<PAGE> 1
Discount
Auto Parts
25th Anniversary
1996 ANNUAL REPORT
<PAGE> 2
TABLE OF CONTENTS
Discount Auto Parts is one of the Southeast's leading speciality retailers of
automotive replacement parts, maintenance items and accessories primarily for
the "Do-It-Yourself" (DIY) consumer. As of May 28, 1996, Discount Auto Parts
operated 314 stores, of which 276 were located in Florida, 32 in Georgia, five
in Alabama and one in South Carolina. Each Discount Auto Parts store carries
an extensive line of replacement hard parts for domestic and import cars, as
well as accessories, chemicals, motor oils and other maintenance items.
<TABLE>
<S> <C>
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Letter to Shareholders and Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Five Year History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . 7
Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Management's Report on Financial Statements and Internal Controls . . . . . . . . . . . . . . . 23
Report of Independent Certified Public Accountants . . . . . . . . . . . . . . . . . . . . . . 23
Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
DISCOUNT AUTO PARTS BUSINESS PHILOSOPHY -- TCI
==============================================
TEAM
First you build the Team then the Team builds the business
[GRAPHIC]
CUSTOMER IDEAS
Customers For A Lifetime There is always a better way
<PAGE> 3
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1996 1995 % CHANGE
------------- ------------- --------
<S> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . $ 307,476,000 $ 253,700,000 21%
Income from Operations . . . . . . . . . . . $ 40,469,000 $ 30,909,000 31%
Net Income . . . . . . . . . . . . . . . . . $ 22,463,000 $ 15,727,000* 43%
Earnings per Share . . . . . . . . . . . . . $ 1.44 $ 1.13* 27%
Stockholders' Equity . . . . . . . . . . . . $ 216,046,000 $ 117,895,000 83%
Number of Stores . . . . . . . . . . . . . . 314 248 27%
</TABLE>
* Excludes a gain of $4,836,000 or $.35 per share on life insurance proceeds
received in 1995.
(BAR CHART OF NET SALES (BAR CHART OF INCOME FROM OPERATIONS
FOR 1992-1996) FOR 1992-1993)
(BAR CHART OF (BAR CHART OF NUMBER OF STORES
STOCKHOLDERS' EQUITY FOR 1992-1996)
FOR 1992-1996)
25th Anniversary
1
<PAGE> 4
Discount ----------------------------------------------------------------------
Auto Parts
TO OUR SHAREHOLDERS AND TEAM:
This annual report marks the successful conclusion of a quarter century of
growth and excitement here at Discount Auto Parts. Rising from a single store
in Eloise, Florida, we have expanded to more than 300 stores spread across four
states. Every year has presented challenges and opportunities and although each
year we have set seemingly impossible goals, we often surpassed even our own
high expectations. Now having concluded our Silver Anniversary year, we are
proud to note that it is the 25th year we have set company records in sales,
profits, growth and gains in market share.
There is no mystery as to how we have managed to pull off the Discount Auto
Parts success story. Our founders Denis, Herman and Marie Fontaine laid it out
for us early on and we have been repeating it over and over again for the past
quarter century. "First you build the Team then the Team builds the business.
There is no other way!"
It is no coincidence that most of our senior management Team has been with us
for more than 10 years. It's no coincidence that we have one of the highest
Team Member retention rates in this or any other retail business. We believe in
our Team and our Team keeps growing this company. Let no one doubt our
commitment to this principle. Let no one doubt that this will be the foundation
for our continued success. The results speak for themselves. This year alone
we:
- Increased sales to a record $307.5 million, increased our average
sale per customer and increased the total number of customers.
- Reduced our long term debt with the success of our secondary stock
offering.
- Implemented our D.C. Wizard software system in our Distribution
Center allowing us to increase inventory turnover and accuracy in
stocking our stores.
- Increased the parts width in our stores and Depots.
- Added 66 stores and replaced or expanded 10 additional stores.
- Created over 300 new jobs.
- Promoted in-store excellence through our goal of remaining 99% in
stock at all times and through our 20/20 program of greeting
customers by the time they are either 20 feet or 20 seconds into our
stores.
- Boosted our training programs to encourage and enable our Team to
move farther along the career paths we have established.
- Improved our overall Team Member retention rates.
- Maintained price leadership through our efficiencies in buying and
increased direct importing strategies.
Reviewing this list of accomplishments, it is fascinating to see
how well they are both the result of and a furtherance of our
overall business goals. Early on we discovered that three
things bring Customers into our stores:
- Every Day Low Prices
(PHOTO OF
- Shopping Convenience PETER J. FONTAINE)
- Service that Exceeds Customer Expectation
EVERY DAY LOW PRICES
Low prices on quality merchandise drive sales. More than any
single factor, they bring new customers into our stores. Several
factors give us a competitive advantage in the price arena.
First, we are able to negotiate favorable prices from our vendors
through volume purchasing which translates into better retail
pricing. We search the planet to find the highest quality
suppliers of parts and car care products from both domestic and
foreign suppliers.
25th Anniversary
2
<PAGE> 5
- ---------------------------------------------------------------------- Discount
Auto Parts
Second, our overall operating expenses run from four to six percent lower than
our primary competitors. In a business where pre-tax profits run in the
neighborhood of 10%, that four to six percent is a formidable advantage. We
have always taken pride in the fact that we are more efficient than any of our
competitors. We realize more and more every day just how much of a competitive
advantage this is for DAP. The fact that we are able to confidently place
stores in any market; the fact that we are capable of gaining market share and
the fact that we can produce 13% operating margins means that we can give added
value and convenience to our customers.
Third, we have one of the lowest distribution costs in the industry. This
year's improvements in our Distribution Center software systems have resulted
in a 21% increase in inventory turnover in the Distribution Center with 99%
accuracy. We decreased our store reorder times from 3.5 days to no more than 48
hours. At the same time, we increased the accuracy of our reorder shipments
from 92.8% to 94.5%. Our fill rate goal for 1997 is a record 96.5%.
Fourth, we have one of the lowest debt burdens for a company our size in our
industry. Long ago we adopted a policy of owning our own real estate and today
we own approximately 89% of our land and buildings. Ownership means long term
equity and fixed operational costs. With our secondary stock offering this year
we issued an additional 2,650,000 shares of common stock and raised $75.4
million. Those funds were primarily used to reduce our long term debt and thus
help to ensure overall lower operating costs.
Fifth, we are tenacious about being lean and mean. One of the fundamental laws
of nature seems to be that, left to its own devices, bureaucracy grows
unchecked. At Discount Auto Parts we are building a Team, not a bureaucracy. We
believe in career paths that involve serving our customers or serving our Team.
