<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
DISCOUNT AUTO PARTS, INC.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
(Discount Auto Parts Logo)
August 18, 1998
Dear Stockholder:
On behalf of the Board of Directors and all the team members of Discount
Auto Parts, Inc. I am pleased to invite you to the Annual Meeting of
Stockholders of Discount Auto Parts, Inc., which will be held at the Lakeland
Center, 700 West Lemon Street, Lakeland, Florida at 10:30 A.M., local time, on
Tuesday, October 6, 1998. I hope you will be able to join us to review the year
and the progress of your company.
The items of business to be acted on during the meeting are listed in the
Notice of Annual Meeting of Stockholders and are described more fully in the
Proxy Statement. In addition, the formal business of the meeting will include a
report on operations followed by a question and discussion period.
TO ENSURE THAT YOUR SHARES WILL BE REPRESENTED, I URGE YOU TO VOTE, DATE,
SIGN AND MAIL THE ENCLOSED PROXY CARD IN THE ENVELOPE WHICH IS PROVIDED, WHETHER
OR NOT YOU EXPECT TO BE PRESENT. YOU MAY, OF COURSE, ATTEND THE ANNUAL MEETING
AND VOTE IN PERSON EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
I look forward to seeing you at the meeting, and on behalf of the Board of
Directors and team members of Discount Auto Parts, Inc. I want to thank you for
your continued support and confidence in us.
Sincerely,
/s/ Peter J. Fontaine
PETER J. FONTAINE
Chairman of the Board and
Chief Executive Officer
<PAGE> 3
(Discount Auto Parts Logo)
DISCOUNT AUTO PARTS, INC.
4900 FRONTAGE ROAD SOUTH
LAKELAND, FLORIDA 33815
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD OCTOBER 6, 1998
To The Stockholders Of
Discount Auto Parts, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Discount
Auto Parts, Inc. will be held on Tuesday, the 6th day of October, 1998, at 10:30
A.M., local time, at the Lakeland Center, 700 West Lemon Street, Lakeland,
Florida for the following purposes:
1. To elect two Class III directors to serve for three-year terms;
2. To transact such other business as may properly come before the
meeting or any adjournments thereof.
The close of business on August 10, 1998 has been fixed by the Board of
Directors as the record date for the determination of the stockholders entitled
to notice of and to vote at the meeting or any adjournments thereof.
Stockholders are requested to vote, date, sign and mail the enclosed proxy
promptly in the enclosed addressed envelope. If you should be present at the
meeting and desire to vote in person, you may withdraw your proxy.
By Order of the Board of Directors,
/s/ C. Michael Moore
C. MICHAEL MOORE
Secretary
August 18, 1998
<PAGE> 4
(Discount Auto Parts Logo)
DISCOUNT AUTO PARTS, INC.
4900 FRONTAGE ROAD SOUTH
LAKELAND, FLORIDA 33815
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of August 18, 1998
Discount Auto Parts, Inc.:
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Discount Auto Parts, Inc. (the "Company"),
from the holders of the Company's common stock, par value $.01 per share (the
"Common Stock"), to be used at the Annual Meeting of Stockholders and at any
adjournments thereof. This meeting will be held at 10:30 A.M., Local Time, on
Tuesday, October 6, 1998, at the Lakeland Center, 700 West Lemon Street,
Lakeland, Florida.
Any proxy given pursuant to this solicitation may be revoked by notice in
writing to the Secretary prior to the voting, by delivering a proxy bearing a
later date or by attending the Annual Meeting and voting the shares in person.
No such notice of revocation or later-dated proxy, however, will be effective
until received by the Company at or prior to the Annual Meeting. Unless the
proxy is revoked, the shares represented thereby will be voted at the Annual
Meeting or any adjournment thereof. The giving of the proxy does not affect the
right to vote in person should the stockholder attend the meeting.
The entire cost of preparing and mailing the proxy material will be borne
by the Company. Solicitation of proxies will be made by mail, personally, or by
telephone or telegraph, by officers, directors and regular employees of the
Company. The Company will request brokerage houses and other custodians,
nominees and fiduciaries to forward soliciting material to the stockholders and
the Company will reimburse such institutions for their out-of-pocket expenses
incurred thereby.
It is important that proxies be returned promptly to avoid unnecessary
expense. Therefore, whether you plan to attend or not, you are urged regardless
of the number of shares of stock owned, to vote, date, sign and return the
enclosed proxy promptly.
The approximate date on which this proxy is to be mailed to stockholders is
August 28, 1998.
Shares of Common Stock are the only outstanding voting securities of the
Company.
The Board of Directors, in accordance with the bylaws, has fixed the close
of business on August 10, 1998 as the record date for determining the
stockholders entitled to notice of and to vote at the Annual Meeting of
Stockholders and adjournments thereof. At the close of business on such date,
the outstanding number of voting securities of the Company was 16,637,937 shares
of Common Stock, each of which is entitled to one vote. All votes will be
tabulated by employees of ChaseMellon Shareholder Services, the Company's
transfer agent for the Common Stock. An employee of ChaseMellon Shareholder
Services and an employee of the Company are expected to serve as the inspectors
of election. Abstentions and broker non-votes are each included in the
determination of the number of shares present but are not counted on any matters
brought before the meeting.
<PAGE> 5
1. ELECTION OF DIRECTORS -- ITEM ONE ON YOUR PROXY CARD
The current terms of the three classes of directors expire in 1998 (Class
III directors), 1999 (Class I directors) and 2000 (Class II directors).
Directors are generally elected for three-year terms.
Two directors (the Class III directors) are to be elected at the 1998
Annual Meeting. The Board of Directors has nominated the following named persons
to stand for election at the 1998 Annual Meeting for the two Class III director
seats (terms expiring in 2001):
Peter J. Fontaine
William C. Perkins
It is the intention of the persons named in the enclosed form of proxy,
unless otherwise directed, to vote such proxy "FOR" the election of Peter J.
Fontaine and William C. Perkins as the Class III directors of the Company, to
serve for the term described above. The nominees that receive a plurality of the
votes cast by the shares entitled to vote at the Annual Meeting shall be elected
as the Class III directors.
The proposed nominees for election as directors are willing to be elected
as such. If, as a result of circumstances not now known or foreseen, a nominee
shall be unavailable or unwilling to serve as a director, proxies may be voted
for the election of such other person as the Board of Directors may select. The
Board of Directors has no reason to believe that any nominee will be unable or
unwilling to serve.
The following sets forth information as to each nominee for election at
this meeting and each Director continuing in office, including his or her age,
present principal occupation, other business experience during the last five
years, directorships in other publicly held companies and period of service as a
Director of Discount Auto Parts.
Nominees for election at this meeting to terms expiring in 2001:
Peter J. Fontaine, 44, Chairman and Chief Executive Officer of the Company.
Mr. Fontaine has been with the Company since March 1975, serving since 1978 in
various managerial and executive capacities. Mr. Fontaine was elected Secretary
and Treasurer in 1979, Executive Vice President -- Operations in 1992, Chief
Operating Officer in 1993 and President, Chief Executive Officer and Chairman of
the Board in July 1994. Effective February 1, 1997 Mr. Fontaine stepped down
from his position as President of the Company but continued in his positions of
Chief Executive Officer and Chairman of the Board of the Company. Mr. Fontaine
is also currently a director of Vision Twenty-One, Inc.
Director since 1978.
William C. Perkins, 41, President and Chief Operating Officer of the
Company. Mr. Perkins has been with the Company since June 1983, serving in
various managerial capacities and executive capacities since 1989. He currently
holds the positions of President and Chief Operating Officer, offices to which
he was elected effective February 1, 1997. Mr. Perkins had previously served as
Controller and Chief Accounting Officer from 1989 to 1992, Chief Financial
Officer from 1992 until 1996 and Executive Vice President -- Operations and
Secretary from 1994 until 1997. Mr. Perkins has more than 17 years of experience
in retailing.
Director since 1994.
Directors whose present terms continue until 1999:
A Gordon Tunstall, 53, Founder of and for more than 14 years has served as
President of Tunstall Consulting, Inc., a provider of strategic consulting and
financial planning services. Tunstall Consulting has provided financial
consulting services to the Company over the past several years. Mr. Tunstall is
also currently a director of LA T Sportswear, Orthodontic Centers of America,
Inc., Romac International and Advanced Lighting Technologies.
Director since 1992.
2
<PAGE> 6
David P. Walling, 67. Since 1990, David P. Walling has provided consulting
services to the Company on a part time basis. Prior to 1990, Mr. Walling was
employed by Kmart for over 32 years in various managerial and executive
capacities. Mr. Walling served as Vice President, General Controller of Kmart
Corporation from 1976 until 1980. From 1980 until 1988, Mr. Walling served as
Vice President -- Corporate Accounting and Reporting and from 1988 until his
retirement in 1989 he served as Vice President -- Accounting/Administration.
Director since 1996.
Directors whose present terms continue until 2000:
Warren Shatzer, 51. Mr. Shatzer had been with the Company since July 1980,
serving in various executive capacities. He was elected Merchandising Director
in 1980, and Executive Vice President -- Merchandising in 1992, a position he
held until he resigned effective July 1998. In his capacity as Executive Vice
President -- Merchandising, Mr. Shatzer was principally responsible for
formulating and implementing the Company's merchandising strategies and programs
and for overseeing real estate operations.
Director since 1983.
E. E. Wardlow, 76. Mr. Wardlow was President and Chief Operating Officer of
Kmart Corporation from 1972 until his retirement in 1981 after 44 years of
service with Kmart Corporation. Over the past eleven years, Mr. Wardlow has
provided consulting services to the Company on a part time basis.
Director since 1992.
MEETINGS OF THE BOARD OF DIRECTORS AND STANDING COMMITTEES.
The Board of Directors held six meetings during fiscal 1998. Each of the
incumbent Directors attended at least 75% of all meetings of the Board and each
committee of which he was a member.
The Board of Directors has a standing Audit Committee and a Compensation
and Benefits Committee (the "Compensation Committee"); it does not have a
Nominating Committee. The Board of Directors functions as a Nominating
Committee, and the Board will consider written recommendations from stockholders
for positions on the Board of Directors in accordance with the procedures set
forth in the Amended and Restated Articles of Incorporation of the Company.
See -- "Stockholder Proposals For Presentation At The 1999 Annual Meeting" for
further information.
The members of the Audit Committee are E. E. Wardlow, A Gordon Tunstall and
David P. Walling. The Audit Committee held two meetings during fiscal 1998. The
Audit Committee recommends the appointment, subject to approval by the Board of
Directors, of the Company's independent auditors. The Committee also reviews the
accounting principles and the financial reporting practices adopted by
management, the non-audit services performed by the independent auditors, the
scope of the audits performed by the independent auditors, and the findings and
recommendations of the independent auditors and approves the fees paid to the
independent auditors.
The members of the Compensation Committee are E. E. Wardlow, A Gordon
Tunstall and David P. Walling. The Compensation Committee held one meeting
during fiscal 1998. The Compensation Committee reviews and recommends to the
Board of Directors the compensation of officers of the Company, examines
periodically the compensation structure of the Company and administers the
Company's 1992 Stock Option Plan, the Company's 1992 Team Members Stock Purchase
Plan, the Company's 1995 Stock Option Plan and certain aspects of the Company's
Supplemental Executive Profit Sharing Plan along with other employee
compensation and benefit programs.
COMPENSATION OF OUTSIDE DIRECTORS
Directors who are not employees received a fee of $2,500 for each regularly
scheduled meeting attended plus reimbursement for reasonable out-of-pocket
expenses to attend meetings of the Board of Directors and its committees. Such
directors are also paid a $2,500 fee for certain special meetings, depending on
the duration
3
<PAGE> 7
of such meetings. In addition, non-employee directors are entitled to receive
1,000 stock options on an annual basis under the Discount Auto Parts, Inc.
Non-Employee Directors' Stock Option Plan. In fiscal 1998, each non-employee
director was granted options to purchase 1,000 shares of the Company's Common
Stock at an exercise price equal to the fair market value of the Common Stock on
the date of grant. The options become exercisable in 25% percent increments on
each subsequent anniversary of the date of grant.
No director who is an employee of the Company will receive separate
compensation for services rendered as a director.
INFORMATION CONCERNING INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Representatives of Ernst & Young LLP, the Company's independent auditors,
are expected to be present at the Annual Meeting with the opportunity to make a
statement if they desire to do so and to respond to appropriate questions posed
by stockholders. Matters pertaining to the auditing of the Company's financial
condition and results of operations are referred to the Company's Board of
Directors and its Audit Committee.
It is expected that the Company's independent certified public accountants
for fiscal 1999 will be confirmed by the Board of Directors during the fiscal
year.
OTHER BUSINESS
It is not expected that any other matters are likely to be brought before
the meeting. However, if any other matters are presented, it is the intention of
the persons named in the proxy to vote the proxy in accordance with their best
judgment.
4
<PAGE> 8
COMPENSATION COMMITTEE REPORT
To: The Board of Directors
As members of the Compensation and Benefits Committee (the "Compensation
Committee"), it is our duty to administer the Company's various incentive plans,
including its stock option plans, its stock purchase plan and its annual bonus
plans. In addition, we review compensation levels of the executive officers,
evaluate the performance of the executive officers, make recommendations to the
Board of Directors with respect to the Company's executive compensation
policies, and deal with related matters. In evaluating the performance of
executive officers, we consult with the Chief Executive Officer and the
President, except when evaluating their respective performance, in which case we
meet independently. The Compensation Committee will review with the Board of
Directors in detail all aspects of compensation for the executive officers. The
Compensation Committee is composed of three outside directors.
The Compensation Committee has available to it access to independent
compensation data and may, from time to time in the future, consult with an
outside compensation consultant.
The Company's compensation policy for executive officers, which is endorsed
by the Compensation Committee, is designed to support the overall objective of
enhancing value for stockholders by attracting, developing, rewarding and
retaining highly qualified and productive individuals; relating compensation to
both Company and individual performance; and insuring compensation levels that
are, in general, externally competitive and internally equitable.
The key elements of the Company's executive officers' compensation in
fiscal 1998 consisted principally of (1) base salary, (2) potential bonuses
based on overall Company performance for the Chief Executive Officer, the
President, the Executive Vice President -- Merchandising, the Chief Financial
Officer, and certain of the other vice presidents and based in part on overall
Company performance and in part on specific performance criteria keyed to areas
of responsibility for each of the other executive officers and (3) the award of
stock options under the 1992 Stock Option Plan and/or the 1995 Stock Option Plan
which is designed to give certain of the officers and other team members the
opportunity to be awarded long-term, stock-based incentives.
The Compensation Committee's policies with respect to each of these
elements are discussed below, including the basis for the compensation awarded
in fiscal 1998 to Peter J. Fontaine, the Company's Chief Executive Officer and
to William C. Perkins, the Company's President. In addition, although the
elements of compensation described below are considered separately, the
Compensation Committee takes into account the full compensation package afforded
by the Company to the individual.
Base Salary
Each officer's base salary is reviewed annually. The specific base salaries
are based upon the subjective determination by the Chief Executive Officer and
the President of appropriate salary levels, taking into consideration the scope
of responsibility, experience, Company and individual performance, as well as
pay practices of other companies relating to executives with similar
responsibility. The Chief Executive Officer and the President then make
recommendations to the Compensation Committee, which is responsible for
approving or disapproving those recommendations.
With respect to the base salary of Peter J. Fontaine in fiscal 1998,
consideration was given to a comparison of base salaries of persons with
comparable positions and responsibilities in peer companies and an assessment of
the individual performances of Mr. Fontaine. Mr. Fontaine was granted a base
salary of $192,400 for fiscal 1998 which was unchanged from his base salary for
fiscal 1997. The level nature of the base salary was reflective of the desire to
reward improved overall performance of the Company and the perceived
contribution of Peter J. Fontaine to this improved performance through the
annual bonus rather than by increasing base salary.
With respect to the base salary of William C. Perkins in fiscal 1998,
consideration was given to a comparison of base salaries of persons with
comparable positions and responsibilities in peer companies and an
5
<PAGE> 9
assessment of the individual performance of Mr. Perkins. Mr. Perkins was granted
a base salary of $192,400 for fiscal 1998 which was unchanged from his base
salary for fiscal 1997. The level nature of the base salary was reflective of
the desire to reward improved overall performance of the Company and the
perceived contribution of William C. Perkins to this improved performance
through the annual bonus rather than by increasing base salary.
Annual Bonus Program
Under the Company's annual bonus plans, incentive compensation is somewhat
discretionary but through objective overall performance criteria established
under the plans, is expected to be paid based on current year's performance. The
fiscal year 1998 annual bonus plans for the Chief Executive Officer, the
President, the Executive Vice President -- Merchandising, the Chief Financial
Officer and certain of the vice presidents were directly tied to pre-tax net
income and was earned based in part on the ability of the Company to achieve a
preestablished goal for comparable store sales growth, in part on the ability of
the Company to achieve a preestablished goal for earnings growth and , with
respect to the Chief Financial Officer and certain of the vice presidents, in
part on such executive officers meeting certain other performance goals such as
gross profit margin and team member retention. Under the bonus program in fiscal
1998 for the particular executive officers who held these positions during
fiscal 1998, determinations as to payment of bonuses were made quarterly. The
base bonus for each of the Chief Executive Officer, the President, and the
Executive Vice President -- Merchandising was 1% of the Company's pre tax
earnings, and for the Chief Financial Officer was .20% of the Company's pre tax
earnings. Under the bonus program for these four executive officers, the amount
of the base bonus is adjusted downward if and to the extent the goals are not
achieved and is increased if and to the extent the goals are exceeded. In fiscal
1998, the goal for comparable store sales increase was 10% and the goal for
earnings growth was 25%.
