  Reporting to district management are
Division Managers who have direct responsibilities for store operations.  A
typical division consists of 14 to 18 stores.  Depending on store size and sales
volume, each store is staffed by 8 to 30 employees under the leadership of a
store manager.  Stores generally are open seven days a week from 8am to 8pm.

                                       2
<PAGE>
 
     The Company's stores are currently located as follows:

<TABLE>
<CAPTION>
                                                                                  
                  Number of                                Number of                                  Number of 
                 Stores as of                             Stores as of                               Stores as of
 Location       January 2, 1999         Location         January 2, 1999         Location          January 2, 1999
-----------   -------------------     ------------    --------------------     ------------      -------------------
<S>                     <C>           <C>                      <C>            <C>                      <C>  
Arkansas                5             Louisiana                  6             Pennsylvania              105
Alabama                55             Massachusetts             19             Puerto Rico                36
California              1             Maryland                  30             Rhode Island                4
Colorado               15             Mississippi               12             South Carolina             98
Connecticut            20             Michigan                  20             South Dakota                1
Delaware                4             Maine                      8             Tennessee                 101
Florida                26             Missouri                  39             Texas                      34
Georgia               125             Nebraska                  11             U.S. Virgin Islands         2
Hawaii                  1             New Hampshire              4             Virginia                  123
Iowa                   21             New Jersey                11             Vermont                     2
Illinois               20             New York                  88             Wisconsin                  15
Indiana                48             North Carolina           167             West Virginia              61
Kansas                 25             Ohio                     140             Wyoming                     2
Kentucky               60             Oklahoma                   2                                         
</TABLE>


Management Information Systems
                              
     Store Based Information Systems
                                    
     The Company'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 ("POS"), Electronic Parts Catalogs ("EPC") and Store
Level Inventory Management ("SLIM") systems.  These systems are tightly
integrated by a communications network and together provide real time,
comprehensive information to store personnel, resulting in improved customer
service levels and in-stock availability.  As part of the Parts America
Conversion, the Company is in the process of completing the MIS Conversion.

     Point-of-Sale:  The Company's POS system has improved store productivity
and customer service by streamlining store procedures.  POS information is used
to formulate the Company's pricing, marketing and merchandising strategies as
well as to rapidly replenish inventory. Additionally, the POS system maintains a
customer purchase and warranty history database which may be used for targeted
marketing programs.

     Electronic Parts Catalog:  The EPC system is a software based system that
identifies the application, location and availability of over 1.5 million parts
enabling 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 and its inventory status, and if the part is not
available at the store, its availability through PDQ/(R)/.  The EPC system also
displays related parts for sales associates to recommend to a customer, leading
to increased average customer sales.  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 allows sales associates to order parts and
accessories electronically from the Company's PDQ/(R)/ system with immediate
confirmation of price, availability and delivery.  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.

     Store Level Inventory Management System ("SLIM"): The SLIM system provides
real-time inventory tracking at the store level.  With SLIM, 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.

                                       3
<PAGE>
 
     Communications Network:  The Company is in the process of replacing its
satellite communications with a Frame Relay network.  Frame Relay communications
will be installed in over 800 stores in 1999 and implemented in all stores by
the end of 2000.  The Frame Relay network will provide increased capacity to
support the Company's growth strategy and future in-store applications.

     Logistics and Purchasing Information Systems

     The Company has installed its Distribution Center Management System
("DCMS") in its Roanoke, Jeffersonville and Thomson distribution centers and
plans to install it in its Gadsden, Salina and Delaware distribution centers.
The Salina and Delaware facilities were acquired in the Western Auto Merger.
The DCMS has also been installed in the Master PDQ/(R)/ warehouse in 
Andersonville and in the Youngwood and Goodlettsville PDQ/(R)/ warehouses. The
DCMS has been installed in the Riverside and the Guilderland Center PDQ/(R)/
warehouses in the first quarter of 1999. The DCMS, together with new material
handling equipment, significantly reduces warehouse and distribution costs while
improving efficiency. Using this technology, the Company will be able to service
over 2,000 stores from its six retail distribution centers that serve stores in
the United States.

     The Company currently is assessing the logistics and purchasing information
systems in its Gastonia and Temple distribution centers, which were acquired in
the Western Auto Merger and service the Service Stores and the dealer network.

     The E3 Replenishment System, which was implemented in 1994, monitors the
Company's distribution center and PDQ/(R)/ warehouse inventory levels and orders
additional products when appropriate.  In addition, the system tracks sales
trends by SKU, allowing the Company to adjust future orders to evolving demand.

Purchasing and Merchandising

     Merchandise is selected and purchased for all retail stores and the dealer
network by personnel at the Company's corporate offices in Roanoke and Kansas
City.  In fiscal 1998, the Company purchased from over 200 vendors, with no
single vendor accounting for 10% or more of purchases.  The Company's purchasing
strategy involves negotiating multi-year agreements with certain vendors based
upon its expansion plans.  In connection with the Western Auto Merger, the
Company entered into several long-term agreements that will provide lower
acquisition costs on future purchases.

     The Company's merchandising objective is to carry a broad selection of
brand name products, including Fram-Bendix-Autolite, Fel-Pro, Federal-Mogul and
AC Delco, that generate customer traffic and appeal to the Company's commercial
delivery customers.  In addition, the Company stocks a wide selection of high
quality private label products that appeal to value conscious customers.  Sales
of replacement parts account for approximately 65% of the Company's sales and
generate higher gross profit margins than maintenance items or general
accessories.  The Company determines 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 sales.  In connection with the Western Auto
Merger, the Company reached agreements with Sears to supply the Service Stores
and dealer network with certain DieHard/(R)/ and Craftsman/(R)/ brand products.

Warehouse and Distribution

     The Company currently operates six distribution centers that service retail
stores in the United States.  They are located in Roanoke, Gadsden,
Jeffersonville, Thomson, Salina and Delaware.  The Company also operates
distribution centers in Temple and Gastonia which service the Service Stores and
dealer network.

     All distribution centers that service retail stores in the United States
are equipped with technologically advanced material handling equipment,
including carousels, "pick to light" systems, radio frequency technology and
automated sortation systems.  The Delaware and Salina distribution centers are
not as technologically advanced as the existing Advance distribution centers and
plans to upgrade them further are being reviewed.

                                       4
<PAGE>
 
     The Company offers approximately 25,000 SKUs on a next day basis to
substantially all of its domestic retail stores via its seven PDQ/(R)/
warehouses. One additional PDQ/(R)/ warehouse will open in the first quarter of
1999. 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 the Company's dedicated PDQ/(R)/ trucking fleet. The Company operates a
PDQ/(R)/ warehouse that stocks approximately 70,000 SKUs 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 Company's stores.

     The following table sets forth certain information relating to the
Company's main distribution facilities:


<TABLE>
<CAPTION>
                                                  Opening                             Size
Distribution Facility                               Date        Area Served          (Sq. ft.)
--------------------------------                 ---------   ----------------      ------------
<S>                                                <C>       <C>                      <C>
Main Distribution Centers
     Roanoke, Virginia........................      1988     Mid-Atlantic             440,000

     Gadsden, Alabama.........................      1994     South                    240,000

     Jeffersonville, Ohio.....................      1996     Mid West                 383,000

     Gastonia, North Carolina(1)..............      1969     Service Stores,          663,000
                                                             Dealer Network

     Salina, Kansas(1)........................      1971     West                     441,000

     Delaware, Ohio(1)........................      1972     Northeast                510,000

     Temple, Texas(1).........................      1974     Dealer Network,          550,000
                                                             Service Stores

     Thomson, Georgia.........................      1999     Southeast                383,000
PDQ/(R)/ Warehouses
     Roanoke, Virginia........................      1983     Mid-Atlantic              50,400

     Smithfield, North Carolina...............      1991     Southeast                 42,000

     Jeffersonville, Ohio(2)..................      1996     Midwest                   50,000

     Thomson, Georgia(2)......................      1998     South, Southeast          50,000

     Goodlettsville, Tennessee................      1999     Central                   41,900

     Youngwood, Pennsylvania..................      1999     East                      49,000

     Riverside, Missouri......................      1999     West                      45,000

     Guilderland Center, New York(3)..........      1999     Northeast                 47,400

Master PDQ/(R)/ Warehouse

     Andersonville, Tennessee.................      1998     All                       66,000
</TABLE>
________________
(1)  The Company acquired these facilities in the Western Auto Merger in
     November 1998.
(2)  This facility is located within the main distribution center.
(3)  The Company recently executed a lease for this facility and contemplates
     that it will open in April 1999.

Employees

     As of April 7, 1999, the Company employed approximately 15,687 full-time
employees and 9,289 part-time employees.  Approximately 84% of the Company's
workforce is employed in store level operations, 11% in distribution and 5% in
the Company's corporate offices in Roanoke and Kansas City.  The Company has
never experienced any labor disruption and believes that its labor relations are
good.  One Service Store employs unionized employees.

Competition

     The Company competes in the automotive aftermarket industry which consists
of replacement parts, maintenance items and accessories and which, according to
industry estimates, generates approximately $78.0 billion in sales per year.
The Company competes for both DIY and DIFM customers.  Although the number of
competitors 

                                       5
<PAGE>
 
and the level of competition vary by market area, both markets are highly
fragmented and generally very competitive. The Company competes primarily with
national and regional retail automotive parts chains (such as AutoZone, Inc.,
Discount Auto Parts, Inc., O'Reilly Automotive, Inc., The Pep Boys--Manny, Moe &
Jack and Trak Auto Corporation), 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, Inc.). The Company believes that chains of automotive parts
stores, such as the Company, 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 the Company's business are store
location, customer service and product selection, availability, quality and
price.

Tradenames, Service Marks and Trademarks

     The Company 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, the Company owns and has
registered a number of trademarks with respect to its private label products.
The Company believes that its various tradenames, service marks and trademarks
are important to its merchandising strategy, but that its business is not
otherwise dependent on any particular service mark, tradename or trademark.
There are no infringing uses known by the Company that materially affect the use
of such marks.  However, in connection with a decision in a recent lawsuit, the
Company is restricted from opening stores under the "Advance Auto Parts" name in
Jefferson County, Kentucky.  See "--Legal Proceedings."

Environmental Matters

     The Company 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.  The Company handles hazardous
materials during its operations, and its customers may also use hazardous
materials on the Company's properties or bring hazardous materials or used oil
onto the Company's properties.  The Company 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, the spent batteries and used
lubricants are collected by Company employees, deposited into vendor-supplied
containers/pallets and stored by the Company 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.

     The Company owns and leases 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 the Company or its operations.  The
Company believes it is currently in material compliance with such laws and
regulations.

                                       6
<PAGE>
 
Item 2.        Properties

     The following table sets forth certain information concerning the Company's
principal facilities:


<TABLE>
<CAPTION>
                                                                                       Square    Nature of
                     Primary Use                                   Location            Footage   Occupancy
-----------------------------------------------------------------------------------------------------------
 
<S>                                                      <C>                            <C>       <C>
Corporate offices ...................................    Roanoke, Virginia               49,000   Leased (1)
Corporate offices ...................................    Kansas City, Missouri          160,000   Owned
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..................................    Temple, Texas                  550,000   Owned
Distribution center..................................    Gastonia, North Carolina       663,000   Owned
Distribution center and regional PDQ/(R)/ Warehouse..    Jeffersonville, Ohio           383,000   Owned
Distribution center and regional PDQ/(R)/ Warehouse..    Thomson, Georgia               383,000   Leased (3)
Regional PDQ/(R)/ Warehouse..........................    Salem, Virginia                 50,400   Leased
Regional PDQ/(R)/ Warehouse..........................    Smithfield, North Carolina      42,000   Leased
Regional PDQ/(R)/ Warehouse..........................    Goodlettsville, 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        66,000   Leased
</TABLE>
____________________

(1) This facility is owned by Ki, L.C., a Virginia limited liability company
    owned by two trusts for the benefit of a child of Nicholas F. Taubman.  See
    "Item 13. Certain Relationships and Related Transactions."
(2) This facility is owned by Nicholas F. Taubman.  See "Item 13. Certain
    Relationships and Related Transactions."
(3) The construction of this facility was financed by a $10.0 million IRB
    issuance from the Development Authority of McDuffie County of the State of
    Georgia, from which the Company leases the facility.  The Company has an
    option to purchase this facility for $10.00 at the end of five years or upon
    prepayment of the outstanding bonds.

     At January 2, 1999, 1,429 of the Company's stores were leased.  The
expiration dates (including renewal options) of the store leases are summarized
as follows:


<TABLE>
<CAPTION>
        Years      Stores (1)
     <S>             <C>  
 
      1999-2000          53
      2001-2005         136
      2006-2010         252
      2011-2020         871
      2021-2030          96
      2031-2045          21
</TABLE>
____________________
(1) Of these stores, 23 are owned by affiliates of the Company.  See "Item 13.
    Certain Relationships and Related Transactions."

                                       7
<PAGE>
 
Item 3.        Legal Proceedings.

     On November 5, 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 the Company from November 1, 1991 to November 5, 1997
filed a class action complaint and motion of class certification against the
Company in the circuit court for Jefferson County, Tennessee, alleging the sale
by the Company of used, old or out-of-warranty automotive batteries as new.  The
complaint seeks compensatory and punitive damages.

     An appeal has been taken in connection with the November 1996 and the
October 1997 decisions in a federal district court restricting the Company from
opening stores under the "Advance Auto Parts" name in a single county in
Kentucky.  In addition, the court granted summary judgment in favor of the
Company in connection with various infringement and unfair competition claims
brought by the appellant.  The appellant is seeking to overturn parts of the
court's decisions regarding the appellant's inability to cancel two of the
Company's trademark registrations and to obtain relief on the infringement and
unfair competition claims.

     Subsequent to January 2, 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 1970s and 1980s. Management has begun investigating 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.

     Three lawsuits were filed against the Company on July 28, 1998 in the
federal district court in South Carolina for wrongful death relating to an
automobile accident involving an employee of the Company. The complaints seek
compensatory and punitive damages. The Company believes its financial exposure 
is covered by insurance.

     The Company currently and from time to time is involved in litigation
incidental to the conduct of its business. The damages claimed against the
Company in some of these proceedings are substantial.  Although the amount of
liability that may result from these matters cannot be ascertained, the Company
does not currently believe that, in the aggregate they will result in
liabilities material to the Company's consolidated financial condition, results
of operations or cash flow.

Item 4.        Submission of Matters to a Vote of Securityholders.

     On November 2, 1998, a majority of the stockholders of Holding executed a
consent authorizing the amendment of the Company's bylaws to increase the number
of authorized directors to no fewer than nine and no more than eleven.

                                       8
<PAGE>
 
                                    PART II

Item 5.        Market for Registrant's Common Equity and Related Stockholder
               Matters.

     There is no established public trading market for the Holding Common Stock.
As of April 2, 1999, there were approximately 42 holders of record of the
Holding Common Stock.

     Holding has not paid cash dividends to its stockholders since the
Recapitalization, and does not intend to pay cash dividends in the foreseeable
future.  In fiscal 1997, Holding paid quarterly dividends to its stockholders
totaling approximately $62,000.  In fiscal 1998, prior to the Recapitalization,
Holding paid a dividend to its stockholders of approximately $15,000.  See "Item
7. Management's Discussion and Analysis of Financial Condition and Results
Operations--Liquidity and Capital Resources" for a discussion of restrictions on
Holding's ability to pay cash dividends.

     On November 2, 1998, Holding (i) sold 4,161,712 shares of Holding Common
Stock to certain existing stockholders for an aggregate cash consideration of
$70.0 million and (ii) sold 11,474,606 shares of Holding Common Stock to the
Company in a series of transactions for an aggregate cash consideration of
approximately $193.0 million, which was used to buy common stock of the Company.
The 11,474,606 shares sold to the Company were used by the Company as partial
consideration in the Western Auto Merger.

Item 6.        Selected Financial Data.

     The following table sets forth selected consolidated statement of
operations, balance sheet and other operating data of Holding.  The selected
consolidated financial data for each of the five fiscal years during the period
ended January 2, 1999 are derived from the audited financial statements of
Holding which have been audited by Arthur Andersen LLP.  The data presented
below should be read in conjunction with the consolidated financial statements
of Holding and the notes thereto included herein, the other financial
information included herein and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."  The following financial data
includes certain expenses related to the merger integration and Parts America
Conversion incurred in fiscal 1998 and certain private company expenses that
were eliminated in the Recapitalization.  See "Item 7.  Management's Discussion
and Analysis of Financial Condition and Results of Operations" for a detailed
discussion of these expenses.

<TABLE>
<CAPTION>
                                                                              Fiscal Year (1)
                                                   ------------------------------------------------------------------
                                                         1994         1995         1996         1997          1998
                                                   ------------------------------------------------------------------
<S>                                                   <C>          <C>          <C>          <C>          <C>
                                                                             (dollars in thousands)
Statement of Operations Data:
Net sales.......................................       $482,347     $602,559     $705,983     $848,108     $1,220,759
Cost of sales...................................        297,444      369,962      437,615      524,586        763,353
Selling, general and administrative expenses(2).        155,583      196,289      228,226      281,095        403,831
Expenses associated with the Recapitalization(3)             --           --           --           --         14,277
Expenses associated with restructuring(4).......             --           --           --           --          6,774
Expenses associated with non-cash
 compensation(5)................................             --           --           --           --            695 
Operating income................................         29,320       36,308       40,142       42,427         31,829
Interest expense................................          2,797        5,028        4,891        6,086         35,038
Other, net......................................         10,709       (1,155)         187         (321)           943
Income (loss) before income taxes...............         37,232       30,125       35,438       36,020         (2,266)
Income tax expense (benefit)....................         13,526       12,122       14,174       14,733            (84)
Net income (loss) (6)...........................         23,706       18,003       21,264       21,287         (2,182)
</TABLE>

                                       9
<PAGE>
 
<TABLE>
<CAPTION>
                                                                              Fiscal Year (1)
                                                   ------------------------------------------------------------------
                                                         1994         1995         1996         1997          1998
                                                   ------------------------------------------------------------------
<S>                                                   <C>          <C>          <C>          <C>          <C>
                                                                             (dollars in thousands)
Other Data:
EBITDA(7) ..........................................   $ 42,568     $ 51,107     $ 57,641     $ 64,228     $  61,793
EBITDAR(8) .........................................     64,770       82,291       96,249      112,538       130,067
Capital expenditures................................     25,781       42,939       44,264       48,864        65,790
Percentage increase in comparable store net                
 sales(9) ..........................................       10.8%         3.3%         2.1%         5.7%          7.8%
Commercial sales(10)................................        N/A          N/A       68,878      100,180       129,926
Net cash provided by (used in) operating                 
 activities ........................................     (6,715)      22,839       27,934       42,283        44,022
Net cash used in investing activities...............    (14,201)     (39,855)     (44,121)     (48,607)     (230,672)
Net cash provided by financing activities...........     18,809       23,643       11,132        6,954       207,302
Stores open at end of period........................        437          536          649          814         1,567

Balance Sheet Data:
Net working capital(11).............................   $ 88,966     $102,708     $110,080     $121,140    $  310,113
Total assets........................................    237,712      295,088      394,395      461,832     1,265,355
Total debt (including current maturities)...........     68,500       93,251      105,861      111,096       521,591
Stockholders' equity (deficit)......................     83,180      101,121      122,323      143,548       159,091
</TABLE>
______________________
(1) Holding'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 1998 amount includes certain merger integration and Parts America
    Conversion expenses that total $7,788. Fiscal 1997 amount includes an
    unusual medical claim that exceeded Holding's stop loss insurance coverage.
    Holding 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.  The pre-tax amount of this claim, net of related increased
    insurance costs, was $882.  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 Holding's
    Chairman that were eliminated after the Recapitalization.  These amounts are
    $1,496, $2,037, $2,482, $3,056 and $845 for fiscal 1994, fiscal 1995, fiscal
    1996, fiscal 1997 and fiscal 1998, respectively.
(3) Represents expenses incurred in the Recapitalization related primarily to
    bonuses paid to certain employees and professional services.
(4) Represents expenses primarily related to lease costs associated with the 31
    Advance Auto Parts stores closed or identified to be closed in overlapping
    markets in connection with the Western Auto Merger.
(5) Represents non-cash compensation expenses related to options granted to
    certain Company employees.
(6) Fiscal 1994 includes a net after-tax gain of $6,700 on the sale of equity
    securities of TBC Corporation, a distributor of automotive products in which
    the Company held a minority equity ownership interest.
(7) EBITDA represents operating income plus depreciation and amortization
    included in operating income.  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 has included it herein because management believes this information
    is useful to investors as such measure provides additional information with
    respect to Holding's ability to meet its future debt service, capital
    expenditure and working capital requirements and, in addition, certain
    covenants in the Indenture and Credit Facility are based upon an EBITDA
    calculation.  Holding's method for calculating EBITDA may differ from
    similarly titled measures reported by other companies. Management believes
    certain one time expenses, private company expenses, Recapitalization
    expenses, non-cash compensation expenses, restructuring expenses and merger
    integration expenses should be eliminated from the EBITDA calculation to
    evaluate the operating performance of the Company.