Our senior management Team continues to spend time in the stores listening to
the Team. Team Member input is vital to shaping the future course of our
company. All of our Managers and Division Managers have the ultimate
responsibility for hiring, training and supervising our Team Members. They are
in charge of maintaining their store facilities and being in tune with the
needs of their customers. We believe that true leaders are true servants. We
believe that individual success comes from building up everyone in the
organization.
SHOPPING CONVENIENCE
Even with low prices, people working on their cars are in a hurry. They are
looking for the closest place that offers the best value. Our strategy in urban
markets is to cluster medium sized stores with a broad selection of the most
commonly sold parts. We are confident about saturating a market with stores. In
addition, our urban market stores are backed up by Depot stores with a broader
selection of parts. We are also aggressive in seeking out small towns and
bringing everyday low prices to our rural customers.
During fiscal 1996, our Real Estate Team successfully purchased land,
supervised the planning and construction of 66 new stores, and replaced or
expanded 10 existing stores. At the same time they accomplished an overall 5%
reduction in the cost of our real estate projects. This reduction comes on the
heels of a 27% decrease in 1995. The quality of our buildings and locations has
in no way been compromised by these reductions. In fact, our buildings today
are sturdier, more efficient in their energy consumption, easier to manage and
offer a more pleasant shopping environment. Next year our Real Estate Team has
set its sights on a 25-30% increase in new store openings and further
reductions in the overall costs of our real estate projects.
Shopping convenience involves more than just location. It means having the
right mix of parts in our stores. This year we added 3,000 SKUs in our
Distribution Center and expanded the parts width in our stores accordingly. The
increase in parts width coupled with the improvements in reordering, inventory
turnover and store order fill rates have had a big impact on store sales and
profits.
SERVICE THAT EXCEEDS CUSTOMER EXPECTATIONS
We recognized from the start that we are not in the auto parts business. We are
in the people business. Building our Team has always meant preparing our people
to serve our Customers. Prices and convenience bring Customers into the store,
but service brings them back. This is an unbeatable combination. When customers
know they can trust the Pros They Know, they return again and again. They
become Customers for a Lifetime.
25th Anniversary
3
<PAGE> 6
Discount ----------------------------------------------------------------------
Auto Parts
Any time we talk about what we have accomplished at Discount Auto Parts or what
we hope to accomplish, it always comes back to our Team. So far we have talked
about the systems and plans developed by our Management, Office, Distribution
Center, Real Estate and M.I.S. Teams. But the Store Teams are where the rubber
meets the road, or in this case, where the Team meets the Customer. The store
is where it all comes together and the individual store is where we make it or
break it every single day. Building up our Store Teams is a major undertaking
and the responsibility of the entire Management Team.
Our growth and success are directly attributed to the strength and stability of
the Team. The results of investing in training programs and promoting from
within are reflected in our retention rates which are some of the best in the
industry as reflected below.
<TABLE>
<S> <C>
District Managers . . . . . . . . . 100%
Managers . . . . . . . . . . . . . 92%
Assistant Managers . . . . . . . . 80%
Team Leaders . . . . . . . . . . . 72%
</TABLE>
These are outstanding figures by any standard, but we believe we can do much
better. To that end we have streamlined and computerized our personnel system,
implemented drug screening for new hires and added a recruiting function to the
duties of our in-store Trainers. We also recognize that even the best Team
Members face temporary personal challenges that can hurt their job performance.
To help these Team Members we have instituted an Employee Assistance Program
that offers professional advice and counseling. We hope this program will help
troubled Team Members get back on the right track both personally and
professionally.
We are happy to invest in Team Members who are willing to learn and eager to
serve our Customers. Make no mistake, investing in a Team Member is an
investment with the best returns. When we invest in training our Team, they
work more effectively and serve more Customers with fewer mistakes. Trained and
seasoned Team Members help us keep our operating costs down in a variety of
ways, from setting the thermostats to training fellow Team Members, from
sprucing up the store to making customer sales.
New to our training efforts this year is week long training we call DAP
University. Held at our Distribution Center, DAP-U is geared to help new
managers and prospective new managers learn our systems directly from the
people who designed and manage them. We had 82 graduates in 1996. We plan to
have 200 graduates in 1997.
(PHOTO OF SINGLE STORE IN 1971
LOCATED IN ELOISE, FLORIDA)
From a single store in 1971 located in Eloise, Florida...
25th Anniversary
4
<PAGE> 7
- ---------------------------------------------------------------------- Discount
Auto Parts
The key to our future success is to have a fully trained Team in every store.
We have stepped up the pace for training new Team Members so that by the time
they are on the job 90 days, our new Team Members should know the basics of how
to help our Customers overcome their automotive challenges. To compliment our
own training efforts, manufacturing representatives have increased their
presence in our stores, bringing Team Members the latest advances in automotive
technology and new products. We had 86 Team Members demonstrate their talent
this year by achieving national certification as Parts Specialist designated by
the National Institute for Automotive Service Excellence (ASE). An additional
151 Team Members went through the Dale Carnegie training program which we have
supported and encouraged for many years.
We promoted five individuals to the Division Manager level this year and we
plan to develop six more in the upcoming year. In five years we expect to have
10,000 Team Members. As a result, we will need 50 District Managers, 150-200
Key Managers and leaders in finance, real estate, distribution, merchandising
and marketing. New growth in the coming years will demand a great deal from
everyone at Discount Auto Parts and we are confident that we can all grow,
learn and develop ourselves as the Team building process continues.
Our policy of promotion from within ensures that as Team Members rise through
the ranks at Discount Auto Parts they get in touch with every aspect of running
our business. They understand firsthand what it takes to do everything from
stocking the shelves and serving customers to developing promotional ideas for
store grand openings.
The result is that we have an experienced Team that knows the auto parts
business. We have the highest rate of sales per Team Member among our major
competitors. This is because we empower our Team to make decisions that affect
their store performance. Our Management Team knows every phase of our business
and this ensures that everyone making decisions understands the full scope of
the challenges we face. They are equipped to handle those challenges because
they have been there. We have Team Spirit here at DAP. We have a history of
performing and working well together and that tradition will carry us
confidently into the next quarter century and beyond.
/s/ Peter J. Fontaine
Peter J. Fontaine
President and Chief Executive Officer
(PHOTO OF MINI-DEPOT STORE)
...Discount Auto Parts has grown to over 300 stores located in four states.