The fiscal year 1998 annual bonus plan for the other executive officers was
based in part on pre-tax net income and comparable store sales growth and in
part on such executive officer meeting (1) certain other overall performance
goals such as gross profit margin, team member retention and controllable
expense percentages and (2) other personal performance goals. The applicable
percentage of pre-tax earnings target for the other executive officers and the
performance criteria for the executive officers who had other performance goals
were developed by the President in coordination with the Chief Executive Officer
of the Company, with input from the respective senior officer to whom they
report and subject to approval by the Compensation Committee.
In order to provide some flexibility, management is given the authority to
amend or terminate these various bonus plans at any time.
Long-Term Compensation
The Compensation Committee awards stock options under the 1992 Stock Option
Plan and/or the 1995 Stock Option Plan to executive officers, other members of
management and key individual contributors. Generally, the President together
with the Chief Executive Officer will recommend the number of options to be
granted and will present this number along with appropriate supporting data to
the Compensation Committee for its review and approval. Options are granted at
fair market value on the date of grant and therefore any value which ultimately
accrues to key team members under such options is based entirely on the
Company's performance, as perceived by investors who establish the price for the
Company's stock. These options generally vest beginning after three years and
then over a four year period and have a 10 year duration.
Stock option grants are designed to retain key team members, including
executive officers, and to provide an incentive for key team members to improve
the return to stockholders. In fiscal 1998, the Compensation Committee awarded
stock options to Mr. Perkins, Mr. Moore, Mr. Bair, Mr. Bottino, Mr. Viele, Mr.
Joiner, Mr. Harrah and Mr. Wiley. The grants were based on their respective
responsibilities, their relative positions in the Company and their respective
contributions to the Company's financial performance. Although stock options
were issued to other key team members as well, no stock options were awarded to
Mr. Fontaine or Mr. Shatzer.
6
<PAGE> 10
Other
The Committee believes that linking executive compensation to corporate
performance through a more significant emphasis on performance bonuses results
in a better alignment of compensation with corporate goals and stockholder
interest. As performance goals are met or exceeded, resulting in increased value
to stockholders, executives are rewarded commensurately. The Committee believes
that compensation levels during fiscal 1998 adequately reflect the Company's
compensation goals and policies.
No member of the Compensation Committee is a former or current officer of
the Company.
COMPENSATION COMMITTEE:
E. E. Wardlow
A Gordon Tunstall
David P. Walling
7
<PAGE> 11
PERFORMANCE GRAPH
The following graph compares the cumulative total return on the Company's
Common Stock with the cumulative total return of the companies in the Standard &
Poor's 500 Index and an Automotive Peer Group(1). Cumulative total return for
each of the periods shown in the Performance Graph is measured assuming an
initial investment of $100 on June 1, 1993, and the reinvestment of dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
MEASUREMENT PERIOD S&P 500 OLD PEER NEW PEER
(FISCAL YEAR COVERED) DAP INDEX GROUP GROUP
<S> <C> <C> <C> <C>
JUNE 1, 1993 100.00 100.00 100.00 100.00
MAY 31, 1994 76.67 103.95 108.09 112.23
MAY 30, 1995 89.59 122.20 106.72 111.47
MAY 28, 1996 86.26 157.13 137.21 144.60
JUNE 3, 1997 61.67 203.51 126.98 134.14
JUNE 2, 1998 82.30 267.04 140.73 151.36
</TABLE>
- - ---------------
(1) The peer group comprises publicly traded Automotive Parts Retailers which
are engaged principally or in significant part in the retail sale of
automotive replacement parts, maintenance items and accessories to the
Do-It-Yourself consumer and which often are viewed as being in competition
with the Company. The returns of each company have been weighted according
to their respective stock market capitalization for purposes of arriving at
a peer group average. The members of the new peer group are as follows: Auto
Zone, Inc.; Genuine Parts Co.; O'Reilly Automotive, Inc.; The Pep
Boys -- Manny, Moe & Jack and Trak Auto Corporation. The members of the old
peer group consisted of Hi-Lo Automotive, Inc. (which was merged into
O'Reilly Automotive, Inc.) and the other members of the new peer group other
than O'Reilly Automotive, Inc.
8
<PAGE> 12
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Company's
executive officers:
<TABLE>
<CAPTION>
YEARS WITH
NAME POSITIONS THE COMPANY
- - ---- --------- -----------
<S> <C> <C>
Peter J. Fontaine...................... Chairman of the Board, Chief Executive 23
Officer and Director
William C. Perkins..................... President, Chief Operating Officer and 15
Director
C. Michael Moore....................... Chief Financial Officer and Secretary 2
David C. Viele......................... Vice President -- Purchasing 22
Steven C. Bair......................... Vice President -- Operations 19
Clement A. Bottino..................... Vice President -- Human Resources 19
Steven K. Joiner....................... Vice President -- Marketing 14
Michael D. Harrah...................... Vice President -- Information Systems 5
Clifford J. Wiley...................... Vice President -- Real Estate 14
</TABLE>
NON-DIRECTOR EXECUTIVE OFFICERS
C. Michael Moore, 38, joined the Company in July 1996 as Chief Financial
Officer and was elected as Secretary in February 1997. Prior to joining the
Company, Mr. Moore was employed by Ernst & Young LLP from December 1981 until
June 1996, most recently as Senior Manager.
David C. Viele, 40, has been with the Company since March 1976, serving in
various distribution and purchasing capacities. Mr. Viele served as Purchasing
Manager from 1988 until April 1994, at which time he was elected to his current
position as Vice President -- Purchasing.
Steven C. Bair, 38, has been with the Company since September 1978, serving
in various managerial capacities. Mr. Bair served as a Division Manager from
1985 until April 1994, at which time he was elected to his current position as
Vice President -- Operations.
Clement A. Bottino, 46, has been with the Company since July 1979, serving
in various managerial capacities. Mr. Bottino served as a Division Manager from
1985 until April 1994, at which time he was elected to his current position as
Vice President -- Human Resources.
Steven K. Joiner, 37, has been with the Company since October 1983, serving
in various managerial capacities. Since 1995, Mr. Joiner has served in the
position of Vice President -- Marketing.
Michael D. Harrah, 48, was appointed Vice President -- Information Systems
in 1995. Prior thereto, Mr. Harrah was the Company's Director of Information
Systems since October 1992. Before joining the Company, Mr. Harrah worked for
Lykes Bros., Inc., for over 13 years, where he last served as Director of Data
Processing.
Clifford Wiley, 41, has been with the Company since August 1984, serving in
various real estate related capacities. Mr. Wiley served as a Real Estate
Manager from August 1984 to July 1996, at which time he was elected to his
current position as Vice President -- Real Estate.
None of the executive officers or directors are related to one another.
Executive officers are elected by and serve at the discretion of the Board of
Directors.
In recent years, the Company has also benefitted from the advice of four
seasoned retailers who, prior to retirement, were executives with Kmart
Corporation. E.E. Wardlow has provided advice and consultation on all phases of
mass merchandising and discount retailing; David P. Walling has provided advice
and consultation on accounting and financial matters; and Ken Dunkel, with
experience in distribution and
9
<PAGE> 13
Kenneth Dowden, with experience in distribution and information systems, have
also been providing guidance to the Company for the past several years and
continue to serve as advisors to the Company.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides information concerning the annual compensation
of each of the named executive officers of the Company, as defined under
applicable Securities and Exchange Commission Rules, for services rendered to
the Company in each of the Company's last three fiscal years.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION(1) AWARDS(2)
----------------------- ------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS(3)($) OPTIONS(#)(4) COMPENSATION($)(5)
- - --------------------------- ---- --------- ----------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Peter J. Fontaine.................... 1998 192,400 333,423 (6) 2,710
Chief Executive Officer and 1997 192,400 203,786 (6) 1,586
Chairman of the Board 1996 192,400 253,793 (6) 5,981
William C. Perkins................... 1998 192,400 333,423 50,000 13,918
President and 1997 141,996 170,142 (6) 12,676
Chief Operating Officer 1996 125,000 155,047 (6) 15,696
Warren Shatzer....................... 1998 186,150 333,423 (6) 3,270
Executive Vice President -- 1997 186,150 203,786 (6) 1,628
Merchandising(7) 1996 186,150 253,793 (6) 5,590
C. Michael Moore..................... 1998 143,942 81,795 1,000 11,849
Chief Financial Officer(8) 1997 120,000 19,575 5,500 0
Steven C. Bair....................... 1998 97,500 80,198 1,000 12,352
Vice President -- 1997 94,400 42,629 500 11,092
Operations 1996 84,808 30,120 1,000 12,251
</TABLE>
- - ---------------
(1) All Other Compensation, other than salary and bonuses, does not exceed the
minimum amounts required to be reported pursuant to Securities and Exchange
Commission Rules.
(2) The Company does not offer any Restricted Stock Awards, SAR or other LTIP
programs.
(3) Amounts in this column include bonuses earned under the annual management
incentive plan which is keyed to the Company's performance. Amounts earned
with respect to a particular fiscal year are accrued as expenses in such
fiscal year.
(4) This category reflects stock options pursuant to the Company's 1992 Stock
Option Plan and 1995 Stock Option Plan.
(5) For 1998, includes: for Mr. Fontaine and Mr. Shatzer the amounts contributed
by the Company to the Team Member's Section 401(k) Plan (the "401(k) Plan");
for Mr. Perkins: $3,418 contributed by the Company to the 401(k) Plan and
$10,500 accrued under the Company's Supplemental Employee Profit Sharing
Plan (the "Supplemental Plan"); for Mr. Moore: $1,349 contributed by the
Company to the 401(k) Plan and $10,500 accrued under the Supplemental Plan;
and for Mr. Bair: $1,852 contributed by the Company to the 401(k) Plan,
$10,500 accrued under the Supplemental Plan.
(6) Not applicable. No compensation of this type received.
(7) Effective July 17, 1998, Mr. Shatzer resigned as Executive Vice
President -- Merchandising of the Company. Mr. Shatzer is continuing as a
director of the Company.
(8) Mr. Moore began his employment with the Company in July 1996 as Chief
Financial Officer.
10
<PAGE> 14
OPTION/SAR GRANTS TABLE
The following table shows information concerning stock options granted
during fiscal 1998 for the individuals shown in the Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
-------------------------- STOCK PRICE
% OF TOTAL APPRECIATION FOR
OPTIONS OPTIONS GRANTED EXERCISE OR OPTION TERM
GRANTED TO EMPLOYEES IN BASE PRICE EXPIRATION -------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- - ---- -------- --------------- ----------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Fontaine................ -0- -- -- -- -- --
Warren Shatzer................... -0- -- -- -- -- --
William C. Perkins............... 50,000 25.4 19.00 7/6/07 597,450 1,514,055
C. Michael Moore................. 1,000 * 19.00 7/6/07 11,949 30,281
Steven C. Bair................... 1,000 * 19.00 7/6/07 11,949 30,281
</TABLE>
- - ---------------
* Less than one percent.
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
The following table shows information concerning stock option values as of
the end of fiscal 1998.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(2)
- - ---- -------------------------------- ----------------------------
<S> <C> <C>
Peter J. Fontaine.......................... -0-/-0- -0-/-0-
Warren Shatzer............................. -0-/-0- -0-/-0-
William C. Perkins......................... 33,560/108,001 192,379/689,153
C. Michael Moore........................... -0-/6,500 -0-/6,910
Steven C. Bair............................. 19,317/48,356 81,352/152,827
</TABLE>
- - ---------------
(1) This represents the excess of the fair market value of the Company's Common
Stock as of the date of exercise above the exercise price of the options.
(2) This represents the amount by which the fair market value of the Company's
Common Stock of $24.69 per share as of June 2, 1998 exceeds the exercise
price of those options held by the named executive officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation and Benefits Committee (the
"Committee"), are E. E. Wardlow, A Gordon Tunstall and David P. Walling. Neither
Mr. Wardlow, Mr. Tunstall nor Mr. Walling has at any time been an officer of the
Company. Neither Mr. Wardlow, Mr. Tunstall nor Mr. Walling were employees of the
Company during fiscal 1998.
No director, executive officer or member of the Committee had any
interlocking relationship with any other company which would require disclosure
in this proxy statement.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of October 10, 1992, the Company and Herman and Marie Fontaine ("Mr. and
Mrs. Fontaine"), entered into a Wage Agreement (the "Agreement") that provides
that from October 10, 1992 and continuing
11
<PAGE> 15
as long as Mr. and Mrs. Fontaine are both living and are continuing to provide
the services required under the Agreement, the Company will pay to Mr. and Mrs.
Fontaine, collectively, $140,000.00 per year. Upon the death of either Herman or
Marie Fontaine, the Company is required to continue to pay the survivor
$140,000.00 per year provided the survivor continues to provide the services
required under the Agreement. Under the Agreement, Mr. and Mrs. Fontaine must
continue to provide services to the Company in the capacities as consultant and
sales auditor, respectively, or to provide consulting services to the Company.
Herman Fontaine is one of the founders of the Company and is currently Chairman
Emeritus of the Company. Mr. and Mrs. Fontaine are the parents of Denis L.
Fontaine and Peter J. Fontaine. In fiscal 1998, the Company paid Mr. and Mrs.
Fontaine a total of $147,280 of which $140,000 was paid in accordance with the
Agreement and $7,280 was paid as additional compensation to Mrs. Fontaine.
The Company leases two of its store locations under separate one year
leases from a Florida partnership which was established by Denis L. Fontaine and
Peter J. Fontaine and the current partners of which are Peter J. Fontaine and
the Glenda A. Fontaine Marital Trust, which was formed after Denis L. Fontaine's
death in June 1994 (the "Marital Trust"). The leases provide for fixed monthly
rental, pass through of all expenses to the Company, including taxes, repairs
and insurance and one year renewal terms. In the past, the leases have been
renewed from year to year and it is anticipated that such renewals will
continue. Lease payments under the two leases aggregated $127,200 in fiscal
1998. The leases are believed to be at or below fair market value.
During fiscal 1998, the Company chartered on a regular basis an airplane
from PF Flyers, Inc., a Florida corporation that owns and operates an airplane
charter service and all of the common stock of which is beneficially owned by
Peter J. Fontaine. The payments made during fiscal 1998 by the Company to PF
Flyers, Inc., aggregated approximately $45,362. The rates charged to the Company
by PF Flyers, Inc., for the chartering services are believed to be at or below
fair market value.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
To the Company's knowledge, based solely on a review of the forms, reports
and certificates filed with the Company by the Company's directors and officers
and the holders of more than 10% of the Company's Common Stock, all Section
16(a) filing requirements were complied with by such persons in fiscal 1998;
except that for Peter J. Fontaine (i) two Forms 4 were filed late to report
distributions from and contributions to Fontaine Industries Limited Partnership
of which Mr. Fontaine is a limited partner and (ii) an amendment to Form 4 was
filed to report a previously unreported distribution by Fontaine Enterprises
Limited Partnership to the Glenda Fontaine Marital Trust of which Mr. Fontaine
is a trustee and to report a previous unreported gift of shares by the trust;
for Fontaine Industries Limited Partnership (i) two Forms 4 were filed late to
report distributions to and contributions from Peter J. Fontaine, a limited
partner of the partnership, and (ii) an amendment to Form 4 was filed to report
a previous unreported distribution made by the partnership to Mr. Fontaine; for
Fontaine Enterprises Limited Partnership an amendment to Form 4 was filed to
report the previous unreported distribution made to the Glenda Fontaine Marital
Trust; and for the Glenda Fontaine Marital Trust an amendment to Form 4 was
filed to report a previous unreported distribution to the trust by Fontaine
Enterprises Limited Partnership and to report the previous unreported gift of
shares by the trust.
12
<PAGE> 16
SECURITY OWNERSHIP
The following table sets forth, as of August 10, 1998, the number of shares
of the Company's Common Stock beneficially owned by i) each person known to the
Company as having beneficial ownership of more than 5% of the Company's Common
Stock together with such person's address, ii) each of the Company's directors
and nominees to become a director, iii) each named executive officer as defined
under applicable Securities and Exchange Commission rules and iv) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE
OF BENEFICIAL PERCENT
NAME OF BENEFICIAL OWNER OR NUMBER IN GROUP OWNERSHIP(1) OF CLASS
- - ------------------------------------------- ---------------- --------
<S> <C> <C>
Fontaine Industries Limited Partnership..................... 4,049,781(2) 24.4
3305 W. Spring Mountain Road #60
Las Vegas, Nevada 89012
Fontaine Enterprises Limited Partnership.................... 3,549,664(3) 21.3
3305 W. Spring Mountain Road #60
Las Vegas, Nevada 89012
Peter J. Fontaine........................................... 7,601,445(4) 45.7
c/o Discount Auto Parts, Inc.
4900 Frontage Road South
Lakeland, Florida 33815
Glenda A. Fontaine Marital Trust............................ 3,549,644(5) 21.3
under Agreement dated July 8, 1993
c/o Discount Auto Parts, Inc.