                                       10
<PAGE>
 
   The following table reflects the effect of these items:


<TABLE>
<CAPTION>
                                                       Fiscal Year
                                                   -------------------   
                                                     1997       1998
                                                   --------   -------- 
                                               (dollars in thousands)  
<S>                                                  <C>       <C>
EBITDA ......................................      $64,228    $61,793
    Medical claim (see note 2 above).........          882         --
    Private company expenses(a)..............        3,056        845
    Recapitalization expenses(b).............           --     14,277
    Non-cash compensation expenses...........           --        695
    Restructuring expenses...................           --      6,774
    Merger integration expenses(c)...........           --      7,788
                                                   --------   --------
EBITDA, as adjusted..........................      $68,166    $92,172
</TABLE>
---------------------
     (a) Reflects management's estimate of expenses primarily related to
         compensation and other benefits of the Company's Chairman, who prior to
         the Recapitalization was Holding'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 merger integration and Parts
         America Conversion. See "Item 7. Management's Discussion and Analysis
         of Financial Condition and Results of Operations."

(8)  EBITDAR represents EBITDA plus operating lease expense.  Because the
     proportion of stores leased versus owned varies among industry competitors,
     Holding believes that EBITDAR permits a meaningful comparison of operating
     performance among industry competitors.  The Company leases substantially
     all of its stores.

(9)  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 date of opening.  Additionally, each
     converted Parts America store will be included in the comparable store net
     sales calculation after thirteen complete accounting periods following its
     physical conversion to an Advance Auto Parts store.  Holding has not
     included and currently does not plan to include Service Stores in its
     comparable store net sales calculation.

(10) Represents net sales from Advance Auto Parts stores only to commercial
     customers, including net sales from stores without commercial delivery.
     The Company's commercial sales program began in 1996.

(11) Net working capital represents total current assets less total current
     liabilities.

Item 7.     Management's Discussion and Analysis of Financial Condition and
            Results of Operations.

     The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements of Holding, the notes thereto and other data and information
appearing elsewhere in this Report on Form 10-K.  Holding's fiscal year ends on
the Saturday nearest December 31. As used in this section, fiscal 1998
represents the 52 weeks ended January 2, 1999; fiscal 1997 represents the 53
weeks ended January 3, 1998; and fiscal 1996 represents the 52 weeks ended
December 28, 1996.  The Company's first quarter consists of 16 weeks, and the
other three quarters consist of 12 weeks.

General

     The Company is the second largest retailer of automotive parts and
accessories in the United States, with 1,567 stores in 39 states, Puerto Rico
and the U.S. Virgin Islands as of January 2, 1999.  Based on store count, the
Company believes it is the largest automotive retailer in a majority of its
markets.

     In April 1998, Holding consummated its Recapitalization. See Note 3 to
"Item 8. Financial Statements" for a detailed discussion of the
Recapitalization. As a result of the Recapitalization, Holding incurred
approximately $385.0 million in long-term debt and approximately $23.8 million
in deferred financing cost, equity reduction and fees and expenses. Holding
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.

                                       11
<PAGE>
 
     On November 2, 1998, Western Auto Supply Company merged with a subsidiary
of the Company.  See "Item 1. Business" for a discussion of the Western Auto
Merger. As a result of the Western Auto Merger, the Company incurred
approximately $90.0 million in long-term debt and approximately $9.3 million in
fees and expenses, of which $0.2 million was charged to operating and
administrative expenses during the fiscal quarter in which the merger was
consummated.  The Company accounted for the Western Auto Merger using the
purchase method of accounting.

     As of the date of the Western Auto Merger, management formalized a plan to
close certain Parts America stores in overlapping markets or stores not meeting
the Company's profitability objectives, to exit certain other facility leases,
to relocate certain Western Auto administrative functions to the Company's
headquarters and to terminate certain management, administrative and support
employees of Western Auto.  Additional purchase price liabilities have been
recorded for approximately $9.0 million for severance and relocation costs and
approximately $14.4 million for store closing and other exit costs.  As of
January 2, 1999, 66 employees have been terminated and 52 Parts America stores
have been closed. The Company expects to finalize its plan for termination of
employees and closure of Parts America stores within one year from the date of
the Western Auto Merger. Additional liabilities for severance, relocation, store
closing and other facility exit costs may result in an adjustment to purchase
accounting.

     The Company expects to achieve benefits from the combination with Western
Auto through improved product pricing and terms from vendors, consolidated
advertising, distribution and corporate support efficiencies, and the closure of
certain overlapping locations.  However, due to the Western Auto Merger, the
Company has incurred and expects to incur additional store closing, store
conversion, distribution center conversion and system conversion expenses and
other exit costs as part of the Parts America Conversion. In addition, the
Company, as part of its plan, will continue to liquidate at reduced prices
certain SKUs carried in the Parts America inventory.

Results of Operations

     The following tables set forth certain operating data for Holding expressed
in dollars and as a percentage of net sales for the periods indicated.


<TABLE>
<CAPTION>
                                                                  Fiscal Year Ended
                                                   ---------------------------------------------
                                                      December 28,     January 3,     January 2,
                                                         1996            1998           1999
                                                   ---------------------------------------------
                                                                 (in thousands)
<S>                                                 <C>             <C>          <C>

Net sales..........................................     $705,983      $848,108    $1,220,759
Cost of sales......................................      437,615       524,586       763,353
                                                        --------      --------    ----------
Gross profit.......................................      268,368       323,522       457,406
Selling, general and administrative expenses.......      225,744       278,039       395,198
                                                        --------      --------    ----------
Operating income, as adjusted......................       42,624        45,483        62,208
Expenses associated with Recapitalization..........           --            --        14,277
Expenses associated with restructuring.............           --            --         6,774
Expenses associated with merger integration........           --            --         7,788
Expenses associated with private company...........        2,482         3,056           845
Expenses associated with non-cash compensation.....           --            --           695
                                                        --------      --------    ----------
Operating income...................................       40,142        42,427        31,829
Interest expense...................................        4,891         6,086        35,038
Other, net.........................................         (187)          321          (943)
Income tax expense (benefit).......................       14,174        14,733           (84)
                                                        --------      --------    ----------
Income (loss)......................................     $ 21,264      $ 21,287    $   (2,182)
                                                        ========      ========    ==========
</TABLE>

                                       12
<PAGE>
 
<TABLE>
<CAPTION>
                                                                  Fiscal Year Ended
                                                   ---------------------------------------------
                                                      December 28,     January 3,     January 2,
                                                         1996            1998           1999
                                                   ---------------------------------------------
<S>                                                     <C>             <C>            <C>
Net sales..........................................     100.0%          100.0%         100.0%
Cost of sales......................................      62.0            61.9           62.5
                                                        -----           -----          -----
Gross profit.......................................      38.0            38.1           37.5
Selling, general and administrative expenses.......      31.9            32.7           32.3
                                                        -----           -----          -----
Operating income, as adjusted......................       6.1             5.4            5.2
Expenses associated with Recapitalization..........        --              --            1.2
Expenses associated with restructuring.............        --              --            0.6
Expenses associated with merger integration........        --              --            0.6
Expenses associated with private company...........       0.4             0.4            0.1
Expenses associated with non-cash compensation.....        --              --            0.1
                                                        -----           -----          -----
Operating income...................................       5.7             5.0            2.6
Interest expense...................................       0.7             0.7            2.9
Other, net.........................................       0.0             0.0           (0.1)
Income tax expense.................................       2.0             1.8            0.0
                                                        -----           -----          -----
Income (loss)......................................       3.0%            2.5%          (0.2)%
                                                        =====           =====          =====
</TABLE>

     Net sales consist primarily of comparable store net sales, new store net
sales and, for fiscal 1998, sales resulting from the Western Auto Merger.
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 date of opening. Additionally, each converted Parts
America store will be included in the comparable store net sales calculation
after thirteen complete accounting periods following its physical conversion to
an Advance Auto Parts store. Holding has not included and currently does not
plan to include Service Stores in its comparable store net sales calculation.

     Holding's cost of goods sold includes merchandise costs and warehouse and
distribution expenses.  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.

     Selling, general and administrative expenses are comprised of store
payroll, store occupancy, net advertising expenses, other store expenses and
general and administrative expenses, including salaries and related benefits of
corporate employees, administrative office expenses, data processing,
professional expenses and other related expenses.

Fiscal Year Ended January 2, 1999 Compared to Fiscal Year Ended January 3, 1998

     Net sales for fiscal 1998 increased $372.7 million, or 43.9%, to $1,220.8
million over net sales for fiscal 1997. Fiscal 1998 represented the first year
that Holding recorded sales in excess of $1.0 billion in a fiscal year.  The
Western Auto Merger, which closed November 2, 1998, added $178.3 million in
sales.  The remainder of the net sales increase was due to a 7.8% increase in
comparable store sales and new stores opened within the last year.  The
comparable sales increase was due to increased product availability at the store
level and from the PDQ(R) and Master PDQ(R) warehouse system.  In addition,
comparable store sales continued to benefit from the growth of the commercial
sales program.

     The Western Auto Merger added 560 net new stores operating under the Parts
America name, 40 stores operating under the Western Auto name, and the wholesale
dealer network.  In conjunction with the Western Auto Merger, Holding closed or
identified to be closed 52 Parts America and 31 Advance Auto Parts overlapping
stores ("Store Closings") and is in the process of evaluating additional store
closures.  During fiscal 1998, in addition to the Western Auto Merger, Holding
opened 169 new stores, relocated 8 stores, and closed 14 stores in addition to
the Store Closings and the stores closed due to relocations.  In fiscal 1998,
Holding added 111 stores to its commercial delivery 

                                       13
<PAGE>
 
program, bringing the total to 532 stores. As of January 2, 1999, Holding
operated 1,567 stores in 39 states, Puerto Rico and the U.S. Virgin Islands and
supplied approximately 740 independent dealers through the wholesale dealer
network.

     After the Western Auto Merger, Holding immediately initiated the Parts
America Conversion. The Parts America Conversion includes the Merchandise
Conversion, the MIS Conversion and the Physical Conversion of the Parts America
stores to Advance Auto Parts stores. As of January 2, 1999, Holding had
initiated the Merchandise Conversions and had completed 22 MIS Conversions and
12 Physical Conversions. Holding had completed approximately 95% of the
Merchandise Conversions, 297 MIS Conversions and 115 Physical Conversions as of
April 2, 1999. Holding expects to complete the Merchandise Conversions by the
end of the first quarter of 1999, the MIS Conversions by the end of the second
quarter of 1999 and the Physical Conversions by the end of fiscal 1999.

     Gross profit for fiscal 1998 was $457.4 million, or 37.5% of net sales,
compared with $323.5 million, or 38.1% of net sales, in fiscal 1997.  The
decrease in the gross profit percentage resulted largely from the gross profit
contribution from the acquired Western Auto dealer network and Service Stores
primarily due to lower margins associated with service and tires and the
wholesale nature of the dealer network.  Additionally, certain product lines in
Parts America stores that were discontinued were sold at lower prices to
liquidate inventory.  Excluding the impact of the Western Auto Merger, Holding's
gross profit percentage would have increased to 38.9% of net sales primarily due
to decreased warehouse and delivery costs as a percentage of sales and generally
better pricing and more favorable terms from its vendors in fiscal 1998 compared
to fiscal 1997.

     Selling, general, and administrative expenses, before expenses associated
with the Recapitalization, restructuring, merger integration, private company
and non-cash compensation, increased by $117.2 to $395.2 million, or 32.3% of
net sales, in fiscal 1998 from $278.0 million, or 32.6% of net sales. The
decrease as a percentage of sales was due to the incremental sales volume added 
by the Western Auto Merger and the lower selling, general and administrative 
expense structure of the dealer network.  

     Operating income, as adjusted for expenses associated with the
Recapitalization, restructuring, merger integration, private company and non-
cash compensation in fiscal 1998 was $62.2 million or 5.1% of net sales as
compared to $45.5 million or 5.4% of net sales in fiscal 1997.

     Holding recorded $14.3 million and $6.8 million in expenses related to the
Recapitalization and a restructuring charge related to the closure of certain
Advance Auto Parts stores as part of the Store Closings, respectively.  The
Recapitalization costs consisted of $11.5 million of bonuses paid to certain
employees for past performance, $0.2 million in related employment taxes and
$2.6 million of non-recurring expenses, which consisted primarily of
professional fees. The restructuring charge relates to estimated exit costs of
$6.3 million and write-offs of related leasehold improvements of $0.4 million
associated with the decision to close 31 Advance Auto Parts stores that
were in overlapping markets with certain Parts America stores obtained in the
Western Auto Merger. As of January 2, 1999, Holding had closed three of these
stores with the remainder to be closed during the first two quarters of fiscal
1999. Store exit costs represent the present value, discounted at a 6.5%
interest rate, of the remaining lease payments, including management's estimate
of future insurance, property tax and common area maintenance, reduced by
management's estimate of future sublease revenue. In addition, Holding recorded
$7.8 million of expenses that consisted of a one-time penalty of $3.3 million
for the cancellation of a long-term vendor contract due to a product line
changeover at the Advance Auto Parts stores and $4.5 million in integration and
transition expenses, primarily for professional services, travel, store
conversions, and project incentives.

     Interest expense in fiscal 1998 was $35.0 million compared to $6.1 million
in fiscal 1997.  The increase in interest in 1998 was primarily due to the
increase in debt related to the Recapitalization, the additional debt incurred
in the Western Auto Merger and higher interest rates.

     Income tax for fiscal 1998 was a benefit of $0.1 million as compared to an
expense of $14.7 million in fiscal 1997, with effective tax rates of 3.7% and
40.9%, respectively.  This decrease was primarily due to lower pretax earnings
due to the Recapitalization and the Western Auto Merger.

                                       14
<PAGE>
 
     As a result of the above factors, Holding incurred a net loss of $2.2
million in fiscal 1998 as compared to net income of $21.3 million in fiscal
1997.  As a percentage of net sales, net loss for fiscal 1998 was 0.2% as
compared to net income of 2.5% for fiscal 1997.

Fiscal Year Ended January 3, 1998 Compared to Fiscal Year Ended December 28,
1996

     Net sales for fiscal 1997 increased by $142.1 million, or 20.1%, over net
sales for fiscal 1996.  This increase was due to an increase in comparable store
sales (adjusted to exclude the fifty-third week of 1997) of 5.7% and new stores
opened within the last year.  Comparable store net sales were enhanced by the
commercial delivery program and by increased average sales per customer.  In
fiscal 1997, Holding opened 170 stores and also relocated 15 stores and
remodeled 27 stores.  By fiscal year end 1997, Holding had 814 stores, as
compared to 649 stores at the end of fiscal 1996.

     Gross profit for fiscal 1997 was $323.5 million, or 38.1% of net sales,
compared with $268.4 million, or 38.0% of net sales, for fiscal 1996.  The
increase in the gross profit percentage was primarily due to decreased warehouse
and delivery expenses (5.7% of net sales in fiscal 1997 compared to 5.8% of
net sales in fiscal 1996) which resulted from the implementation of the
distribution center management system ("DCMS") and more efficient material
handling equipment in certain distribution centers.  In addition, Holding was
able to offset lower gross profit margins in its commercial delivery business
with improved gross profit margins in its DIY business.  Holding believes that
as its store count grows, it will achieve greater operating leverage from its
distribution centers.

     Selling, general and administrative expenses, before private company
expenses, for fiscal 1997 increased by $52.3 million as compared to fiscal 1996
and, as a percentage of net sales, increased to 32.7% from 31.9%.  This increase
as a percentage of net sales was primarily due to the higher operating costs as
a percentage of net sales of the greater number of new stores that were in the
early stage of maturation in fiscal 1997, particularly the 58 stores opened in
the fourth quarter of 1997.  In addition, the increase was partially
attributable to increases in reserves for self-insured medical and worker
compensation plans.

     Interest expense for fiscal 1997 was $6.1 million compared to $4.9 million
in fiscal 1996.  Interest expense was affected by higher rates and increased
borrowings in fiscal 1997.

     Income tax expense for fiscal 1997 was $14.7 million as compared to $14.2
million for fiscal 1996, with effective tax rates of 40.9% and 40.0%,
respectively.  This increase was primarily due to increasing tax reserves.

     As a result of the above factors, net income of $21.3 million was recorded
in fiscal 1997 as compared to $21.3 million for fiscal 1996.  As a percentage of
sales, net income for fiscal 1997 was 2.5% as compared to 3.0% for fiscal 1996.

Liquidity and Capital Resources

     Holding'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 and the
Western Auto Merger.  From fiscal 1996 through fiscal 1998, Holding opened 454
stores, closed the Western Auto Merger, constructed two new distribution
centers, and expanded its Roanoke distribution center.  Holding has financed its
growth through a combination of internally generated funds, borrowings, and
issuances of equity.

     Holding's new stores require capital expenditures of approximately $120,000
per store and an inventory investment of approximately $400,000 per store.  A
substantial portion of these inventories are 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.  Additionally, Holding plans to convert the Parts America stores
into Advance Auto Parts stores, which will require capital expenditures of
approximately $80,000 and conversion expense of approximately $30,000 per store.
Generally, Parts America stores carried approximately $100,000 more inventory
(including support inventory in the distribution centers) than Advance Auto
Parts stores. Holding expects to reduce the inventory levels in the Parts
America stores to Holding's average over the next 12-18 months.









                                       15
<PAGE>
 

     Historically, Holding has negotiated extended payment terms from suppliers
to finance inventory growth, and Holding believes that it will be able to
continue financing much of its inventory growth through such extended payment
terms.  Holding anticipates that inventory levels will continue to increase
primarily as a result of new store openings and increased SKU levels.
Additionally, related to the Western Auto Merger, the Company and Holding
entered into several new long-term vendor agreements which will provide for
price reductions on future purchases.  Holding believes this will have a
positive impact on gross margins after the turn of existing inventory.

     In fiscal 1996, net cash provided by operating activities was $26.5
million.  Of this amount, $21.3 million was due to net income.  Depreciation and
amortization provided an additional $17.5 million of funds and $12.3 million was
used for working capital and other. Net cash used for investing activities was
$44.1 million and was comprised primarily of capital expenditures. Net cash
provided by financing activities was $12.5 million and was comprised primarily
of net borrowings.

     In fiscal 1997, net cash provided by operating activities was $42.5
million. Of this amount, $21.3 million was due to net income. Depreciation and
amortization provided an additional $21.8 million of funds and $0.6 million was
used for working capital and other. Net cash used for investing activities was
$48.6 million and was comprised of capital expenditures. Net cash provided by
financing activities was $6.8 million and was comprised primarily of net
borrowings.

     In fiscal 1998, net cash provided by operating activities was $44.0
million. Of this amount, $2.2 million was due to a net loss. Depreciation and
amortization provided an additional $30.0 million of funds, amortization of
deferred debt issuance costs and bond discount provided an additional $7.7
million and $8.5 million was provided by working capital and other. Net cash
used for investing activities was $230.7 million and was comprised primarily of
net capital expenditures of approximately $59.7 million and cash consideration
of approximately $171.0 million in the Western Auto Merger. Net cash provided by
financing activities was $207.3 million and was comprised primarily of net
borrowings and issuance of equity.

     The Company funded the Western Auto Merger with 11,474,606 shares of
Holding Common Stock representing approximately 40.6% of the outstanding Holding
Common Stock, additional borrowings of $90.0 million under a deferred term loan
facility under the Credit Facility, the sale of approximately $70.0 million of
Holding Common Stock to existing stockholders of Holding and cash on hand. After
the Western Auto Merger, Sears sold certain credit card portfolios related to
Western Auto to third party buyers and is attempting to sell the remaining
credit card portfolio related to Western Auto. The Company has agreed to share
in losses associated with the credit card portfolios up to a maximum of $10.0
million. The Company intends to close additional stores in overlapping markets
as well as evaluate other potential facility closures as a result of the Western
Auto Merger and is in the process of completing this analysis. Thus far,
management, through purchase accounting, has accrued $11.8 million for the
closing of certain Parts America stores, $9.0 million for severance and
relocation and $2.6 million for other exit costs. The Company also assumed
certain restructuring reserves of $9.7 million that Western Auto recorded in
prior restructuring activities. Additionally the Company assumed a deferred
compensation plan from Western Auto. At January 2, 1999, the total liability
under the deferred compensation plan was $15.3 million, of which $6.3 million is
recorded as current liabilities. The classification for deferred compensation is
determined by employee election, and can be changed upon 12 months' notice.