25th Anniversary
5
<PAGE> 8
Discount ----------------------------------------------------------------------
Auto Parts
5 YEAR HISTORY
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------
MAY 28 MAY 30 MAY 31 JUNE 1 JUNE 2
1996 1995 1994 1993 1992 (1)
-------------------------------------------------------------
(in thousands, except per share data and selected operating data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales $307,476 $253,700 $ 207,569 $176,786 $141,206
Cost of sales, including distribution costs 186,917 158,710 131,469 111,782 89,130
-------- -------- --------- -------- --------
Gross profit 120,559 94,990 76,100 65,004 52,076
Selling, general and administrative expenses 80,090 64,081 49,985 43,227 35,676
-------- -------- --------- -------- --------
Income from operations 40,469 30,909 26,115 21,777 16,400
Interest and other income 1,164 1,133 799 519 483
Gain on life insurance proceeds -- 4,836 -- -- --
Interest expense (5,078) (6,295) (3,635) (3,401) (4,657)
-------- -------- --------- -------- --------
Income before income taxes 36,555 30,583 23,279 18,895 12,226
Income taxes 14,092 10,020 8,962 5,272 --
-------- -------- --------- -------- --------
Net income $ 22,463 $ 20,563 $ 14,317 $ 13,623 $ 12,226
======== ======== ========= ======== ========
Net income per share $ 1.44 $ 1.48 $ 1.03
======== ======== =========
PRO FORMA DATA
Pro forma net income (2) $ 11,919 $ 7,774
======== ========
Pro forma net income per share (2) $ 0.91 $ 0.78
======== ========
Weighted average number of shares 15,647 13,907 13,954 13,127 10,000
SELECTED OPERATING DATA
Number of stores at year end 314 248 208 175 158
Total net square footage at year end
(in thousands) (3) 1,610 1,405 1,197 934 781
Average net sales per store
(in thousands) (4) $ 1,094 $ 1,113 $ 1,084 $ 1,062 $ 951
Average net sales per net square foot (4) $ 204 $ 195 $ 195 $ 206 $ 199
Percentage increase in comparable store
net sales (5) 4.9% 5.8% 4.0% 14.6% 14.2%
Team members 3,148 2,826 2,172 1,806 1,526
BALANCE SHEET DATA
Inventories $111,408 $ 91,187 $ 59,581 $ 49,497 $ 39,630
Working capital 59,801 46,420 34,055 33,824 22,156
Property, plant and equipment, net 208,094 166,169 131,893 89,318 71,537
Total assets 334,264 270,832 213,174 159,079 124,754
Long-term debt, excluding current maturities 50,400 94,550 70,118 42,021 61,102
Stockholders' equity 216,046 117,895 97,214 82,815 35,394
</TABLE>
(1) Fiscal year 1992 consisted of 53 weeks, all other years reported
consisted of 52 weeks.
(2) For all periods prior to September 1992, the Company was an S Corporation
for federal and state income tax purposes and, accordingly, was not
subject to corporate income taxes. The pro forma information has been
computed as if the Company were subject to corporate income taxes for all
periods presented, based on the tax laws in effect during the respective
periods.
(3) Net square footage includes all selling and merchandising space.
(4) Average net sales per store and average net sales per square foot are
based on the average of beginning and ending number of stores and store
square footage. For fiscal 1992, average net sales per store and average
net sales per net square foot have been adjusted to exclude the effect of
the fifty-third week.
(5) Comparable store net sales data are calculated based on the change in net
sales of all stores open at the beginning of the preceding fiscal year.
Increases for fiscal 1992 and fiscal 1993 have been adjusted to exclude
the effect of the fifty-third week in fiscal 1992.
6
<PAGE> 9
- ---------------------------------------------------------------------- Discount
Auto Parts
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the income statement
data and the percentage of the Company's net sales represented by each line
item presented:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------------
MAY 28 MAY 30 MAY 31
1996 % 1995 % 1994 %
------------------ ------------------ ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 307,476 100.0% $ 253,700 100.0% $ 207,569 100.0%
Cost of sales, including distribution costs 186,917 60.8 158,710 62.6 131,469 63.3
------------------ ------------------ ------------------
Gross profit 120,559 39.2 94,990 37.4 76,100 36.7
Selling, general and administrative expenses 80,090 26.0 64,081 25.2 49,985 24.1
------------------ ------------------ ------------------
Income from operations 40,469 13.2 30,909 12.2 26,115 12.6
Interest and other income 1,164 .4 1,133 .4 799 .4
Gain on life insurance proceeds -- -- 4,836 2.0 -- --
Interest expense (5,078) (1.7) (6,295) (2.5) (3,635) (1.8)
------------------ ------------------ ------------------
Income before income taxes 36,555 11.9 30,583 12.1 23,279 11.2
Income taxes 14,092 4.6 10,020 4.0 8,962 4.3
------------------ ------------------ ------------------
Net income $ 22,463 7.3% $ 20,563 8.1% $ 14,317 6.9%
================== ================== ==================
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales for fiscal 1996 increased by $53.8 million, or 21.2%, over net sales
for fiscal 1995. This increase was the result of (1) an increase in net sales
of $42.0 million attributable to stores opened since the beginning of fiscal
1995, and (2) a comparable store sales increase of 4.9%. At May 28, 1996, the
Company had 314 stores in operation compared to 248 at the end of fiscal 1995.
Gross profit for fiscal 1996 was $120.6 million, or 39.2% of net sales,
compared with $95.0 million, or 37.4% of net sales, for fiscal 1995. The
increase in gross profit percentage was partially due to more favorable vendor
pricing as a result of increased purchasing volume. In addition, the Company
continues to experience an increase, as a percentage of net sales, in sales of
replacement hard parts of a type which generally carry higher gross profit
margins. This increase was offset in part by the Company's continued commitment
to maintaining its everyday low price policy, and lower gross profit margins on
certain product categories.
Selling, general and administrative expenses for fiscal 1996 increased by $16.0
million over such expenses for fiscal 1995, and increased as a percentage of
net sales to 26.0% from 25.2%. The increase was primarily due to expenses
associated with team member benefits, including the continued emphasis in
training, and increased depreciation
7
<PAGE> 10
Discount ----------------------------------------------------------------------
Auto Parts
expense associated with new store additions. For both fiscal 1996 and 1995
gross advertising expense was substantially offset by vendor cooperative
advertising allowances. Net advertising expense is included as a component of
selling, general and administrative expenses.
Interest expense for fiscal 1996 was $5.1 million compared to $6.3 million in
fiscal 1995. The decrease in interest expense was the result of lower average
interest rates and the overall reduction in average borrowings as a result of
the net proceeds received from the Company's secondary common stock offering in
October 1995. The reduction in borrowings as a result of the secondary
offering, was partially offset by subsequent borrowings for new store
additions.