4900 Frontage Road South
Lakeland, Florida 33815
William C. Perkins.......................................... 38,521(6) *
Warren Shatzer.............................................. 5,000(7) *
C. Michael Moore............................................ 1,200 *
Steven C. Bair.............................................. 21,481(8) *
E. E. Wardlow............................................... 8,250(9) *
A Gordon Tunstall........................................... 4,250(10) *
David P. Walling............................................ 6,040(11) *
FMR Corp.................................................... 2,041,900(12) 12.3
82 Devonshire Street
Boston, Massachusetts 02109
Fidelity Management & Research Company...................... 1,973,400(12) 11.9
82 Devonshire Street
Boston, Massachusetts 02109
Edward C. Johnson 3d........................................ 2,041,900(12) 12.3
82 Devonshire Street
Boston, Massachusetts 02109
Abigail P. Johnson.......................................... 2,041,900(12) 12.3
82 Devonshire Street
Boston, Massachusetts 02109
T. Rowe Price Associates, Inc. ............................. 1,303,000(13) 7.8
100 E. Pratt Street
Baltimore, Maryland 21202
</TABLE>
13
<PAGE> 17
<TABLE>
<CAPTION>
AMOUNT AND
NATURE
OF BENEFICIAL PERCENT
NAME OF BENEFICIAL OWNER OR NUMBER IN GROUP OWNERSHIP(1) OF CLASS
- - ------------------------------------------- ---------------- --------
<S> <C> <C>
T. Rowe Price New Horizons Fund, Inc. ...................... 1,100,000(13) 6.6
100 E. Pratt Street
Baltimore, Maryland 21202
All Directors and Executive Officers as a Group (13
persons).................................................. 7,744,271 46.6
</TABLE>
- - ---------------
* Less than one percent
(1) Beneficial ownership of shares, as determined in accordance with applicable
Securities and Exchange Commission rules, includes shares as to which a
person has or shares voting power and/or investment power. Except as
otherwise indicated, all shares are held of record with sole voting and
investment power.
(2) Fontaine Industries Limited Partnership ("Industries L.P.") is a Nevada
Limited Partnership. A revocable trust established by Peter J. Fontaine and
under which Mr. Fontaine is the trustee, is the sole general partner and is
one of two limited partners of Industries L.P., owning an aggregate of 99%
of the partnership interests. Peter J. Fontaine is a limited partner and
owns the remaining 1% of the partnership interests. Although not reflected
in the table, Industries L.P. may be considered, for beneficial ownership
purposes, part of a group which also includes Fontaine Enterprises Limited
Partnership, Peter J. Fontaine Revocable Trust, Glenda A. Fontaine Marital
Trust, certain trusts established for the benefit of the children of Denis
L. Fontaine, Peter J. Fontaine and Merritt A. Gardner as Trustee;
therefore, Industries L.P. may be considered as beneficially owning the
same aggregate number of shares shown in the table as being beneficially
owned by Peter J. Fontaine.
(3) Fontaine Enterprises Limited Partnership ("Enterprises L.P.") is a Nevada
Limited Partnership. The Glenda A. Fontaine Marital Trust (the "Glenda
Fontaine Trust"), of which Peter J. Fontaine and Merritt A. Gardner are the
trustees, is the sole general partner and a limited partner of Enterprises
L.P., owning an aggregate of 81.5% of the partnership interests. Certain
trusts established for the benefit of the children of Denis L. Fontaine
(the "Children's Trusts"), of which Peter J. Fontaine and Merritt A.
Gardner are also the trustees, are limited partners of Enterprises L.P. and
in such capacity own the remaining 18.5% of the partnership interests.
Although not reflected in the table, Enterprises L.P. may be considered,
for beneficial ownership purposes, part of a group which also includes
Fontaine Industries Limited Partnership, Peter J. Fontaine Revocable Trust,
Glenda A. Fontaine Marital Trust, certain trusts established for the
benefit of the children of Denis L. Fontaine, Peter J. Fontaine and Merritt
A. Gardner as Trustee; therefore, Enterprises L.P. may be considered as
beneficially owning the same aggregate number of shares shown in the table
as being beneficially owned by Peter J. Fontaine.
(4) Peter J. Fontaine does not directly own any shares. Beneficial ownership by
Mr. Fontaine reflects (i) 4,049,781 shares owned by Industries L.P., (ii)
3,549,644 shares owned by Enterprises L.P., (iii) 1,000 shares owned by
Debra Fontaine, Mr. Fontaine's wife and (iv) 1,000 shares owned by Mr.
Fontaine's daughter. See Notes (2) and (3) above.
(5) The Glenda Fontaine Trust does not directly own any shares. Beneficial
ownership by the Glenda Fontaine Trust reflects shares owned by Enterprises
L.P. See Note (3) above.
(6) The number of shares shown includes 33,672 shares deemed to be beneficially
owned by Mr. Perkins by virtue of certain stock options that are currently
exercisable or become exercisable within 60 days. Also includes 272 shares
owned by Gina Perkins, his wife, and 200 additional shares (100 owned by
each of his two sons).
(7) The number of shares shown for Warren Shatzer includes all of the shares
held by Shatzer Enterprises Limited Partnership, a Nevada limited
partnership. A revocable trust established by Mr. Shatzer and under which
Mr. Shatzer is the trustee, is the sole general partner and is one of two
limited partners of Shatzer Enterprises Limited Partnership, owning an
aggregate of 99% of the partnership interests, with Warren Shatzer being a
limited partner and owning the remaining 1% of the partnership interests.
Effective July 17, 1998, Mr. Shatzer resigned as Executive Vice
President -- Merchandising of the Company. Mr. Shatzer is continuing as a
director of the Company.
14
<PAGE> 18
(8) The number of shares shown includes 20,781 shares deemed to be beneficially
owned by Mr. Bair by virtue of certain stock options that are currently
exercisable or become exercisable within 60 days.
(9) The number of shares shown includes 3,250 shares deemed to be beneficially
owned by Mr. Wardlow by virtue of certain stock options that are currently
exercisable or become exercisable within 60 days. Also includes 5,000
shares that are held in a revocable trust established by Mr. Wardlow and
under which Mr. Wardlow is the Trustee.
(10) The number of shares shown includes 3,250 shares deemed to be beneficially
owned by Mr. Tunstall by virtue of certain stock options that are currently
exercisable or become exercisable within 60 days.
(11) The number of shares shown includes 750 shares deemed to be beneficially
owned by Mr. Walling by virtue of certain stock options that are currently
exercisable or become exercisable within 60 days. Also includes 245 shares
owned by Elizabeth Walling, his wife.
(12) This information is derived from a Schedule 13G dated February 14, 1998,
filed by FMR Corp., Edward C. Johnson 3d. and Abigail P. Johnson. FMR
Corp., Edward C. Johnson 3d and Abigail P. Johnson are each shown to have
sole dispositive power with respect to all 2,041,900 shares. Fidelity
Management & Research Company is a wholly owned subsidiary of FMR Corp. and
is deemed the beneficial owner with respect to 1,937,400 shares as a result
of acting as investment adviser to several investment companies registered
under Section 8 of the Investment Company Act of 1940. Neither FMR Corp.,
Edward C. Johnson, 3d, or Abigail P. Johnson has the sole power to vote or
direct the voting of any of the 2,041,900 shares shown. This power resides
with the Board of Trustees of the various institutions for which FMR
Corp.'s wholly owned subsidiaries act as investment advisers.
(13) The number of shares shown are owned by various individual and
institutional investors including the T. Rowe Price Horizons Fund, Inc.
(which owns 1,100,000 shares, representing 6.0% of the shares outstanding),
for which T. Rowe Price Associates, Inc. ("Price Associates") serves as
investment adviser with power to direct investments and/or sole power to
vote the securities. For purposes of the reporting requirements of the
Securities Exchange Act of 1934, Price Associates is deemed to be a
beneficial owner of such securities; however, Price Associates expressly
disclaims that it is, in fact, the beneficial owner of such securities.
This information is derived from a Schedule 13G dated February 12, 1998
filed by Price Associates and T. Rowe Price Horizons Fund, Inc.
15
<PAGE> 19
STOCKHOLDERS PROPOSALS FOR PRESENTATIONS AT THE 1999 ANNUAL MEETING
Pursuant to the General Rules under the Securities Exchange Act of 1934,
proposals of stockholders intended to be presented at the 1999 Annual Meeting of
Stockholders must be received by management of the Company at its executive
offices by April 28, 1999 (i.e., 120 days prior to August 28, 1999).
The Company's Amended and Restated Articles of Incorporation also contain
requirements concerning advance notice to the Company of any stockholder
proposal and of any nominations by stockholders of persons to stand for election
as directors at a stockholders' meeting. Notice of stockholder proposals and of
director nominations must be timely given in writing to the Secretary of the
Company prior to the meeting at which the directors are to be elected. To be
timely, notice must be received at the principal executive offices of the
Company not less than 60 days prior to the meeting of stockholders; provided,
however, that in the event that less than 70 days' notice prior to public
disclosure of the date of the meeting is given or made to the stockholders,
notice by the stockholder, in order to be timely, must be so delivered or
received not later than the close of business on the tenth day following the day
on which such notice of the date of the annual meeting was mailed or public
disclosure of the date of the annual meeting was made, whichever first occurs.
A stockholder's notice with respect to a proposal to be brought before the
annual meeting must set forth (a) a brief description of the proposal and the
reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the Company's books, of the stockholder proposing
such business and any other stockholders known by such stockholder to be
supporting such proposal, (c) the class and number of shares of the Company
which are beneficially owned by such stockholder on the date of such stockholder
notice and by any other stockholders known by such stockholder to be supporting
such proposal on the date of such stockholder notice, and (d) any financial
interest of the stockholder in such proposal.
A stockholder's notice with respect to a director nomination must set forth
(a) as to each nominee (1) the name, age, business address and residence address
of the person, (2) the principal occupation or employment of the person, (3) the
class and number of shares of the Company which are beneficially owned by such
person, (4) all information that would be required to be included in a proxy
statement soliciting proxies for the election of the nominee director (including
such person's written consent to serve as a director if so elected) and (b) as
to the stockholder providing such notice (i) the name and address, as they
appear on the Company's books, of the stockholder and (ii) the class and number
of shares of the Company which are beneficially owned by such stockholder on the
date of such stockholder notice.
The complete Amended and Restated Articles of Incorporation provisions
governing these requirements are available to any stockholder without charge
upon request from the Secretary of the Company.
By Order of the Board of Directors,
/s/ C. Michael Moore
C. MICHAEL MOORE,
Secretary
Dated: August 18, 1998
16
<PAGE> 20
DISCOUNT AUTO PARTS, INC.
1998 ANNUAL REPORT
DRIVEN TO WIN
<PAGE> 21
(YEARLY GROWTH BAR GRAPHS)
<PAGE> 22
TABLE OF CONTENTS
DISCOUNT AUTO PARTS, INC. IS ONE OF THE SOUTHEAST'S LEADING
SPECIALTY RETAILERS OF AUTOMOTIVE REPLACEMENT PARTS, MAINTENANCE
ITEMS AND ACCESSORIES FOR THE DO-IT-YOURSELF ("DIY") CONSUMER. AS OF
AUGUST 12, 1998, DISCOUNT AUTO PARTS OPERATED 467 STORES LOCATED
THROUGHOUT FLORIDA, GEORGIA, ALABAMA, MISSISSIPPI, SOUTH CAROLINA
AND LOUISIANA.
<TABLE>
<S> <C>
LETTER TO SHAREHOLDERS AND TEAM 2
BUILDING THE BUSINESS 4
SELECTED FINANCIAL DATA 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 14
CONSOLIDATED STATEMENTS OF INCOME 20
CONSOLIDATED BALANCE SHEETS 21
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 22
CONSOLIDATED STATEMENTS OF CASH FLOWS 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24
REPORT OF MANAGEMENT 34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 35
CORPORATE INFORMATION 36
</TABLE>
1
<PAGE> 23
TO OUR SHAREHOLDERS AND TEAM:
We're pleased to report another strong fiscal year, with do-it-yourself
("DIY") sales up 23 percent, a 32 percent increase in profits from our core
business, and ending our fourth quarter with some of the highest gross margins
in our history - 40 percent. These strong results continue to give us confidence
that our team is highly motivated and passionate about serving our customers for
a lifetime and developing ideas to better develop our team and serve our
customers. In short, we have the team that is "Driven to Win."
At fiscal year-end our store count totaled 452, and our Team began to serve
customers in the exciting aftermarket parts markets of Atlanta, Georgia (17
stores) and Mississippi (20 stores), as well as continued expansion in our
existing markets. During July 1998, we also opened our first stores in the State
of Louisiana.
Our goal is to be the dominant auto parts supplier in every market we
serve. We're the clear leader in Florida, and we continue to cement that top
position by executing what we call our "scorch the earth" strategy. Florida is
one of the fastest growing states, with a total available parts aftermarket of
approximately $4 billion and a ideal climate for year round auto repair work. It
ranks third in the number of registered vehicles, has a median income of $25,255
and is the fourth most populated state in the nation. And most important,
there's still room for us to expand our DIY market dominance in Florida by
continuing to open more stores in the state while continuing to position
Discount Auto Parts to be the aftermarket parts supplier to the vast amount of
commercial installer customers we will be serving. With nearly a quarter of our
stores outside the state of Florida, we believe we have built the same
foundation to "scorch the earth" in every market we serve. We're focused, we're
confident, and we're in motion.
We doubled the size of our distribution center this year. This will allow
us to expand our total SKU count availability, as well as better serve our DIY
and commercial installer customers. With a higher percentage of products in
stock, customers rarely have to wait for special orders. In fact, our
distribution center filled, on average, approximately 97 percent of all orders
requested by our stores. Our expanded 600,000 square foot distribution center
will also allow Discount Auto Parts to serve more stores with greater
efficiency. This will provide our Express Warehouses with daily delivery of
thousands of new part numbers. Our Express Warehouse, a mini-distribution
center, was introduced this year and we currently have four opened with four
more under development for fiscal 1999. These sites are designed to provide
tremendous parts availability to our DIY and commercial customers.
Like many industries, ours is consolidating, with significant mergers and
acquisitions by and among many of the top companies. According to the magazine
Automotive Marketing (July 1998), the top 10 national chains now account for 70
percent of all stores on the Top 100. It can be expected that the top tier
companies, like Discount Auto Parts, will use their strengths - experienced
teams, capital resources and strategic advantages - to continue to capture even
greater market share. We believe the industry will continue to consolidate and
that there continue to be opportunities to expand. One only needs to consider
that the top 10 automotive parts retailers only account for approximately 14% of
the estimated $70 billion parts market.
As you'll note further on in this Annual Report, our management team has
deep experience in the automotive parts market. With an average of over 12 years
in the business, many starting at the store level, they know the industry and
are well-equipped to lead our charge into new markets and new ventures.
Providing our Team opportunity to grow into anything they dream they can be is a
strategic advantage that has helped us meet every challenge we've faced so far.
We are certain that our Team will carry us ably into the future.
2
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 24
This year, Warren Shatzer, our executive vice president of merchandising
retired. The team he's coached and prepared over the years is confidently taking
over where he left off. Warren continues to serve our Company as a director but
we must thank him for his many years of exceptional service as an officer of
Discount Auto Parts. We wish him well in his retirement.
Our entry this year into the commercial market has allowed us to leverage
our retail capabilities and pursue part of what is believed to be a $45 billion
nationwide market. Careful to protect our core business of retail auto parts,
we've set up a separate business unit to handle the special needs of commercial
installers. You'll read more about this later in this Annual Report.
[PICTURE OF CEO & PRESIDENT]
We also believe involvement in our communities is important for our team.
Many of our team members are involved in community service, such as youth sport
teams, civic clubs and other activities that help improve their communities. We
support these efforts wholeheartedly. In fact, our team members throughout the
Company raised more than $100,000 for the Children's Miracle Network this year,
on top of participating in the Hope Worldwide toy drive, the Juvenile Diabetes
Foundation, and many other worthy charities.
As usual, it has been an exciting year. But as exciting as this past year
has been we believe it is simply a stepping stone and outstanding bridge for the
robust times ahead for our Team, our Customers and our Company. History always
identifies moments of great change and we believe fiscal 1998 will be identified
as one of those moments as it relates to Discount Auto Parts. Our commitment to
our Team, our Customers and the numerous new Ideas to operating more efficiently
gives us confidence to march forward toward our goals and continue to be the low
cost provider for our Customers.
We thank our over 4,300 team members, our Customers and our shareholders
for their support this past year, and look forward to an exciting and
challenging future for Discount Auto Parts.
/s/ Peter J. Fontaine /s/ William C. Perkins
Peter J. Fontaine William C. Perkins
Chairman & CEO President & COO
3
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 25
BUILDING THE BUSINESS
"There is only one way to build a business. First you build the team,
and then the team builds the business. There is no other way."
Herman and Denis Fontaine
Discount Auto Parts Co-Founders
At Discount Auto Parts, we believe that a company's business strategy is
only as good as the people who execute it. Our 27-year success story can be
credited to the hard work and devotion of our Team, and they are playing a
pivotal role as we move forward with new products into new markets, new ventures
and new opportunities. Our Team is "Driven to Win."
Our business strategy is driven by what we call the three "P"s: People,
Parts and Profit. People-our Team-are the linchpin of our success. Our expanded
product offering, the second "P", is an important way we can provide our
customers with what they want when they want it. And profit is really what it
all adds up to. It's the yardstick of our success.
We learned long ago that if we give our Team the tools and skills they need
to succeed, they will. Combine a committed, focused Team with a customer-focused
business strategy, and the result is a win for everyone. Just look at our solid
financial performance for the past five years: sales have grown at 21 percent
annually; operating income has grown at a rate of 19 percent annually; and our
five-year adjusted annual growth in net income has been at a 19 percent rate.
A CUSTOMER-DRIVEN BUSINESS STRATEGY
It all begins with knowing the customer. The "do-it-yourself" customer has
very specific needs. When he or she is looking for an auto part, it's usually
because the car is either broken down, or needs work then and now. A convenient,
neighborhood store with convenient store hours is appreciated, and appreciated
even more is the ability to find the right part in stock. In the store, the
customer wants to be assisted by a knowledgeable and courteous store
representative. And price is paramount: our customers are looking for
affordability and that means we need to deliver low cost.
[TEAM MEMBER BEHIND COUNTER HELPING CUSTOMER]
Discount Auto Parts' success is built on our ability to provide customers
with exactly what they want: convenience, availability, customer service and low
cost. That's the formula for our success.