     Holding believes it will have sufficient liquidity to fund its debt service
obligations, including indebtedness incurred in connection with the Western Auto
Merger, and implement its growth strategy over the next twelve months. As of
January 2, 1999, Holding and the Company had outstanding indebtedness consisting
of $65.7 million of Senior Discount Debentures (the "Debentures"), $200.0
million of Senior Subordinated Notes (the "Senior Subordinated Notes"),
borrowings of $225.0 million under the Credit Facility and $10.0 million of
indebtedness under the McDuffie County Development Authority Taxable Industrial
Bonds ("IRB").

     The Debentures accrete at a rate of 12.875%, compounded semiannually, 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
semiannually at a rate of 12.875% per annum. The Indenture governing the
Debentures contains certain covenants that, among other things, limit the
ability of 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.

                                       16
<PAGE>


     The Senior Subordinated Notes bear interest at a rate of 10.25%, payable
semiannually, 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 the Company 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 the Company from engaging in certain
mergers or consolidations and sell assets. The $10.0 million principal amount
IRB bears interest at a variable rate and will require no principal payments
until maturity in November 2002.

     The Company has access to a total of $465.0 million through the Credit
Facility in addition to its operating cash flow.  The Credit Facility provides
for (i) a $125.0 million Tranche B term loan, which was made at the closing of
the Recapitalization; (ii) a revolver with maximum borrowings including letters
of credit of approximately $125.0 million, of which $38.3 million was available
on April 2, 1999, (iii) a $125.0 million delayed draw term loan (which was
undrawn as of April 2, 1999), of which $50.0 million is available to the Company
through October 15, 1999 and $75.0 million is available to the Company through
April 15, 2001, and (iv) a $90.0 million deferred term loan facility, which was
made at the closing of the Western Auto Merger.  The term loan facilities, other
than the Tranche B term loan, will mature on the sixth anniversary of initial
borrowing, and the Tranche B term loan will mature on the eighth anniversary of
initial borrowing.  Annual principal payments on the term loan facilities prior
to the sixth anniversary of initial borrowing will be nominal; thereafter,
required principal payments will be approximately $236.5 million in 2004, $60.0
million in 2005 and $30.0 million in 2006, assuming the term loan facilities
have been fully borrowed.  The revolving loan facility will mature on the sixth
anniversary of initial borrowing.  None of the delayed draw term loans were
drawn in connection with the Recapitalization or the Western Auto Merger.  Until
the delivery to the lenders of the Company's consolidated financial statements
for the first four fiscal quarters after the closing of the Recapitalization,
the interest rates under the delayed draw facilities and the revolver are based,
at the option of the Company, on either a Eurodollar rate plus 2.25% per annum
or a base rate plus 1.25% per annum.  From and after the delivery of such
consolidated financial statements, the interest rates under the delayed draw
facilities and the revolver will be determined by reference to a pricing grid
that will provide 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).  The initial margins will be 2.25% and 1.25% for Eurodollar and base
rate borrowings, respectively, and can step down to 1.75% and 0.75%,
respectively, if the Company's total debt to EBITDA ratio is less than or equal
to 4.00 to 1.00.  The interest rate under the Tranche B term loan and the
deferred term loan facility is based, at the option of the Company, on a
Eurodollar rate plus 2.50% or a base rate plus 1.50%.

     The Credit Facility contains covenants restricting the ability of the
Company 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 the Company or other subsidiaries; (x)
change the nature of the business conducted by the Company and its subsidiaries,
(xi) change the passive holding company status of Holding, and (xii) amend
existing debt agreements or the Company's or Holding's certificate of
incorporation, by-laws or other organizational documents.  The Company 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.  The Company is generally prohibited from paying dividends
(including to Holding) except that as long as no defined event of default under
the Credit Facility then exists, the Company will be permitted to pay dividends
to Holding in an amount sufficient to cover the cash interest due on the
Debentures commencing October 15, 2003.

                                       17
<PAGE>
 
     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 the revolver and delayed draw
term loans are subject to a borrowing base formula, which is based on certain
percentages of the Company's inventories. As of January 2, 1999, $226.9 million
was available under these facilities, net of $13.1 million outstanding for
letters of credit. The Company intends to use borrowings under the revolver and
delayed draw term loans for store expansion, the Parts America Conversion and
funding of working capital. 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 the Company and its subsidiaries (including certain insurance and
condemnation proceeds), subject to certain exceptions (including exceptions for
(i) reinvestment of certain asset sale proceeds within 360 days of such sale and
(ii) certain sale-leaseback transactions), (c) 100% of the net proceeds of
issuances of debt obligations of the Company and its subsidiaries, and (d) 100%
of the net proceeds of issuance of equity of the Company and its subsidiaries.
Because increases in net working capital, capital expenditures and debt
repayments are deducted in calculating excess cash flow, the Company 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 the Company to
secure additional equity or debt financing to fund an acquisition, but while no
assurance can be given, the Company does not anticipate that this would have a
material effect on its ability to finance acquisitions in the future. The
Company did not make any mandatory prepayments in fiscal 1998, and does not
anticipate any mandatory prepayments under this provision in fiscal 1999.

     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.  No assurance can be made that the Company will
be able to pay cash dividends to Holding when required on the Debentures.

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.

Year 2000 Conversion

     The following discussion about the implementation of the Company's Year
2000 program, the costs expected to be associated with the program and the
results the Company expects to achieve constitute forward-looking information.
As noted below, there are many uncertainties involved in the Year 2000 issue,
including the extent to which the Company will be able to adequately provide for
contingencies that may arise, as well as the broader scope of the Year 2000
issue as it may affect third parties and the Company's business partners.
Accordingly, the costs and results of the Company's Year 2000 program and the
extent of any impact on the Company's results of operations could vary
materially from that stated herein.

     A significant percentage of the software that runs most computers relies on
two-digit date codes to perform computations and decision-making functions.
Commencing on January 1, 2000, these computer programs may fail from an
inability to interpret date codes properly, misinterpreting "00" as the year
1900 rather than 2000.  The Company has completed the identification of all
necessary internal software changes to ensure that it does not experience any
loss of critical business functionality due to the Year 2000 issue.  The Company
has appointed an internal Year 2000 project manager and remediation team and has
adopted a four phase approach of assessment, remediation, testing, and
contingency planning.  The scope of the project includes all internal software,
hardware, operating systems, and assessment of risk to the business from vendors
and other partners' Year 2000 issues.  The assessment of all internal systems
has been completed, the remediation and testing phases are in progress, and
contingency planning for certain information technology systems has begun.

                                       18
<PAGE>
 
     The Company is utilizing internal and external resources to correct,
replace, and test its software for Year 2000 compliance.  The Company has two
Year 2000 compliance teams focused on the completion of the Year 2000 projects
in the retail stores and related support functions (the "Retail Team") and the
Service Stores, dealer network and related support functions (the "KC Team").
The Retail Team expects and plans to complete the Year 2000 project no later
than June 30, 1999.  The KC Team expects and plans to complete the Year 2000
project no later than August 1999.  The total cost of the Year 2000 project for
the Retail Team is estimated at $3.7 million.  Of that cost, approximately $1.0
million represents the purchase of new software and hardware, which will be
capitalized.  The remaining costs were or will be expensed as incurred during
fiscal 1998 and 1999.  The total cost of the Year 2000 project for the KC Team
is estimated at $2.5 million, of which approximately $1.5 million represents the
purchase of new hardware and software, which will be capitalized.  As of the end
of fiscal 1998, the Company has spent approximately $1.7 million on the Year
2000 project.

     The Company's Year 2000 program is designed to minimize the possibility of
serious Year 2000 interruptions. Possible Year 2000 worst case scenarios include
the interruption of significant parts of the Company's business as a result of
critical information systems failure or the failure of vendors, distributors or
service providers.  Since these possibilities cannot be eliminated, ongoing
communications have been established with almost all vendors and other partners
to monitor their progress in resolving Year 2000 issues, most of which the
Company believes are making substantial progress.  However, the Company cannot
guarantee that Year 2000 related systems issues of its business partners will be
corrected in a timely manner or that the failure of its business partners to
correct these issues would not have a material adverse effect.

     The Company has begun to develop contingency plans in the event a business
interruption caused by Year 2000 problems should occur.  For certain information
technology systems, contingency plans are in place.  Elements of the Company's
contingency plans include: switching of vendors, back-up systems that do not
rely on computers, and the stockpiling of certain products in the months before
the Year 2000.

     The cost and time estimated for the Year 2000 project are based on the
Company's best estimates.  There can be no guarantee that these estimates will
be achieved or that planned results will be achieved.  Risks factors include,
but are not limited to, the retention of internal and external resources
dedicated to the project, the timely delivery of software corrections from
external vendors, and the successful completion of key business partners' Year
2000 projects.

Item 7A.  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 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 has changed significantly since
January 3, 1998 due to the increase in total debt outstanding and the change in
debt instruments as a result of the Recapitalization and the Western Auto
Merger.  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 (see "Item 7.
Management's Discussion and Analysis and Results of Operations--Liquidity and
Capital Resources").  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 January 2, 1999 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 January 2, 1999.  Implied forward rates should not be considered a
predictor of actual future interest rates.

                                       19
<PAGE>
 
 
<TABLE>
<CAPTION>
                                                                                                            Fair  
                       Fiscal     Fiscal     Fiscal     Fiscal      Fiscal                                 Market    
                        1999       2000       2001        2002       2003       Thereafter     Total       Value     
                   -----------------------------------------------------------------------------------------------
<S>                   <C>        <C>        <C>        <C>         <C>        <C>           <C>          <C>
Long-term debt:
Fixed  rate            $   --     $   --     $   --     $    --     $   --      $312,000     $312,000     $269,080
Weighted Average           --         --         --          --         --          11.2%        11.2%
 Interest Rate
Variable rate          $  500     $1,000     $1,500     $12,000     $2,000      $218,000     $235,000     $235,000
Weighted Average          7.5%       7.7%       7.9%        7.8%       8.0%          8.1%         8.0%
 Interest Rate
</TABLE>


Item 8.        Financial Statements.

     See the Index included at "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K."

Item 9.        Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

     None.

                                       20
<PAGE>
 
                                   PART III

Item 10.  Directors and Executive Officers of the Registrant.

     The following table sets forth certain information regarding the directors
and executive officers of Holding and the Company as of April 15, 1999:



<TABLE>
<CAPTION>
          Name              Age                               Position
          ----              ---                               --------
<S>                         <C>    <C>
Nicholas F. Taubman          64   Chairman of the Board and Director of Holding and the Company
Garnett E. Smith             59   President and Chief Executive Officer and Director of Holding
                                  and the Company
Carroll R. Tilley, Jr.       49   Executive Vice President and General Manager of Holding and the
                                  Company
Jimmie L. Wade               45   Executive Vice President and Chief Administrative Officer of the
                                  Company
J. O'Neil Leftwich           37   Senior Vice President and Chief Financial Officer, Secretary and
                                  Treasurer of Holding and the Company
Paul W. Klasing              39   Senior Vice President, Merchandising of the Company
David R. Reid                36   Senior Vice President, Real Estate and Store Support of the
                                  Company
S. Lynn Stevens              50   Senior Vice President and Chief Information Officer of the
                                  Company
Anthony R. Weatherly         39   Senior Vice President, Store Operations of the Company
Kenneth A. Wirth, Jr.        40   Senior Vice President, Sales of the Company
Joe H. Vaughn, Jr.           38   Vice President, Finance of the Company and Assistant Secretary
                                  and Assistant Treasurer of Holding and the Company
John M. Roth                 40   Director of Holding and the Company
Mark J. Doran                35   Director of Holding and the Company
Timothy C. Collins           42   Director of Holding and the Company
Peter M. Starrett            50   Director of Holding and the Company
Julian C. Day                46   Director of Holding and the Company
Michael Coyne                35   Director of Holding and the Company
William L. Salter            55   Director of Holding and the Company
</TABLE>

     Mr. Taubman, Chairman of the Board of Holding and the Company, joined the
Company in 1956. Mr. Taubman has served as Chairman of the Company since January
1985 and as Chief Executive Officer of the Company from January 1985 to July
1997.  From 1969 to 1984, Mr. Taubman served as President of the Company. In
addition, Mr. Taubman has served as Chairman of Holding since May 1992, the year
it was formed, as Chief Executive Officer of Holding from May 1992 to March
1998, and as Secretary and Treasurer of Holding from May 1992 to February 1998.
Mr. Taubman has served on numerous business, arts and civic boards.

     Mr. Smith, President and Chief Executive Officer and a Director of Holding
and the Company, joined the Company in November 1959 and is responsible for
overall management and operations of the Company.  Mr. Smith served as President
and Chief Operating Officer of the Company 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 Holding since May 1992, as Chief Operating Officer of
Holding from May 1992 to March 1998, and as Chief Executive Officer since March
1998.

                                       21
<PAGE>
 
     Mr. Tilley, Executive Vice President and General Manager, joined the
Company in June 1984.  Mr. Tilley has served as Vice President and Senior Vice
President of Purchasing, Advertising and Marketing and was promoted to his
present position in July 1997.  Mr. Tilley's responsibilities include
merchandising, marketing and store operations.

     Mr. Wade, Executive Vice President and Chief Administrative Officer, joined
the Company in February 1994. Mr. Wade is responsible for logistics,
distribution, transportation, inventory management and information services.
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--Finance of American
Motor Inns. Mr. Wade is a certified public accountant.

     Mr. Leftwich, Senior Vice President and Chief Financial Officer, Secretary
and Treasurer, joined the Company in September 1984.  Mr. Leftwich was appointed
Chief Financial Officer of the Company in January 1994, Senior Vice President in
July 1997 and Secretary and Treasurer in February 1998.  Mr. Leftwich has also
served in numerous other positions with the Company.  Mr. Leftwich is
responsible for financial, human resources and loss prevention functions and is
a certified public accountant.  In addition, Mr. Leftwich became Senior Vice
President and Chief Financial Officer, Secretary and Treasurer of Holding in
February 1998, prior to which he served as Assistant Secretary and Assistant
Treasurer.

     Mr. Klasing, Senior Vice President, Merchandising, joined the Company in
April 1995.  Mr. Klasing is responsible for purchasing, quality control and
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. Reid, Senior Vice President, Real Estate and Store Support, joined the
Company in October 1984. Mr. Reid is responsible for real estate and store
visual presentation.  In addition, since March 1999, Mr. Reid has served as the
Chief Executive Officer of Western Auto.  From 1994 to 1995, Mr. Reid was
Assistant Vice President, Store Support for the Company.  Mr. Reid has also
served in training and store operations as Store Manager and Division Manager.

     Ms. Stevens, Senior Vice President and Chief Information Officer, joined
the Company in July 1979. Ms. Stevens is responsible for systems development,
computer services and technology.  Ms. Stevens has held several management
positions in Information Services, most recently as Vice President, Systems
Development.

     Mr. Weatherly, Senior Vice President, Store Operations, joined the Company
in August 1981.  Mr. Weatherly is responsible for district, division, and store
operations.  Mr. Weatherly has held numerous other operational positions
including District Assistant Vice President, Zone Manager, Division Manager and
Store Manager.

     Mr. Wirth, Senior Vice President, Sales, joined the Company in September
1982.  Mr. Wirth is responsible for the Company's largest product category,
batteries, as well as new store sales coordination, commercial sales and
training.  From June 1992 to January 1998, Mr. Wirth served as Senior Vice
President, Store Operations and prior to that held numerous other operational
positions including Zone Manager, Division Manager and Store Manager.

     Mr. Vaughn, Vice President, Finance, Assistant Secretary and Assistant
Treasurer, joined the Company in May 1995.  Mr. Vaughn was appointed Vice
President, Finance of the Company in October 1997 and Assistant Secretary and
Assistant Treasurer of Holding and the Company in April 1998.  Mr. Vaughn is
responsible for treasury, employee benefits, corporate services and risk
management.  From 1983 to 1989, Mr. Vaughn worked for KPMG Peat Marwick, from
1989 to 1992, he worked for Dominion Bank, and from 1992 to 1995, he worked for
Ferguson Andrews & Associates.  Mr. Vaughn is a certified public accountant.

     Mr. Doran, Director, became a member of the Board in connection with the
Recapitalization.  Mr. Doran joined Freeman Spogli & Co. Incorporated ("Freeman
Spogli") in 1988 and became a principal in January 1998.  Mr. Doran is also a
director of AFC Enterprises, Inc. and Century Maintenance Supply, Inc.

     Mr. Roth, Director, became a member of the Board in connection with the
Recapitalization.  Mr. Roth joined Freeman Spogli in March 1988 and became a
principal in March 1993.  Mr. Roth is also a director of AFC Enterprises, Inc.
and Envirosource, Inc.

                                       22
<PAGE>
 
     Mr. Collins, Director, became a member of the Board in connection with the
Recapitalization.  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.  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 Danielson Holding Corporation and Dayton Superior
Corporation.

     Mr. Starrett, Director, became a member of the Board in November 1998.
Since August 1998, Mr. Starrett has served as a consultant to Freeman Spogli.
Prior to August 1998, Mr. Starrett was President of Warner Bros. Studio Stores
Worldwide and had been employed by Warner Bros. since May 1990.  Mr. Starrett is
also a director of AFC Enterprises, Inc., Brylane, Inc., Guitar Center, Inc.,
Petco Animal Supplies, Inc. and The Pantry, Inc.

     Mr. Day, Director, became a member of the Board in April 1999.  Mr. Day has
been the Executive Vice President and Chief Financial Officer of Sears since
March 1999.  From July 1993 to June 1998, Mr. Day served as the Executive Vice
President and Chief Financial Officer of Safeway Inc. and had been employed by
Safeway since 1992.

     Mr. Coyne, Director, became a member of the Board in connection with the
Western Auto Merger.  Mr. Coyne joined Sears in November 1993 and is currently
Director of Strategy and Business Development.  Mr. Coyne has held previous
positions in the investor relations, capital markets, and controller groups
within Sears.  From August 1985 to November 1993, Mr. Coyne worked for Ernst &
Young.  Mr. Coyne is a certified public accountant.

     Mr. Salter, Director, became a member of the Board in April 1999.  Mr.
Salter has served as the President of the Home Stores division of Sears since
1996.  From 1995 to 1996, Mr. Salter served as President of the 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.

     Directors of the Company and Holding 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.  The Company has entered into employment agreements with
certain of its executive officers.  See "--Executive Employment Contracts."

                                       23
<PAGE>
 
Item 11.  Executive Compensation

     The following table sets forth information with respect to compensation
earned by the Chief Executive Officer and the four other most highly compensated
executive officers who were serving as executive officers at the end of the last
completed fiscal year (collectively, the "Executive Officers").


                          Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                                          
                                                                                          Long Term       
                                                                                        Compensation     
                                                      Annual Compensation                  Awards         
                                          -------------------------------------------  -------------                       
                                                                                         Securities                            
                                  Fiscal                              Other Annual       Underlying        All Other     
 Name and Principal Position       Year     Salary      Bonus(1)     Compensation(2)    Options/SARs    Compensation(3)  
------------------------------   -------- ---------   -----------   -----------------  --------------  -----------------  
<S>                              <C>      <C>         <C>           <C>                <C>             <C>
Garnett E. Smith ..............    1998   $ 457,600   $ 7,948,011       $  --             362,500         $ 8,000  
   President and Chief             1997     453,580       471,553          --                  --           7,500  
    Executive Officer                                                                                              
                                                                                                                   
Carroll R. Tilley, Jr. ........    1998   $ 240,000   $ 1,236,040       $  --             145,000         $ 7,459  
   Executive Vice                  1997     219,014       110,429          --                  --           7,500  
    President and General                                                                                          
    Manager                                                                                                        
                                                                                                                   
J. O'Neil Leftwich ............    1998   $ 164,415   $   828,220       $  --              72,500         $ 6,932  
   Senior Vice President           1997     153,825        42,500          --                  --           7,500  
    and Chief Financial                                                                                            
    Officer, Secretary and                                                                                         
    Treasurer                                                                                                      
                                                                                                                   
Kenneth A. Wirth, Jr. .........    1998   $ 112,060   $   264,411       $  --              25,000         $ 6,778  
   Senior Vice President,          1997     106,460        75,900          --                  --           7,500  
    Store Operations                                                                                               
                                                                                                                   
Paul W. Klasing ...............    1998   $ 140,000   $   231,382       $  --              25,000         $ 6,589  
   Senior Vice President,          1997     107,692        18,778          --                  --           6,129   
   Merchandising
</TABLE>
______________________
(1) In connection with the Recapitalization, an aggregate of $11.5 million in
    extraordinary bonuses were paid to senior employees in April 1998.
(2) 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.
(3) Consists of matching contributions made by the Company under the Company's
    401(k) savings plan.

