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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended November 26, 1996
Commission file number 1-11276
DISCOUNT AUTO PARTS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-1447420
- --------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
4900 Frontage Road, South
Lakeland, Florida 33815
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(Address of principal executive offices) (zip code)
(941) 687-9226
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Registrant's telephone number, including area code
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 periods 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
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock $.01 Par Value - 16,580,014 shares as of November 26, 1996
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DISCOUNT AUTO PARTS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
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<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets - November 26, 1996 and May 28, 1996................3
Condensed Statements of Income - for the twenty-six and thirteen weeks
ended November 26, 1996 and November 28, 1995...............................4
Condensed Statements of Cash Flows - for the twenty-six weeks
ended November 26, 1996 and November 28, 1995...............................5
Notes to Condensed Financial Statements......................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................9
Item 4. Submission of Matters to a Vote of Security Holders..........................9
Item 6. Exhibits and Reports on Form 8-K............................................10
SIGNATURES..........................................................................10
</TABLE>
2
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PART I - FINANCIAL INFORMATION
DISCOUNT AUTO PARTS, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
NOVEMBER 26 MAY 28
1996 1996
-------------------------
Assets (In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,097 $ 4,552
Inventories 128,244 111,408
Prepaid expenses and other current assets 13,769 9,197
------------------------
Total current assets 146,110 125,157
Property, plant and equipment 282,369 247,021
Less allowances for depreciation
and amortization (44,416) (38,927)
------------------------
237,953 208,094
Other assets 854 1,013
------------------------
Total assets $ 384,917 $ 334,264
========================
Liabilities and stockholders' equity
Current liabilities:
Note payable to bank $ 5,000 $ 5,000
Trade accounts payable 45,184 49,056
Other current liabilities 11,120 8,900
Current maturities of long-term debt 2,400 2,400
------------------------
Total current liabilities 63,704 65,356
Deferred income taxes 2,462 2,462
Long-term debt 89,300 50,400
Stockholders' equity:
Preferred stock -- --
Common stock 166 166
Additional paid-in capital 140,339 140,245
Retained earnings 88,946 75,635
------------------------
Total stockholders' equity 229,451 216,046
------------------------
Total liabilities and stockholders' equity $ 384,917 $ 334,264
========================
</TABLE>
See accompanying notes. 3
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DISCOUNT AUTO PARTS, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS THIRTEEN WEEKS
ENDED ENDED
----------------------------- ----------------------------
NOVEMBER 26 NOVEMBER 28 NOVEMBER 26 NOVEMBER 28
1996 1995 1996 1995
----------------------------- ----------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 185,155 $ 145,119 $ 95,054 $ 73,765
Cost of sales, including
distribution costs 114,481 88,286 58,328 44,658
--------- --------- --------- ---------
Gross profit 70,674 56,833 36,726 29,107
Selling, general and
administrative expenses 46,427 37,672 23,938 19,431
--------- --------- --------- ---------
Income from operations 24,247 19,161 12,788 9,676
Other income (expense) (79) 697 (101) 660
Interest expense (2,539) (3,157) (1,471) (1,302)
--------- --------- --------- ---------
Income before income taxes 21,629 16,701 11,216 9,034
Income taxes 8,318 6,445 4,318 3,474
--------- --------- --------- ---------
Net income $ 13,311 $ 10,256 $ 6,898 $ 5,560
========= ========= ========= =========
Net income per share $ .80 $ .70 $ .42 $ .36
========= ========= ========= =========
Weighted average number of shares 16,576 14,723 16,578 15,533
========= ========= ========= =========
</TABLE>
See accompanying notes. 4
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DISCOUNT AUTO PARTS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
TWENTY - SIX WEEKS
ENDED
----------------------------
NOVEMBER 26 NOVEMBER 28
1996 1995
----------------------------
(In thousands)
<S> <C> <C>
Operating activities:
Net income $ 13,311 $ 10,256
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,867 4,509
Changes in operating assets and liabilities:
(Increase) in inventories (16,836) (2,357)
(Increase) in prepaid expenses and
other current assets (4,572) (1,125)
Decrease (increase) in other assets 106 (90)
(Decrease) in trade accounts payable (3,872) (11,411)
Increase (decrease) in other current liabilities 2,220 (1,080)
-------- --------
Net cash used in operating activities (3,776) (1,298)
Investing activities:
Purchases of property, plant and equipment (35,673) (20,009)
-------- --------
Net cash used in investing activities (35,673) (20,009)
Financing activities:
Proceeds from short-term borrowings and long-term debt 53,600 21,000
Payments of short-term borrowings and long-term debt (14,700) (75,940)
Proceeds from issuances of common stock 94 75,561
-------- --------
Net cash provided by financing activities 38,994 20,621
Net decrease in cash and cash equivalents (455) (686)
Cash and cash equivalents at beginning of period 4,552 5,329
-------- --------
Cash and cash equivalents at end of period $ 4,097 $ 4,643
======== ========
</TABLE>
See accompanying notes. 5
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DISCOUNT AUTO PARTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOVEMBER 26, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Discount Auto
Parts, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended May 28,
1996.