4
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IT BEGINS WITH THE TEAM
A key component of our business strategy is our investment in the training
and development of our Team. We've learned that if the Team understands our core
values, our business strategies and what our customers need, they're better
prepared to execute our plan. Every team member receives not only technical
training, but continual training on the Company's operations, goals and
objectives. The Company's commitment to customer service and low cost is
ingrained in every team member and becomes the guidepost for his or her daily
work.
The entire Team is tenacious about cost savings-because they understand the
connection between company costs and our ability to provide our customers with
low prices. This company-wide focus on cost control allows us to remain a
low-cost provider in our business-yet still be profitable. We work hard to make
sure that Discount Auto Parts has some of the highest operating margins in the
business.
Our profitability allows us to open more stores, providing customers with
the convenience they seek and building our revenue and bottom line income in the
process. It also allows us to invest in systems and inventory to ensure parts
are available when customers need them. And, the Team's focus on customer
service builds repeat business, adding even further to our bottom line.
We're proud to have one of the highest team member retention rates in our
industry. That means our staffing and turnover costs tend to be lower than
others in our industry, which plays a key role in the company's cost-efficiency.
ACHIEVING MARKET DOMINANCE
Our goal is market dominance and our customer-driven business strategy is a
reliable formula for getting us there. We've proved it in Florida, where we're
number one in almost every market we serve, and we're on our way to proving it
in other states. Starting from our strong base in Florida, we've been
geographically and strategically expanding our presence through the south. We're
now in six states and growing.
Over the years, we've refined and tested our market strategy so that today,
we have a proven formula for how to enter a market and succeed. Our strategy is
built around the tried and tested concept of store saturation.
[GRAPH]
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STORE SATURATION
We're often asked why we place Discount Auto Parts stores so close
together. Doesn't the opening of a new Company store reduce sales from the
adjacent store?
Experience has taught us that immediately after we open a new store in
close proximity to an existing Discount Auto Parts store, we usually see an
overall increase in sales for the entire area. Besides increased total sales,
this store saturation strategy allows us to leverage advertising, distribution
and other costs, helping keep our retail prices low. In addition, we believe
this strategy helps us to attack new markets successfully.
[STORE EXTERIOR]
If the strategy sounds familiar, it's the same one that's been used
successfully by the retail fast food industry, which shares a focus on customer
convenience. Clustering stores works. We may not have invented it, but we've
certainly refined it.
We took this strategy to a new level in 1991, when we opened our first
"Discount Auto Parts Depot" store. A depot store is larger than our standard
store, offers a wider assortment of parts and is usually located in a highly
populated urban area. It serves as a sort of hub, surrounded by our standard
mini-depot stores, and not only serves customers, but supports the surrounding
stores with additional parts. We have 23 Discount Auto Parts Depots now, each
carrying an average of 20,000 SKUs.
COMMERCIAL INSTALLERS: NEW SALES OPPORTUNITIES
For some time, we've been looking at the feasibility of applying our
formula for success to a new, even bigger and faster-growing market: commercial
installers. This market, which is estimated to be over $45 billion in size,
offers us the opportunity for additional sales growth, at a lower capital cost,
since we can leverage our current real estate, systems, and to a great extent,
our inventory.
Our research told us that this commercial customer wanted access to a large
inventory of high quality parts, a fast delivery system, knowledgeable service
and competitive prices. We knew we had the ability to service each one of those
needs.
After more than a year of study and test, we began to roll out our
commercial business plan in the third quarter of fiscal 1998, with plans to
expand the roll-out chain-wide over the next 18 to 24 months. When complete we
expect that commercial delivery will be provided from approximately two-thirds
of our store base. Our aim has been to prudently enter this market, adding
incremental sales while taking care to not dilute our retail business, and so
far we've been able to do just that.
PRO 2 CALL
Auto Parts for Professionals
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Using our existing infrastructure, we established "Pro2Call", our
commercial business unit, and staffed it with a team of highly qualified,
dedicated professionals trained to respond to the issues important to commercial
installers. The commercial team operates separately from our retail-focused
team, so that our retail business can continue its own focus without disruption.
The commercial business actually leverages our existing retail
capabilities. It was fairly simple to expand our Express Warehouse concept to
serve the commercial market. This mini-distribution center concept was
originally intended to provide our retail customer with quick access to an
expanded product line. Usually attached to the depot store in a major
metropolitan market, the Express Warehouse stocks tens of thousands of
additional parts and can serve up to 80 stores in a geographic area.
We have been able to leverage the Express Warehouse to efficiently service
our commercial customers as well, allowing us to utilize fixed assets-our land
and buildings-more efficiently. We operate four Express Warehouses today and
expect to open another four in the coming fiscal year. Our stores stock
thousands of SKU's and are positioned to serve the retail and commercial
customers' needs. The infrequent times we are unable to serve our customers
needs from our retail store location, the parts can usually be quickly accessed
from our Express Warehouse inventory.
MORE PRODUCTS MEANS BETTER CUSTOMER SERVICE
It's important that customers find the parts they need quickly and easily,
and to that end, we've expanded our product line extensively through the Depot
and Express Warehouse concepts. After nearly three decades of experience, we
have learned to examine emerging trends in the automotive industry (such as the
increasing proliferation of trucks and sports-utility vehicles) and data on the
popularity of parts to come up with the right mix to serve customer needs.
[STORE INTERIOR]
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<PAGE> 29
Further, we've worked hard to increase margins on parts without sacrificing
our base as a low-cost provider through such mechanisms as premium product
categories.
The right mix of products is an ever changing challenge, but we believe
we're getting closer every day. Our DIY comparable store sales increase of 7.7%
for fiscal 1998 would appear to be proof positive.
MEET THE SENIOR MANAGEMENT TEAM
When all is said and done, it's the Team that makes it all happen. We'd
like you to meet some of the men and women who lead our Discount Auto Parts
Team. Our senior management team is experienced, committed, and motivated-and
most important-they're able to motivate and inspire the more than 4,300 Team
Members they lead.
[MEMBERS OF SENIOR MANAGEMENT TEAM: VP - MARKETING, VP - REAL ESTATE,
DIRECTOR - ADMINISTRATION AND INVESTOR RELATIONS, VP - MIS,
VP - HUMAN RESOURCES, DIRECTOR - COMMERCIAL SALES AND CFO]
BILL PERKINS: From Store Clerk to Company President
When a new team member asks about opportunities to succeed, he or she need
look for inspiration no further than Discount Auto Parts President Bill Perkins.
In 1983, Bill worked behind the counter at Store #2 on Memorial Boulevard
in Lakeland, Florida. He received his first promotion to team leader in a few
months. Then, in 1985 he was named manager of another Florida store, in 1986 was
promoted to a Training Manager, in 1987 received a promotion to Key Manager and
by 1988 he transferred to corporate headquarters and was placed in charge of
inventory valuation. Just four years later he was named chief financial officer.
In 1994 he took charge of operations and, in 1997, he took the reins as company
president.
During that same period, Discount Auto Parts grew from less than 50 stores
and $50 million in revenue to 452 stores and $447.5 million in revenue at the
end of fiscal year 1998. Bill Perkins' success story epitomizes the Company's
belief that if you build the team, the team builds the business. And he's not
alone. The depth of experience in the entire senior management team inspires
young team members to believe that old-fashioned hard work and commitment pay
off and that they, too, can build long, successful careers at Discount Auto
Parts.
Operations
STEVE BAIR, vice president-operations, is a 20-year company veteran who is
directly responsible for day-to-day operation of our stores, and, in fact, Steve
started his career in the stores too. He eventually became a store manager, then
served as division manager and regional manager. His deep experience in our
retail operations has served him well in his senior management role.
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"I've held just about every position in retail, which gives me a unique
understanding of customer needs, as well as what the team needs to support our
customers. I believe it's important to stay abreast of current management
practices, so I've taken numerous management seminars, Dale Carnegie programs,
the Covey Leadership Conference, as well as others."
Commercial Sales
JIM MULLIGAN, director-commercial sales, also began his career with
Discount Auto Parts in our stores. During his 12 years at the company, he worked
his way up to division manager and then moved to our corporate headquarters as
merchandising manager. Jim was chosen to head up our entry into the important
commercial market based on his ability to meet head-on every challenge he's been
given.
"One thing I learned early in my career at Discount Auto Parts: a team
member is given as much responsibility as he or she is capable of and willing to
take on. There's no end to the opportunities available. This year, I've enjoyed
building a new team of capable professionals for our entry into the commercial
market."
Human Resources
CLEMENT BOTTINO, vice president-human resources, will celebrate his 20th
anniversary with the company next year. His responsibilities include all
staffing and benefits programs, as well as team training and development. Like
so many other senior managers, Clement began his career at the store level and
worked his way up through store and division management positions. This unique
blend of skills and experience makes him a more effective human resources
professional.
"I was a teacher for a year after college, and coached basketball and
football, and I've called on those skills many times in working with our team.
Executives from other companies have told me they admire our team's performance,
and I tell them the key is training, development and coaching."
[MEMBERS OF SENIOR MANAGEMENT TEAM: DIRECTOR - MERCHANDISING, DISTRIBUTION
CENTER MANAGER, DISTRIBUTION CENTER - GENERAL MANAGER, VP - PURCHASING,
VP - OPERATIONS & DIRECTOR - PURCHASING]
Distribution
ROSS MULLIS, general manager-distribution, came to Discount Auto Parts in
1990, working in the shipping department and as a part-time driver. He was
promoted to shipping supervisor and gained experience managing all aspects of
the distribution center. Today, Ross is responsible for the distribution
center's current expansion program and its long-term vision.
"Planning future distribution needs can be a formidable task, but
fortunately, we have a good handle on where the company is going long-term, and
a good grasp of what's needed by our stores to serve our customers even better."
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RUSSELL MORRISON, distribution center manager, is a 12-year Discount Auto
Parts veteran, having begun in the distribution center and having run every one
of its departments. Today, he manages our Lakeland distribution center team and
its operations.
"I work with more than 400 team members and am responsible for our entire
distribution budget. It's a big job-and it gets bigger every year as we continue
to expand through the Southeast. Expansion can only mean more opportunities for
our company and the team. It's an exciting time to be at Discount Auto Parts."
Purchasing
DAVE VIELE, vice president-purchasing, is a 22-year Discount Auto Parts
veteran with extensive experience in all facets of supply chain management. Dave
began his career loading trucks in the distribution center, and moved up in the
organization over the years, learning all aspects of both distribution and the
buying systems. His natural talent for negotiation has led Dave to his present
position, where he's responsible for inventory performance, profitability and
key vendor negotiations and relationships.
"I've seen many similarities between my tenure in the U.S. Navy and my
career at Discount Auto Parts. Team work and effective leadership are key in
both organizations. A team needs to work together to accomplish extraordinary
things, and it's not uncommon for our team to exceed expectations. That's what
it's all about at Discount Auto Parts."
[26 DIVISION MANAGERS]
ROB WILLIS, director-purchasing, has served the company for more than 13
years. He, too, started in our stores, and worked his way up to division
manager. Rob was one of our first Depot store managers, where he developed
expertise in product selection and the testing of new products. He's drawing on
that experience today, in his responsibility for the day to day operations of
the purchasing department, as well as the management and development of our
buyers.
"The diversity of my job keeps me interested and challenged every day. I
work with talented buyers and get to assist them in selecting new products for
our customers. It's a stimulating environment in which every day brings a new
opportunity and a new test of our skills."
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Merchandising
TOM MERK, director-merchandising, joined the company in 1989 as a store
manager, and has held several senior management positions and played a major
role in our success in the highly competitive Jacksonville, Florida market. Tom
was experienced in our industry when he joined us: for 15 years he had owned and
operated multiple auto parts stores in New York.
[EIGHT DISTRIBUTION CENTER MANAGERS]
"As I look back over the past 25 years I can see many changes in the
automotive aftermarket. But one thing hasn't changed, and that's the requirement
to understand the customer's needs- and then be responsive to them. Discount
Auto Parts shares that philosophy, and that's why I came to work here."
Marketing
STEVE JOINER, vice president-marketing, started work at Discount Auto Parts
in 1983 as an advertising professional, after beginning his career in a Florida
advertising agency. At the time, the company had 32 stores, and Steve was called
on to create its advertising and marketing strategy from scratch. As the company
grew and evolved, so did Steve's job, and he is now responsible for an extensive
marketing and advertising program to support and grow sales.
"When I received my degree in marketing and journalism I never thought it
would lead to what is now a 15-year career in retail marketing. Advertising is a
key marketing tactic in any retail business, and we're no different. We use it
to prove to our customers daily that we're the low-cost provider of auto parts
in their community."
Real Estate
CLIFF WILEY, vice president-real estate, began his career in commercial
real estate and joined the Company 14 years ago in the real estate department.
Cliff worked directly for and learned from Co-founder Denis Fontaine, who seemed
to know how to select exactly the right store location. Over the years Cliff has
continued to hone his research and analytical skills.
"Sometimes I'm asked how my accounting degree has helped me select property
for new stores. Actually, the analytical skills I learned in college have helped
me develop a means of weighing the many factors that go into site selection. We
look at traffic patterns, population, competition, neighborhood demographics-
all sorts of data that must be factored in to come up with the perfect site for
a new store."
Systems
HANK HARRAH, vice president-information systems, came to the company in
1992, after a more than 20-year career in data processing and information
systems. He leads the company's ongoing efforts to achieve economies through
more effective use of technology and computer systems and has played a key role
in setting up the company's management information systems.
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"The technology changes that have taken place since my college days have
been enormous. Today, technology means more than a mainframe at corporate
headquarters processing historical data. Technology has an impact on all aspects
of our business. It's especially exciting to use technology to better serve our
customers and team and keep us on the cutting edge of our industry".
Finance
MIKE MOORE, chief financial officer and a CPA, came to Discount Auto Parts
in 1996 after a 15-year career in public accounting with Ernst & Young LLP. In
fact, Discount Auto Parts was his client for many years, giving him a unique,
below-the-surface perspective on the Company. He brings to his position superb
financial management skills.
"While my career at Ernst & Young focused on the retail sector, I also
worked in numerous other industry sectors with clients ranging from millions of
dollars in revenues to billions of dollars. Everyday I draw from those
experiences to assist Discount Auto Parts in its growth and market expansion."
Administration / Investor Relations
KRISTI MULLIS, director-administration and investor relations, joined the
Company's finance department in 1990 after over a decade in the banking
industry. She left banking management to come to Discount Auto Parts and, never
shying from a challenge, has been able to use that experience to help lend shape
and order to several Company programs which included the creation of the
investor relations department when the Company went public in 1992.
"Talking with our shareholders and working with Wall Street gives me a
broad perspective on our Company and our industry and also generates new ideas
about how we can continue to improve communications with our shareholders and
those who follow our stock. My separate role in risk management affords me the
challenge of identifying, analyzing and correcting potential areas of risk to
the company."
Other Key Management
While we have separately listed certain key members of management herein,
those individuals are also backed and supported by the Company's 26 Division
Managers ( "DM's"). On average, our DM's have over 12 years of experience with
Discount Auto Parts and are on average 35 years old. These are the members of
management that ensure our over 4,300 team members and our 467-plus stores
perform consistently every day.
In addition to the DM's, the Company has a distribution center management
team that has on average over 12 years experience with Discount Auto Parts. The
distribution management team oversees our newly expanded 600,000 square foot
distribution center and its approximately 450 team members. Their experience has
helped keep our distribution costs among the lowest in our industry.
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SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------
JUNE 2 JUNE 3 MAY 28 MAY 30 MAY 31
1998 1997(1) 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SELECTED
OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales $447,491 $405,186 $307,476 $253,700 $207,569
Cost of sales, including distribution costs 271,404 256,646 186,917 158,710 131,469
-------- -------- -------- -------- --------
Gross profit 176,087 148,540 120,559 94,990 76,100
Selling, general and administrative expenses 124,125 101,336 80,090 64,081 49,985
-------- -------- -------- -------- --------
Income from operations 51,962 47,204 40,469 30,909 26,115
Litigation settlement -- (20,545) -- -- --
Other income 2,434 187 1,164 1,133 799
Gain on life insurance proceeds -- -- -- 4,836 --
Interest expense (10,203) (6,125) (5,078) (6,295) (3,635)
-------- -------- -------- -------- --------
Income before income taxes 44,193 20,721 36,555 30,583 23,279
Income taxes 17,013 7,980 14,092 10,020 8,962
-------- -------- -------- -------- --------
Net income $ 27,180 $ 12,741 $ 22,463 $ 20,563 $ 14,317
======== ======== ======== ======== ========
Basic net income per common share $ 1.64 $ .77 $ 1.44 $ 1.48 $ 1.03
======== ======== ======== ======== ========
Diluted net income per common share $ 1.63 $ .77 $ 1.41 $ 1.47 $ 1.02
======== ======== ======== ======== ========
Weighted average common shares outstanding 16,604 16,581 15,647 13,907 13,954
SELECTED OPERATING DATA
NUMBER OF STORES AT YEAR END 452 400 314 248 208
TOTAL STORE SQUARE FOOTAGE AT YEAR END (IN
THOUSANDS)(2) 2,007 1,836 1,610 1,405 1,197
AVERAGE NET SALES PER STORE (IN THOUSANDS)(3)(4) $ 1,050 $ 1,023 $ 1,094 $ 1,113 $ 1,084
AVERAGE NET SALES PER SQUARE FOOT(3)(4) $ 233 $ 212 $ 204 $ 195 $ 195
PERCENTAGE INCREASE (DECREASE) IN COMPARABLE STORE NET
SALES(4)(5) 7.7% (.6)% 4.9% 5.8% 4.0%
TEAM MEMBERS 4,350 3,677 3,148 2,826 2,172
BALANCE SHEET DATA
INVENTORIES $172,027 $151,644 $111,408 $ 91,187 $ 59,581
WORKING CAPITAL 105,662 80,573 59,801 46,420 34,055
PROPERTY AND EQUIPMENT, NET 314,519 265,589 208,094 166,169 131,893
TOTAL ASSETS 511,735 443,066 338,263 270,832 213,174
LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES 160,695 114,117 50,400 94,550 70,118
STOCKHOLDERS' EQUITY 256,885 229,061 216,046 117,895 97,214
</TABLE>
- - ---------------
(1) FISCAL YEAR 1997 CONSISTED OF 53 WEEKS; ALL OTHER YEARS REPORTED CONSISTED
OF 52 WEEKS.