Executive Employment Contracts

     On April 15, 1998, Mr. Smith entered into an employment and non-competition
agreement with the Company. The agreement has an initial term of three years,
and renews automatically each year thereafter unless terminated by the Company
or Mr. Smith.  The agreement provides for a base salary of $458,000, subject to
annual increases at the discretion of the Board of Directors, and an annual cash
bonus based on the Company's 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 the Company
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 the Company, to preserve
its confidential information, not to recruit or employ employees of the Company
to or in other businesses, and not to solicit customers or suppliers of the
Company for competitors.

     On April 15, 1998, Messrs. Leftwich, Tilley, Wirth and Klasing entered into
employment agreements with the Company.  The agreements provide that each
Executive Officer will receive a base salary of $162,000, $240,000, $112,000 and
$140,000, respectively, subject to annual increases at the discretion of the
Board of Directors.  Such agreements contain severance provisions that provide
for base salary for the remainder of the term of the agreement 

                                       24
<PAGE>
 
upon termination of employment or one year, unless the termination is due to
death, disability or retirement, by the Company 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 initial term of
the employment agreements is two years, after which the term of employment will
extend from year-to-year unless terminated by either the Company or the
employee. Other provisions require the Company to pay bonuses earned by the
employee upon the Company's achievement of earnings targets established by the
Board of Directors, and an agreement by the employee not to compete with the
Company, to preserve its confidential information, not to recruit or employ
employees of the Company to or in other businesses, and not to solicit customers
or suppliers of the Company for competitors.

Consulting Agreement

     Mr. Taubman has entered into a consulting and non-competition agreement
with Holding and the Company. The agreement, which has a term of three years,
requires Holding or the Company 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
1998, Mr. Taubman earned $708,222 pursuant to the consulting agreement.  Mr.
Taubman has agreed not to compete with the Company, to preserve its confidential
information, not to recruit or employ employees of the Company to or in other
businesses, and not to solicit customers or suppliers of the Company for
competitors.  Pursuant to the consulting agreement, Holding and Mr. Taubman have
entered into an indemnity agreement whereby Holding will indemnify Mr. Taubman
for actions taken as an officer or director of or consultant to Holding or the
Company 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.  The  Company has entered into indemnification agreements similar to
that with Mr. Taubman with five of its other directors.

Compensation of Directors

     Directors of the Company receive no compensation as directors.  Directors
are reimbursed for their reasonable expenses in attending meetings and
performing duties as directors.

Stock Subscription Plans

     Holding has adopted Stock Subscription Plans (the "Stock Subscription
Plans") pursuant to which certain directors, officers and key employees of the
Company have purchased 801,800 shares of the outstanding Holding Common Stock at
the same price as Freeman Spogli's purchase of its shares in the
Recapitalization, or fair market value at the time of purchase.  $2,615,000 of
the purchase price for such shares was paid by delivery of full recourse
promissory notes bearing interest at the prime rate and due five years from the
Recapitalization, secured by all of the stock each such executive owns in
Holding.  Messrs. Smith, Leftwich, Tilley, Wirth and Klasing purchased 250,000
shares, 50,000 shares, 150,000 shares, 20,000 shares and 20,000 shares,
respectively.  For these individuals, $0, $250,000, $750,000, $106,000 and
$110,000 of their purchase price, respectively, was financed through the
delivery of promissory notes on the terms described above.  As of January 2,
1999, the outstanding balance on the promissory notes was $237,500, $750,000,
$106,000 and $110,000 for each of Messrs. Leftwich, Tilley, Wirth and Klasing,
respectively.  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 Holding and co-sale rights in favor of the executive if
Freeman Spogli sells its shares to a third party.  The agreements also include
an obligation to sell at the request of Freeman Spogli.  These rights (but not
the restrictions on transferability) will terminate upon an initial public
offering by Holding of Holding Common Stock, as further defined in agreements
entered into under the Stock Subscription Plans.

Stock Option Plans

     Holding has adopted stock option plans (the "Option Plans"), under which
Holding made initial grants of approximately 898,750 shares of Holding Common
Stock in April 1998.  Each Option Plan participant has entered into an option
agreement (an "Option Agreement") with Holding.  The Option Plans and each
outstanding option thereunder are subject to termination in the event of a
change in control of Holding or other extraordinary corporate transactions, as
more fully described in the Option Plans.  In addition, all options granted
pursuant to the Option Plans will terminate 

                                       25
<PAGE>
 
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 Holding, and co-sale rights in favor of the optionee. These
rights will terminate upon an initial public offering by Holding of its Common
Stock, as further defined in the Option Agreements. 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. 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 will vest over a three-year period in three
equal annual installments beginning in fiscal 1999.  Performance Options will be
earned in installments based upon satisfaction of certain performance targets
for the four-year period ending in fiscal 2001.  Variable Price Service Options
will vest in equal annual installments over a two year period beginning in 2000,
and have an exercise price that increases over time.

Option Grants in Connection with the Recapitalization

     The following table sets forth information concerning Options granted in
fiscal 1998 to each of the Executive Officers.



                                         Individual Grants
                          ------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                    Potential Realizable Value at
                                                                                                    Assumed Annual Rates of Stock
                                             % of Total                                                  Price Appreciation
                               Number of       Options/                                                   for Option Term
                              Securities        SARs                                                       Fixed Price and
                              Underlying     Granted to        Exercise or                               Performance Options
                             Options/SARs    Employees in      Base Price      Expiration      -----------------------------------
          Name                Granted(#)     Fiscal Year       ($/Sh)(1)         Date          0%(2)       5%($)(3)    10%($)(3)
--------------------------  -------------- --------------    --------------  -------------     ------     ----------  -----------
<S>                           <C>                <C>             <C>          <C>              <C>          <C>          <C>
Garnett E. Smith..........     362,500(4)         40.3           10.00          4/14/05         -            814,201     1,897,434

Carroll R. Tilley, Jr.....     145,000(5)         16.1           10.00          4/14/05         -            325,680       758,974

J. O'Neil Leftwich........      72,500(6)          8.1           10.00          4/14/05         -            162,840       379,487

Kenneth A. Wirth, Jr......      25,000(7)          2.8           10.00          4/14/05         -             56,994       132,820

Paul W. Klasing...........      25,000(8)          2.8           10.00          4/14/05         -             56,994       132,820
</TABLE>
________________
(1) Represents the fair market value of the underlying shares of Common Stock at
    the time of the grant. A portion of the grant consists of Variable Price
    Service Options with an exercise price that increases $2.00 on each April
    15 (the anniversary of the grant date). 
(2) Unless the stock price increases, which will benefit all stockholders
    commensurately, an Option holder will realize no gain.
(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.  Variable Price Service Options will
    have no value at the appreciation rates shown.  Performance Options are
    assumed to be fully vested at the end of the period. Full vesting would
    require achievement of certain performance targets (as defined in each Stock
    Option Agreement) by the Company for the period beginning January 4, 1998
    and ending at the end of the Company's fiscal year 2001.
(4) Represents 37,500 Fixed Price Service Options, 162,500 Variable Price
    Service Options, and 162,500 Performance Options.
(5) Represents 15,000 Fixed Price Service Options, 65,000 Variable Price Service
    Options and 65,000 Performance Options.
(6) Represents 7,500 Fixed Price Service Options, 32,500 Variable Price Service
    Options, and 32,500 Performance Options.
(7) Represents 3,000 Fixed Price Service Options, 11,000 Variable Price Service
    Options, and 11,000 Performance Options.

                                       26
<PAGE>
 
(8) Represents 3,000 Fixed Price Service Options, 11,000 Variable Price Service
    Options, and 11,000 Performance Options.

Option Exercises and Year-End Value

  The following table sets forth information with respect to the Executive
Officers concerning option exercises for the fiscal 1998 and exercisable and
unexercisable options held as of January 2, 1999.

<TABLE>
<CAPTION>                                                           Number of Securities
                                                                   Underlying Unexercised               Value of Unexercised
                                                                         Options at                    In-the-Money Options at
                                     Shares                          January 2, 1999(#)                January 2, 1999($)(a)(b)
                                  Acquired on       Value      --------------------------------   ----------------------------------
            Name                  Exercise(#)     Realized($)   Exercisable      Unexercisable      Exercisable        Unexercisable
-----------------------------   --------------  -------------- -------------    ---------------   --------------     ---------------
<S>                                        <C>             <C>         <C>        <C>             <C>                <C> 
Garnett E. Smith.............               --              --         0          362,500         $          --      $  2,472,250
Carroll R. Tilley, Jr........               --              --         0          145,000                    --           988,900
J. O'Neil Leftwich...........               --              --         0           72,500                    --           494,450
Kenneth A. Wirth, Jr.........               --              --         0           25,000                    --           170,500
Paul W. Klasing..............               --              --         0           25,000                    --           170,500
</TABLE>
______________________
(a) There is no established public trading market for the Holding Common Stock.
    Holding believes that the fair market value of the Holding Common Stock was
    $16.82 per share as of January 2, 1999.
(b) 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 of the underlying the Holding Common Stock of $16.82 as
    described in note (a).

Compensation Committee Interlocks and Insider Participation

     The Board of Directors of the Company determines the compensation of the
Executive Officers.  During fiscal 1998, Messrs. Taubman and Smith participated
in Board of Director deliberations regarding the compensation of the Company's
Executive Officers.

                                       27
<PAGE>
 
Item 12.  Security Ownership of Certain Beneficial Owners and Management.

     The following table sets forth certain information, as of April 2, 1999,
with respect to the beneficial ownership of Holding Common Stock by (i) each
person who beneficially owns more than 5% of such shares, (ii) each of the
Executive Officers named in the Summary Compensation Table, (iii) each member of
the Board of Directors of Holding and (iv) all Executive Officers and Directors
of Holding and the Company as a group.

<TABLE>
<CAPTION>
                                                            Amount of
                                                            Beneficial          Percent
Name of Beneficial Owner                                    Ownership          of Class
----------------------------------------------------------------------     ------------
<S>                                                         <C>             <C>
Freeman Spogli & Co. Incorporated(1)                        11,022,652             39.0%
 Mark J. Doran(1)                                                   --               --
 John M. Roth(1)                                                    --               --
WA Holding Co.(2).                                          11,474,606             40.6%
 Julian C. Day(2)                                                   --               --
Ripplewood Partners, L.P. and affiliates(3)                  2,891,795             10.2%
 Timothy C. Collins(3)                                              --               --
Nicholas F. Taubman(4)                                       1,398,632              5.0%
Arthur Taubman Trust dated July 13, 1964(5)                  1,148,633              4.0%
Garnett E. Smith                                               250,000                *
Carroll R. Tilley, Jr.                                         150,000                *
J. O'Neil Leftwich                                              50,000                *
Peter J. Starrett                                               23,782                *
Michael Coyne                                                       --               --
William L. Salter                                                   --               --
Paul W. Klasing                                                 20,000                *
David R. Reid                                                   20,000                *
S. Lynn Stevens                                                 20,000                *
Jimmie L. Wade                                                  25,000                *
Anthony R. Weatherly                                            20,000                *
Kenneth A. Wirth, Jr.                                           20,000                *
Joe H. Vaughn, Jr.                                              10,000                *
All directors and officers as a group (16 individuals)      28,045,100(6)          99.2%
</TABLE>
-------------------
* Less than 1%
(1)  11,022,652 shares of Holding Common Stock are held of record by FS Equity
     Partners IV, L.P. ("FSEP IV"). As general partner of FSEP IV, FS Capital
     Partners LLC ("FS Capital") has the sole power to vote and dispose of the
     shares owned by FSEP IV. Messrs. Doran and Roth and Bradford M. Freeman,
     Todd W. Halloran, Jon D. Ralph, Charles P. Rullman, J. Frederick Simmons,
     Ronald P. Spogli and William M. Wardlaw are the sole managing members of FS
     Capital, and Messrs. Doran, Freeman, Halloran, Ralph, Roth, Rullman,
     Simmons, Spogli and Wardlaw are the sole directors, officers and
     shareholders of Freeman Spogli & Co. Incorporated, and as such may be
     deemed to be the beneficial owners of the shares of Holding Common Stock
     and rights to acquire Holding Common Stock owned by FSEP IV. Freeman Spogli
     and its named officers and directors have, in addition, sole power to vote
     2,891,795 shares of Holding Common Stock owned of record by Ripplewood
     Partners, L.P. (the "Ripplewood Partners") and Ripplewood Advance Auto
     Parts Employee Fund I L.L.C. (the "Ripplewood Fund") pursuant to an
     irrevocable proxy delivered to Freeman Spogli under the terms of the
     Stockholders Agreement. Such irrevocable proxy will expire upon an initial
     public offering by Holding. Freeman Spogli neither has shared nor sole
     power to dispose of shares held by Ripplewood Partners or Ripplewood Fund.
     The business address of Freeman Spogli & Co. Incorporated, FSEP IV, FS
     Capital, and Messrs. Freeman, Spogli,
                                       28
<PAGE>
 
     Wardlaw, Simmons, Roth, Rullman and Doran is 11100 Santa Monica Boulevard,
     Suite 1900, Los Angeles, California 90025.
(2)  11,474,606 shares of Holding Common Stock are held of record by WA Holding
     Co. ("WAH") a wholly owned subsidiary of Sears. As the sole stockholder of
     WAH, Sears has the sole power to vote and dispose of the shares owned by
     WAH. As Chief Financial Officer of Sears, Mr. Day has the power to direct
     the voting of the shares of Holding Common Stock held by WAH, and as such
     may be deemed to be the beneficial owner of the shares of Holding Common
     Stock owned by WAH. The business address of WAH and Mr. Day is 3333 Beverly
     Road, Hoffman Estates, Illinois 60179.
(3)  2,763,110 shares of Holding Common Stock are held of record by Ripplewood
     Partners, and 128,685 shares of Holding Common Stock are held of record by
     Ripplewood Fund.  Ripplewood Holdings, L.L.C. is the sole general partner
     of Ripplewood Partners and the sole managing member of Ripplewood Fund and,
     therefore, has the sole power to dispose of the shares owned by Ripplewood
     Partners or Ripplewood Fund.  Until an initial public offering by Holding,
     pursuant to the Stockholders Agreement and an irrevocable proxy required by
     the terms thereof, Freeman Spogli has sole voting power over all of the
     shares of Holding Common Stock held by Ripplewood Partners and Ripplewood
     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 Holding Common Stock and the rights to
     acquire Holding Common Stock owned by Ripplewood Partners and Ripplewood
     Fund.  The business address of Ripplewood Holdings L.L.C., Ripplewood
     Partners, Ripplewood Fund, and Mr. Collins is 1 Rockefeller Plaza, 32nd
     Floor, New York, New York 10020.
(4)  Includes 250,000 shares subject to immediately exercisable options.  The
     stockholder's business address is 5673 Airport Road, Roanoke, Virginia
     24012.
(5)  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, and Grace W. Taubman,
     who is his mother.  The business address of the trust is 5673 Airport Road,
     Roanoke, Virginia 24012.
(6)  Includes 608,782 shares which have been acquired by management pursuant to
     stock subscription plans, including Messrs. Smith, Tilley, Leftwich and
     Wirth.

Item 13.  Certain Relationships and Related Transactions.

Affiliated Leases

     The Company leases its Roanoke, Virginia distribution center, an
office/warehouse, a warehouse, 23 of its stores and four 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 of Mr. Taubman.  Rents for the affiliated
leases may be slightly higher than rents for non-affiliated leases, but the
Company does not believe the amount of such difference to be material.  In
addition, certain terms of the affiliate leases may be more favorable to the
landlord than those contained in leases with non-affiliates, primarily terms
relating to the maintenance of the facilities.  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 the Company than non-
affiliated leases.  All affiliate leases are on a triple net basis.  Lease
expense for leases with affiliates has been $3,076,000, $3,171,000 and
$2,888,000 for fiscal 1996, 1997 and 1998, respectively.

     Three Western Auto Puerto Rico stores are on the premises of Sears stores
and the buildings are subleased from Sears.  The rental rates were established
prior to the Western Auto Merger by arm's-length negotiation between the Company
and Sears, and the Company believes that the rent under and terms of the
subleases reflect market rates and terms at the time of the Western Auto Merger.
$97,450 in rent payable to Sears was accrued in fiscal year 1998.

Stockholders Agreement

     Mr. Taubman and the Arthur Taubman Trust Dated July 13, 1964 (the "Taubman
Trust" and, together with Mr. Taubman, the "Continuing Stockholders"), Freeman
Spogli, Ripplewood Partners, L.P. and Ripplewood Advance Auto Parts Employee
Fund I L.L.C. (collectively, "Ripplewood"), WAH and Holding have entered into an
Amended and Restated Stockholders Agreement (the "Stockholders Agreement").
Under the


                                       29
<PAGE>
 
Stockholders Agreement, Freeman Spogli, Ripplewood, WAH and the Continuing
Stockholders have the right to purchase their pro rata share of certain new
issuances of securities, including capital stock by Holding. In addition, the
Stockholders Agreement provides for restrictions on the transferability of the
shares of Holding Common Stock of the parties until the earlier of April 1, 2000
or upon consummation of a public offering. Prior to April 15, 2001 (or if
earlier, the date of an initial public offering), any transfers of Holding
Common Stock by any Continuing Stockholder and Ripplewood are subject to rights
of first offer in favor of Freeman Spogli and WAH on a pro rata basis. Prior to
an initial public offering, any transfers of Holding Common Stock are subject to
rights of first refusal in favor of (i) Freeman Spogli 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 and (iii) Freeman Spogli, in the case of a transfer
by WAH. The Stockholders Agreement further provides tag-along rights such that
(i) upon transfers of Holding Common Stock by Freeman Spogli (excluding
transfers to affiliates of Freeman Spogli), the Continuing Stockholders,
Ripplewood and WAH will have the right to participate in such sales on a pro
rata basis; (ii) upon transfers of Holding Common Stock by WAH (excluding
transfers to affiliates of WAH), Freeman Spogli, the Continuing Stockholders and
Ripplewood will have the right to participate in such sales on a pro rata basis;
and (iii) upon transfers of Holding Common Stock by Ripplewood (excluding
transfers to affiliates of Ripplewood), Freeman Spogli will have the right to
participate in such sales on a pro rata basis, and if Freeman Spogli exercises
such right, the Continuing Stockholders and WAH will have the right to
participate in such sales on a pro rata basis. In addition, from and after April
1, 2000, or earlier with the consent of WAH, if Freeman Spogli sells all of its
holdings of Holding Common Stock, Ripplewood and the Continuing Stockholders
will be obligated to sell all of their shares of Holding Common Stock at the
request of Freeman Spogli. 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 Holding.

     The Stockholders Agreement further provides that the parties will vote at
each annual meeting of Holding to elect to the Board of Directors Mr. Taubman,
the Chief Executive Officer of Holding, three nominees of Freeman Spogli, three
nominees of WAH and one nominee of Ripplewood.  Certain transfers of Holding
Common Stock by either Freeman Spogli or WAH will reduce the number of directors
such parties are entitled to nominate.  Ripplewood has granted Freeman Spogli an
irrevocable proxy to vote Ripplewood's stock in Holding on all matters, expiring
upon an initial public offering of common stock by Holding, but Freeman Spogli
will nominate one director designated by Ripplewood.  The Ripplewood director
will agree to vote with the Freeman Spogli directors on all matters prior to an
initial public offering of common stock by Holding.  Pursuant to the
Stockholders Agreement, Mr. Taubman has certain approval rights with respect to
major corporate transactions.

Options Granted to the Continuing Stockholders

     In connection with the Recapitalization, Holding entered into an Option
Agreement with Mr. Taubman and the Taubman Trust whereby each of them has been
granted immediately exercisable options to purchase 250,000 shares of Holding
Common Stock.  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 the Continuing
Stockholders will be subject to the Stockholders Agreement.

Sale of Airplane

     In fiscal 1998, in connection with the Recapitalization, Mr. Taubman
purchased an airplane from the Company for $4.1 million, a price equal to the
approximate net book value of the airplane, which amount also equaled the
approximate fair market value of the airplane (based on estimates of value
provided by the airplane's manufacturer). The airplane was purchased in 1995 for
$5.2 million.