The Company's effective tax rate for fiscal 1996 was 38.6% as compared with
38.9% in fiscal 1995, after excluding the nontaxable $4.8 million gain from
life insurance proceeds.
As a result of the above factors, net income increased to $22.5 million in
fiscal 1996 from $15.7 million in fiscal 1995 (after excluding the non-taxable
life insurance proceeds of $4.8 million received in fiscal 1995).
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales for fiscal 1995 increased by $46.1 million, or 22.2%, over net sales
for fiscal 1994. This increase was the result of (1) an increase in net sales
of $34.7 million, attributable to stores opened since the beginning of fiscal
1994, and (2) a comparable store sales increase of 5.8%, which was principally
attributable to an increase in the number of customers, increased in-stock
positions due to the Company's point-of-sale systems and an increased number of
SKUs in the stores. At May 30, 1995 the Company had 248 stores in operation
compared to 208 at the end of fiscal 1994.
Gross profit for fiscal 1995 was $95.0 million, or 37.4% of net sales, compared
with $76.1 million, or 36.7% of net sales, during fiscal 1994. The increase in
gross profit percentage resulted primarily from lower merchandise cost and
increased vendor incentives. In addition, the Company experienced an increase,
as a percentage of net sales, in sales of replacement hard parts of a type
which generally carry higher gross profit margins. This increase was offset in
part by the Company's continued commitment to maintaining its everyday low
price policy and lower gross margins on certain product categories.
Selling, general and administrative expenses for fiscal 1995 increased as a
percentage of net sales to 25.2% from 24.1% in fiscal 1994. This increase was
primarily a result of the Company's increased emphasis on training of the
Company's team members, costs associated with the implementation of enhanced
systems technology and equipment and increased depreciation expense resulting
from increased new store additions during fiscal 1995, offset in part by the
Company's ability to leverage its overhead and fixed expenses with higher sales
volumes. The Company also was able to achieve continued operating efficiencies
and was able to implement certain cost control measures.
Interest expense for fiscal 1995 was $6.3 million compared to $3.6 million in
fiscal 1994. The increase in interest expense was the result of additional
borrowings in connection with new store growth and higher average interest
rates.
8
<PAGE> 11
- ---------------------------------------------------------------------- Discount
Auto Parts
As a result of the above factors, net income increased to $20.6 million in
fiscal 1995 (which includes $4.8 million of life insurance proceeds received
during fiscal 1995) from $14.3 million in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements have been the funding of new store
openings, store renovation and expansion and the resultant increase in
inventory requirements. In addition, in fiscal 1994, the Company's capital
requirements included the expansion of its distribution center. Capital
expenditures, principally relating to new stores and store renovation and the
expansion of the distribution center, were $52.2 million in fiscal 1996, $42.3
million in fiscal 1995 and $47.9 in fiscal 1994. From the beginning of fiscal
1994 to the end of fiscal 1996, the Company opened 139 stores and replaced or
substantially renovated 24 stores. The Company opened 66, 40 and 33 new stores
during fiscal years 1996, 1995 and 1994, respectively. Total merchandise
inventories increased by approximately $61.9 million from the beginning of
fiscal 1994 to the end of fiscal 1996. The Company has financed this growth
through a combination of internally generated funds, borrowings, sales of
common stock and trade credit. Net cash provided by operating activities was
$18.8 million in fiscal 1996, $0.6 million in fiscal 1995 and $21.2 million in
fiscal 1994. The increase in net cash provided by operating activities for
fiscal 1996 was primarily the result of the cash provided by the Company's net
income, an increase in trade accounts payable, and non-cash expenses such as
depreciation. These items were offset in part by a $20.2 million increase in
inventory associated with new store growth and the addition of new SKU's.
The Company plans to open 85 to 90 new stores during fiscal 1997, as well as
replace or expand certain other stores. In addition, the Company is currently
reviewing plans to expand its existing Distribution Center in Lakeland,
Florida. Construction of the DC expansion is expected to begin in the spring
of 1997 with completion occurring approximately 10 months to one year later.
The Company anticipates that total capital expenditures for fiscal 1997 will be
in the range of $65 million to $70 million.
The Company has historically been able to finance most of its new store growth
through unsecured lines of credit and medium and longer term mortgage financing
provided by banks and other institutional lenders, and through cash flow from
operations. As of May 28, 1996, the Company had approximately $57.8 million of
borrowings outstanding and had $117.8 million of additional availability under
the financing sources referred to above. Consistent with its historical
practice, the Company expects to finance both its short and long term liquidity
needs for new store growth, as to land and buildings, primarily through these
lines of credit and mortgage financing (and renewals and replacements thereof),
and as to equipment and fixtures, primarily through cash flow from operations.
The Company expects to finance its DC expansion through existing lines of
credit.
The Company's new store development program also requires significant working
capital, principally for inventories. The Company has historically used trade
credit to finance a portion of its inventory expansion and has been successful
in negotiating extended payment terms and incentives from many suppliers
through volume purchases. The Company believes that it will be able to continue
financing much of its inventory growth through the extension of favorable
payment terms and incentives from its vendors, but there can be no assurance
that the Company will be successful in doing so. The additional funding for
inventory expansion has been and is expected to be provided from cash flow from
operations.
Historically the Company has provided liquidity for maintaining proper
inventory levels through cash flow from operations and trade credit. During
fiscal 1995, substantially all of the Company's cash flow from operations was
9
<PAGE> 12
Discount ----------------------------------------------------------------------
Auto Parts
used to fund inventory growth as a result of the Company's decision to
significantly broaden its SKU selection so as to help maintain its competitive
position. During fiscal 1996, the Company, through the use of the Company's
enhanced technology, experienced a slight increase in per store inventory
requirements without a significant impact on cash flow from operations.
As of May 28, 1996, 36 or 11.5% of the Company's stores were leased. The
Company anticipates similar own/lease percentage relationships for new stores
in fiscal 1997.
The Company believes that the expected cash flows from operations, available
bank borrowings and trade credit, will be sufficient to fund both short term
and long term capital and liquidity needs of the Company.
INFLATION AND SEASONALITY
The Company does not believe its operations have been materially affected by
inflation. The Company has been successful, in many cases, in reducing the
effects of merchandise cost increases principally by taking advantage of vendor
incentive programs, economies of scale resulting from increased volumes of
purchases, and selective forward buying.
Although sales have historically been somewhat higher in the Company's fourth
fiscal quarter (March through May), the Company does not consider its business
to be seasonal.