(2) STORE SQUARE FOOTAGE INCLUDES ONLY SELLING AND MERCHANDISING SPACE.
(3) 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 THE RESPECTIVE PERIOD. FOR FISCAL 1997, AVERAGE NET SALES PER
STORE AND AVERAGE NET SALES PER SQUARE FOOT HAVE BEEN ADJUSTED TO EXCLUDE
THE EFFECT OF THE FIFTY-THIRD WEEK.
(4) THE AMOUNTS SHOWN FOR FISCAL 1997 EXCLUDE COMMERCIAL SALES OF AIR
CONDITIONING PRODUCTS, SUCH AS FREON. IF THESE COMMERCIAL SALES OF FREON
WERE TO HAVE BEEN INCLUDED, THE AVERAGE NET SALES PER STORE, AVERAGE NET
SALES PER SQUARE FOOT AND THE INCREASE IN COMPARABLE STORE SALES FOR FISCAL
1997 WOULD HAVE BEEN $1,115,000, $231 AND 9.7%, RESPECTIVELY.
(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. THE
DECREASE FOR FISCAL 1997 HAS BEEN ADJUSTED TO EXCLUDE THE EFFECT OF THE
FIFTY-THIRD WEEK.
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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
--------------------------------------------------------
JUNE 2 JUNE 3 MAY 28
1998 % 1997 % 1996 %
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales $447,491 100.0% $405,186 100.0% $307,476 100.0%
Cost of sales, including distribution
costs 271,404 60.7 256,646 63.3 186,917 60.8
-------- ----- -------- ----- -------- -----
Gross profit 176,087 39.3 148,540 36.7 120,559 39.2
Selling, general and administrative
expenses 124,125 27.7 101,336 25.0 80,090 26.0
-------- ----- -------- ----- -------- -----
Income from operations 51,962 11.6 47,204 11.7 40,469 13.2
Litigation settlement -- -- (20,545) (5.1) -- --
Other income, net 2,434 .6 187 -- 1,164 .4
Interest expense (10,203) (2.3) (6,125) (1.5) (5,078) (1.7)
-------- ----- -------- ----- -------- -----
Income before income taxes 44,193 9.9 20,721 5.1 36,555 11.9
Income taxes 17,013 3.8 7,980 2.0 14,092 4.6
-------- ----- -------- ----- -------- -----
Net income $ 27,180 6.1% $ 12,741 3.1% $ 22,463 7.3%
======== ===== ======== ===== ======== =====
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES FOR THE FIFTY-TWO WEEK PERIOD ENDED JUNE 2, 1998 INCREASED $42.3
MILLION, OR 10.4%, OVER NET SALES FOR THE FIFTY-THREE WEEK PERIOD ENDED JUNE 3,
1997. COMMERCIAL SALES OF R-12 FREON REPRESENTED APPROXIMATELY $32.7 MILLION OR
8.1% OF THE TOTAL SALES FOR FISCAL 1997. SUCH COMMERCIAL SALES WERE NEGLIGIBLE
FOR FISCAL 1998. EXCLUDING THE IMPACT OF SUCH COMMERCIAL SALES AND THE EXTRA
WEEK IN FISCAL 1997, TRADITIONAL DIY RETAIL SALES FOR FISCAL 1998 INCREASED
22.5% OVER THE COMPARABLE FISCAL 1997 PERIOD. TRADITIONAL DIY COMPARABLE STORE
SALES INCREASED 7.7% FOR FISCAL 1998 AS COMPARED TO FISCAL 1997, AFTER EXCLUDING
THE EFFECT OF THE EXTRA WEEK. WHEN INCLUDING COMMERCIAL SALES OF FREON IN
COMPARABLE STORE SALES FOR FISCAL 1997, COMPARABLE STORE SALES WOULD HAVE
REFLECTED A DECREASE OF 1.9% FOR FISCAL 1998. THE REMAINING INCREASE IN NET
SALES FROM THE COMPANY'S CORE OPERATIONS WAS ATTRIBUTABLE TO APPROXIMATELY $83.1
MILLION IN SALES FROM NEW STORES OPENED SINCE THE BEGINNING OF FISCAL 1997. AS
OF JUNE 2, 1998, THE COMPANY HAD 452 STORES IN OPERATION COMPARED TO 400 AT THE
END OF FISCAL 1997.
GROSS PROFIT FOR THE FIFTY-TWO WEEK PERIOD ENDED JUNE 2, 1998 WAS $176.1
MILLION, OR 39.3% OF NET SALES, COMPARED WITH $148.5 MILLION, OR 36.7% FOR
FISCAL 1997. THE IMPROVEMENT IN GROSS MARGINS FOR FISCAL 1998 WAS DUE IN PART TO
THE HIGHER LEVEL OF COMMERCIAL SALES OF R-12 FREON IN THE FISCAL 1997 COMPARABLE
PERIOD, WHICH GENERALLY HAD LOWER GROSS MARGINS DUE TO THE PRODUCT'S COMMODITY
NATURE. EXCLUDING THE IMPACT OF COMMERCIAL FREON SALES IN FISCAL 1997, THE GROSS
MARGIN WOULD HAVE BEEN 38.0% FOR FISCAL 1997. THE REMAINING
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IMPROVEMENT IN GROSS MARGIN FOR FISCAL 1998 WAS PRIMARILY ATTRIBUTABLE TO LOWER
PRODUCT COSTS AND MODIFICATIONS TO THE COMPANY'S MERCHANDISING STRATEGY.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES FOR FISCAL 1998
INCREASED BY $22.8 MILLION OVER SUCH EXPENSES FOR FISCAL 1997, AND INCREASED AS
A PERCENTAGE OF NET SALES FROM 25.0% IN FISCAL 1997 TO 27.7% IN FISCAL 1998. THE
INCREASE WAS PRIMARILY THE RESULT OF HIGHER LEVELS OF COMMERCIAL SALES OF R-12
FREON IN FISCAL 1997. SUCH COMMERCIAL SALES GENERALLY HAD VERY LIMITED
ASSOCIATED SG&A EXPENSES. EXCLUDING THE COMMERCIAL SALES OF R-12 FREON, SG&A
EXPENSES AS A PERCENTAGE OF SALES FOR FISCAL 1997 WOULD HAVE BEEN 27.2%. AFTER
THE EXCLUSION OF SUCH SALES, THE INCREASE IN SG&A EXPENSE AS A PERCENTAGE OF
SALES FOR FISCAL 1998 WAS PRIMARILY ATTRIBUTABLE TO EXPENSES INCURRED IN THE
DEVELOPMENT AND ROLLOUT OF THE COMPANY'S COMMERCIAL DELIVERY PROGRAM.
INCOME FROM OPERATIONS FOR FISCAL 1998 INCREASED 10.1% TO $52.0 MILLION AS
COMPARED TO $47.2 MILLION FOR FISCAL 1997. INCOME FROM OPERATIONS FOR FISCAL
1997 INCLUDE EARNINGS ASSOCIATED WITH COMMERCIAL SALES OF FREON WHILE SIMILAR
SALES GENERALLY WERE NOT MADE IN FISCAL 1998. THE FISCAL 1997 INCOME FROM
OPERATIONS ALSO REFLECTS AN EXTRA WEEK OF RESULTS. WHEN EXCLUDING THE IMPACT OF
SUCH COMMERCIAL SALES AND THE EFFECTS OF THE EXTRA WEEK OF OPERATIONS IN THE
FISCAL 1997 PERIOD, TRADITIONAL DIY OPERATING INCOME (WHICH REFLECTS OPERATING
INCOME EXCLUSIVE OF COMMERCIAL FREON SALES AND ASSOCIATED COST OF SALES)
INCREASED 31.6% FOR FISCAL 1998 OVER THE FISCAL 1997 RESULTS.
AS FURTHER DISCUSSED IN NOTE 9 OF THE NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, THE COMPANY REACHED AN AGREEMENT IN JULY 1997 TO SETTLE A LAWSUIT
BROUGHT BY AIRGAS, INC. AND CERTAIN AIRGAS AFFILIATES AGAINST SEVERAL
DEFENDANTS, INCLUDING THE COMPANY AND ONE OF ITS EMPLOYEES. AS A RESULT OF THE
SETTLEMENT, THE COMPANY RECORDED A PRE-TAX CHARGE OF $20.5 MILLION IN THE FOURTH
QUARTER OF FISCAL 1997. THE CHARGE REFLECTS THE PAYMENTS MADE PURSUANT TO THE
TERMS OF THE ACTUAL SETTLEMENT PLUS ASSOCIATED LEGAL AND PROFESSIONAL FEES.
OTHER INCOME FOR FISCAL 1998 PRIMARILY INCLUDES A $4.0 MILLION FEE RECEIVED
FROM THE TERMINATION OF THE PROPOSED ACQUISITION OF HI-LO AUTOMOTIVE, INC., LESS
RELATED EXPENSES.
INTEREST EXPENSE FOR FISCAL 1998 WAS $10.2 MILLION AS COMPARED TO $6.1 MILLION
FOR FISCAL 1997. THE INCREASE FOR FISCAL 1998 WAS PRIMARILY THE RESULT OF
INCREASED BORROWINGS ASSOCIATED WITH NEW STORE GROWTH, THE EXPANSION OF THE
COMPANY'S EXISTING DISTRIBUTION CENTER, AND THE SEPTEMBER 1997 FUNDING OF THE
AMOUNTS DUE PURSUANT TO THE TERMS OF THE SETTLEMENT AGREEMENT WITH AIRGAS.
THE COMPANY'S EFFECTIVE TAX RATE FOR BOTH FISCAL 1998 AND FISCAL 1997 WAS
38.5%.
PRIMARILY AS A RESULT OF THE FOREGOING, NET INCOME FOR FISCAL 1998 WAS $27.2
MILLION OR $1.63 PER DILUTED SHARE AS COMPARED TO $12.7 MILLION OR $.77 PER
DILUTED SHARE REPORTED FOR FISCAL 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES FOR THE FIFTY-THREE WEEK PERIOD ENDED JUNE 3, 1997 INCREASED $97.7
MILLION, OR 31.8%, OVER NET SALES FOR THE FIFTY-TWO WEEK PERIOD ENDED MAY 28,
1996. COMMERCIAL SALES OF R-12 FREON REPRESENTED APPROXIMATELY $32.7 MILLION OR
8.1% OF THE TOTAL SALES FOR FISCAL 1997. NET SALES FOR THE FIFTY-THREE WEEKS
ENDED JUNE 3, 1997 FROM THE COMPANY'S CORE RETAIL STORE OPERATIONS INCREASED
$67.7 MILLION OR 22.2% OVER THE FIFTY-TWO WEEK PERIOD ENDED MAY 28, 1996.
COMPARABLE STORE SALES FROM THE COMPANY'S CORE RETAIL STORE OPERATIONS
15
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 37
DECREASED BY .6% FOR FISCAL 1997 ON A COMPARABLE WEEK BASIS, WHEN EXCLUDING
COMMERCIAL SALES OF R-12 FREON. WHEN INCLUDING SUCH SALES, COMPARABLE STORE
SALES INCREASED 9.7% FOR FISCAL 1997 ON A COMPARABLE WEEK BASIS AS COMPARED TO
FISCAL 1996. THE REMAINING INCREASE IN NET SALES FROM THE COMPANY'S CORE
OPERATIONS WAS ATTRIBUTABLE TO APPROXIMATELY $84.0 MILLION IN SALES FROM NEW
STORES OPENED SINCE THE BEGINNING OF FISCAL 1996. AS OF JUNE 3, 1997, THE
COMPANY HAD 400 STORES IN OPERATION COMPARED TO 314 AT THE END OF FISCAL 1996.
GROSS PROFIT FOR THE FIFTY-THREE WEEK PERIOD ENDED JUNE 3, 1997 WAS $148.5
MILLION, OR 36.7% OF NET SALES COMPARED WITH $120.6 MILLION, OR 39.2% OF NET
SALES FOR FISCAL 1996. THE LOWER GROSS PROFIT PERCENTAGE FOR FISCAL 1997 WAS
PRIMARILY THE RESULT OF INCREASED REVENUES ASSOCIATED WITH COMMERCIAL SALES OF
R-12 FREON IN FISCAL 1997, WHICH GENERALLY TEND TO HAVE LOWER GROSS MARGINS DUE
TO THE PRODUCT'S COMMODITY NATURE. EXCLUDING THE IMPACT OF COMMERCIAL FREON
SALES IN FISCAL 1997, THE GROSS MARGIN WOULD HAVE BEEN 38.0% FOR FISCAL 1997.
THE REDUCTION IN FISCAL 1997 TRADITIONAL DIY GROSS MARGIN WAS PRIMARILY THE
RESULT OF THE CONTINUING EFFECTS OF THE DECREASE IN RETAIL PRICING WHICH
OCCURRED LATE IN THE FOURTH QUARTER OF FISCAL 1996 AND HIGHER PROMOTIONAL
MARKDOWNS WHICH RESULTED FROM INCREASED ADVERTISING EFFORTS IN THE SECOND HALF
OF FISCAL 1997.
SG&A EXPENSES FOR FISCAL 1997 INCREASED BY $21.2 MILLION OVER SUCH EXPENSES
FOR FISCAL 1996, AND DECREASED AS A PERCENTAGE OF NET SALES TO 25.0% FROM 26.0%.
THIS DECREASE WAS PRIMARILY THE RESULT OF THE IMPACT OF THE HIGHER LEVELS OF
COMMERCIAL SALES OF R-12 FREON IN FISCAL 1997, WHICH HAD RELATIVELY LOW SG&A
EXPENSES. THE DECREASE WAS OFFSET IN PART BY AN INCREASE IN NET ADVERTISING
EXPENSE.
AS FURTHER DISCUSSED IN NOTE 9 OF THE NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, THE COMPANY REACHED AN AGREEMENT IN JULY 1997 TO SETTLE A LAWSUIT
BROUGHT BY AIRGAS, INC. AND CERTAIN AIRGAS AFFILIATES AGAINST SEVERAL
DEFENDANTS, INCLUDING THE COMPANY AND ONE OF ITS EMPLOYEES. AS A RESULT OF THE
SETTLEMENT, THE COMPANY RECORDED A PRE-TAX CHARGE OF $20.5 MILLION IN THE FOURTH
QUARTER OF FISCAL 1997. THE CHARGE REFLECTS THE PAYMENTS MADE PURSUANT TO THE
TERMS OF THE ACTUAL SETTLEMENT PLUS ASSOCIATED LEGAL AND PROFESSIONAL FEES.
OTHER INCOME PRIMARILY INCLUDES GAINS AND LOSSES ON REAL ESTATE DISPOSALS AND
INTEREST INCOME. THE DECREASE IN FISCAL 1997 IN OTHER INCOME IS PRIMARILY
ATTRIBUTABLE TO THE LOWER AMOUNT OF NET REAL ESTATE GAINS OF APPROXIMATELY
$100,000 IN FISCAL 1997 AS COMPARED TO $1.5 MILLION OF NET REAL ESTATE GAINS IN
FISCAL 1996.
INTEREST EXPENSE FOR FISCAL 1997 WAS $6.1 MILLION AS COMPARED TO $5.1 MILLION
FOR FISCAL 1996. THE INCREASE FOR FISCAL 1997 WAS PRIMARILY THE RESULT OF
INCREASED AVERAGE BORROWINGS ASSOCIATED WITH NEW STORE GROWTH.
THE COMPANY'S EFFECTIVE TAX RATE FOR FISCAL 1997 WAS 38.5% AS COMPARED WITH
38.6% IN FISCAL 1996.
AFTER REFLECTING THE CHARGE ASSOCIATED WITH THE AIRGAS LITIGATION SETTLEMENT,
NET INCOME FOR FISCAL 1997 WAS $12.7 MILLION OR $.77 PER DILUTED SHARE AS
COMPARED TO $22.5 MILLION OR $1.44 PER DILUTED SHARE REPORTED FOR FISCAL 1996.
EXCLUDING THE IMPACT OF THE LITIGATION SETTLEMENT AND ALL RELATED EXPENSES, NET
INCOME WOULD HAVE BEEN $25.6 MILLION OR $1.54 PER DILUTED SHARE FOR FISCAL 1997.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH PROVIDED BY OPERATING ACTIVITIES WAS $14.5 MILLION IN FISCAL 1998,
$8.7 MILLION IN FISCAL 1997 AND $22.8 MILLION IN FISCAL 1996. THE OVERALL
DECREASE IN NET CASH PROVIDED BY OPERATING ACTIVITIES IN FISCAL 1998 AS COMPARED
TO NET CASH PROVIDED BY OPERATING ACTIVITIES IN FISCAL 1996 WAS PRIMARILY THE
RESULT OF THE FUNDING OF THE AIRGAS SETTLEMENT IN FISCAL 1998. THE INCREASE IN
FISCAL 1998 AS COMPARED TO FISCAL 1997 WAS PRINCIPALLY THE
16
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 38
RESULT OF AN INCREASE IN NET INCOME, SUBSTANTIAL DEFERRED INCOME TAX EXPENSE IN
FISCAL 1998 AS COMPARED TO A DEFERRED INCOME TAX BENEFIT IN FISCAL 1997,
INVENTORY GROWTH IN FISCAL 1998 AT A LEVEL SUBSTANTIALLY LESS THAN IN FISCAL
1997, AN INCREASE IN THE AMOUNT OF DEPRECIATION AND AN INCREASE IN CURRENT
LIABILITIES, OFFSET IN PART BY THE FUNDING OF THE AIRGAS SETTLEMENT, A DECREASE
IN THE AMOUNT OF INCREASE IN ACCOUNTS PAYABLE AND ADDITIONAL INCREASES IN THE
AMOUNTS OF PREPAID EXPENSES AND OTHER CURRENT ASSETS.