Registration Rights Agreement

     Pursuant to the Stockholders Agreement, Holding agreed, beginning 180 days
after consummation of an initial public offering of common stock by Holding,
that upon the request of Freeman Spogli, WAH and the Continuing Stockholders it
will register under the Securities Act and applicable state securities laws the
sale of Holding Common Stock owned by Freeman Spogli, WAH and the Continuing
Stockholders subject to certain limitations.  Holding has 

                                       30
<PAGE>
 
granted unlimited piggy-back registration rights to Freeman Spogli, Ripplewood,
WAH and the Continuing Stockholders. Holding also granted three demand
registrations to each of Freeman Spogli and WAH, two demand registrations to the
Continuing Stockholders, and one demand registration to Ripplewood. Holding
granted WAH the right, beginning 180 days after the consummation of an initial
public offering, to distribute its shares of Holding Common Stock to Sears'
stockholders. Holding's obligation is subject to certain limitations relating to
the minimum amount required for registration, the timing of registrations and
other similar matters. Holding is obligated to pay any registration expenses
incidental to such registrations, excluding underwriters' commissions and
discounts. Holding has agreed to indemnify Freeman Spogli, Ripplewood, WAH, the
Continuing Stockholders and the control person of any of the foregoing against
certain liabilities including liabilities under the Securities Act.

Management Equity Plans

     See "Item 11. Executive Compensation--Stock Subscription Plans" and "--
Stock Option Plans."

Indemnification Agreements

     In connection with the Recapitalization, the Company entered into
indemnification agreements with certain of the directors of the Company.

Certain Payments

     In connection with the Recapitalization, a portion of the common stock and
all of the preferred stock of Holding were converted into the right to receive
in the aggregate approximately $351.0 million in cash and certain options to
purchase shares of Holding Common Stock.  In addition, Freeman Spogli and
Ripplewood, stockholders of Holding, received collectively a $5.0 million fee
for arranging the financing, performing advisory and consulting services and
negotiating the Recapitalization, and Freeman Spogli, Ripplewood and the
Continuing Stockholders received collectively a $3.5 million fee for performing
similar services with respect to the Western Auto Merger.  In connection with
the Recapitalization, certain employees of the Company, including the Executive
Officers, received an aggregate of approximately $11.5 million in bonuses with
Messrs. Smith, Tilley, Leftwich, Wirth and Klasing receiving $7.0 million, $1.0
million, $750,000, $150,000 and $150,000, respectively.

Other Transactions with Sears

     On November 2, 1998, Western Auto Supply Company merged into a subsidiary
of the Company.  In the Western Auto Merger, WAH was issued 11,474,606 shares of
Holding Common Stock, representing approximately 40% of the outstanding Holding
Common Stock.  In connection with the Western Auto Merger, WAH became entitled,
under the Stockholders Agreement described above, to nominate three directors to
the Board of Directors of Holding.  Michael Coyne, an employee of Sears, was
appointed to the Board of Directors on November 2, 1998.  Julian C. Day and
William L. Salter, each an employee of Sears, were appointed to the Board of
Directors in April 1999.

     In connection with the Western Auto Merger, Western Auto entered into
agreements with Sears in order to continue to obtain supplies of certain
products bearing trademarks owned by Sears for the Western Auto dealer network
and the Service Stores for three years. Pursuant to these agreements, Western
Auto purchased directly from the manufacturers approximately $6.0 million of
these products in fiscal 1998, and the Company believes that Sears received fees
in association with such sales. The prices paid per unit for the products sold
in the Western Auto and Parts America stores were determined prior to the
Western Auto Merger by arm's-length negotiation between the Company and Sears.

     In connection with the Western Auto Merger, Western Auto and Western Auto
of Puerto Rico, Inc., a subsidiary of Western Auto, entered into agreements with
Sears and its affiliates whereby consumers can make retail purchases at Western
Auto, Parts America and Western Auto Puerto Rico stores and the dealer network
using the Sears credit card and other Western Auto 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 Auto and the Company to third party
credit card providers such as Visa, MasterCard and American Express. In fiscal
1998, Western Auto and Western Auto of Puerto Rico accrued approximately

                                       31
<PAGE>
 
$657,000 in discount fees payable to Sears, $147,000 of which was paid. In
addition, a portion of Western Auto's Puerto Rico administrative facility and
certain Western Auto employees are leased to Sears for use in Sears
administration of the credit card program. The lease payments, which aggregated
approximately $644,000 in fiscal 1998, are intended to reimburse the Company for
its expense in connection with the facility and the employees.

     In connection with the Western Auto Merger, Sears and the Company are each
providing certain services to effect an orderly transition of Western Auto
Supply Company from a subsidiary of Sears to a subsidiary of the Company. Such
services include payroll, accounts payable and administration of commercial
credit programs. Each party is reimbursed by the other for its costs incurred in
providing transition services. Pursuant to this arrangement, the Company accrued
$844,000 for services performed by Sears for the Company and $38,000 as
reimbursement for services performed by the Company for Sears in fiscal 1998.

     Under the terms of an insurance program established by a Sears subsidiary
on behalf of Western Auto Supply Company prior to the Western Auto Merger, with
respect to certain insurable losses where the Company may otherwise have a
retention obligation or deductible under the applicable insurance policy
providing coverage, the Company will be entitled to be reimbursed by Sears for
its losses. No material payments were made under the insurance program in fiscal
year 1998. Western Auto is currently processing a claim with Sears under the
insurance program from which the Company expects to receive approximately $1.5
million.

     In connection with the Western Auto Merger, Sears and the Company entered
into an agreement under which the Company may be given a priority position as a
local supplier to up to approximately 250 Sears Auto Centers or NTB Stores that
are located near Company stores. Under this agreement, upon request from a Sears
Auto Center or NTB Store, the Company will deliver parts and charge a price
negotiated prior to the Western Auto Merger between the Company 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 is currently being phased in by the Company and Sears, and no
material purchases were made by Sears in fiscal year 1998. There can be no
assurance that the program will result in meaningful revenues to the Company in
fiscal year 1999.

     In connection with the Western Auto Merger, Sears has arranged to buy from
the Company certain products in bulk for its automotive centers, at cost plus a
set handling fee.  In fiscal 1998, the Company shipped approximately $2.1
million in products to Sears.  The Company made final shipments to Sears under
this arrangement of $530,000 in first fiscal quarter of fiscal 1999.

                                       32
<PAGE>
 
                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
<TABLE> 
          <S>                                                                                       <C> 
          (a) Documents filed as part of this Report:                                             
                                                                                                  
                                                                                                  
            (1 & 2)  Index to Consolidated Financial Statements and Schedules:                                                  
                                                                                                  
                     Advance Holding Corporation and Subsidiaries                                    
                     Consolidated Financial Statements:                                              

                     Report of Independent Public Accountants--Arthur Andersen                        
                       LLP..........................................................                F-1

                     Consolidated Balance Sheets as of January 2, 1999 and                            
                       January 3, 1998..............................................                F-2
  
                     Consolidated Statements of Operations for the Years Ended
                       January 2, 1999, January 3, 1998 and December 28, 1996.......                F-3           
 
                     Consolidated Statements of Changes in Stockholders' Equity for
                       the Years Ended January 2, 1999, January 3, 1998 and                         
                       December 28, 1996............................................                F-4

                     Consolidated Statements of Cash Flows for the Years Ended
                       January 2, 1999, January 3, 1998 and December 28, 1996.......                F-5            

                     Notes to Consolidated Financial Statements January 2, 1999,                      
                       January 3, 1998 and December 28, 1996........................                F-6
                                                                                                  
                     Schedule I -- Condensed Financial Information of the                            
                       Registrant...................................................                F-37
                                                                                                  
                     Schedule II -- Valuation and Qualifying Accounts...............                F-43
              


</TABLE>

               (3)  Exhibits:
<TABLE>
<CAPTION>
Exhibit  
 Number                                        Description
--------                                       -----------                                
<S>              <C>
  2.1(2)         Merger Agreement dated as of March 4, 1998 among AHC
                 Corporation and 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. ("Sears"), Western Auto Holding Co.
                 ("WAHC"), Holding, the Company, Western Auto, Advance
                 Acquisition Corporation ("AAC") and the stockholders of Holding
                 listed on the signature pages thereto.

  2.3(4)         Amendment No. 1 to Agreement and Plan of Merger dated as of
                 November 2, 1998 among the Registrant, Sears, WAHC, Western
                 Auto, Holding, AAC and certain stockholders of Holding.

  3.1(1)         Articles of Incorporation of Holding, as amended to date.

  3.2(1)         Bylaws of Holding, as amended to date.
</TABLE> 

                                       33
<PAGE>
 
<TABLE>
<CAPTION>
Exhibit  
 Number                                        Description
--------                                       -----------                               
<S>               <C>
  4.1(1)         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).

  4.2(2)         Amended and Restated Stockholders Agreement dated 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, The Arthur Taubman Trust dated July 13, 1964, WA
                 Holding Co. and Holding. (including the Terms of the Registration
                 Rights of Common Stock).

 10.1(4)         Amended and Restated Credit Agreement dated as of October 19,
                 1998 among Holding, the Registrant, the lenders party thereto, The
                 Chase Manhattan Bank ("Chase"), Chase Securities Inc., DLJ Capital
                 Funding, Inc. and First Union National Bank.

 10.2(5)         Pledge Agreement dated as of April 15, 1998, as amended and
                 restated as of November 2, 1998, among the Registrant, Holding, the
                 Subsidiary Pledgors listed therein and Chase, as collateral agent.

 10.3(6)         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.

 10.4(7)         Indemnity, Subrogation and Contribution Agreement dated as of
                 April 15, 1998, as amended and restated as of November 2, 1998,
                 among the Registrant, Holding, the Guarantors listed therein and
                 Chase, as collateral agent.

 10.5(8)         Security Agreement dated as of April 15, 1998, as amended and
                 restated as of November 2, 1998, among the Registrant, Holding, the
                 Subsidiary Guarantors listed therein and Chase, as collateral agent.

 10.6(2)         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.

 10.7(2)         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.

 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 the Company
                 relating to the IRB.

10.10(2)         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.

10.11(2)         Advance Holding Corporation 1998 Senior Executive Stock Option
                 Plan.

10.12(2)         Form of Advance Holding Corporation 1998 Senior Executive Stock
                 Option Agreement.

10.13(2)         Advance Holding Corporation 1998 Executive Stock Option Plan.
</TABLE> 

                                       34
<PAGE>
 
<TABLE>
<CAPTION>
Exhibit  
 Number                                        Description
--------                                       -----------                               
<S>              <C>
10.14(2)         Form of Advance Holding Corporation 1998 Stock Option
                 Agreement.

10.15(2)         Advance Holding Corporation 1998 Senior Executive Stock
                 Subscription Plan.

10.16(2)         Form of Advance Holding Corporation Senior Executive Stock
                 Subscription Agreement.

10.17(2)         Advance Holding Corporation 1998 Employee Stock Subscription
                 Plan.

10.18(2)         Form of Advance Holding Corporation Employee Stock Subscription
                 Agreement.

10.19(2)         Form of Secured Promissory Note.

10.20(2)         Form of Stock Pledge Agreement.

10.21(2)         Form of Employment and Non-Competition Agreement between
                 Childs, Cox, Dickerson, Gearheart, Gerald, Gray, Gregory, Hale,
                 Helms, Jeter, Knighten, Kyle, Livesay, McDaniel, Miley, Quinn,
                 Rakes, Richardson, Smith, Turner and Williams and the Company
                 (one-year agreement).

10.22(2)         Form of Employment and Non-Competition Agreement between
                 Tilley, Bigoney, Buskirk, Felts, Fralin, Haan, Klasing, Leftwich, Reid,
                 Stevens, Vaughn, Wade, Weatherly and Wirth and the Company (two-
                 year agreement).

10.23(2)         Form of Indemnity Agreement between certain directors of Holding
                 (other than Nicholas F. Taubman) and Holding.

10.24(2)         Form of Consulting and Non-Competition Agreement among
                 Nicholas F. Taubman, Holding  and the Company.

10.25(2)         Indemnity Agreement dated as of April 15, 1998 between Nicholas F.
                 Taubman and Holding.

10.26(2)         Option Agreement dated as of April 15, 1998 between Nicholas F.
                 Taubman and Holding.

10.27(2)         Option Agreement dated as of April 15, 1998 between Arthur
                 Taubman Trust dated July 13, 1968 and Holding.

10.28(2)         Form of Employment and Non-Competition Agreement among
                 Garnett E. Smith, Holding and the Company.

10.29(1)         Form of Series B Debenture.

    21.1         Subsidiaries of the Company.

    24.1         Power of Attorney (contained in the signature pages hereof).

    27.1         Financial Data Schedule.
</TABLE>
     _______________________________
     (1) Incorporated by reference to the exhibit designated as the same number
         in the Registration Statement on Form S-4 of Holding effective October
         30, 1998 (No. 333-56031).
     (2) Incorporated by reference to the exhibit designated as exhibit 4.3 in
         the Registration Statement on Form S-4 of Advance Stores Company,
         Incorporated effective October 30, 1998 (No. 333-56013).
     (3) Incorporated herein by reference to the exhibit designated as exhibit
         10.31 filed with the Current Report on Form 8-K of Advance Stores
         Company, Incorporated dated November 2, 1998.

                                       35
<PAGE>
 
     (4) Incorporated herein by reference to the exhibit designated as exhibit
         10.32 filed with the Current Report on Form 8-K of Advance Stores
         Company, Incorporated dated November 2, 1998.
     (5) Incorporated herein by reference to the exhibit designated as exhibit
         10.33 filed with the Current Report on Form 8-K of Advance Stores
         Company, Incorporated dated November 2, 1998.
     (6) Incorporated herein by reference to the exhibit designated as exhibit
         10.34 filed with the Current Report on Form 8-K of Advance Stores
         Company, Incorporated dated November 2, 1998.
     (7) Incorporated herein by reference to the exhibit designated as exhibit
         10.35 filed with the Current Report on Form 8-K of Advance Stores
         Company, Incorporated dated November 2, 1998.
     (8) Incorporated herein by reference to the exhibit designated as exhibit
         10.36 filed with the Current Report on Form 8-K of Advance Stores
         Company, Incorporated dated November 2, 1998.

(4)  Reports on Form 8-K.

     (a) Current Report on Form 8-K (date of earliest event--November 2, 1998)
         related to the Western Auto Merger.

                                       36
<PAGE>
 
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 January
2, 1999, and January 3, 1998, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the three
fiscal years in the period ended January 2, 1999.  These consolidated financial
statements and the schedules referred to below are the responsibility of the
Company's management.  Our responsibility is to express an opinion on these
consolidated financial statements and schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advance Holding
Corporation and subsidiaries as of January 2, 1999, and January 3, 1998, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended January 2, 1999, in conformity with generally accepted
accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole.  The schedules listed in the
index to consolidated 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 consolidated financial statements.  The schedules have
been subjected to the auditing procedures applied in the audits of the basic
consolidated 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 consolidated financial statements taken as a whole.

Greensboro, North Carolina,                          ARTHUR ANDERSEN LLP   
 April 9, 1999.

                                      F-1
<PAGE>

                 Advance Holding Corporation and Subsidiaries

       Consolidated Balance Sheets - January 2, 1999 and January 3, 1998

                    (dollars in thousands, except per share data)

<TABLE>
<CAPTION>

                                                                               January 2,        January 3,
                 Assets                                                          1999              1998
                 ------                                                      ----------------  -----------------
<S>                                                                          <C>               <C>
Current assets:
   Cash and cash equivalents                                                 $      36,115      $      15,463
   Marketable securities                                                               -                2,025
   Receivables, net                                                                 92,199             21,892
   Inventories                                                                     726,172            280,267
   Prepaid expenses and other current assets                                         9,254              2,895
   Deferred income taxes                                                               223                  -
   Refundable income taxes                                                             -                1,765
                                                                             ------------------ -----------------
     Total current assets                                                          863,963            324,307
Property and equipment, net                                                        377,761            134,896
Other assets, net of accumulated amortization of $1,875 and $0                      23,631              2,054
                                                                             ------------------ -----------------
                                                                             $   1,265,355      $     461,257
                                                                             ================== =================
  Liabilities and Stockholders' Equity
  ------------------------------------
Current liabilities:
   Bank overdrafts                                                           $      20,403      $       6,970
   Borrowings secured by receivables                                                 5,000              3,359
   Notes payable and current portion of long-term debt                               1,026              3,959
   Current portion of deferred revenue                                               8,049              1,530
   Accounts payable                                                                364,758            157,096
   Accrued expenses                                                                154,614             27,143
   Deferred income taxes                                                               -                3,110
                                                                             ------------------ -----------------
         Total current liabilities                                                 553,850            203,167
                                                                             ------------------ -----------------
Long-term debt                                                                     500,162            100,167
                                                                             ------------------ -----------------
Deferred revenue                                                                     1,389                693
                                                                             ------------------ -----------------
Deferred income taxes                                                                  254             12,839
                                                                             ------------------ -----------------
Other long-term liabilities                                                         50,609                843
                                                                             ------------------ -----------------
Commitments and contingencies

Stockholders' equity:
   8% noncumulative, nonvoting preferred stock, $10 par value,
      redeemable by the Company at par; liquidation value at par;
      100,000 shares authorized; 0 and 77,300 shares issued
      and outstanding                                                                  -                  773
   Common stock, Class A, voting, $.01 par value; 62,500,000
      shares authorized; 28,261,900 and 2,412,500 issued
      and outstanding                                                                  283                 19
   Common stock, Class B, nonvoting, $.01 par value,
      437,500,000 shares authorized; 0 and 21,875,000 shares
      issued and outstanding                                                           -                  175
   Additional paid-in capital                                                      370,306                -
   Outstanding stock options                                                         3,731                -
   Unamortized stock option compensation                                            (2,736)               -
   Stockholder subscription receivables                                             (2,527)               -
   (Accumulated deficit) retained earnings                                        (209,966)           142,581
                                                                             ------------------ -----------------
         Total stockholders' equity                                                159,091            143,548
                                                                             ------------------ -----------------
                                                                             $   1,265,355       $    461,257
                                                                             ================== =================
</TABLE>

                    The accompanying notes to consolidated financial statements
                            are an integral part of these balance sheets.

                                      F-2
<PAGE>


                 Advance Holding Corporation and Subsidiaries

                     Consolidated Statements of Operations
                     For the Years Ended January 2, 1999,
                    January 3, 1998, and December 28, 1996
                            (dollars in thousands)
<TABLE>
<CAPTION>
                                                                            1998         1997       1996
                                                                        ------------  ---------   ---------- 
                                                                        (52 weeks)   (53 weeks)   (52 weeks)
<S>                                                                     <C>          <C>          <C>
Net sales                                                                $1,220,759    $848,108   $705,983
Cost of sales, including purchasing and warehousing costs                   763,353     524,586    437,615
                                                                         -----------    --------  ---------   
          Gross profit                                                      457,406     323,522    268,368
Selling, general and administrative expenses                                404,526     281,095    228,226
Expenses associated with Recapitalization                                    14,277         -          -
Expenses associated with restructuring                                        6,774         -          -
                                                                         -----------    --------  ---------  
          Operating income                                                   31,829      42,427     40,142
Other income (expense):                                                                           
   Interest expense                                                         (35,038)     (6,086)    (4,891)
   Interest income                                                            1,960         463        638
   Net losses on sales of property and equipment                               (150)       (362)       (97)
   Other, net                                                                  (867)       (422)      (354)
                                                                         -----------    --------  ---------  
          Total other income (expense), net                                 (34,095)     (6,407)    (4,704)
                                                                         -----------    --------  ---------  
(Loss) income before (benefit) provision for income taxes                    (2,266)     36,020     35,438
(Benefit) provision for income taxes                                            (84)     14,733     14,174
                                                                         -----------   ---------  ---------  
Net (loss) income                                                        $   (2,182)   $ 21,287   $ 21,264
                                                                         ===========   =========  ========== 
</TABLE> 



          The accompanying notes to consolidated financial statements
                   are an integral part of these statements.