Operating results for the thirteen-week and twenty-six week periods ended
November 26, 1996 are not necessarily indicative of the results that may be
expected for the entire fiscal year.
2. 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 (after offering expenses) 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.
3. NOTE PAYABLE AND LONG-TERM DEBT
The note payable to a bank consists of borrowings outstanding under a maximum
$10 million unsecured working capital line of credit which expired in December
1996 and was repaid at expiration. The line of credit was not renewed.
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
November 26 May 28
1996 1996
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<S> <C> <C>
Unsecured revolving loan $ 5,000 $ 5,000
Real estate acquisition and
construction lines of credit 72,300 32,200
Senior secured notes 14,400 15,600
-------------------------
91,700 52,800
Less current maturities (2,400) (2,400)
-------------------------
$ 89,300 $ 50,400
=========================
</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 of 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.
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At November 26, 1996, the Company's weighted average interest rate on its
revolving loan agreement and real estate acquisition and construction lines of
credit was 6.0%.
As of November 26, 1996, the Company had approximately $72.7 million of
available borrowings under its revolving loan agreement and real estate
acquisition and construction lines of credit.
The Company has issued two senior secured notes, each for an original principal
amount 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 on each December 15
and May 31.
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 November 26, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRTEEN WEEKS AND TWENTY-SIX WEEKS ENDED NOVEMBER 26, 1996 COMPARED TO
THIRTEEN WEEKS AND TWENTY-SIX WEEKS ENDED NOVEMBER 28, 1995
Net sales for the thirteen weeks ended November 26, 1996 increased $21.3
million, or 28.9% over net sales for the comparable period ended November 28,
1995. The increase was a result of (1) a comparable store sales increase of
10.0% and (2) an increase in net sales for stores opened since the beginning of
fiscal 1996. Net sales for the twenty-six weeks ended November 26, 1996
increased $40.0 million, or 27.6% over net sales for the comparable period
ended November 28, 1995. The increase was a result of (1) a comparable store
sales increase of 9.3%. and (2) an increase in net sales for stores opened
since the beginning of fiscal 1996. At November 26, 1996, the Company had 360
stores in operation, compared with 314 stores at May 28, 1996 and 277 stores at
November 28, 1995.
Comparable store sales for both the second quarter and the first six months of
fiscal 1997 include commercial sales of air conditioning products, such as
freon. These commercial sales have been the driving force behind the Company's
ability to achieve positive comparable store sales for both of these periods.
Although there can be no assurance, commercial sales of R-12 freon, which
comprised the majority of the increase in commercial sales, are anticipated to
continue for the next 4 to 6 fiscal quarters.
In both the second quarter and the first six months of fiscal 1997, the more
traditional DIY comparable store sales continued to be impacted by the
Company's strategy of opening new stores that are in proximity to existing
Discount Auto Parts stores. The Company believes the negative impact on
comparable store sales in time will be substantially offset by its ability to
leverage costs such as advertising, transportation and store management
expenses. The Company also believes this strategy responds to its customers'
desire for shopping convenience. In addition, comparable store sales for the
second quarter and the first six months of fiscal 1997 are being compared to a
comparable store sales increase of 8.1% for the same periods a year ago.