CAPITAL EXPENDITURES FOR FISCAL 1998 WERE $64.6 MILLION AS COMPARED TO $70.2
MILLION IN FISCAL 1997 AND $52.2 MILLION IN FISCAL 1996. THE MAJORITY OF THE
FISCAL 1998 CAPITAL EXPENDITURES RELATED TO THE 53 NEW STORES OPENED DURING THAT
PERIOD AND COSTS ASSOCIATED WITH A MAJOR EXPANSION OF THE COMPANY'S DISTRIBUTION
CENTER, WHICH INVOLVES AN INCREASE OF THE COMPANY'S EXISTING DISTRIBUTION CENTER
FROM APPROXIMATELY 300,000 SQUARE FEET TO APPROXIMATELY 600,000 SQUARE FEET.
MOST OF THE EXPANSION PROJECT HAS BEEN COMPLETED AND THE BALANCE OF THE PROJECT
IS PRINCIPALLY A SIGNIFICANT ADDITION OF OFFICE SPACE. THE TOTAL COST OF THE
EXPANSION IS ESTIMATED TO BE APPROXIMATELY $20 TO $22 MILLION. THROUGH JUNE 2,
1998, THE COMPANY HAS SPENT APPROXIMATELY $12.0 MILLION ON THE DISTRIBUTION
CENTER EXPANSION PROJECT.
THE COMPANY ALSO BEGAN THE ROLLOUT OF A COMMERCIAL DELIVERY SERVICE IN THE
THIRD QUARTER OF FISCAL 1998. THE COMPANY'S COMMERCIAL DELIVERY SERVICE CONSISTS
OF A PROGRAM WHEREBY COMMERCIAL CUSTOMERS (SUCH AS AUTO SERVICE CENTERS,
COMMERCIAL MECHANICS, GARAGES AND THE LIKE) ESTABLISH COMMERCIAL ACCOUNTS WITH
THE COMPANY AND ORDER AUTOMOTIVE PARTS FROM THE COMPANY WITH SUCH PARTS BEING
DELIVERED FROM, OR PICKED UP FROM, NEARBY DISCOUNT AUTO PARTS STORES. DURING
FISCAL 1998, THE COMPANY'S ENTRY INTO THE COMMERCIAL DELIVERY MARKET INVOLVED
TOTAL CAPITAL EXPENDITURES OF APPROXIMATELY $3.6 MILLION. IN ADDITION, THE
COMMERCIAL DELIVERY PROGRAM HAS REQUIRED, AND CAN BE EXPECTED TO CONTINUE TO
REQUIRE, THE COMPANY TO EXTEND TRADE CREDIT TO CERTAIN OF THE COMMERCIAL ACCOUNT
CUSTOMERS IN THE ORDINARY COURSE OF BUSINESS. THE EXTENSION OF SUCH TRADE CREDIT
INCREASES THE CAPITAL REQUIREMENTS ASSOCIATED WITH THE ROLLOUT OF THE PROGRAM
AND EXPOSES THE COMPANY TO CREDIT RISK AND THE ASSOCIATED LOSS ATTRIBUTABLE TO
UNCOLLECTIBLE ACCOUNTS. THE COMPANY HAS ESTABLISHED SYSTEMS TO MANAGE AND
CONTROL SUCH CREDIT RISK. THE AMOUNT OF CAPITAL THAT IS NEEDED FOR EXTENSION OF
TRADE CREDIT WILL BE DEPENDENT IN LARGE PART UPON THE SUCCESS OF THE COMMERCIAL
DELIVERY SERVICE ROLL-OUT AND HOW QUICKLY THE COMMERCIAL BUSINESS DEVELOPS.
BECAUSE THIS IS A RELATIVELY NEW ASPECT OF THE AUTO PARTS SUPPLY BUSINESS FOR
THE COMPANY, THERE ARE RISKS ASSOCIATED WITH THE COMPANY'S ENTRY INTO THIS NEW
ASPECT OF THE BUSINESS AND THERE CAN BE NO ASSURANCE AS TO IF AND/OR WHEN THE
COMMERCIAL DELIVERY SERVICE BUSINESS WILL BE PROFITABLE OR AS TO WHETHER THE
COMPANY WILL EXPERIENCE ANY FINANCIAL OR OTHER CHALLENGES IN MANAGING AND
CONTROLLING THE CREDIT RISK.
THE COMPANY ANTICIPATES THAT TOTAL CAPITAL EXPENDITURES FOR FISCAL 1999,
INCLUDING THE COSTS ASSOCIATED WITH THE ADDITION OF APPROXIMATELY 75 NEW STORES,
THE DISTRIBUTION CENTER EXPANSION AND THE WORKING CAPITAL COSTS ASSOCIATED WITH
THE ROLL-OUT OF THE COMMERCIAL DELIVERY SERVICE, WILL BE IN THE RANGE OF $70
MILLION TO $80 MILLION.
THE COMPANY'S CREDIT FACILITIES ARE DISCLOSED IN NOTE 3 OF THE NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS. AS OF JUNE 2, 1998, THE COMPANY HAD $71.5
MILLION OF ADDITIONAL AVAILABILITY UNDER ITS EXISTING REVOLVING CREDIT AGREEMENT
WITH A SYNDICATE OF BANKS.
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. CONSISTENT WITH ITS HISTORICAL PRACTICE, THE COMPANY EXPECTS
17
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 39
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 (RENEWALS AND REPLACEMENTS THEREOF), AND AS TO EQUIPMENT AND FIXTURES,
PRIMARILY THROUGH CASH FLOW FROM OPERATIONS.
THE COMPANY'S NEW STORE DEVELOPMENT PROGRAM ALSO REQUIRES SIGNIFICANT WORKING
CAPITAL, PRINCIPALLY FOR INVENTORIES. THE COMPANY HAS HISTORICALLY USED TRADE
CREDIT TO PARTIALLY FINANCE NEW STORE INVENTORIES 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 SOME 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 IN LARGE PART FROM CASH FLOW FROM
OPERATIONS.
AS OF JUNE 2, 1998, 36 OR 8.0% OF THE COMPANY'S STORES WERE LEASED. ALTHOUGH
THE COMPANY GENERALLY ANTICIPATES A SIMILAR OWN/LEASE PERCENTAGE RELATIONSHIP
FOR NEW STORES IN THE FUTURE, THE COMPANY MAY EXPLORE OPPORTUNITIES WHICH COULD
LEAD TO INCREASES IN THIS PERCENTAGE.
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
QUARTER (MARCH THROUGH MAY), THE COMPANY DOES NOT CONSIDER ITS BUSINESS TO BE
SEASONAL.
YEAR 2000
MANAGEMENT HAS DEVELOPED A PLAN TO MODIFY THE COMPANY'S INFORMATION TECHNOLOGY
TO RECOGNIZE THE YEAR 2000 AND HAS BEGUN CONVERTING CRITICAL DATA PROCESSING
SYSTEMS. THE COMPANY'S YEAR 2000 INITIATIVE IS BEING MANAGED BY A TEAM OF
INTERNAL STAFF AND MANAGEMENT. MANAGEMENT CURRENTLY EXPECTS THE PROJECT TO BE
SUBSTANTIALLY COMPLETE BY EARLY 1999 AND THAT THE COST OF THE YEAR 2000
INITIATIVE, PRINCIPALLY INCLUDING INTERNAL COSTS, WILL NOT BE MATERIAL TO THE
COMPANY'S RESULTS OF OPERATIONS OR FINANCIAL POSITION. FURTHERMORE, THIS PROJECT
IS NOT EXPECTED TO HAVE A SIGNIFICANT EFFECT ON OPERATIONS.
FORWARD LOOKING STATEMENTS
THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND OTHER SECTIONS OF THIS ANNUAL REPORT CONTAIN FORWARD LOOKING
STATEMENTS THAT ARE BASED ON THE CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS
ABOUT THE INDUSTRY IN WHICH THE COMPANY OPERATES, MANAGEMENT'S
18
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 40
BELIEFS AND THE ASSUMPTIONS MADE BY MANAGEMENT. THESE STATEMENTS INCLUDE THE
WORDS "ANTICIPATES", "EXPECTS", "EXPECTED" AND "BELIEVES", VARIATIONS OF SUCH
WORDS, AND SIMILAR EXPRESSIONS WHICH ARE INTENDED TO IDENTIFY SUCH FORWARD
LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO POTENTIAL
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR THOSE CURRENTLY ANTICIPATED.
THESE POTENTIAL RISKS AND UNCERTAINTIES INCLUDE INCREASED COMPETITION, EXTENT
OF THE MARKET DEMAND FOR AUTO PARTS, AVAILABILITY OF INVENTORY SUPPLY, PROPRIETY
OF INVENTORY MIX, ADEQUACY AND PERCEPTION OF CUSTOMER SERVICE, PRODUCT QUALITY
AND DEFECT EXPERIENCE, AVAILABILITY OF AND ABILITY TO TAKE ADVANTAGE OF VENDOR
PRICING PROGRAMS AND INCENTIVES, SOURCING AVAILABILITY, RATE OF NEW STORE
OPENINGS, CANNIBALIZATION OF STORE SITES, MIX AND TYPES OF MERCHANDISE SOLD,
GOVERNMENTAL REGULATION OF PRODUCTS, NEW STORE DEVELOPMENT AND THE LIKE,
PERFORMANCE OF INFORMATION SYSTEMS, EFFECTIVENESS OF DELIVERIES FROM THE
DISTRIBUTION CENTER, ABILITY TO HIRE, TRAIN AND RETAIN QUALIFIED TEAM MEMBERS,
AVAILABILITY OF QUALITY STORE SITES, ABILITY TO COMPLETE TIMELY EXPANSION OF THE
DISTRIBUTION CENTER, ABILITY TO SUCCESSFULLY ROLL-OUT THE COMMERCIAL DELIVERY
SERVICE, CREDIT RISK ASSOCIATED WITH THE COMMERCIAL DELIVERY SERVICE,
ENVIRONMENTAL RISKS, AVAILABILITY OF EXPANDED AND EXTENDED CREDIT FACILITIES,
LEGAL EXPENSES ASSOCIATED WITH DISPUTES AND INVESTIGATIONS CONCERNING FREON
MATTERS, POTENTIAL FOR LIABILITY WITH RESPECT TO THESE MATTERS AND OTHER FACTORS
DISCUSSED IN THE REPORTS -- INCLUDING FORM 10-K -- FILED FROM TIME TO TIME BY
THE COMPANY WITH THE SEC.
19
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 41
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------
JUNE 2 JUNE 3 MAY 28
1998 1997 1996
---------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales $447,491 $405,186 $307,476
Cost of sales, including distribution costs 271,404 256,646 186,917
-------- -------- --------
Gross profit 176,087 148,540 120,559
Selling, general and administrative expenses 124,125 101,336 80,090
-------- -------- --------
Income from operations 51,962 47,204 40,469
Litigation settlement -- (20,545) --
Other income, net 2,434 187 1,164
Interest expense (10,203) (6,125) (5,078)
-------- -------- --------
Income before income taxes 44,193 20,721 36,555
Income taxes 17,013 7,980 14,092
-------- -------- --------
Net income $ 27,180 $ 12,741 $ 22,463
======== ======== ========
Net income per share:
Basic net income per common share $ 1.64 $ 0.77 $ 1.44
======== ======== ========
Diluted net income per common share $ 1.63 $ 0.77 $ 1.41
======== ======== ========
Average common shares outstanding 16,604 16,581 15,647
Dilutive effect of stock options 111 73 257
-------- -------- --------
Average common shares outstanding -- assuming dilution 16,715 16,654 15,904
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
20
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 42
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 2 JUNE 3
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 5,064 $ 6,409
Inventories 172,027 151,644
Prepaid expenses and other current assets 17,657 12,332
Deferred income taxes -- 6,312
-------- --------
Total current assets 194,748 176,697
Property and equipment 379,991 316,315
Less allowances for depreciation and amortization (65,472) (50,726)
-------- --------
314,519 265,589
Other assets 2,468 780
-------- --------
Total assets $511,735 $443,066
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 67,083 $ 63,753
Accrued salaries, wages and benefits 7,317 6,035
Litigation settlement -- 20,400
Deferred income taxes 1,101 --
Other current liabilities 11,185 3,536
Current maturities of long-term debt 2,400 2,400
-------- --------
Total current liabilities 89,086 96,124
Deferred income taxes 5,069 3,764
Long-term debt 160,695 114,117
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized, none issued or outstanding -- --
Common Stock, $.01 par value, 50,000 shares
authorized, 16,630 and 16,594 shares issued and
outstanding at June 2, 1998 and June 3, 1997,
respectively 166 166
Additional paid-in capital 141,163 140,519
Retained earnings 115,556 88,376
-------- --------
Total stockholders' equity 256,885 229,061
-------- --------
Total liabilities and stockholders' equity $511,735 $443,066
======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
21
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 43
CONSOLIDATED 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 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 in 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
Stock issued under stock purchase and stock
option plans 19 -- 274 -- 274
Net income 12,741 12,741
------- ------ ---- -------- -------- --------
Balance at June 3, 1997 -- 16,594 166 140,519 88,376 229,061
Stock issued under stock purchase and stock
option plans 36 -- 644 -- 644
Net income 27,180 27,180
------- ------ ---- -------- -------- --------
Balance at June 2, 1998 $ -- 16,630 $166 $141,163 $115,556 $256,885
======= ====== ==== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
22
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 44
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------
JUNE 2 JUNE 3 MAY 28
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities
Net income $ 27,180 $ 12,741 $ 22,463
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 15,011 12,490 9,936
Deferred income tax expense (benefit) 8,718 (6,344) 1,696
Gain on disposals of property and equipment (783) (92) (1,452)
Changes in operating assets and liabilities:
(Increase) in inventories (20,383) (40,236) (20,221)
(Increase) in prepaid expenses and other current assets (5,325) (3,135) (2,099)
(Increase) decrease in other assets (1,819) 130 (85)
Increase in trade accounts payable 3,330 10,698 11,749
Increase in accrued salaries, wages and benefits 1,282 1,773 543
(Decrease) increase in accrued litigation settlement (20,400) 20,400 --
Increase in other current liabilities 7,649 232 232
-------- -------- --------
Net cash provided by operating activities 14,460 8,657 22,762
Investing activities
Proceeds from sales of property and equipment 1,614 397 1,896
Purchases of property and equipment (64,641) (70,187) (52,185)
-------- -------- --------
Net cash used in investing activities (63,027) (69,790) (50,289)
Financing activities
Proceeds from short-term borrowings and long-term debt 148,971 89,023 34,000
Payments of short-term borrowings and long-term debt (102,393) (30,306) (78,940)
Net proceeds from secondary offering of common stock -- -- 75,415
Proceeds from other issuances of common stock 644 274 273
-------- -------- --------
Net cash provided by financing activities 47,222 58,991 30,748
Net (decrease) increase in cash (1,345) (2,142) 3,221
Cash at beginning of year 6,409 8,551 5,330
-------- -------- --------
Cash at end of year $ 5,064 $ 6,409 $ 8,551
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
23
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 45
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 2, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
DISCOUNT AUTO PARTS, INC. IS A SPECIALTY RETAILER OF AUTOMOTIVE REPLACEMENT
PARTS, MAINTENANCE ITEMS AND ACCESSORIES FOR THE "DO-IT-YOURSELF" CONSUMER.
DURING THE THIRD QUARTER OF FISCAL 1998, THE COMPANY ALSO BEGAN SERVICING THE
COMMERCIAL INSTALLER MARKET THROUGH THE ROLLOUT OF ITS COMMERCIAL DELIVERY
PROGRAM. AS OF JUNE 2, 1998, JUNE 3, 1997, AND MAY 28, 1996, THE COMPANY
OPERATED A CHAIN OF 452, 400, AND 314 STORES, RESPECTIVELY. AS OF JUNE 2, 1998,
351 OF THE STORES WERE LOCATED IN FLORIDA, 61 WERE LOCATED IN GEORGIA, 20 IN
MISSISSIPPI, 16 IN ALABAMA, AND FOUR 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 JUNE 2, 1998 AND MAY 28, 1996 CONSISTED OF 52
WEEKS. THE YEAR ENDED JUNE 3, 1997 CONSISTED OF 53 WEEKS.
PRINCIPLES OF CONSOLIDATION
THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDE THE ACCOUNTS OF DISCOUNT AUTO
PARTS, INC. AND ITS SUBSIDIARIES (THE "COMPANY"). ALL SIGNIFICANT INTERCOMPANY
ACCOUNTS AND TRANSACTIONS HAVE BEEN ELIMINATED IN CONSOLIDATION.
INVENTORIES
INVENTORIES ARE REPORTED AT THE LOWER OF COST OR MARKET USING THE FIRST-IN,
FIRST-OUT (FIFO) METHOD.
PROPERTY AND EQUIPMENT
PROPERTY 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.
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.
PRE-OPENING COSTS
COSTS ASSOCIATED WITH THE OPENING OF NEW STORES, WHICH PRIMARILY CONSISTS OF
PAYROLL AND OCCUPANCY COSTS, ARE CHARGED AGAINST OPERATIONS AS INCURRED.