                                      F-3
<PAGE>

                 Advance Holding Corporation and Subsidiaries

          Consolidated Statements of Changes in Stockholders' Equity
                     For the Years Ended January 2, 1999,
                    January 3, 1998, and December 28, 1996
                 (dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                               Class A                         Class B             
                                           Preferred Stock                  Common Stock                     Common Stock          
                                     -------------------------     -----------------------------    -------------------------------
                                       Shares        Amount            Shares         Amount         Shares               Amount   
                                     -----------   -----------     -----------      ------------    -----------        ------------
<S>                                   <C>          <C>              <C>            <C>             <C>                <C>          
Balance, December 30, 1995               77,300     $     773        2,412,500       $       19     21,875,000          $     175  
 Net income                                   -             -                -                -              -                  -  
 Preferred dividend,                                                                                                               
  $0.80 per share                             -             -                -                -              -                  -  
                                     -----------    -----------    -------------     ------------   ----------          ---------- 
Balance, December 28, 1996               77,300           773        2,412,500               19     21,875,000                175  
 Net income                                   -             -                -                -              -                  -  
 Preferred dividend,                                                                                                               
  $0.80 per share                             -             -                -                -              -                  -  
                                     -----------    -----------    -------------     ------------   ----------          ---------- 
Balance, January 3, 1998                 77,300           773        2,412,500               19     21,875,000                175  
 Change in par value of stock                 -             -                -                5              -                 44  
 Redemption of stock                    (77,300)         (773)        (662,500)              (7)   (21,875,000)              (219) 
 Issuance of Class A common stock                                                                                                  
  associated with the Recapitalization,                                                                                            
  net of issuance costs of $775               -             -       10,853,800              109              -                  -  
 Issuance of Class A common                                                                                                        
  associated with Western Merger,                                                                                                  
  net of issuance costs of $575               -             -       15,636,318              156              -                  -  
 Other issuances of Class A                                                                                                        
  common stock                                -             -           21,782                1              -                  -  
 Stockholder subscriptions receivable         -             -                -                -              -                  -  
 Stock option compensation                    -             -                -                -              -                  -  
 Amortization of stock                                                                                                             
  option compensation                         -             -                -                -              -                  -  
 Net loss                                     -             -                -                -              -                  -  
 Preferred dividend,                                                                                                               
  $0.80 per share                             -             -                -                -                                 -  
                                     -----------    -----------    -------------     ------------   ----------          ---------- 
Balance, January 2, 1999                      -     $       -       28,261,900       $      283            -          $       -  
                                     -----------    -----------    -------------     ------------   ----------          ---------- 
<CAPTION>
                                                                                 Unamortized    Retained
                                        Additional    Stockholder   Outstanding     Stock       Earnings       Total
                                          Paid-in    Subscriptions     Stock        Option    (Accumulated  Stockholders'
                                          Capital     Receivable      Options    Compensation   Deficit)       Equity
                                        ---------     ----------      -------    ------------   --------      --------     
<S>                                     <C>           <C>             <C>         <C>          <C>           <C>        
Balance, December 30, 1995              $       -     $      -        $    -      $       -     $100,154      $101,121
 Net income                                     -            -             -              -       21,264        21,264
 Preferred dividend,                     
  $0.80 per share                               -            -             -              -          (62)          (62)
                                         --------      --------       -------       --------   ---------      ---------
Balance, December 28, 1996                      -            -             -              -      121,356       122,323
 Net income                                     -            -             -              -       21,287        21,287
 Preferred dividend,                                                                                           
  $0.80 per share                               -            -             -              -          (62)          (62)
                                         --------      --------       -------       --------   ---------      ---------
Balance, January 3, 1998                        -            -             -              -      142,581       143,548
 Change in par value of stock                   -            -             -              -          (49)            -
 Redemption of stock                            -            -           300              -     (350,301)     (351,000)
 Issuance of Class A common stock                                                                              
  associated with the Recapitalization,                                                                        
  net of issuance costs of $775           107,654            -             -              -            -       107,763
 Issuance of Class A common                                                                                    
  associated with Western Merger,                                                                              
  net of issuance costs of $575           262,272            -             -              -            -       262,428
 Other issuances of Class A                                                                                    
  common stock                                380            -             -              -            -           381
 Stockholder subscriptions                                                                                     
  receivable                                    -       (2,527)            -              -            -        (2,527)
 Stock option compensation                      -            -         3,431         (3,431)           -             -
 Amortization of stock                                                                                         
  option compensation                           -            -             -            695            -           695
 Net loss                                       -            -             -              -       (2,182)       (2,182)
 Preferred dividend,                
  $0.80 per share                               -            -             -              -          (15)          (15)
                                         --------      --------       -------       --------   ---------      ---------
Balance, January 2, 1999                 $370,306      $(2,527)       $3,731        $(2,736)   $(209,966)     $159,091
                                         --------      --------       -------       --------   ---------      --------- 
</TABLE> 

The accompanying notes to consolidated financial statements are an integral part
of these statements.

                                      F-4
<PAGE>
 

                 Advance Holding Corporation and Subsidiaries

                     Consolidated Statements of Cash Flows

  For the Years Ended January 2, 1999, January 3, 1998, and December 28, 1996

                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                                                        1998       1997       1996
                                                                                     ---------- ---------- -----------
                                                                                      (52 weeks)  (53 weeks)  (52 weeks)
<S>                                                                                     <C>         <C>        <C>           
Cash flows from operating activities:                                                
 Net (loss) income                                                                     $  (2,182)  $  21,287   $  21,264
 Adjustments to reconcile net (loss) income to net cash
  provided by operating activities:
   Depreciation and amortization                                                          29,964      21,801      17,499
   Amortization of stock option compensation                                                 695         -           -
   Amortization of deferred debt issuance costs                                            2,070         -           -
   Amortization of bond discount                                                           5,645         -           -
   Net losses on sales of property and equipment                                             150         362          97
   Sales (purchases) of marketable securities                                              2,025        (192)        (84)
  (Benefit) provision for deferred income taxes                                           (5,348)      4,216       5,234
   Restructuring charge                                                                    6,774         -           -
   Net (increase) decrease in:
       Receivables, net                                                                    4,295      (7,498)     (5,623)
       Inventories                                                                       (99,653)    (27,723)    (72,645)
       Prepaid expenses and other assets                                                  (2,062)       (837)        515
       Refundable income taxes                                                             1,765      (1,765)        -
   Net increase (decrease) in:
       Accounts payable                                                                   65,170      27,072      58,589
       Accrued expenses                                                                   25,877       5,173       2,843
       Deferred revenue                                                                    7,215         195      (1,416)
       Other long-term liabilities                                                         1,622         387         245
                                                                                       ----------- ----------  ------------
         Net cash provided by operating activities                                        44,022      42,478      26,518
                                                                                       ----------- ----------  ------------
Cash flows from investing activities:
 Purchases of property and equipment                                                      (65,790)   (48,864)    (44,264)
 Proceeds from sales of property and equipment                                              6,073        257         143
 Western Merger, net of cash acquired                                                    (170,955)         -           -
                                                                                       ----------- ----------  ------------
         Net cash used in investing activities                                           (230,672)   (48,607)    (44,121)
                                                                                       ----------- ----------  ------------
Cash flows from financing activities:
 Increase (decrease) in bank overdrafts                                                    13,434     (7,188)        634
 Net (repayments) borrowings under notes payable                                           (2,959)         6         226
 Proceeds from issuance of long-term debt                                                  11,500     65,000      62,200
 Principal payments of long-term debt                                                    (102,667)   (52,583)    (50,450)
 Borrowings under debt facilities                                                         485,017        -           -
 Payment of debt issuance costs                                                           (23,374)       -           -
 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                                                                                      2,397      1,524         (62)
                                                                                       ----------- ----------  ------------
         Net cash provided by financing activities                                        207,302      6,759      12,548
                                                                                       ----------- ----------  ------------
Net increase (decrease) in cash and cash equivalents                                       20,652        630      (5,055)
Cash and cash equivalents, beginning of year                                               15,463     14,833      19,888
                                                                                       ----------- ----------  ------------
Cash and cash equivalents, end of year                                                 $   36,115  $  15,463   $  14,833
                                                                                      ============ ==========  ============
Supplemental cash flow information:
 Interest paid                                                                         $   23,639  $   5,867   $   5,026
 Income taxes paid, net of refunds received                                                 3,129     13,302       7,771
Noncash transactions:
 Debt issuance and acquisition costs accrued at January 2, 1999                             3,734          -           -
 Stock options issued for redemption of stock                                                 300          -           -
 Loans receivable related to issuance of common stock                                       2,527          -           -
 Issuance of common stock - Western Merger                                                193,003          -           -
 Accrued credit card liability - Western Merger                                            10,000          -           -
</TABLE> 

                The accompanying notes to consolidated financial statements
                         are an integral part of these statments.

                                      F-5
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries


                  Notes to Consolidated Financial Statements

            January 2, 1999, January 3, 1998, and December 28, 1996

                 (dollars in thousands, except per share data)


1.  Description of Business:

Advance Holding Corporation and subsidiaries (the Company) is a retailer of
automotive replacement parts, accessories and maintenance items, with 1,567, 814
and 649 stores as of January 2, 1999, January 3, 1998, and December 28, 1996,
respectively. The Company's principal markets are located throughout the Eastern
and Midwest portions of the United States.

On November 2, 1998, Western Auto Supply Company and its wholly owned
subsidiaries, Parts America, Inc., Western Auto of Puerto Rico, Inc., Western
Auto of St. Thomas, Inc. and WASCO Insurance Company, collectively known as
Western, formerly wholly owned by Sears, Roebuck and Co. (Sears) were merged
with a subsidiary of the Company (Note 4). The Western Merger added 560 net
retail stores in the U.S. operating under the "Parts America" name, and 36
retail stores in Puerto Rico, two retail stores in the U.S. Virgin Islands and
two domestic specialty stores that provide service and parts sales, under the
"Western Auto" name. In addition to the retail stores, the Company also assumed
Western's wholesale business to independent dealers that operate under the
"Western Auto" name.

2.  Summary of Significant Accounting Policies:

Accounting Period

The Company's fiscal year ends on the Saturday nearest the end of the month of
December.  The consolidated financial statements reflect the results of
operations for the 52-week periods ended January 2, 1999 (fiscal 1998) and
December 28, 1996 (fiscal 1996) and the 53-week period ended January 3, 1998
(fiscal 1997).

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries.  All significant intercompany balances and
transactions have been eliminated in consolidation.

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.

                                      F-6
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries


                  Notes to Consolidated Financial Statements

            January 2, 1999, January 3, 1998, and December 28, 1996

                 (dollars in thousands, except per share data)


Cash and Cash Equivalents

Cash and cash equivalents consist of cash in banks, money market funds,
commercial paper and municipal bonds with investor put options at par or
original maturities of three months or less.

Marketable Securities

Marketable securities have been categorized as trading securities and, as a
result, are stated at fair value as current assets in the accompanying
consolidated balance sheets.  Unrealized holding gains and losses are recorded
as other income or expense due to the short-term nature of the investments.

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 January 2, 1999 and January 3, 1998, 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 January 2, 1999 and January 3, 1998,
were $41,168 ($18,768 related to inventory acquired from Western) and $16,608,
respectively.  Inventories consist of the following:

<TABLE>
<CAPTION>
                                                        January 2,      January 3, 
                                                          1999             1998
                                                     -------------    --------------
          <S>                                        <C>              <C>
          Inventories at FIFO                             $718,909          $280,267
          Reserve to state inventories at LIFO              10,622             2,274
                                                     -------------    --------------
          Inventories at LIFO                              729,531           282,541
          Other reserves                                    (3,359)           (2,274)
                                                     -------------    --------------
                                                          $726,172          $280,267
                                                     =============    ==============
</TABLE>

As a result of price decreases on certain inventory items that went into effect
in the last quarter of fiscal 1998, replacement cost of inventory was
approximately $709,559 at January 2, 1999.  Replacement cost approximated FIFO
cost at January 3, 1998.

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.

                                      F-7
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries


                  Notes to Consolidated Financial Statements

            January 2, 1999, January 3, 1998, and December 28, 1996

                 (dollars in thousands, except per share data)


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 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.

Impairment of Long-lived Assets

Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
requires that long-lived assets and certain identifiable intangible assets to be
held and used or disposed of by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.  SFAS No. 121 also requires that assets to be disposed
of be reported at the lower of the carrying amount or the fair market value less
selling costs.  During 1996, the Company adopted the provisions of SFAS No. 121,
the effect of which was not material to the accompanying consolidated financial
statements.

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 reflected as a current liability in the accompanying
consolidated balance sheets.  Total deferred revenue is $9,438 and $2,223 at
January 2, 1999 and January 3, 1998, respectively, of which $5,568 and $0 are
receivable at January 2, 1999 and January 3, 1998, respectively.

Closed Stores

The Company recognizes a provision for future obligations at the time a decision
is made to close a store.  The provision for closed stores includes the present
value of the remaining lease payments, reduced by the present value of estimated
revenues from subleases, and management's estimate of future insurance, property
tax and common area maintenance.

                                      F-8
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries


                  Notes to Consolidated Financial Statements

            January 2, 1999, January 3, 1998, and December 28, 1996

                 (dollars in thousands, except per share data)


Postretirement Benefits

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 (Note 4), the Company assumed Western's
benefit obligation under its postretirement health care plan.  Under Western's
postretirement plan, employees retiring from the Company on or after age 55 who
have rendered at least 10 years of service and have participated in the group
health insurance plan are entitled to extend their participation in the plan and
purchase postretirement coverage for themselves and their dependents.  The plan
was frozen in fiscal year 1996.

During 1998, the Company adopted SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits."  SFAS No. 132 revises employers'
disclosure about pension and other postretirement benefit plans.  It does not
change the measurement or recognition of these plans.

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 was
approximately $35,972, $23,274 and $21,694 in fiscal 1998, 1997 and 1996,
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 recorded in the period the product is sold.

                                      F-9
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries


                  Notes to Consolidated Financial Statements

            January 2, 1999, January 3, 1998, and December 28, 1996

                 (dollars in thousands, except per share data)


Income Taxes

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.  The provision or benefit for income taxes includes
the income tax payable or receivable for the period and the net change during
the period in deferred income tax assets and liabilities.

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, during 1996, the Company began to extend credit 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.  In fiscal 1997,
the Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," which 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 $5,000 and $3,359 at January 2, 1999 and January 3, 1998, respectively.

Stock Options

As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company elected to account 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.  Pro-forma information is presented as if net income had been
calculated under the fair value based method as prescribed by SFAS No. 123 (Note
20).

                                     F-10
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries


                  Notes to Consolidated Financial Statements

            January 2, 1999, January 3, 1998, and December 28, 1996

                 (dollars in thousands, except per share data)


Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board 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.  This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.  The Company plans to adopt the provisions of
this Statement in fiscal 2000.  The Company has not yet determined the impact
SFAS No. 133 will have on its financial position or the results of its
operations.

Reclassifications

Certain items in the fiscal 1997 and fiscal 1996 financial statements have been
reclassified to conform with the fiscal 1998 presentation.

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 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. 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.  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.

                                     F-11
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries


                  Notes to Consolidated Financial Statements

            January 2, 1999, January 3, 1998, and December 28, 1996

                 (dollars in thousands, except per share data)


On April 15, 1998, the Company entered into a new bank 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 senior discount
debentures with an original discount of $51,983. 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 new bank 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 paid $11,500 in bonuses to
certain employees, including executive officers.  The Company also incurred
$23,927 of Recapitalization related costs and fees, of which $20,375 has been
recorded as deferred debt issuance costs, $775 has been recorded as a reduction
of the proceeds from the sale of common stock and $2,777 has been expensed.

The employee bonuses and Recapitalization related expenses, primarily
professional service fees, are presented as expenses associated with
Recapitalization in the accompanying consolidated statement of operations for
the year ending January 2, 1999.

In connection with the Recapitalization, FS&Co. and Ripplewood collectively
received $5,000 in fees for negotiating the Recapitalization, advisory and
consulting services, arranging financing and raising equity funding.

                                     F-12
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries


                  Notes to Consolidated Financial Statements

            January 2, 1999, January 3, 1998, and December 28, 1996

                 (dollars in thousands, except per share data)


4.  Western Merger:

On November 2, 1998, the Company consummated a Plan of Merger (the Western
Merger) with Sears to acquire Western, for $175,000 in cash and 11,474,606
shares of the Company's common stock. In addition, the Company has 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 amount of
$10,000 (Credit Card Liability).  Based on the sale of the private label credit
card programs to date, the Company has recorded the $10,000 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 a result of the transaction, Sears
owns 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 and, accordingly, the results of operations of Western for the period
from November 2, 1998 to January 2, 1999, are included in the accompanying
consolidated financial statements. The purchase price has been allocated to the
assets acquired and liabilities assumed based upon preliminary estimates of fair
values. Negative goodwill of $11,738, resulting from excess fair value over the
purchase price, was allocated proportionately as a reduction to certain
noncurrent assets, primarily property and equipment. A summary of the fair value
of the net assets acquired and cash paid in the Western Merger follows:

<TABLE>
               <S>                                    <C>                  
               Fair value of assets acquired         $670,186
               Liabilities assumed                   (287,637)
                                                    ----------
                                                      382,549
               Common stock issued                   (193,003)
               Credit card liability                  (10,000)
               Accrued acquisition costs               (2,591)
                                                    ----------
               Cash paid, including acquisition    
                costs of $1,955                       176,955
               Less:  Cash acquired                    (6,000)
                                                    ----------
               Net cash paid                         $170,955
                                                    ==========
</TABLE>

Total acquisition costs related to the transaction were approximately $4,546, of
which $2,591 is reflected in accrued liabilities at January 2, 1999.

Liabilities assumed include restructuring liabilities of approximately $23,354
for severance and relocation costs, facility and other exit costs (Note 5).

The following unaudited pro forma information presents the results of operations
of the Company as if the Recapitalization (Note 3) and the Western Merger had
taken place on December 29, 1996:

                                     F-13
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries


                  Notes to Consolidated Financial Statements

            January 2, 1999, January 3, 1998, and December 28, 1996

                 (dollars in thousands, except per share data)


<TABLE>
<CAPTION>
                                          1998                 1997
                                      ------------         ------------
           <S>                        <C>                  <C>
           Net sales                   $2,174,076           $2,122,019
           Net loss                        (6,427)             (43,056)
                                      ============         =============
</TABLE>

The pro forma amounts give effect to certain adjustments, including changes in
interest expense, depreciation and amortization, the net costs of credit card
programs retained by Sears 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.

The pro forma results of operations have been prepared for comparative purposes
only and do not purport to be indicative of the results of operation which
actually would have resulted had the Western Merger occurred on the date
indicated, or which may result in the future.

In addition to the acquisition costs, the Company incurred $4,747 of costs and
fees, of which $3,942 has been recorded as deferred debt issuance costs, $575
has been recorded as a reduction of the proceeds from the sale of common stock
and $230 has been expensed.  Of the $4,747, FS&Co., Ripplewood, the Chairman of
the Board and an affiliated trust (the Continuing Stockholders) collectively
received $3,575 in fees and expenses for assistance in the Western Merger,
arranging financing, raising equity funding and general consultation.

5.  Restructuring Liabilities:

Expenses associated with restructuring include estimated exit costs of $6,348
and write-offs of related leasehold improvements of $426 associated with the
decision to close 31 Advance Auto Parts stores that were in overlapping markets
with certain Parts America stores obtained in the Western Merger.  As of January
2, 1999, the Company had closed 3 of these stores with the remainder to be
closed during the first two quarters of fiscal 1999.  Store exit costs represent
the present value, discounted at a 6.5% interest rate, of remaining lease
payments, including management's estimate of future insurance, property tax and
common area maintenance, reduced by management's estimate of future sublease
revenue.

In connection with the Western Merger, the Company assumed the restructuring
accrual related to Western's restructuring activities prior to the Western
Merger.  As of January 2, 1999, this restructuring accrual relates primarily to
ongoing lease obligations on closed facilities and estimated severance payments.

The Company is pursuing subleasing closed stores, including service bays in
stores obtained through the Western Merger that are currently not involved in
the production of revenue.

                                     F-14
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries


                  Notes to Consolidated Financial Statements

            January 2, 1999, January 3, 1998, and December 28, 1996

                 (dollars in thousands, except per share data)


A reconciliation of activity with respect to these restructuring accruals is as
follows:

<TABLE>
<CAPTION>
                                                                 Other
                                                                  Exit
                                                 Severance       Costs
                                                -----------  ----------
<S>                                               <C>            <C> 
Restructuring reserves assumed
 in Western Merger                                $1,092        $8,569
                                                      
Restructuring provision for Advance store
 exit costs and fixed asset write-downs                -         6,774
Reserves utilized                                   (410)         (570)
                                                -----------  -----------
Balance, January 2, 1999                            $682        $14,773
                                                ========================
</TABLE>

As of the date of the Western Merger, management began to assess and formulate a
plan to close certain Parts America stores in overlapping markets or stores not
meeting the Company's profitability objectives, to exit certain other facility
leases, to relocate certain Western administrative functions to the Company's
headquarters and to terminate certain management, administrative and support
employees of Western.  Additional purchase price liabilities have been recorded
for approximately $8,970 for severance and relocation costs and approximately
$14,384 for store and other exit costs.  As of January 2, 1999, 66 employees
have been terminated and 52 stores have been closed.  The Company expects to
finalize its plan for termination of employees and closure of Parts America
stores within one year from the date of the Western Merger.  Additional
liabilities for severance, relocation, store and other facility exit costs may
result in an adjustment to purchase accounting.