Gross profit for the thirteen weeks ended November 26, 1996 was $36.7 million,
or 38.6% of net sales, compared with $29.1 million, or 39.5% of net sales, for
the comparable period of fiscal 1996. Gross profit for the twenty-six weeks
ended November 26, 1996 was $70.7 million, or 38.2% of net sales, compared with
$56.8 million, or 39.2% of net sales, for the comparable period of fiscal 1996.
The reduction in gross profit percentage for both periods was primarily the
result of the increased sales of freon, which generally tend to have a lower
gross margin because of the product's commodity nature.
7
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Selling, general and administrative (SG&A) expenses as a percentage of sales
decreased during the second quarter of fiscal 1997 to 25.2% from 26.3% a year
earlier. SG&A expenses as a percentage of sales decreased during the twenty-six
weeks ended November 26, 1996 to 25.1% from 26.0% a year earlier. The decrease
was primarily a result of lower SG&A expenses associated with commercial freon
sales and cost leveraging from new store growth. The decrease was offset in
part by increased team member benefits, including continued emphasis in
training and increased advertising expenses, and additional depreciation
expense attributable to new store growth.
Interest expense for the thirteen weeks ended November 26, 1996 was $1.5
million, compared to $1.3 million for the thirteen weeks ended November 28,
1995. The increase in interest expense was the result of additional borrowings
in connection with new store growth and other working capital needs and was
offset in part from lower average interest rates.
Interest expense for the twenty-six weeks ended November 26, 1996 was $2.5
million, compared to $3.2 million for the twenty-six weeks ended November 28,
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 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 and other
working capital needs.
The Company's effective tax rate for the thirteen weeks ended November 26, 1996
was 38.5% as compared with 38.5% for the same period a year ago. The Company's
effective tax rate for the twenty-six weeks ended November 26, 1996 was 38.5%
as compared with 38.6% for the same period a year ago.
As a result of the above factors, net income increased to $6.9 million for the
thirteen weeks ended November 26, 1996 as compared to $5.6 million for the
comparable period in fiscal 1996 and, net income increased to $13.3 million for
the twenty-six weeks ended November 26, 1996 as compared to $10.3 million for
the comparable period in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
For the twenty-six weeks ended November 26, 1996, net cash of $3.8 million was
used in the Company's operations versus $1.3 million for the comparable period
of fiscal year 1996. During the first six months of fiscal 1997, cash flows
from operating activities was positively impacted primarily by current period
earnings, depreciation and an increase in other liabilities. These positive
impacts were offset by an increase in inventories resulting from primarily new
store growth, a decrease in trade accounts payable and an increase in prepaid
expenses and other current assets. Trade accounts payable decreased as a result
of certain extended vendor payment terms granted at the end of fiscal 1996
coming due. Prepaid expenses and other current assets primarily increased due
to the timing of amounts earned and collections on certain vendors incentive
programs.
Capital expenditures for the twenty-six weeks ended November 26, 1996 were
$35.7 million. The majority of the capital expenditures related to the 46
stores opened during the first six months of fiscal 1997. The Company
anticipates that capital expenditures for all of fiscal 1997 will total $65
million to $70 million. The Company expects to open 85 to 90 stores during
fiscal 1997, as well as replacing or expanding an additional 10 to 20 stores.
The Company also expects to begin the expansion of its existing distribution
center from 300,000 square feet to 600,000 square feet in the spring of 1997,
with completion expected near the end of fiscal 1998. Total cost of the
expansion is estimated to be approximately $15 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.
8
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As of November 26, 1996, the Company had $72.7 million of additional
availability under its existing financing agreements. 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, fixtures, primarily through
cash flow from operations. Financing for the distribution center expansion is
expected to be provided through more permanent type financing.
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 provided and is expected to continue to be
provided from cash flow from operations.