24
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 46
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. ADVERTISING EXPENSE, NET OF VENDOR REBATES, WAS APPROXIMATELY
$2.3 MILLION FOR FISCAL 1998, $2.1 MILLION FOR FISCAL 1997 AND WAS INSIGNIFICANT
FOR FISCAL 1996.
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.
STOCK OPTION PLANS
THE COMPANY HAS ELECTED TO FOLLOW ACCOUNTING PRINCIPLES BOARD OPINION NO. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) AND RELATED INTERPRETATIONS IN
ACCOUNTING FOR ITS EMPLOYEE STOCK OPTIONS AND PRESENTS DISCLOSURES REQUIRED
UNDER STATEMENT OF FINANCIAL ACCOUNTING STANDARDS STATEMENT NO. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION. UNDER APB 25, BECAUSE THE EXERCISE PRICE OF THE
COMPANY'S STOCK OPTIONS EQUALS THE MARKET PRICE OF THE UNDERLYING STOCK ON THE
DATE OF GRANT, NO COMPENSATION EXPENSE IS RECOGNIZED.
EARNINGS PER SHARE
IN 1997, THE FINANCIAL ACCOUNTING STANDARDS BOARD ISSUED STATEMENT NO. 128,
EARNINGS PER SHARE. STATEMENT 128 REPLACED THE CALCULATION OF PRIMARY AND FULLY
DILUTED EARNINGS PER SHARE WITH BASIC AND DILUTED EARNINGS PER SHARE. BASIC
EARNINGS PER SHARE IS COMPUTED BY DIVIDING NET INCOME BY THE WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING DURING THE YEAR. THE COMPUTATION OF DILUTED
EARNINGS PER SHARE INCLUDES THE DILUTIVE EFFECT OF STOCK OPTIONS. ALL EARNINGS
PER SHARE AMOUNTS FOR ALL PERIODS HAVE BEEN PRESENTED, AND WHERE APPROPRIATE,
RESTATED TO CONFORM TO THE REQUIREMENTS OF STATEMENT 128.
FAIR VALUES OF FINANCIAL INSTRUMENTS
THE COMPANY'S FINANCIAL INSTRUMENTS CONSIST OF CASH, ACCOUNTS PAYABLE AND
LONG-TERM DEBT. THE CARRYING VALUE OF CASH AND ACCOUNTS PAYABLE APPROXIMATE
THEIR FAIR MARKET VALUES. THE CARRYING AMOUNT OF LONG-TERM DEBT APPROXIMATES
FAIR MARKET VALUE BASED ON CURRENT INTEREST RATES.
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 THOSE ESTIMATES.
25
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 47
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING STANDARDS
IN 1997, THE FINANCIAL ACCOUNTING STANDARDS BOARD ISSUED STATEMENT NO. 130,
REPORTING COMPREHENSIVE INCOME AND NO. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. THESE STATEMENTS, WHICH ARE EFFECTIVE FOR
FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1997, EXPAND OR MODIFY DISCLOSURES AND
ARE NOT EXPECTED TO HAVE AN IMPACT ON THE COMPANY'S CONSOLIDATED FINANCIAL
POSITION, RESULTS OF OPERATIONS OR CASH FLOWS.
2. PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT CONSISTS OF THE FOLLOWING (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
JUNE 2, 1998 JUNE 3, 1997 LIFE (YEARS)
------------ ------------ ------------
<S> <C> <C> <C>
LAND $134,582 $104,103
BUILDINGS 138,338 132,540 5 -- 31.5
FURNITURE, FIXTURES AND EQUIPMENT 73,762 61,581 5 -- 7
BUILDING AND LEASEHOLD IMPROVEMENTS 3,102 3,021 5 -- 31.5
AUTOMOTIVE EQUIPMENT 3,741 3,725 3 -- 7
CONSTRUCTION IN PROGRESS 26,466 11,345
-------- --------
$379,991 $316,315
======== ========
</TABLE>
DEPRECIATION EXPENSE TOTALED APPROXIMATELY $14,880,000, $12,387,000, AND
$9,815,000 FOR FISCAL YEARS 1998, 1997 AND 1996, RESPECTIVELY.
3. LONG-TERM DEBT
LONG-TERM DEBT CONSISTS OF THE FOLLOWING (IN THOUSANDS):
<TABLE>
<CAPTION>
JUNE 2, 1998 JUNE 3, 1997
------------ ------------
<S> <C> <C>
REVOLVING LOAN $ -- $ 12,500
REAL ESTATE ACQUISITION AND CONSTRUCTION LINES OF CREDIT -- 92,017
REVOLVING CREDIT AGREEMENT 103,495 --
SENIOR TERM NOTES 50,000 --
SENIOR SECURED NOTES 9,600 12,000
-------- --------
163,095 116,517
LESS CURRENT MATURITIES (2,400) (2,400)
-------- --------
$160,695 $114,117
======== ========
</TABLE>
AS OF JUNE 3, 1997, THE COMPANY HAD AN UNSECURED REVOLVING LOAN AGREEMENT WITH
A BANK. THE AGREEMENT PROVIDED FOR MAXIMUM BORROWINGS OF $20 MILLION, INCLUDING
UP TO $1 MILLION FOR LETTERS OF CREDIT. INTEREST WAS PAYABLE MONTHLY AND WAS A
FUNCTION OF THE PRIME RATE OR THE LONDON INTERBANK OFFERED RATE (LIBOR).
THE COMPANY'S REAL ESTATE ACQUISITION AND CONSTRUCTION LINES OF CREDIT
PROVIDED FOR MAXIMUM AGGREGATE BORROWINGS OF $130 MILLION FOR THE ACQUISITION
AND CONSTRUCTION OF PROPERTIES. INTEREST WAS PAYABLE MONTHLY AND WAS A FUNCTION
OF THE PRIME RATE OR LIBOR. THE FACILITIES WERE PROVIDED BY TWO SEPARATE BANKS.
26
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 48
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EFFECTIVE JULY 16, 1997, THE COMPANY REPLACED ITS AFOREMENTIONED CREDIT
FACILITIES WITH A NEW THREE YEAR $175 MILLION UNSECURED REVOLVING CREDIT
AGREEMENT (THE "REVOLVER") DUE IN FISCAL YEAR 2001. THE RATE OF INTEREST PAYABLE
UNDER THE REVOLVER IS A FUNCTION OF LIBOR OR THE PRIME RATE OF THE LEAD AGENT
BANK, AT THE OPTION OF THE COMPANY. THE COMPANY MAY INCREASE THE AMOUNT OF THE
FACILITY TO $200 MILLION WITH THE CONSENT OF THE SYNDICATE OF BANKS. DURING THE
TERM OF THE REVOLVER, THE COMPANY IS OBLIGATED TO PAY A FEE OF .125% PER ANNUM
FOR THE UNUSED PORTION OF THE REVOLVER.
EFFECTIVE AUGUST 8, 1997, THE COMPANY ISSUED $50 MILLION OF SENIOR TERM NOTES
(THE "NOTES"). THE NOTES PROVIDE FOR INTEREST AT A FIXED RATE OF 7.46%, PAYABLE
SEMI-ANNUALLY, WITH SEMI-ANNUAL PRINCIPAL PAYMENTS OF $7.1 MILLION, BEGINNING
JULY 15, 2004. THE NET PROCEEDS FROM THE NOTES WERE USED TO REDUCE THE COMPANY'S
INDEBTEDNESS UNDER THE REVOLVER.
AT JUNE 2, 1998 AND JUNE 3, 1997, THE COMPANY'S WEIGHTED AVERAGE INTEREST RATE
ON ITS BORROWINGS UNDER THE REVOLVER, THE REVOLVING LOAN, AND THE REAL ESTATE
ACQUISITION AND CONSTRUCTION LINES OF CREDIT WERE 6.0% AND 6.2%, RESPECTIVELY.
AS OF JUNE 2, 1998, THE COMPANY HAD APPROXIMATELY $71.5 MILLION OF AVAILABLE
BORROWINGS UNDER THE REVOLVER.
THE COMPANY HAS ISSUED TWO SENIOR SECURED NOTES, EACH FOR AN ORIGINAL
PRINCIPAL OF $12 MILLION, TO AN INSURANCE COMPANY. THE NOTES ARE COLLATERALIZED
BY A FIRST MORTGAGE ON CERTAIN 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 $17.9 MILLION AT JUNE 2, 1998.
THE COMPANY'S DEBT AGREEMENTS CONTAIN VARIOUS RESTRICTIONS, INCLUDING THE
MAINTENANCE OF CERTAIN FINANCIAL RATIOS AND RESTRICTIONS ON DIVIDENDS, WITH
WHICH THE COMPANY IS IN COMPLIANCE. BASED ON THE TERMS OF THE REVOLVER AND THE
NOTES, AS OF JUNE 2, 1998, APPROXIMATELY $36.9 MILLION OF RETAINED EARNINGS WAS
AVAILABLE FOR DIVIDEND DISTRIBUTION.
ANNUAL MATURITIES, AS OF JUNE 2, 1998, OF ALL LONG-TERM DEBT FOR THE NEXT FIVE
YEARS ARE AS FOLLOWS (IN THOUSANDS):
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- - ----------- ------
<S> <C>
1999 $2,400
2000 2,400
2001 2,400
2002 1,200
2003 1,200
</TABLE>
27
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 49
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THE AMOUNTS EXCLUDE AMOUNTS DUE IN FISCAL YEAR 2001 UNDER THE REVOLVER
DESCRIBED ABOVE, BECAUSE MANAGEMENT BELIEVES BASED UPON HISTORICAL PERFORMANCE
THAT THE AGREEMENT WILL BE RENEWED OR REPLACED PRIOR TO ITS EXPIRATION.
TOTAL INTEREST PAID DURING FISCAL YEARS 1998, 1997 AND 1996 WAS APPROXIMATELY
$8,402,000, $6,287,000, AND $5,518,000, RESPECTIVELY, NET OF CAPITALIZED
INTEREST. CAPITALIZED INTEREST FOR FISCAL YEARS 1998, 1997 AND 1996 TOTALED
APPROXIMATELY $384,000, $281,000 AND $118,000, 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 JUNE
2, 1998, 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. LEASES
CERTAIN OF THE COMPANY'S RETAIL STORES AND EQUIPMENT ARE LEASED UNDER
NONCANCELABLE OPERATING LEASES. THE MAJORITY OF THE RETAIL STORE 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 (IN
THOUSANDS):
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- - ----------- ------
<S> <C>
1999 $1,810
2000 1,433
2001 1,214
2002 788
2003 and thereafter 380
------
$5,625
======
</TABLE>
RENTAL EXPENSE FOR FISCAL YEARS 1998, 1997 AND 1996 TOTALED APPROXIMATELY
$1,987,000, $1,815,000 AND $1,625,000, 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.
28
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 50
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THE COMPANY ALSO LEASES CERTAIN PORTIONS OF ITS OWNED FACILITIES TO OUTSIDE
PARTIES. RENTAL INCOME FOR FISCAL YEARS 1998, 1997 AND 1996 TOTALED
APPROXIMATELY $492,000, $328,000 AND $366,000, RESPECTIVELY.
6. BENEFIT PLANS
THE COMPANY HAS A 401(K) PROFIT-SHARING PLAN COVERING SUBSTANTIALLY ALL OF ITS
TEAM MEMBERS (EMPLOYEES) WHO HAVE AT LEAST ONE YEAR OF SERVICE AND WORK MORE
THAN 1,000 HOURS PER YEAR. TEAM MEMBERS MAY CONTRIBUTE UP TO 15% OF THEIR ANNUAL
COMPENSATION SUBJECT TO INTERNAL REVENUE CODE MAXIMUM LIMITATIONS. THE COMPANY
HAS AGREED TO MAKE MATCHING CONTRIBUTIONS, BASED UPON THE TEAM MEMBER'S FIRST
SIX PERCENT OF COMPENSATION, RANGING FROM 25% TO 100% OF THE TEAM MEMBER'S
CONTRIBUTION DEPENDING ON THE TEAM MEMBER'S YEARS OF SERVICE. AFTER THREE YEARS
OF SERVICE, COMPANY CONTRIBUTIONS AND EARNINGS THEREON VEST AT THE RATE OF 20%
PER YEAR OF SERVICE WITH THE COMPANY. COSTS UNDER THIS PLAN FOR FISCAL YEARS
1998, 1997 AND 1996 WERE APPROXIMATELY $864,000, $547,000 AND $449,000,
RESPECTIVELY.
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 MEMBERS OF MANAGEMENT. 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 JUNE 2, 1998 AND JUNE 3, 1997,
THE COMPANY HAS ACCRUED APPROXIMATELY $880,000, AND $520,000, RESPECTIVELY, FOR
BENEFITS DUE UNDER THE SEPS PLAN.
THE BOARD OF DIRECTORS HAS ADOPTED A STOCK PURCHASE PLAN (THE "PURCHASE
PLAN"), WHICH INITIALLY RESERVED 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 1998, 1997 AND 1996, 9,740, 15,082, AND 7,165 SHARES, RESPECTIVELY, WERE
PURCHASED UNDER THE TERMS OF THE PURCHASE PLAN. AS OF JUNE 2, 1998, 486,760
SHARES OF COMMON STOCK WERE RESERVED FOR ISSUANCE UNDER THE PURCHASE PLAN.
7. STOCK OPTION PLANS
THE COMPANY HAS STOCK OPTION PLANS WHICH PROVIDES FOR THE GRANTING TO KEY TEAM
MEMBERS OPTIONS TO PURCHASE SHARES OF ITS COMMON STOCK. A TOTAL OF 1,700,000
SHARES OF COMMON STOCK WERE INITIALLY RESERVED FOR ISSUANCE UNDER THE PLANS AND,
AS OF JUNE 2, 1998, A TOTAL OF 1,663,787 SHARES OF COMMON STOCK REMAIN SO
RESERVED. 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 THE 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.
29
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 51
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A SUMMARY OF THE COMPANY'S STOCK OPTION ACTIVITY AND RELATED INFORMATION ARE
AS FOLLOWS (SHARES IN THOUSANDS):
<TABLE>
<CAPTION>
JUNE 2, 1998 JUNE 3, 1997 MAY 28, 1996
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........... 1,017 $21 955 $21 787 $20
Granted.................................... 218 19 117 22 198 28
Exercised.................................. (27) 24 (4) 18 (6) 18
Canceled................................... (81) 22 (51) 21 (24) 21
------ ------ ------
Outstanding at end of year................. 1,127 $21 1,017 $21 955 $21
====== ====== ======
Exercisable at end of year................. 289 $22 138 $21 34 $18
====== ====== ======
Weighted-average fair value of options
granted during the year.................. $ 9.98 $11.66 $14.59
====== ====== ======
Shares available for future grants......... 1,704 1,130 1,140
====== ====== ======
</TABLE>
EXERCISE PRICES FOR OPTIONS EXERCISED DURING 1998 RANGED FROM APPROXIMATELY
$16 TO $22. EXERCISE PRICES FOR OPTIONS OUTSTANDING AS OF JUNE 2, 1998 RANGED
FROM APPROXIMATELY $16 TO $31. THE WEIGHTED-AVERAGE REMAINING CONTRACTUAL LIFE
OF THOSE OPTIONS IS 7 YEARS.
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 JUNE 2, 1998, 12,000 OPTIONS HAD BEEN
GRANTED UNDER THIS PLAN AT AN AVERAGE PRICE OF $24.02. AS OF JUNE 2, 1998, 5,250
OF SUCH OPTIONS WERE EXERCISABLE.
PRO FORMA INFORMATION REGARDING NET INCOME AND EARNINGS PER SHARE IS REQUIRED
BY STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 ("SFAS 123"), AND HAS
BEEN DETERMINED AS IF THE COMPANY HAD ACCOUNTED FOR ITS EMPLOYEE AND
NON-EMPLOYEE DIRECTOR STOCK OPTIONS UNDER THE FAIR VALUE METHOD OF SFAS 123.
THE FAIR VALUES FOR THESE OPTIONS WERE ESTIMATED AT THE DATE OF GRANT USING A
BLACK-SCHOLES OPTION PRICING MODEL WITH THE FOLLOWING WEIGHTED-AVERAGE
ASSUMPTIONS: RISK-FREE INTEREST RATE OF RETURN OF 5.75% FOR 1998 AND 6.00% FOR
1997 AND 1996; VOLATILITY FACTOR OF .405 FOR 1998 AND .376 FOR 1997 AND 1996;
AND WEIGHTED AVERAGE EXPECTED OPTION LIFE OF SEVEN YEARS FOR ALL OPTIONS. THE
COMPANY ASSUMED THAT NO DIVIDENDS WOULD BE PAID OVER THE EXPECTED LIFE OF THE
OPTIONS.
THE BLACK-SCHOLES OPTION VALUATION MODEL WAS DEVELOPED FOR USE IN ESTIMATING
THE FAIR VALUE OF TRADED OPTIONS WHICH HAVE NO VESTING RESTRICTIONS AND ARE
FULLY TRANSFERABLE. IN ADDITION, OPTION VALUATION MODELS REQUIRE THE INPUT OF
HIGHLY SUBJECTIVE ASSUMPTIONS, INCLUDING THE EXPECTED STOCK PRICE VOLATILITY.