A reconciliation of activity with respect to these liabilities, which are
included in restructuring accruals on the consolidated balance sheet as of
January 2, 1999, is as follows:

                                     F-15
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries


                  Notes to Consolidated Financial Statements

            January 2, 1999, January 3, 1998, and December 28, 1996

                 (dollars in thousands, except per share data)


<TABLE>
<CAPTION>
                                                                                       Other
                                                                                        Exit
                                                        Severance      Relocation      Costs
                                                        ---------      ----------      -----
     <S>                                             <C>               <C>           <C>
     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
                                                      ========        =======        =========
</TABLE>

6.  Stockholders' Agreement:

The Continuing Stockholders, WA Holding Co. (WAH), a subsidiary of Sears and the
Company have entered into a Stockholders' Agreement (the Stockholders'
Agreement). Under the Stockholders' Agreement, 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. In addition, the Stockholders' Agreement provides that
until the earlier of April 2000 or the consummation of a public offering, FS&Co.
and WAH have approval rights related to any sale of shares by a party to the
Stockholders Agreement. Sales of common stock by the Chairman of the Board, an
affiliated trust and Ripplewood are subject to a right of first offer in favor
of FS&Co. and WAH through April 2001. The Stockholders' Agreement provides
Ripplewood, the Chairman of the Board and an affiliated trust with tag-along
rights in the event of sales by FS&Co. or WAH. After April 2000, if FS&Co. sells
all of its common stock, Ripplewood, the Chairman of the Board and an affiliated
trust 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 and Ripplewood
will have defined levels of representation on the Board of the 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
Stockholders' Agreement, the existing Chairman of the Board has certain approval
rights with respect to major corporate transactions.

                                     F-16
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries


                  Notes to Consolidated Financial Statements

            January 2, 1999, January 3, 1998, and December 28, 1996

                 (dollars in thousands, except per share data)


7.  Investments:


Marketable securities classified as current assets include the following:

<TABLE>
<CAPTION>
                                                                                     
                                                               January 2, 1999                      January 3, 1998
                                                     ------------------------------------    ------------------------------
                                                            Fair                                   Fair
                                                            Value               Cost              Value           Cost
                                                     ----------------    ----------------    -------------    -------------
<S>                                                      <C>                 <C>                 <C>              <C>
Cash and cash equivalents-
      Municipal bonds                                         $     -             $     -           $1,175           $1,175
      Commercial paper                                         13,713              13,713            6,821            6,821
      Money market funds                                        1,341               1,341               42               42 
                                                     ----------------    ----------------    -------------    -------------
                                                              $15,054             $15,054           $8,038           $8,038
                                                     ================    ================    =============    =============
Marketable securities - Mutual fund                           $     -             $     -           $2,025           $1,962
                                                     ================    ================    =============    =============
 
</TABLE>

8.  Receivables:

Receivables consist of the following:

<TABLE>
<CAPTION>
 
                                                                January 2,            January 3,
                                                                   1999                  1998
                                                           ----------------     -------------------
<S>                                                           <C>                  <C>
Trade:
       Wholesale                                                    $26,463                 $     -
       Retail                                                         6,470                   3,359
Vendor                                                               38,142                  19,029
Installment                                                          11,311                       -
Related parties                                                       6,236                       -
Employees                                                               555                      79
Other                                                                 6,802                       -
                                                           ----------------     -------------------
Total receivables                                                    95,979                  22,467
Less:  allowance for doubtful accounts                               (3,780)                   (575)
                                                           ----------------     -------------------
Receivables, net                                                    $92,199                 $21,892
                                                           ================     ===================
</TABLE>

                                     F-17
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                 (dollars in thousands, except per share data)


9.  Property and Equipment:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                         Estimated    January 2,  January 3,
                                        Useful Lives     1999        1998
                                        ------------  ----------  ----------
    <S>                                 <C>           <C>
    Land and land improvements            0-10 years   $ 45,577    $  3,316
    Buildings                               40 years     71,752      10,434
    Building and leasehold 
      improvements                      (See Note 2)     73,772      18,435
    Furniture, fixtures and equipment     3-12 years    254,573     143,069
    Vehicles                              2-10 years     22,892      21,979
    Property held for sale                                2,479           -
    Construction in progress                              5,065      15,603
                                                       --------    --------
                                                        476,110     212,836
    Less: Accumulated depreciation and
      amortization                                      (98,349)    (77,940)
                                                       --------    --------
    Property and equipment, net                        $377,761    $134,896
                                                       ========    ========
</TABLE>

10.  Other Assets:

As of January 2, 1999, other assets include deferred debt issuance costs of
$20,375 and $3,942 relating to the Recapitalization (Note 3) and the Western
Merger (Note 4), respectively.  Such costs are being amortized over the term of
the related debt (6 years to 11 years).

11.  Accrued Expenses:

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                          January 2,  January 3
                                                             1999       1998
                                                          ----------  ---------
     <S>                                                  <C>         <C>
     Payroll and related benefits                          $ 36,671    $ 7,307
     Restructuring                                           20,604         -
     Warranty                                                21,249      1,750
     Other                                                   76,090     18,086
                                                           --------    -------
     Total accrued expenses                                $154,614    $27,143
                                                           ========    =======
</TABLE>

                                     F-18
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                (dollars in thousands, except per share data)

12.  Other Long-term Liabilities:

Other long-term liabilities consist of the following:

<TABLE>
<CAPTION>
                                                        January 2,   January 3, 
                                                           1999         1998
                                                        ----------   ----------
     <S>                                                <C>          <C>
     Other postretirement employee benefits               $30,460       $843
     Restructuring                                         17,159         -
     Other                                                  2,990         -
                                                          -------       ----
     Total other long-term liabilities                    $50,609       $843
                                                          -------       ----
</TABLE>

13.  Notes Payable and Short-term Financing Agreements:

The Company maintained short-term lines of credit with several banks with
aggregate available borrowings of $32,000 at January 3, 1998.  All amounts
borrowed under these lines of credit were repaid during fiscal 1998 in
connection with the Recapitalization.  During fiscal 1998, fiscal 1997 and
fiscal 1996 the maximum short-term borrowings were $19,500,  $22,109 and
$28,068, respectively; the average borrowings were $2,944, $7,406 and $11,624,
respectively; and the weighted average interest rates were 6.1%, 6.1% and 6.0%,
respectively.  Borrowings outstanding under the lines of credit were $2,959 at
January 3, 1998.

                                     F-19
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                (dollars in thousands, except per share data)

14.  Long-term Debt:

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                        January 2,   January 3,
                                                           1999         1998
                                                        ----------   ---------
<S>                                                     <C>          <C>
Senior Debt:
  Deferred term loan at variable interest rates 
    (8.125% at January 2, 1999), due April 2004          $ 90,000    $     - 
  Delayed draw facilities at variable interest
    rates, due April 2004                                     -            -
  Revolving facility at variable interest rates
    (7.8125% at January 2, 1999), due April 2004           10,000          -
  Tranche B facility at variable interest rates
    (8.125% at January 2, 1999), due April 2006           125,000          -
  Revolving credit arrangements unsecured, interest 
    payable monthly at variable rates (6.22% at 
    January 3, 1998, repaid in April 1998                     -         84,500
  Term note, unsecured, interest payable monthly
    at variable rates (6.47% at January 3, 1998),
    repaid in April 1998                                      -          6,667
  McDuffie County Authority taxable industrial
    development revenue bonds, issued December 31,
    1997, interest due monthly beginning February 1,
    1998, at an adjustable rate established by the
    Remarketing Agent (6.0% at January 2, 1999),
    principal due on November 1, 2002                      10,000       10,000
  Other                                                       526
Subordinate debt:
  Subordinated notes payable, interest due semi-
    annually at 10.25%, commencing on October 15,
    1998, due April 2008                                  200,000          -
  Discount debentures, at 12.875%, due April 2009,
    face amount of $112,000 less unamortized discount
    of $46,338 (subordinate to substantially all other
    liabilities)                                           65,662
                                                        ---------    ---------
     Total long-term debt                                 501,188      101,167
Less - Current portion of long-term debt                    1,026        1,000
                                                        ---------    ---------
Long-term debt, excluding current portion                $500,162     $100,167
                                                        =========    =========
</TABLE> 

The deferred term loan, delayed draw facilities, revolving facility and Tranche
B facility (New Credit Facility) are with a syndicate of banks.  The New Credit
Facility provides for the Company to borrow up to $465,000 in the form of senior
secured credit facilities, consisting of (i) $90,000 senior secured deferred
term loan,(ii) $50,000 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 $125,000 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 sublimit of $25,000.  Amounts available under
the Delayed Draw Facilities and the Revolving Facility are subject to a
borrowing base formula based on a specified percentage of the Company's eligible
inventory. As of January 2, 1999, $226,900 was available under these facilities.

                                     F-20
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                (dollars in thousands, except per share data)


Borrowings under the New 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 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 non cash charges, (iii) any decrease in Net Working
Capital (as defined), (iv) increases in the deferred revenues, and (v) proceeds
of certain indebtedness incurred, over (B) the sum of (a) any non cash gains,
(b) any increases in Net Working Capital, (c) decreases in consolidated deferred
revenues, (d) capital expenditures, and (c) repayments of indebtedness (subject
to certain exceptions).  No mandatory Excess Cash Flow prepayments were made in
fiscal 1998 nor are any expected for fiscal 1999.

For the first four fiscal quarters after April 1998, the interest rates under
the Delayed Draw Facilities and the Revolving Facility are based, at the option
of the Company, on either a eurodollar rate plus 2.25% per annum or a base rate
plus 1.25% per annum.  Thereafter, the interest rates under the Delayed Draw
Facilities and the Revolving Facility will be determined by reference to a
pricing grid that will provide for reductions in the applicable interest rate
margins based on the trailing Total Debt to EBITDA ratio, as defined, of Stores.
The interest rate under the Deferred Term Loan and Tranche B Facility are based,
at the option of the Company, on a Eurodollar rate plus 2.5% or a base rate plus
1.5%.  A commitment fee of 0.50% per annum will be charged on the unused portion
of the New Credit Facility.

The New Credit Facility is guaranteed by the Company and is secured by
substantially all of the assets of the Company and its subsidiaries. The New
Credit Facility 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, and (c) a minimum
retained cash earnings test.

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 that have not been expended
as of January 2, 1999, of $1,091 are in a restricted escrow account and included
in prepaid expenses and other current assets on the January 2, 1999,
consolidated balance sheet.  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.

                                     F-21
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                (dollars in thousands, except per share data)


The $200,000 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, (as defined), 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.

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.

The Senior Discount Debentures (the Debentures) accrue at a rate of 12.875%,
compounded semi-annually, to an aggregate principal amount of $112,000 million
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 January 2, 1999, the Debentures have
been accreted by $5,645 with corresponding interest expense of $5,645 recognized
for the year ended January 2, 1999.

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.

                                     F-22
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                (dollars in thousands, except per share data)


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 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 New Credit Facility).  As a
result, 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 New
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.

As of January 2, 1999, the Company was in compliance with the covenants of the
New Credit Facility, the Notes and the Debentures.  Substantially all of the net
assets of the Company's subsidiaries are restricted at January 2, 1999.

The aggregate future annual maturities of long-term debt are as follows:

<TABLE> 
             <S>                              <C> 
                   1999                       $  1,026
                   2000                          1,000
                   2001                          1,500
                   2002                         12,000
                   2003                          2,000
             Thereafter                        483,662
                                              --------
                                              $501,188
                                              ========
</TABLE> 

The aggregate future annual maturities above are net of the unamortized discount
of $46,338 related to the Debentures.

15.  Income Taxes:

(Benefit) provision for income taxes for fiscal 1998, fiscal 1997 and fiscal
1996 consists of the following:

                                     F-23
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996

                (dollars in thousands, except per share data)

 
<TABLE>
<CAPTION>
                           Current    Deferred    Total
                         ----------- ----------- ---------
<S>                     <C>          <C>         <C>
1998-
   Federal                 $ 3,845    $(4,528)   $  (683)
   State                     1,419       (820)       599
                          --------    -------    --------
                           $ 5,264    $(5,348)   $   (84)
                          ========    =======    ========
1997-
   Federal                 $ 9,177    $ 2,198    $11,375
   State                     1,340      2,018      3,358
                          --------    -------    --------
                           $10,517    $ 4,216    $14,733
                          ========    =======    ========
1996-
   Federal                 $ 8,079    $ 3,843    $11,922
   State                       861      1,391      2,252
                          --------    -------    --------
                           $ 8,940    $ 5,234    $14,174
                          ========    =======    ========
</TABLE>

The provision for income taxes differed from the amount computed by applying the
federal statutory income tax rate due to:


<TABLE> 
<CAPTION> 
                                                      1998       1997       1996
                                                    --------   --------    --------
<S>                                                 <C>        <C>         <C> 
   Pre-tax (loss) income at statutory U.S.       
     federal income tax rate                          $(793)    $12,607     $12,403
   State income taxes, net of fedral
     income tax benefit                                 389       2,183       1,464
   Nondeductible interest and other
     expenses                                           609         384         327
   Changes in certain tax accounting methods           (366)       (196)          -
   Puerto Rico dividend withholding tax                 120           -           -
   Other, net                                           (43)       (245)        (20) 
                                                    --------   --------    --------
                                                      $ (84)    $14,733     $14,174 
                                                    ========   ========    ========
</TABLE> 

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:

                                     F-24
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                 (dollars in thousands, except per share data)


<TABLE>
<CAPTION>
                                   January 2,  January 3,
                                     1999         1998
                               ---------------------------
<S>                            <C>             <C>
Deferred income tax assets         $ 43,000     $  5,728
Deferred income tax liabilities     (43,031)     (21,677)
                               ---------------------------
Net deferred income taxes          $    (31)    $(15,949)
                                   ========== ============
</TABLE>

Net deferred income tax assets of $10,570 were recorded in the purchase price 
allocation of Western.

Management believes that it is more likely than not that all of the deferred 
income tax assets will be realized through future earnings. Therefore, no 
valuation allowances against deferred income tax assets were recorded at January
2, 1999, or January 3, 1998. The amount of deferred income tax assets 
realizable, however, could change in the near future if estimates of future 
taxable income are changed.

Temporary differences which gave rise to significant deferred income tax assets 
(liabilities) were as follows:


<TABLE>
<CAPTION>
                                                         January 2,  January 3,
                                                             1999        1998
                                                         -------------------------
<S>                                                      <C>         <C>
Current deferred income taxes-
 Inventory valuation differences                            $(23,228)   $ (6,592)
 Accrued medical and workers compensation                      2,133       1,805
 Accrued expenses not currently deductible for tax            21,548       1,418
 Other, net                                                     (230)        259
                                                         -------------------------
 Total current deferred income taxes                        $    223    $ (3,110)
                                                          =========== ============
Long-term deferred income taxes-
 Property and equipment                                      (11,851)    (13,225)
 Postretirement benefit obligation                             8,591         313
 Amortization of bond discount                                 1,918           -
 Other, net                                                    1,088          73
                                                         -------------------------
 Total long-term deferred income taxes                      $   (254)   $(12,839)
                                                          =========== ============
</TABLE>


The Company currently has three years that are open to audit by the Internal 
Revenue Service. In addition, various state income and franchise 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 and results of operations.


16.  Lease Commitments:

The Company leases store locations, distribution centers, office space,
equipment and vehicles under lease arrangements, some of which are with related
parties.

                                     F-25
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                 (dollars in thousands, except per share data)


At January 2, 1999, future minimum lease payments due under non-cancelable 
operating leases are as follows:

<TABLE>
<CAPTION>
                    Related
                    Parties      Other        Total 
                  ---------- ------------  ----------
<S>               <C>        <C>           <C>      
1999               $ 3,199     $102,259     $105,458
2000                 3,041       96,817     $ 99,858
2001                 2,644       88,698     $ 91,342
2002                 2,594       80,514     $ 83,108
2003                 2,379       69,960     $ 72,339
Thereafter           4,908      232,749     $237,657
                  ----------  -----------  ---------- 
                   $18,765     $670,997     $689,762
                  ==========  ===========  ========== 
</TABLE> 

At January 2, 1999, future minimum sub-lease income to be received under 
non-cancelable operating leases is $9,283.

Net rent expense for fiscal 1998, fiscal 1997 and fiscal 1996 was a follows:

<TABLE>
<CAPTION>
                                        1998       1997       1996   
                                     --------------------------------
<S>                                  <C>        <C>        <C>       
Minimum facility rentals               $63,787    $44,707    $36,678
Contingent facility rentals                718        413        357    
Equipment rentals                        1,804      1,532      1,242    
Vehicle rentals                          2,391      1,658        331    
                                     --------------------------------
                                        68,700     48,310     38,608    
Less:  Sub-lease income                    426        100        103    
                                     --------------------------------
                                       $68,274    $48,210    $38,505  
                                     ========== ========== =========
</TABLE>

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. 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 approximatley $2,984 in fiscal 1998, 
$3,171 in fiscal 1997 and $3,076 in fiscal 1996 are included in the total rent 
expense.

                                     F-26
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                 (dollars in thousands, except per share data)


17.  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 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 case is in the discovery stage and
management plans a vigorous defense. 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. Management 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.
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.

Subsequent to January 2, 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. Management has begun investigating 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.

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 4), relating to certain
environmental matters that had been accrued by Western 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.

                                     F-27
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                 (dollars in thousands, except per share data)


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.  The maximum contingent liability under these employment
agreements is approximately $6,400 at January 2, 1999.

18.  Benefit Plans:

401(k) Plans

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 $2,634 in fiscal 1998, $3,196 in fiscal 1997 and
$2,779 in fiscal 1996.

The Company also maintains a profit sharing plan covering Western employees that
was frozen prior to the Western Merger on November 2, 1998 (Note 4).  This plan
covered all full-time employees who have completed one year of service and have
attained the age of 21 as of the first day of each month.  All employees covered
under this plan were included in the Company's plan on January 1, 1999.  During
first quarter fiscal 1999, the Company contributed the employer match liability
assumed in the Western Merger.  No additional contributions will be made to the
frozen plan.

Deferred Compensation

The Company maintains an unfunded deferred compensation plan established for
certain key employees of Western prior to the Western Merger (Note 4).  The
Company assumed the plan liability of $15,253 through the Western Merger.  The
plan was frozen at the date of the Western Merger.

                                     F-28
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                 (dollars in thousands, except per share data)



Postretirement Plans

The Company provides certain health care and life insurance benefits for
eligible retired employees.  The Company maintains the existing plan and the
assumed plan covering Western employees.  Financial information related to the
plans were determined by the Company's independent actuaries as of January 2,
1999 and January 3, 1998. The following provides a reconciliation of the benefit
obligation and the funded status of the plan:

<TABLE>
<CAPTION>
                                                                      Employment Benefits
                                                              -----------------------------------
                                                                    1998                1997
                                                              -----------------     -------------
<S>                                                           <C>                   <C> 
Change in benefit obligation:
   Benefit obligation at beginning of the year                         $  3,225           $ 2,645
   Obligation assumed in the Western Merger (Note 4)                     20,257                 -
   Service cost                                                             240               139
   Interest cost                                                            440               195
   Benefits paid                                                           (367)              (58)
   Actuarial gain/(loss)                                                   (236)              304
                                                              -----------------     -------------
   Benefit obligation at end of the year                                 23,559             3,225
Change in plan assets:                             
   Fair value of plan assets at beginning of the year                         -                 -
   Employer contributions                                                   367                58
   Benefits paid                                                           (367)              (58)
                                                              -----------------     -------------
   Fair value of plan assets at end of year                                   -                 -
Reconciliation of funded status:
   Funded status                                                        (23,559)           (3,225)
   Unrecognized transition obligation                                       926               984
   Unrecognized actuarial loss                                            1,101             1,398
                                                              -----------------     -------------
Accrued postretirement benefit cost                                    $(21,532)          $  (843)
                                                              =================     =============
</TABLE>

                                     F-29
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                 (dollars in thousands, except per share data)

Net periodic postretirement benefit cost is as follows:

<TABLE>
<CAPTION>
                                                                1998           1997           1996
                                                             -----------    -----------    -----------
<S>                                                          <C>            <C>            <C>
Service cost                                                       $ 240          $ 139          $ 155
Interest cost                                                        440            195            113
Amortization of the transition obligation                             58             58             58
Amortization of unrecognized net actuarial losses                     60             54              8
                                                             -----------    -----------    -----------
                                                                   $ 798          $ 446          $ 334
                                                             ===========    ===========    ===========
</TABLE>

The postretirement benefit obligation was computed using an assumed discount
rate of 6.5% in 1998 and 7.0% in 1997.  The health care cost trend rate was
assumed to be 6.0% for 1998 and 5.0% for 1999 and thereafter.

If the health care cost were increased 1% for all future years the accumulated
postretirement benefit obligation would have increased by $865 as of January 2,
1999.  The effect of this change on the combined service and interest cost would
have been an increase of $315 for 1998.