10
<PAGE> 13
- ---------------------------------------------------------------------- Discount
Auto Parts
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------
MAY 28 MAY 30 MAY 31
1996 1995 1994
--------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net sales $ 307,476 $ 253,700 $ 207,569
Cost of sales, including distribution costs 186,917 158,710 131,469
--------- --------- ---------
Gross profit 120,559 94,990 76,100
Selling, general and administrative expenses 80,090 64,081 49,985
--------- --------- ---------
Income from operations 40,469 30,909 26,115
Interest and other income 1,164 1,133 799
Gain on life insurance proceeds -- 4,836 --
Interest expense (5,078) (6,295) (3,635)
--------- --------- ---------
Income before income taxes 36,555 30,583 23,279
Income taxes 14,092 10,020 8,962
--------- --------- ---------
Net income $ 22,463 $ 20,563 $ 14,317
========= ========= =========
Net income per share $ 1.44 $ 1.48 $ 1.03
========= ========= =========
Weighted average number of shares 15,647 13,907 13,954
========= ========= =========
</TABLE>
See accompanying notes.
11
<PAGE> 14
Discount ----------------------------------------------------------------------
Auto Parts
BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 28 MAY 30
1996 1995
------------------------
(In thousands, except
per share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,552 $ 5,330
Inventories 111,408 91,187
Prepaid expenses and other current assets 9,197 7,098
--------- ---------
Total current assets 125,157 103,615
Property, plant and equipment 247,021 198,301
Less allowances for depreciation and amortization (38,927) (32,132)
--------- ---------
208,094 166,169
Other assets 1,013 1,048
--------- ---------
Total assets $ 334,264 $ 270,832
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 5,000 $ 5,000
Trade accounts payable 49,056 41,306
Accrued salaries, wages and benefits 4,262 3,719
Deferred income taxes 1,334 908
Other current liabilities 3,304 3,072
Current maturities of long-term debt 2,400 3,190
--------- ---------
Total current liabilities 65,356 57,195
Deferred income taxes 2,462 1,192
Long-term debt 50,400 94,550
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized, none issued or outstanding -- --
Common stock, $.01 par value, 50,000 shares authorized,
16,575 and 13,912 shares issued and outstanding
at May 28, 1996 and May 30, 1995, respectively 166 139
Additional paid-in capital 140,245 64,584
Retained earnings 75,635 53,172
--------- ---------
Total stockholders' equity 216,046 117,895
--------- ---------
Total liabilities and stockholders' equity $ 334,264 $ 270,832
========= =========
</TABLE>
See accompanying notes.
12
<PAGE> 15
- ---------------------------------------------------------------------- Discount
Auto Parts
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
PREFERRED ------------ PAID-IN RETAINED
STOCK SHARES AMOUNT CAPITAL EARNINGS TOTAL
-----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at June 2, 1993 $ -- 13,902 $ 139 $ 64,384 $ 18,292 $ 82,815
Stock issued under stock
purchase plan 3 -- 81 81
Net income 14,317 14,317
--------- ------ --------- --------- --------- ---------
Balance at May 31, 1994 -- 13,905 139 64,465 32,609 97,213
Stock issued under stock
purchase plan 7 -- 119 119
Net income 20,563 20,563
--------- ------ --------- --------- --------- ---------
Balance at May 30, 1995 -- 13,912 139 64,584 53,172 117,895
Stock issued under stock
purchase and stock
option plans 13 -- 273 273
Stock issued under secondary
stock offering 2,650 27 75,388 75,415
Net income 22,463 22,463
--------- ------ --------- --------- --------- ---------
Balance at May 28, 1996 $ -- 16,575 $ 166 $ 140,245 $ 75,635 $ 216,046
========= ====== ========= ========= ========= =========
</TABLE>
See accompanying notes.
13
<PAGE> 16
Discount ----------------------------------------------------------------------
Auto Parts
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
MAY 28 MAY 30 MAY 31
1996 1995 1994
-------------------------------------
(In thousands)
<S> <C> <C> <C>
Operating activities $ 22,463 $ 20,563 $ 14,317
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,936 7,188 5,170
Gain on disposals of property, plant and equipment (1,452) (498) (122)
Deferred income taxes 1,696 1,378 912
Changes in operating assets and liabilities:
Increase in inventories (20,221) (31,606) (10,084)
(Increase) decrease in prepaid expenses and other
current assets (2,099) (3,111) 192
(Increase) decrease in other assets (85) 204 (18)
Increase in trade accounts payable 7,750 5,141 10,645
Increase in accrued salaries, wages and benefits 543 1,252 508
Increase (decrease) in other current liabilities 232 92 (359)
-------- -------- --------
Net cash provided by operating activities 18,763 603 21,161
Investing activities
Proceeds from sales of property, plant and equipment 1,896 1,461 419
Purchases of property, plant and equipment (52,185) (42,296) (47,902)
-------- -------- --------
Net cash used in investing activities (50,289) (40,835) (47,483)
Financing activities
Proceeds from short-term borrowings and long-term debt 34,000 55,622 36,125
Payments of short-term borrowings and long-term debt (78,940) (26,510) (7,944)
Net proceeds from secondary offering of common stock 75,415 -- --
Proceeds from other issuances of common stock 273 119 81
-------- -------- --------
Net cash provided by financing activities 30,748 29,231 28,262
Net (decrease) increase in cash and cash equivalents (778) (11,001) 1,940
Cash and cash equivalents at beginning of year 5,330 16,331 14,391
-------- -------- --------
Cash and cash equivalents at end of year $ 4,552 $ 5,330 $ 16,331
======== ======== ========
</TABLE>
See accompanying notes.
14
<PAGE> 17
- ---------------------------------------------------------------------- Discount
Auto Parts
NOTES TO FINANCIAL STATEMENTS
May 28, 1996
(Tables in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Discount Auto Parts, Inc. (the "Company") is a specialty retailer of automotive
replacement parts, maintenance items and accessories for the "Do-It-Yourself"
consumer. As of May 28, 1996, May 30, 1995, and May 31, 1994, the Company
operated a chain of 314, 248, and 208 stores, respectively. As of May 28, 1996,
276 of the stores were located in Florida, 32 were located in Georgia, five in
Alabama and one in South Carolina.
FISCAL YEAR END
The Company's fiscal year consists of 52 or 53 weeks ending on the Tuesday
closest to May 31. The years ended May 28, 1996, May 30, 1995 and May 31, 1994
all consist of 52 weeks.
INVENTORIES
Inventories are reported at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is provided using
accelerated and straight-line methods over periods that approximate the assets'
estimated useful lives. Maintenance and repairs are charged against operations
as incurred.