The Company believes that the expected cash flows from operations, available
bank borrowings and trade credit, will be sufficient to fund both the capital
and liquidity needs of the Company for the near term.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A.E.W., Inc. d/b/a DAPS Discount Auto Parts Stores vs. Discount Auto Parts,
Inc., United States District Court for the Northern District of Florida, Civil
Division, Civil Action 94-30073-CIV-LAC.
On or about January 31, 1994, a complaint was originally filed against the
Company by A.E.W., Inc. d/b/a DAPS Discount Auto Parts Stores in the Circuit
Court in and for Escambia County, Florida (Case 94-0166-CA-01). A.E.W., which
operates several retail auto parts stores in Escambia County, Florida, Fort
Walton Beach, Florida, Mobile, Alabama, and Pascagoula and Gulfport,
Mississippi, sought to enjoin, under several different counts, the Company's
use of the trade names "Discount Auto Parts" and "DAP" without an accompanying
identifier to the extent such use was likely to create confusion with A.E.W.'s
business, and to recover, under several different counts, compensatory and
punitive damages and attorney's fees. No specific dollar amount of damages was
alleged in the complaint. A motion for preliminary injunction was also filed by
A.E.W. The Company sought to remove the case to federal court and also moved to
dismiss several counts or portions thereof and to strike certain references in
the complaint. In February 1994, the Company was able to remove the case to
federal court. A.E.W.'s motion for preliminary injunction was denied as was its
motion for reconsideration of the ruling. The Company's motions to dismiss, and
to strike were granted as to certain counts and denied as to all other counts.
Discovery requests have been exchanged by the parties and such discovery is
proceeding. Management of the Company believes that the claims in the complaint
that have survived the motions to dismiss and to strike are without any
substantial merit and intends to continue to defend the action vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on October 8, 1996.
There were 16,575,343 shares of Common Stock entitled to vote. The following
matters were voted at the meeting.
The Board of Directors was increased in the number of members from five
directors to six directors, with 15,592,300 votes for the increase, 112,775
votes against the increase and 42,469 abstentions.
9
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A Gordon Tunstall was elected to fill a Class I director seat for a three year
term, with 15,378,276 votes for his election and 369,268 withheld. David P.
Walling was elected to fill a Class I director seat for a three year term with
15,380,152 votes for his election and 367,392 withheld. Directors continuing to
serve are Peter Fontaine, President and Chief Executive Officer, Warren
Shatzer, Executive Vice President - Merchandising, William C. Perkins,
Executive Vice President - Operations and E.E. Wardlow, Director.
A proposal to ratify the appointment of Ernst & Young LLP as the Company's
independent auditor for fiscal year 1997 was approved and adopted, with
15,727,475 votes for the proposal, 11,590 against the proposal and 8,479
abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (For SEC Use Only)
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the thirteen-week
period ended November 26, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DISCOUNT AUTO PARTS, INC.
Date: January 8, 1997 By: /s/ Peter J. Fontaine
-------------------- ---------------------
Peter J. Fontaine
Chief Executive Officer and President
(Principal Executive Officer)
Date: January 8, 1997 By: /s/ C. Michael Moore
-------------------- ---------------------
C. Michael Moore
Chief Financial Officer
(Principal Financial and Accounting
Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-03-1997
<PERIOD-START> MAY-28-1996
<PERIOD-END> NOV-26-1996
<CASH> 4,097
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 128,244
<CURRENT-ASSETS> 146,110
<PP&E> 282,369
<DEPRECIATION> 44,416
<TOTAL-ASSETS> 384,917
<CURRENT-LIABILITIES> 63,704
<BONDS> 89,300
0
0
<COMMON> 166
<OTHER-SE> 229,285
<TOTAL-LIABILITY-AND-EQUITY> 384,917
<SALES> 185,155
<TOTAL-REVENUES> 185,155
<CGS> 114,481
<TOTAL-COSTS> 114,481
<OTHER-EXPENSES> 46,506
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,539
<INCOME-PRETAX> 21,629
<INCOME-TAX> 8,318
<INCOME-CONTINUING> 13,311
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,311
<EPS-PRIMARY> .80
<EPS-DILUTED> .80
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