If the health care cost were decreased 1% for all future years the accumulated
postretirement benefit obligation would have decreased by $712 as of January 2,
1999.  The effect of this change on the combined service and interest cost would
have been a decrease of $256 for 1998.

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.

19.  Related-party Transactions:

Rents for related-party leases may be slightly higher than rents for
nonaffiliated leases, and certain terms of the related-party leases are more
favorable to the landlord than those contained in leases with nonaffiliates.

In 1996, the Company entered into an agreement for the sale and leaseback of a
$2,200 addition to a distribution center.  There was no gain or loss as a result
of the transaction.  The lease is classified as an operating lease in accordance
with SFAS No. 13, "Accounting for Leases."

At April 1998, the Company sold its airplane to the Chairman of the Board, an
existing stockholder, for its net book value of approximately $4,100, which
approximated fair value.

                                     F-30
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                 (dollars in thousands, except per share data)


Under the terms of the shared services agreement, Sears will provide certain
services to the Company, including payroll and payable processing for Western,
among other services, until such activities are transitioned to the Company,
which the Company expects to occur in fiscal 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 will also become 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.

The Company and Sears have entered into an agreement that provides for the
Company to lease certain employees to Sears to perform all operations and
services that were previously performed by Western and its affiliates with
respect to certain credit card operations for stores in Puerto Rico.  In
addition, the Company will continue to provide certain services to Sears that
were previously performed by Western until such services are transitioned to
Sears.

The following table presents the related party transactions with Sears for the
period from November 2, 1998, to January 2, 1999:

<TABLE>
<CAPTION>
                                                                 Fiscal
                                                                  1998
                                                            -------------
          <S>                                                  <C>
          Net sales to Sears                                      $ 2,124
          Shared services revenue                                     644
          Shared services expense                                    (844)
          Credit card fees expense                                   (657)
          Other revenues, net                                          53
                                                      
          Receivables from Sears                                    6,036
          Payables to Sears                                        (5,457)
</TABLE>


20.  Stock Options:

During 1998, the Company adopted 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 Option Plan.  Shares
available for grant under the senior executive and the executive stock option
plans are 507,500 and 450,000, respectively, at January 2, 1999.

                                     F-31
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                 (dollars in thousands, except per share data)


Three different types of options were granted pursuant to the Option Plans.
Fixed Price Service Options will vest over a three-year period in three equal
installments beginning in fiscal 1999.  Performance Options will be earned in
installments based upon satisfaction of certain performance targets for the
four-year period ending in fiscal 2001.  Variable Price Service Options will
vest in equal annual installments over a two-year period beginning in 1999, and
have an exercise price that increases over time.

Total options outstanding at January 2, 1999, were as follows:

<TABLE>
<CAPTION>
                                             Number of           Initial Exercise
                                               Shares                 Price
                                        -----------------    ---------------------
<S>                                        <C>                  <C>
Variable price service options                    397,085                      $10
Performance options                               397,085                       10
Fixed price service options                       104,580                       10
Other options (Note 3)                            500,000                       10
                                        -----------------
                                                1,398,750
                                        =================
</TABLE>

Only the 500,000 other options were exercisable at January 2, 1999.

The Company applies APB No. 25, "Accounting for Stock Issued to Employees" in
accounting for its stock options.  Accordingly, the Company did not recognize
compensation expense on the issuance of its stock options because the exercise
price equaled the fair market value of the underlying stock on the grant date.
The Board of Directors determines fair market value.  The fair market value of
the stock as of January 2, 1999, as determined by the Board of Directors, was
$16.82.  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
in stockholders' equity.  This compensation is amortized to expense over the
vesting periods.  Compensation expense related to these options of $695 is
included in selling, general and administrative expenses in the accompanying
consolidated statements of operations for the 52-week period ended January 2,
1999.

                                     F-32
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                 (dollars in thousands, except per share data)


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:

<TABLE>
<CAPTION>
                                                         1998
                                                   ------------
                  Net loss:          
                   <S>                            <C>
                       As reported                      ($2,182)
                       Pro forma                        ($1,700)
</TABLE>

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 (iii) expected dividend yield of zero.  As permitted for companies
with non-public equity securities by SFAS No. 123, the Company used the
assumption of zero volatility in valuing their options.

Subsequent to fiscal year end January 2, 1999, the Board of Directors approved
an additional 255,000 shares at $16.82 per share for upcoming grants.

21.  Fair Value of Financial Instruments:

The estimated fair value of the Company's financial instruments are as follows:

<TABLE>
<CAPTION>
                                                 January 2, 1999          January 3, 1998
                                            Carrying         Fair      Carrying         Fair
                                             Amount          Value      Amount          Value
                                           -----------    ----------  ------------   ------------
<S>                                        <C>            <C>         <C>            <C>
Assets:                                                                             
 Cash and cash equivilants                    $36,115        $36,115      $15,463        $15,463
 Marketable securities                              -              -        2,025          2,025
 Receivables, net                              92,199         92,199       21,892         21,892
                                                                   -                
Liabilities:                                                       -                
 Accounts payable                             364,758        364,758      157,096        157,096
 Borrowings secured by receivables              5,000          5,000        3,359          3,359
 Notes payable and current portion                                 -                
    of long-term debt                           1,026          1,026        3,959          3,959
 Long-term debt                               500,162        504,080      100,167        100,167
</TABLE>

                                     F-33
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                 (dollars in thousands, except per share data)


The carrying amount of the cash and cash equivalents, receivables, accounts
payable and borrowings secured by receivables approximates fair value because of
the short maturity of those instruments. Marketable securities are stated at
fair value due to their classification as trading securities.  The fair value of
all fixed rate long-term debt was determined based on current market prices. The
carrying amount for variable rate long-term debt approximates fair value for
similar issues available to the Company.

22.  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 two reportable segments: Advance Stores and Western.  The
Advance Store segment consists primarily of existing retail operations of the
Company, which offer only automotive replacement parts, accessories and
maintenance items.  Western consists of retail stores and wholesale operations,
all under the "Parts America" or "Western Auto" name, obtained through the
Western Merger (Note 4).  The Parts America stores offer merchandise similar to
that offered in the Advance retail stores.  The stores operating under the
Western Auto name carry non-automotive items as well as auto parts and
accessories and perform certain services for retail customers.  The wholesale
operation consists of distribution services to independent dealers operating
under the "Western Auto" name, including 3 franchises.

The Company is in the process of converting the Parts America stores to Advance
Auto Parts stores and expects to complete the conversions during fiscal 1999.

As of January 2, 1999, the Company continues to formulate an appropriate
management reporting approach for the Western operations.  For the period from
November 2, 1998 to January 2, 1999, management received and used financial
information aggregated at the Western level in evaluating the performance of the
acquired operations.  The accounting policies of the reportable segments are the
same as those described in Note 2.

                                     F-34
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                 (dollars in thousands, except per share data)


 
<TABLE>
<CAPTION>
                                                   Advance         Advance
1998                                               Holding         Stores         Western (b)      Eliminations      Totals
-----------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>            <C>              <C>              <C>             <C>
Net sales (a)                                     $      -        $1,042,434        $178,325       $          -    $1,220,759
Gross profit                                             -           404,990          52,416                  -       457,406
Operating (loss) income                               (564)           32,175             235                (17)       31,829
Net interest (expense) income                       (6,252)          (28,310)            416              1,068       (33,078)
(Loss) income before provision for income taxes     (4,503)            4,201            (702)            (1,262)       (2,266)
Segment assets                                     224,879         1,036,411         225,105           (221,040)    1,265,355
Depreciation and amortization                            -            26,778           3,186                  -        29,964
Capital expenditures                                     -            55,428          10,362                  -        65,790
1997
-----------------------------------------------------------------------------------------------------------------------------
Net sales                                         $      -        $  848,108      $        -       $          -    $  848,108
Gross profit                                             -           323,522               -                  -       323,522
Operating (loss) income                             (1,140)           43,598               -                (31)       42,427
Net interest expense                                (1,867)           (7,709)              -              3,953        (5,623)
Income before provision for income taxes            20,074            35,042               -            (19,096)       36,020
Segment assets                                     238,103           449,626               -           (226,472)      461,257
Depreciation and amortization                            -            21,801               -                  -        21,801
Capital expenditures                                     -            48,864               -                  -        48,864
1996
-----------------------------------------------------------------------------------------------------------------------------
Net sales                                         $      -        $  705,983      $        -       $          -    $  705,983
                                                         
Gross profit                                             -           268,368               -                  -       268,368
Operating (loss) income                               (166)           40,319               -                (11)       40,142
Net interest expense                                (1,946)           (5,946)              -              3,639        (4,253)
Income before provision for income taxes            20,511            33,947               -            (19,020)       35,438
Segment assets                                     212,624           384,620               -           (202,849)      394,395
Depreciation and amortization                            -            17,499               -                  -        17,499
Capital expenditures                                     -            44,264               -                  -        44,264
</TABLE>


(a) For fiscal years ended 1998, 1997 and 1996, total revenues include
    approximately $130,000, $100,000 and $70,000, respectively, related to
    revenues derived from commercial sales.

(b) On January 2, 1999, inventory and fixed assets of $427,714, a current
    deferred tax liability of $4,952 and a noncurrent deferred tax asset of
    $2,109 related to the operations of the Parts America stores were
    transferred to the Advance Stores segment through a dividend.

                                     F-35
<PAGE>
 
                 Advance Holding Corporation and Subsidiaries

                  Notes to Consolidated Financial Statements
            January 2, 1999, January 3, 1998, and December 28, 1996
                 (dollars in thousands, except per share data)

23.  Quarterly Financial Data (Unaudited):

The following table summarizes quarterly financial data for fiscal years 1998
and 1997:

<TABLE>
<CAPTION>
1998                                First              Second             Third              Fourth
------------------------------------------------------------------------------------------------------
<S>                             <C>                 <C>                <C>                <C>
Net sales                           $288,963            $255,037           $258,839           $417,920
Gross profit                         112,586              98,589             98,357            147,874
Operating income (loss)                 (705)             18,957             16,945             (3,368)
Net income (loss)                     (2,352)              4,925              4,093             (8,848)
 
 
1997
------------------------------------------------------------------------------------------------------
Net sales                           $239,151            $196,729           $206,409           $205,819
Gross profit                          92,291              75,391             77,717             78,123
Operating income                      10,257              11,947             10,311              9,912
Net income                             4,822               6,133              5,335              4,997
</TABLE>

Fiscal 1998 results of operations include the effect of the Recapitalization
(Note 3) and the Western Merger (Note 4) for the first and fourth quarters,
respectively.

                                     F-36
<PAGE>
 
<TABLE>
<CAPTION>

                          Advance Holding Corporation
        Schedule I - Condensed Financial Information of the Registrant

                    Condensed Parent Company Balance Sheets

             (Dollar amounts in thousands, except per share data)


                                                   January 2,       January 3,
                                                      1999             1998
                                                  ------------     -----------
<S>                                               <C>             <C>
Assets
Cash and cash equivalents                           $  1,742         $     75
Intercompany receivables                                  -            47,210
Investments in Subsidiaries                          220,591          187,033
Other assets                                           2,546            3,785
                                                   ----------       ----------
                                                    $224,879         $238,103
                                                   ==========       ==========

Liabilities and stockholders' equity
Accrued expenses                                    $    126         $    429
Long-term debt                                        65,662           94,126
                                                   ----------       ---------
      Total liabilities                               65,788           94,555
Stockholders' equity
  8% noncumulative, nonvoting preferred stock, $1         -               773
    par value, redeemable by the Company at par;
    liquidation value at par; 100,000 shares authorized;
    0 and 77,300  issued and outstanding
  Common stock, Class A, voting, $.01 par value;
    62,500,000 shares authorized; 28,261,900 and
    2,412,500 issued and outstanding                     283               19
  Common stock, Class B, nonvoting, $.01 par value; 
    437,500,000 shares authorized; 0 and 21,875,000
    issued and outstanding                                 -              175
  Additional paid in capital                         370,306                -
  Outstanding stock options                            3,731                -
  Unamortized stock option compensation               (2,736)               -
  Stockholder subscription receivables                (2,527)               -
  (Accumulated deficit) retained earnings           (209,966)          142,581
                                                 ------------      -----------
      Total stockholders' equity                     159,091           143,548
                                                 ------------      -----------
                                                  $  224,879        $  238,103
                                                  ===========      ===========
</TABLE> 

The accompanying notes to condensed parent company financial statements are an
                    integral part of these balance sheets.

                                     F-37

<PAGE>
 
                          Advance Holding Corporation
        Schedule I - Condensed Financial Information of the Registrant

               Condensed Parent Company Statements of Operations

             (Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>

                                                                  Fiscal Year
                                                      ---------------------------------- 
                                                         1998        1997        1996
                                                      ---------   ---------   ---------- 
<S>                                                     <C>         <C>         <C>  
Selling, general and administrative expenses            ($564)      ($1,140)      ($166)
Interest expense                                       (7,436)       (5,916)     (4,811)
Interest income                                         1,184         4,049       2,865
Other, net                                                 (9)           50         (22)
Equity in earnings of subsidiaries                      2,322        23,031      22,645
Income tax benefit                                      2,321         1,213         753
                                                      ---------   ---------   ---------- 
Net (loss) income                                     ($2,182)      $21,287     $21,264
                                                      =========   =========   ==========
</TABLE> 

The accompanying notes to condensed parent company financial statements are an
                      integral part of these statements.

                                     F-38
<PAGE>
 
                          Advance Holding Corporation
        Schedule I - Condensed Financial Information of the Registrant

               Condensed Parent Company Statements of Cash Flows

             (Dollar amounts in thousands, except per share data)

<TABLE>
<CAPTION>
                                                          Fiscal Years
                                                -------------------------------
                                                   1998        1997      1996
                                                ---------    -------   --------
<S>                                             <C>          <C>       <C>
Cash flows from operating activities:          
  Net (loss) income                             $  (2,182)   $21,287   $ 21,264
  Adjustments to reconcile net (loss)          
    income to net cash provided by             
    (used in) operating activities:            
    Amortization of stock option               
      compensation                                    695         -          -
    Amortization of deferred debt issuance     
      costs                                           179         -          -
    Amortization of bond discount                   5,645         -          -
    Equity in earnings of subsidiaries             (2,322)   (23,031)   (22,645)
    Net change in:
      Other assets                                  3,647     (1,950)       (85)
      Other liabilities                              (303)    (2,472)     2,955
                                                ---------    -------   --------
        Net cash provided by (used in) 
          operating activities                      5,359     (6,166)     1,489
                                                ---------    -------   --------
Cash flows from investing activities:
  Change in intercompany receivables               47,210      2,438    (10,979)
  Distributions from subsidiaries                 242,023         -          -
  Capital contributions to subsidiaries           (10,259)        -          -
  Purchase of Stores common stock - 
    Western Merger                               (263,000)        -          -
                                                ---------    -------   --------
        Net cash provided by (used in) 
          investing activities                     15,974      2,438    (10,979)
                                                ---------    -------   --------
Cash flows from financing activities:
  Proceeds of long-term debt                      184,616      3,767      9,650
  Repayments of long-term debt                   (218,725)        -          -
  Debt issuance costs                              (2,587)        -          -
  Proceeds from issuance of Class A Common 
    Stock                                         368,045         -          -
  Redemption of preferred and common stock       (351,000)        -          -
  Payment of preferred dividend                       (15)       (62)       (62)
                                                ---------    -------   --------
        Net cash(used in) provided by 
          financing activities                    (19,666)     3,705      9,588
                                                ---------    -------   --------
Net increase (decrease) in cash and cash 
  equivalents                                       1,667        (23)        98
Cash and cash equivalents, beginning of year           75         98         -
                                                ---------    -------   --------
Cash and cash equivalents, end of year          $   1,742    $    75   $     98
                                                =========    =======   ========
</TABLE> 

The accompanying notes to condensed parent company financial statements are an
                      integral part of these statements.

                                     F-39

<PAGE>
 
                          Advance Holding Corporation
         Schedule I--Condensed Financial Information of the Registrant

                    Notes to Condensed Financial Statements

             (Dollars amounts 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 generally accepted accounting principles 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.  As of January 2, 1999, as a
result of the liquidation during fiscal 1998 of the other subsidiaries, Stores
is 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 new bank 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 

                                     F-40

<PAGE>
 
approximately $60,000 of 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 new bank 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 $3,362 of costs and
expenses.  Of these costs, $2,587 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 January 2, 1999 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 January 2, 1999, the Debentures have been
accreted by $5,645 with corresponding interest expense of $5,645 recognized for
the year ended January 2, 1999.

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; provide that
at least 65% of the original aggregate principal amount at maturity of the
Debentures will remain outstanding immediately following each such redemption.

                                     F-41
<PAGE>
 
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 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 New Credit Facility).  As a
result, 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 New
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 of the net assets of the
Company's subsidiaries are restricted at January 2, 1999.

5.  See Notes to Consolidated Financial Statements for Additional Disclosures

                                     F-42
<PAGE>
 
                          ADVANCE HOLDING CORPORATION
                               AND SUBSIDIARIES


               SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

                             (dollars in thousands)



<TABLE>
<CAPTION>
                                                 Balance at                                                          Balance at
                                                 Beginning        Charges to                                           End of
                                                 of Period         Expenses         Deductions        Other            Period
                                              -------------       ----------       ------------      -------         -----------
<S>                                              <C>               <C>              <C>              <C>               <C>
Allowance for doubtful accounts receivable:
December 28, 1996...........................       $  --            $   --            $  --           $   --          $   --
January 3, 1998.............................          --              1,040               (465)(2)        --              575
January 2, 1999.............................         575              1,193               (582)(2)     2,594(1)         3,780
                                              =============       ==========       ===========       =======         ===========

(1)  Allowance for doubtful accounts receivable assumed in the Western Merger.
(2)  Accounts written off during the period.

Restructuring reserves:
December 28, 1996...........................       $  --             $   --         $     --          $   --          $   --
January 3, 1998.............................          --                 --               --              --              --
January 2, 1999.............................          --              6,774              (2,026)(2)   33,015(1)        37,763
                                              =============       ==========        ===========      =======         ===========
</TABLE>
 
(1)  Restructuring reserves assumed and established in the Western Merger.
(2)  Represents amounts paid for restructuring charges.
----------------------------------------------------------------------------

                                     F-43
<PAGE>
 
                                   SIGNATURE



     Pursuant to the requirements of the Section 15(d) 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, in Roanoke,
Commonwealth of Virginia, on April 19, 1999.
                                  
 
                                   ADVANCE HOLDING CORPORATION

                                    By:  /s/ J. O'Neil Leftwich
                                         ----------------------------
                                         J. O'Neil Leftwich
                                         Senior Vice President and
                                         Chief Financial Officer,
                                         Secretary and Treasurer


                               POWER OF ATTORNEY

     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints J. O'Neil Leftwich his true and lawful attorney-
in-fact with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in and any all capacities, to sign any and
all amendments to this Report on Form 10-K and to file same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
        Signature           Title                                          Date
<S>                         <C>                                            <C>  
/s/ Garnett E. Smith        President and Chief Executive Officer          April 19, 1999
--------------------------  and Director (Principal Executive Officer)          
     Garnett E. Smith            
                                                                           
/s/ J. O'Neil Leftwich      Senior Vice President and Chief                April 19, 1999
--------------------------  Financial Officer, Secretary and Treasurer          
    J. O'Neil Leftwich      
                            (Principal Financial and Accounting Officer)   
                                                                           
/s/ Nicholas F. Taubman     Chairman of the Board and Director             April 19, 1999
--------------------------                                                      
Nicholas F. Taubman                                                        
                                                                           
/s/ Mark J. Doran           Director                                       April 19, 1999
--------------------------                                                      
Mark J. Doran                                                              
                                                                           
/s/ John M. Roth            Director                                       April 19, 1999
--------------------------                                                      
John M. Roth                                                               
                                                                           
/s/ Timothy C. Collins      Director                                       April 19, 1999
--------------------------                                                       
Timothy C. Collins
</TABLE> 
                                      II-1
<PAGE>
 
<TABLE> 
<S>                    <C>                                                 <C>  
/s/ Peter M. Starrett  Director                                           April 19, 1999
---------------------                                                            
Peter M. Starrett                                                                  
                                                                                   
/s/ Julian C. Day      Director                                           April 19, 1999
---------------------                                                            
Julian C. Day                                                                      
                                                                                   
/s/ Michael Coyne      Director                                           April 19, 1999
---------------------                                                            
Michael Coyne                                                                      
                                                                                   
/s/ William L. Salter  Director                                           April 19, 1999
---------------------                                                            
William L. Salter
</TABLE>

                                      II-2
<PAGE>
 
Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act

     Other than this Report on Form 10-K, no other annual report and no proxy
materials have been or will be furnished to Holding's security holders.

                                      II-3