PRE-OPENING COSTS
Costs associated with the opening of new stores are charged against operations
as incurred.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
The Company's financial instruments that are exposed to concentrations of risk,
as defined by Statement of Financial Accounting Standards (SFAS) No. 105,
"Disclosure of Information about Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentrations of Credit Risk," are cash
and cash equivalents. The Company places its cash and temporary cash
investments with high-credit quality institutions.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets principally include amounts due from
vendors related to cooperative advertising and various incentive programs.
OTHER ASSETS
Other assets principally include deferred financing costs incurred in
connection with the issuance of debt, which are amortized using the effective
interest method over the term of the respective debt agreements.
15
<PAGE> 18
Discount ----------------------------------------------------------------------
Auto Parts
ADVERTISING COSTS
The Company expenses its share of all advertising costs as such costs are
incurred. The portion of advertising expenditures which are to be recovered
through vendor cooperative advertising and other similar programs are recorded
as receivables.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities.
EARNINGS PER SHARE
Net income per common share is based on the weighted average number of shares
outstanding, excluding the dilutive effect of stock options as their dilutive
effect is less than three percent.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from these estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (FAS 121), which
requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows are not sufficient to recover the assets' carrying amount. The impairment
loss is measured by comparing the fair value of the asset to its carrying
amount. FAS 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company adopted the provisions of FAS 121 in
the first quarter of fiscal 1996 with no impact to the financial statements.
In October 1995, the FASB issued Statement of Financial Standards No. 123,
"Accounting and Disclosure of Stock-Based Compensation," which encourages but
does not require companies to recognize stock awards based on their fair value
at the date of grant. The Company currently follows, and expects to continue to
follow, the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related
interpretations in accounting for its employee stock options. Under APB 25, no
compensation expense is recognized when the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
MAY 28, 1996 MAY 30, 1995 LIFE (YEARS)
------------------------------------------
<S> <C> <C> <C>
Land $ 82,098 $ 62,918
Buildings 106,862 86,197 5 - 31.5
Furniture, fixtures and equipment 48,472 37,484 5 - 7
Building and leasehold improvements 2,927 2,981 5 - 31.5
Automotive equipment 2,796 2,313 3 - 7
Construction in progress 3,866 6,408
--------- ---------
$ 247,021 $ 198,301
========= =========
</TABLE>
Depreciation expense amounted to approximately $9,815,000, $7,057,000 and
$5,030,000 for fiscal years 1996, 1995 and 1994, respectively.
16
<PAGE> 19
- ---------------------------------------------------------------------- Discount
Auto Parts
3. NOTE PAYABLE AND LONG-TERM DEBT
The note payable to bank consists of borrowings outstanding under a maximum $10
million unsecured working capital line of credit which expires in December
1996. Interest is payable monthly and is a function of the prime rate or LIBOR
(5.7% at May 28, 1996).
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MAY 28, 1996 MAY 30, 1995
-----------------------------
<S> <C> <C>
Unsecured revolving loan $ 5,000 $ 5,000
Real estate acquisition and
construction lines of credit 32,200 66,133
Senior secured notes 15,600 18,000
Mortgages -- 8,607
-------- --------
52,800 97,740
Less current maturities (2,400) (3,190)
-------- --------
$ 50,400 $ 94,550
======== ========
</TABLE>
In February 1995, the Company entered into an unsecured revolving loan
agreement with a bank. The agreement provides for maximum borrowings of $20
million, including up to $1 million for letters of credit. Interest is payable
monthly and is a function of the prime rate or LIBOR. The agreement is
renewable annually with principal becoming due six months after the agreement
is not renewed. The scheduled maturity date of the agreement is October 1997.
The Company's real estate acquisition and construction lines of credit provide
for maximum aggregate borrowings of $130 million for the acquisition and
construction of properties. Interest is payable monthly and is a function of
the prime rate or LIBOR. The line of credit agreements, which are unsecured,
expire at various dates through December 1997, but are expected to be renewed
prior to their expirations.
At May 28, 1996, the Company's weighted average interest rate on its revolving
loan agreement and real estate acquisition and construction lines of credit was
5.8%.
As of May 28, 1996, the Company had approximately $117.8 million of available
borrowings under its various working capital and real estate acquisition lines
of credit.
The Company has issued two senior secured notes, each for an original principal
of $12 million, with an insurance company. The notes are collateralized by a
first mortgage on certain retail store properties, equipment and fixtures. The
agreements provide for interest at fixed rates of 10.11% and 9.8%, payable
quarterly, with annual principal payments of $1.2 million each due on December
15 and May 31.
The carrying value of all assets mortgaged or otherwise subject to lien totaled
approximately $16.0 million at May 28, 1996.
The Company's debt agreements contain various restrictions, including the
maintenance of certain financial ratios and restrictions on dividends, with
which the Company was in compliance as of May 28, 1996. Approximately $33.9
million of retained earnings was available for dividend distribution as of May
28, 1996.
17
<PAGE> 20
Discount ----------------------------------------------------------------------
Auto Parts
Annual maturities as of May 28, 1996 of all long-term debt for the next five
years are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
------------------------------------------
<S> <C>
1997 $2,400
1998 2,400
1999 2,400
2000 2,400
2001 2,400
</TABLE>
The amounts exclude $37.2 million due in fiscal year 1998 under the Company's
real estate and acquisition lines of credit and the unsecured revolving loan
described above, because management believes based upon historical experience,
that these loans will be renewed prior to their expiration.
Total interest paid during fiscal years 1996, 1995 and 1994 was approximately
$5,518,000, $6,468,000, and $3,671,000, respectively, net of capitalized
interest. Capitalized interest for fiscal years 1996, 1995 and 1994 totaled
approximately $118,000, $190,000 and $264,000, respectively.
4. STOCKHOLDERS' EQUITY
In October 1995, the Company consummated a secondary public offering of
approximately 2,650,000 shares of its common stock. From the offering, the
Company realized net proceeds of approximately $75.4 million. Proceeds from the
offering were used to repay certain indebtedness of approximately $71.1
million. The balance of the net proceeds were used for general corporate
purposes.
The Board of Directors is authorized, without further stockholder action, to
divide any or all shares of the authorized preferred stock into series and to
fix and determine the designation, preferences and relative, participating,
option or other special rights, and qualifications, limitations, or
restrictions thereon, of any series so established, including voting powers,
dividend rights, liquidation preferences, redemption rights and conversion
privileges. As of May 28, 1996, the Board had not authorized any series of
preferred stock and there are no plans, agreements or understandings for the
authorization or issuance of any shares of preferred stock.
5. LIFE INSURANCE PROCEEDS
During the first quarter of fiscal 1995, the Company recorded a $4.8 million
gain related to life insurance proceeds resulting from the death of the
Company's former President and C.E.O. in June 1994. The insurance proceeds are
generally not subject to income taxes.
6. LEASES
Certain of the Company's retail stores are leased under noncancelable operating
leases. The majority of these leases include options to purchase and provisions
for rental increases based on the consumer price index.
Future minimum annual rental commitments under noncancelable operating leases
with initial or remaining terms of one year or more are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
------------------------------------------
<S> <C>
1997 $1,398
1998 1,288
1999 1,159
2000 1,007
2001 and thereafter 947
------
$5,799
======
</TABLE>
18
<PAGE> 21
- ---------------------------------------------------------------------- Discount
Auto Parts
Rental expense for fiscal years 1996, 1995 and 1994 totaled approximately
$1,625,000, $1,588,000 and $1,442,000, respectively. Rental expense in each of
the fiscal years includes approximately $127,000 of rent paid to a partnership
which included the Company's two majority stockholders.
The Company also leases certain portions of its owned facilities to outside
parties. Rental income for fiscal years 1996, 1995 and 1994 totaled
approximately $366,000, $342,000 and $449,000, respectively.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Long-term debt: The carrying amount of the Company borrowings under its
variable rate long-term debt agreements approximate their fair value. The
fair value of the Company's fixed rate long-term debt is estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rate for similar types of borrowing agreements.
The carrying amounts and fair value of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
MAY 28, 1996 MAY 30, 1995
----------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 4,552 $ 4,552 $ 5,330 $105,330
Long-term debt, including note payable
and current maturities 57,800 59,528 102,740 104,846
</TABLE>
8. BENEFIT PLANS
The Company has a 401 (k) profit-sharing plan (the Plan) covering substantially
all of its team members. Team members' rights to Company-contributed benefits
vest over three to seven years of service, as specified in the Plan. The
Company makes quarterly discretionary contributions to the Plan. Costs under
this plan for fiscal years 1996, 1995 and 1994 were approximately $449,000,
$381,000 and $421,000, respectively.
The Company also has a stock option plan (the 1992 Option Plan) which provides
for the granting to key team member options to purchase shares of its common
stock. A total of 800,000 shares of common stock are reserved for future
issuance under the Option Plan. The per share exercise price of each stock
option is generally not less than the fair market value of the stock on the
date of grant or, in the case of a team member owning more than 10% of the
outstanding stock of the Company, the price for incentive stock options is not
less than 110% of such fair market value.
Effective April 17, 1995, the Board of Directors adopted the 1995 Stock Option
Plan (the 1995 Option Plan). The 1995 Option Plan is similar to the 1992 Option
Plan described above. A total of 300,000 shares of common stock are reserved
for future issuance under this plan.
19
<PAGE> 22
Discount ----------------------------------------------------------------------
Auto Parts
Option Plan activity for fiscal years 1994, 1995 and 1996 is summarized as
follows:
<TABLE>
<CAPTION>
NUMBER OF PER SHARE
SHARES OPTION PRICE
-----------------------------------
<S> <C> <C>
Outstanding, June 2, 1993 175 $18.00
Granted 306 23.50 - 25.63
Canceled (14) 18.00 - 25.63
---
Outstanding, May 31, 1994 467 18.00 - 25.63
Granted 350 16.38 - 22.88
Canceled (30) 16.38 - 25.63
---
Outstanding, May 30, 1995 787 16.38 - 25.63
Granted 198 26.50 - 30.50
Exercised (6) 18.00
Canceled (24) 16.38 - 30.50
---
Outstanding, May 28, 1996 955 16.38 - 30.50
===
Exercisable at May 28, 1996 34 18.00
===
</TABLE>
All options outstanding generally vest beginning after three years and then
over a four year period and have a ten year duration.
In May 1993, the Board of Directors adopted the Discount Auto Parts, Inc.
Non-Employee Directors' Stock Option Plan. A total of 40,000 shares are
reserved for future issuance under this plan. As of May 28, 1996, 6,000 options
had been granted under this plan at an average price of $23.75. As of May 28,
1996, 1,500 of such options were exercisable.
The Board of Directors also adopted a stock purchase plan (the Purchase Plan),
which reserves an aggregate of 550,000 shares of common stock. Under the
Purchase Plan, all team members have the right to purchase shares of common
stock of the Company at a price equal to 85% of the value of the stock
immediately prior to the beginning of each exercise period. All team members
are eligible to participate except for those who have been employed by the
Company for less than one year, team members who customarily work twenty hours
or less per week, team members who customarily work five months or less in any
calendar year, and team members owning at least 5% of the Company's stock.
During fiscal years 1996, 1995 and 1994, 7,165, 7,120 and 3,811 shares,
respectively, were purchased under the terms of the Purchase Plan.
Effective May 30, 1995, the Company adopted a Supplemental Executive Profit
Sharing Plan (the SEPS Plan). The SEPS Plan is an unfunded deferred
compensation plan covering certain key executives. The amount of benefit each
participant is entitled to is established annually by the Board of Directors
or, in certain cases, by a committee of the Board of Directors. Each
participant's account accrues interest on unpaid awards at a rate determined
annually as defined in the plan agreement. As of May 28, 1996 and May 30, 1995,
the Company has accrued approximately $285,000 and $133,000, respectively, for
benefits due under the SEPS Plan.
20
<PAGE> 23
- ---------------------------------------------------------------------- Discount
Auto Parts
9. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------
MAY 28, 1996 MAY 30, 1995 MAY 31, 1994
------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $10,782 $ 7,353 $6,921
State 1,614 1,289 1,129
------- -------- ------
12,396 8,642 8,050
Deferred:
Federal 1,456 1,189 791
State 240 189 121
------- -------- ------
1,696 1,378 912
------- -------- ------
$14,092 $ 10,020 $8,962
======= ======== ======
</TABLE>
A reconciliation of the difference between the effective income tax rate and
the statutory federal tax rate follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------
MAY 28, 1996 MAY 30, 1995 MAY 31, 1994
------------------------------------------------
<S> <C> <C> <C>
Income tax expense at federal statutory rate $12,794 $10,704 $8,148
State income taxes, net of federal benefit 1,205 961 832
Gain on life insurance proceeds -- (1,693) --
Other items, net 93 48 (18)
------- ------- ------
$14,092 $10,020 $8,962
======= ======= ======
</TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
MAY 28, 1996 MAY 30, 1995
------------------------------
<S> <C> <C>
Deferred tax assets:
Various accrued expenses $ 614 $ 466
Other, net 98 254
------- -------
Total deferred tax assets 712 720
Deferred tax liabilities:
Depreciation 2,433 1,192
Accrued liabilities 618 487
Inventory related items 1,268 933
Other, net 189 208
------- -------
Total deferred tax liabilities 4,508 2,820
------- -------
Net deferred tax liabilities $ 3,796 $ 2,100
======= =======
</TABLE>
For fiscal years 1996, 1995 and 1994, the Company paid income taxes of
approximately $12,962,000, $8,951,000 and $8,107,000, respectively.
21
<PAGE> 24
Discount ----------------------------------------------------------------------
Auto Parts
10. COMMITMENTS AND CONTINGENCIES
The Company is not a party to any legal proceedings other than various claims
and lawsuits arising in the normal course of business. Management of the
Company does not believe that any such claims or lawsuits will have a material
adverse effect on the Company's financial condition or results of operation.
As of May 28, 1996, the Company's cost to complete construction contracts in
progress was approximately $17.5 million.
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the years ended May 28, 1996 and May 30, 1995:
<TABLE>
<CAPTION>
NET INCOME
NET GROSS NET PER COMMON
SALES PROFIT INCOME SHARE
-----------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal year ended May 28, 1996:
First Quarter $71,354 $27,727 $4,696 $.34
Second Quarter 73,765 29,107 5,560 .36 (1)
Third Quarter 75,426 29,981 5,646 .34 (1)
Fourth Quarter 86,931 33,744 6,561 .40 (1)
Fiscal year ended May 30, 1995:
First Quarter $57,810 $20,260 $7,316 (2) $.52 (2)
Second Quarter 59,967 22,268 4,024 .29
Third Quarter 63,924 24,111 4,270 .31
Fourth Quarter 71,999 28,351 4,953 .36
</TABLE>
(1) Includes the impact of the Company's issuance of approximately 2,650,000
additional shares of common stock in connection with a secondary offering
completed in October 1995.
(2) Includes a net gain of $4,836,000 or $.35 per share on life insurance
proceeds received in the first quarter of fiscal 1995.
22
<PAGE> 25
- ---------------------------------------------------------------------- Discount
Auto Parts
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
AND INTERNAL CONTROLS
To Our Shareholders:
The management of Discount Auto Parts, Inc. has the responsibility for
preparing the accompanying financial statements and for their integrity and
objectivity. The statements, which include amounts that are based on
management's best estimates and judgments, based upon current available
information and management's view of current conditions and circumstances, have
been prepared in conformity with generally accepted accounting principles and
are free of material misstatement. Management also prepared the additional
information contained in the annual report and is responsible for its accuracy
and consistency with the financial statements.
Management of Discount Auto Parts, Inc. has developed and maintains a system of
internal control over the preparation of its published annual and interim
financial statements which are designed to provide reasonable assurance that
the Company's assets are safeguarded and protected from improper use. This
system is constantly monitored, revised and improved to meet changing business
conditions, company growth, and recommendations made by the independent
auditors. Management has assessed the Company's system of internal control over
the preparation of its published annual and interim financial statements. Based
on its assessment, it is management's opinion that its system of internal
control as of May 28, 1996, is effective in providing reasonable assurance that
its published annual and interim financial statements are free of material
misstatement.
The Audit Committee of the Board of Directors is composed of the outside
directors and is responsible for approving the selection of the independent
certified public accounting firm. The Audit Committee meets periodically with
the independent auditors, as well as with management, to review accounting,
auditing, internal controls and financial reporting matters. The independent
auditors have private and confidential access to the Audit Committee.
/s/ Peter J. Fontaine /s/ C. Michael Moore
Peter J. Fontaine C. Michael Moore
President Chief Financial Officer
and Chief Executive Officer
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Discount Auto Parts, Inc.
We have audited the accompanying balance sheets of Discount Auto Parts, Inc. as
of May 28, 1996 and May 30, 1995, and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended May 28, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Discount Auto Parts, Inc. at
May 28, 1996 and May 30, 1995 and the results of its operations and its cash
flows for each of the three years in the period ended May 28, 1996, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Tampa, Florida
July 8, 1996
23
<PAGE> 26
Discount ----------------------------------------------------------------------
Auto Parts
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Discount Auto Parts, Inc.
4900 Frontage Road, South
Lakeland, Florida 33815
Telephone: (941) 687-9226
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, New Jersey 07660
INDEPENDENT AUDITORS
Ernst & Young LLP
P.O. Box 740
Tampa, Florida 33601
STOCK EXCHANGE LISTING
New York Stock Exchange
Trading Symbol -- DAP
ANNUAL MEETING
The Annual Meeting of the Stockholders
will be held at 10:30 am Tuesday,
the 8th day of October at the
Lakeland Centre,
700 West Lemon Street,
Lakeland, Florida 33801
NUMBER OF STOCKHOLDERS
As of August 12, 1996, there were approximately
575 stockholders of record.
FORM 10-K
A copy of the Company's Annual Report on
Form 10-K for the fiscal year ended May 28, 1996,
as filed with the Securities and Exchange Commission,
will be sent to any stockholder upon request in
writing to: Investor Relations
Discount Auto Parts, Inc.
4900 Frontage Road, South
Lakeland, Florida 33815
MARKET INFORMATION
The Company has not paid or declared cash distributions or dividends since the
consummation of its initial public offering in August 1992, and does not intend
to pay cash dividends on its Common Stock in the foreseeable future.
COMMON STOCK PRICE RANGE
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1995
---------------- ----------------
HIGH LOW HIGH LOW
---------------- ----------------
<S> <C> <C> <C> <C>
QTR 1 32 24 1/2 24 1/8 20 1/4
QTR 2 33 7/8 26 1/4 23 1/4 13 7/8
QTR 3 31 1/8 21 1/4 22 1/2 15 7/8
QTR 4 30 7/8 24 3/4 26 7/8 20 1/4
</TABLE>
OFFICERS AND DIRECTORS
PETER J. FONTAINE
President, Chief Executive Officer and Director
WARREN SHATZER
Executive Vice President -- Merchandising and Director
WILLIAM C. PERKINS
Executive Vice President -- Operations,
Secretary, and Director
C. MICHAEL MOORE
Chief Financial Officer
E.E. WARDLOW
Director
Retired President and Chief Operating Officer,
Kmart Corporation
A GORDON TUNSTALL
Director
President, Tunstall Consulting
25th Anniversary
24
<PAGE> 27
Discount
Auto Parts
4900 Frontage Road South
Lakeland, Florida 33815
(941) 687-9226