BECAUSE THE COMPANY'S STOCK OPTIONS HAVE CHARACTERISTICS SIGNIFICANTLY DIFFERENT
FROM THOSE OF TRADED OPTIONS AND BECAUSE CHANGES IN THE SUBJECTIVE INPUT
ASSUMPTIONS CAN MATERIALLY AFFECT THE FAIR VALUE ESTIMATE, IN
30
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 52
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MANAGEMENT'S OPINION, THE EXISTING MODEL DOES NOT NECESSARILY PROVIDE A RELIABLE
SINGLE MEASURE OF THE FAIR VALUE OF ITS EMPLOYEE STOCK OPTIONS. FOR PURPOSES OF
PRO FORMA DISCLOSURES, THE ESTIMATED FAIR VALUE OF THE OPTIONS IS AMORTIZED TO
EXPENSE OVER THE OPTIONS' VESTING PERIOD. THE EFFECTS OF APPLYING SFAS 123 FOR
PRO FORMA DISCLOSURES ARE NOT LIKELY TO BE REPRESENTATIVE OF THE EFFECTS ON
REPORTED NET INCOME OR LOSSES FOR FUTURE YEARS.
THE COMPANY'S PRO FORMA INFORMATION FOLLOWS (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Pro forma net income $26,680 $12,443 $22,341
Pro forma basic net income per common share $ 1.61 $ .75 $ 1.43
Pro forma diluted net income per common share $ 1.60 $ .75 $ 1.43
</TABLE>
8. INCOME TAXES
THE PROVISION FOR INCOME TAXES IS COMPRISED OF THE FOLLOWING (IN THOUSANDS):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
JUNE 2, 1998 JUNE 3, 1997 MAY 28, 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal $ 7,442 $12,185 $ 10,782
State 853 2,139 1,614
------- ------- --------
8,295 14,324 12,396
Deferred:
Federal 7,468 (5,438) 1,456
State 1,250 (906) 240
------- ------- --------
8,718 (6,344) 1,696
------- ------- --------
$17,013 $ 7,980 $ 14,092
======= ======= ========
</TABLE>
A RECONCILIATION OF THE PROVISION FOR INCOME TAXES TO THE AMOUNTS COMPUTED AT
THE FEDERAL STATUTORY TAX RATE IS AS FOLLOWS (IN THOUSANDS):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
JUNE 2, 1998 JUNE 3, 1997 MAY 28, 1996
------------ ------------ ------------
<S> <C> <C>
Federal income taxes at statutory rate $15,468 $ 7,252 $ 12,794
State income taxes, net of federal tax benefit 1,367 801 1,205
Other items, net 178 (73) 93
------- ------- --------
$17,013 $ 7,980 $ 14,092
======= ======= ========
</TABLE>
31
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 53
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SIGNIFICANT COMPONENTS OF THE COMPANY'S DEFERRED TAX ASSETS AND LIABILITIES
ARE AS FOLLOWS (IN THOUSANDS):
<TABLE>
<CAPTION>
JUNE 2, 1998 JUNE 3, 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Litigation settlement $ - $ 7,224
Various accrued expenses 1,204 702
Other, net 274 117
------ -------
Total deferred tax assets 1,478 8,043
Deferred tax liabilities:
Depreciation 5,435 3,910
Accrued liabilities 866 746
Inventory related items 844 553
Other, net 503 286
------ -------
Total deferred tax liabilities 7,648 5,495
------ -------
Net deferred tax liability (asset) $6,170 $(2,548)
====== =======
</TABLE>
FOR FISCAL YEARS 1998, 1997 AND 1996, THE COMPANY PAID INCOME TAXES OF
APPROXIMATELY $6,723,000, $15,110,000 AND $12,962,000, RESPECTIVELY.
9. LITIGATION SETTLEMENT
IN FEBRUARY 1997, A COMPLAINT WAS FILED BY AIRGAS, INC. AND CERTAIN AIRGAS
AFFILIATES AGAINST SEVERAL DEFENDANTS, INCLUDING THE COMPANY AND ONE OF ITS
EMPLOYEES. THE COMPLAINT ALLEGED, AMONG OTHER THINGS, THAT THE COMPANY TOOK PART
IN A CONSPIRACY WITH OTHER COMPANIES AND INDIVIDUALS UNRELATED TO DISCOUNT AUTO
PARTS, INC. TO DEFRAUD AIRGAS IN CONNECTION WITH COMMERCIAL SALES OF REFRIGERANT
R-12 (FREON) AND SOUGHT COMPENSATORY DAMAGES IN EXCESS OF $20 MILLION, TREBLE
DAMAGES AND OTHER RELIEF TOTALING IN EXCESS OF $80 MILLION. THE TRIAL WAS
SCHEDULED TO BEGIN ON AUGUST 4, 1997.
EFFECTIVE JULY 26, 1997, THE COMPANY ENTERED INTO A COMPROMISE AND SETTLEMENT
AGREEMENT (THE "SETTLEMENT AGREEMENT") WITH AIRGAS AND ITS AFFILIATES, THE OTHER
DEFENDANTS, AND CERTAIN OTHER PARTIES. UNDER THE TERMS OF THE SETTLEMENT
AGREEMENT, THE COMPANY PURCHASED FROM AIRGAS SPECIALTY GASES, ON AN "AS IS,
WHERE IS" BASIS, APPROXIMATELY 6,500 CYLINDERS BELIEVED TO CONTAIN AN
ALTERNATIVE TO R-12 REFRIGERANT FOR AN AGGREGATE PRICE OF $4.0 MILLION, WHICH
REPRESENTED A PRICE THAT WAS BELIEVED BY THE COMPANY TO BE APPROXIMATELY $3.6
MILLION IN EXCESS OF THE CURRENT MARKET VALUE OF SUCH PRODUCT. IN ADDITION, THE
COMPANY AGREED TO PAY AN ADDITIONAL $13.0 MILLION TO AIRGAS SPECIALTY GASES.
AS A SEPARATE BUT RELATED PART OF THE SETTLEMENT AGREEMENT, THE COMPANY PAID
$500,000 TO THE BANKRUPTCY ESTATE OF REFRIGERATION STATION, INC. ("RSI") TO
SETTLE ANY CLAIMS, INCLUDING CLAIMS OF PREFERENCE, THAT THE RSI BANKRUPTCY
ESTATE MIGHT HAVE ASSERTED AGAINST THE COMPANY AND PURCHASED FROM THE BANKRUPTCY
ESTATE APPROXIMATELY 7,200 CYLINDERS OF MERCHANTABLE FREEZE 12 REFRIGERANT (AN
R-12 ALTERNATIVE), FOR AN ADDITIONAL $1.0 MILLION (BELIEVED TO HAVE A BULK SALE
VALUE OF APPROXIMATELY $600,000). DISCOUNT AUTO PARTS, INC., AIRGAS, THE RSI
BANKRUPTCY ESTATE, THE OTHER DEFENDANTS AND CERTAIN OTHER PARTIES HAVE EXCHANGED
MUTUAL RELEASES OF ALL CLAIMS AND ISSUES BETWEEN THEM. IN THE SETTLEMENT
AGREEMENT, THERE IS NO FINDING OR
32
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 54
DISCOUNT AUTO PARTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADMISSION OF WRONGDOING ON THE PART OF DISCOUNT AUTO PARTS, INC. BASED ON THE
TERMS OF THE SETTLEMENT AGREEMENT, THE COMPANY RECORDED A CHARGE TO EARNINGS IN
THE FOURTH QUARTER OF FISCAL 1997 OF $20,545,000. THE CHARGE INCLUDED RELATED
LEGAL EXPENSES.
THE COMPANY IS PRESENTLY INVOLVED IN LITIGATION WITH ITS INSURANCE CARRIER
PURSUANT TO WHICH THE COMPANY IS SEEKING RECOVERY UNDER ITS INSURANCE POLICY OF
CERTAIN AMOUNTS INCURRED IN CONNECTION WITH THE AIRGAS LITIGATION AND THE
SETTLEMENT THEREOF. THE ULTIMATE OUTCOME OF SUCH LITIGATION OR AN ESTIMATE OF
THE AMOUNT OF POTENTIAL INSURANCE RECOVERIES, IF ANY, CANNOT BE DETERMINED AT
THIS TIME. NO BENEFIT FOR ANY RECOVERY WHICH MAY RESULT HAS BEEN REFLECTED IN
THE ACCOMPANYING FINANCIAL STATEMENTS.
10. COMMITMENTS AND CONTINGENCIES
EXCEPT AS DISCLOSED IN NOTE 9, THE COMPANY IS NOT A PARTY TO ANY OTHER 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 JUNE 2, 1998, THE COMPANY'S COST TO COMPLETE CONSTRUCTION CONTRACTS IN
PROGRESS WAS APPROXIMATELY $12.4 MILLION.
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THE FOLLOWING QUARTERLY FINANCIAL DATA IS UNAUDITED, BUT IN THE OPINION OF
MANAGEMENT, ALL ADJUSTMENTS NECESSARY FOR A FAIR PRESENTATION OF THE SELECTED
DATA FOR THESE INTERIM PERIODS PRESENTED HAVE BEEN INCLUDED. THE FISCAL 1997 AND
FIRST TWO QUARTERS OF FISCAL 1998 EARNINGS PER SHARE AMOUNTS HAVE BEEN RESTATED,
WHERE NECESSARY, TO COMPLY WITH SFAS NO. 128, EARNINGS PER SHARE.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER(1) QUARTER
-------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Fiscal Year Ended June 2, 1998:
Net sales $109,737 $105,240 $110,329 $122,185
Gross profit 42,402 41,350 43,387 48,948
Net income 6,450 6,087 6,972 7,671
Basic net income per common share .39 .37 .42 .46
Diluted net income per common share .39 .37 .42 .46
Fiscal Year Ended June 3, 1997:
Net sales $ 90,101 $105,788 $101,876 $107,421
Gross profit 33,948 36,726 37,853 40,013
Net income (loss) 6,413 6,898 5,612 (6,182)(2)
BASIC NET INCOME (LOSS) PER COMMON SHARE .39 .42 .34 (.37)(2)
DILUTED NET INCOME (LOSS) PER COMMON SHARE .38 .42 .34 (.37)(2)
</TABLE>
- - ---------------
(1) THE THIRD QUARTER OF FISCAL 1997 INCLUDES 14 WEEKS OF OPERATIONS AS COMPARED
TO 13 WEEKS OF OPERATIONS FOR ALL OTHER QUARTERS PRESENTED.
(2) INCLUDES A $12.6 MILLION, OR $.76 PER BASIC AND DILUTED INCOME PER COMMON
SHARE AFTER TAX IMPACT OF THE AIRGAS LITIGATION SETTLEMENT. SEE NOTE 9.
EXCLUDING THE IMPACT OF THE LITIGATION SETTLEMENT AND ALL RELATED EXPENSES,
THE COMPANY WOULD HAVE REPORTED NET INCOME OF $6.5 MILLION OR $.39 PER BASIC
AND DILUTED INCOME PER COMMON SHARE.
33
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 55
REPORT OF MANAGEMENT
DISCOUNT AUTO PARTS, INC.
WE HAVE PREPARED THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS AND
RELATED INFORMATION INCLUDED HEREIN FOR THE YEARS ENDED JUNE 2, 1998, JUNE 3,
1997 AND MAY 28, 1996. THE OPINION OF ERNST & YOUNG LLP, THE COMPANY'S
INDEPENDENT AUDITORS, ON THOSE FINANCIAL STATEMENTS IS INCLUDED HEREIN. THE
PRIMARY RESPONSIBILITY FOR THE INTEGRITY OF THE FINANCIAL INFORMATION INCLUDED
IN THIS ANNUAL REPORT RESTS WITH MANAGEMENT. SUCH INFORMATION WAS PREPARED IN
ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES APPROPRIATE IN THE
CIRCUMSTANCES BASED ON OUR BEST ESTIMATES AND JUDGMENTS AND GIVING DUE
CONSIDERATION TO MATERIALITY.
DISCOUNT AUTO PARTS MAINTAINS INTERNAL ACCOUNTING CONTROL SYSTEMS WHICH ARE
ADEQUATE TO PROVIDE REASONABLE ASSURANCE THAT ASSETS ARE SAFEGUARDED FROM LOSS
OR UNAUTHORIZED USE AND WHICH PRODUCE RECORDS ADEQUATE FOR PREPARATION OF
FINANCIAL INFORMATION. THE SYSTEM AND CONTROLS AND COMPLIANCE THEREWITH ARE
MONITORED, REVISED AND IMPROVED TO MEET CHANGING BUSINESS CONDITIONS, COMPANY
GROWTH, AND RECOMMENDATIONS MADE BY THE INDEPENDENT AUDITORS. THERE ARE LIMITS
INHERENT IN ALL SYSTEMS OF INTERNAL ACCOUNTING CONTROL BASED ON THE RECOGNITION
THAT THE COST OF SUCH A SYSTEM SHOULD NOT EXCEED THE BENEFITS TO BE DERIVED. WE
BELIEVE THE COMPANY'S SYSTEM PROVIDES THIS APPROPRIATE BALANCE.
THE AUDIT COMMITTEE OF DISCOUNT AUTO PARTS' BOARD OF DIRECTORS IS RESPONSIBLE
FOR REVIEWING AND MONITORING THE COMPANY'S FINANCIAL REPORTS AND ACCOUNTING
PRACTICES TO ASCERTAIN THAT THEY ARE WITHIN ACCEPTABLE LIMITS OF SOUND PRACTICE
IN SUCH MATTERS. THE MEMBERSHIP OF THE COMMITTEE CONSISTS OF NON-EMPLOYEE
DIRECTORS. AT PERIODIC MEETINGS, THE AUDIT COMMITTEE DISCUSSES AUDIT AND
FINANCIAL REPORTING MATTERS AND THE INTERNAL AUDIT FUNCTION WITH REPRESENTATIVES
OF FINANCIAL MANAGEMENT AND WITH REPRESENTATIVES FROM ERNST & YOUNG LLP.
<TABLE>
<S> <C>
/S/ PETER J. FONTAINE /S/ C. MICHAEL MOORE
PETER J. FONTAINE C. MICHAEL MOORE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
</TABLE>
34
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 56
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BOARD OF DIRECTORS
DISCOUNT AUTO PARTS, INC.
WE HAVE AUDITED THE ACCOMPANYING CONSOLIDATED BALANCE SHEETS OF DISCOUNT AUTO
PARTS, INC. AS OF JUNE 2, 1998 AND JUNE 3, 1997, AND THE RELATED CONSOLIDATED
STATEMENTS OF INCOME, STOCKHOLDERS' EQUITY AND CASH FLOWS FOR EACH OF THE THREE
YEARS IN THE PERIOD ENDED JUNE 2, 1998. 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 CONSOLIDATED FINANCIAL STATEMENTS REFERRED TO ABOVE
PRESENT FAIRLY, IN ALL MATERIAL RESPECTS, THE CONSOLIDATED FINANCIAL POSITION OF
DISCOUNT AUTO PARTS, INC. AT JUNE 2, 1998 AND JUNE 3, 1997 AND THE CONSOLIDATED
RESULTS OF ITS OPERATIONS AND ITS CASH FLOWS FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED JUNE 2, 1998, IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
/S/ ERNST & YOUNG LLP
TAMPA, FLORIDA
JULY 6, 1998
35
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 57
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
DISCOUNT AUTO PARTS, INC.
4900 FRONTAGE ROAD, SOUTH
LAKELAND, FLORIDA 33815
TELEPHONE: (941) 687-9226
WWW.DISCOUNTAUTOPARTS.NET
TRANSFER AGENT AND REGISTRAR
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
85 CHALLENGER ROAD
OVERPECK CENTRE
RIDGEFIELD PARK, NEW JERSEY 07660
WWW.CHASEMELLON.COM
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, OCTOBER
6, 1998 AT:
THE LAKELAND CENTER
700 WEST LEMON STREET
LAKELAND, FLORIDA 33801
NUMBER OF STOCKHOLDERS
AS OF AUGUST 10, 1998, THERE WERE APPROXIMATELY 630 STOCKHOLDERS OF RECORD.
FORM 10-K
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
JUNE 2, 1998, 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 1998 FISCAL 1997
------------- -----------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
QTR 1 20 15/16 17 5/8 26 1/4 22 3/8
QTR 2 24 15/16 18 3/16 25 7/8 21 1/4
QTR 3 22 5/8 18 1/2 26 3/8 12 7/8
QTR 4 25 5/8 21 1/8 19 1/4 14 1/4
</TABLE>
OFFICERS AND DIRECTORS
PETER J. FONTAINE
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND DIRECTOR
WILLIAM C. PERKINS
PRESIDENT, CHIEF OPERATING OFFICER AND DIRECTOR
C. MICHAEL MOORE
CHIEF FINANCIAL OFFICER AND SECRETARY
WARREN SHATZER
DIRECTOR
FORMER EXECUTIVE VICE PRESIDENT -- MERCHANDISING,
DISCOUNT AUTO PARTS, INC.
E.E. WARDLOW
DIRECTOR
FORMER PRESIDENT AND CHIEF OPERATING OFFICER,
KMART CORPORATION
A GORDON TUNSTALL
DIRECTOR
PRESIDENT, TUNSTALL CONSULTING
DAVID P. WALLING
DIRECTOR
FORMER VICE PRESIDENT, GENERAL CONTROLLER,
KMART CORPORATION
36
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 58
STORES AS OF AUGUST 12, 1998
<TABLE>
<S> <C> <C>
STATE STORES
FLORIDA 354
GEORGIA 65
MISSISSIPPI 25
ALABAMA 17
SOUTH CAROLINA 4
LOUISIANA 2
</TABLE>
* DISTRIBUTION CENTER/
CORPORATE HEADQUARTERS
[MAP OF UNITED STATES]
[DISCOUNT AUTO PARTS LOGO]
<PAGE> 59
[DISCOUNT AUTO PARTS LOGO]
CORPORATE HEADQUARTERS
DISCOUNT AUTO PARTS, INC.
4900 FRONTAGE ROAD, SOUTH
LAKELAND, FLORIDA 33815
TELEPHONE: (941) 687-9226
WWW.DISCOUNTAUTOPARTS.NET
<PAGE> 60
APPENDIX
DISCOUNT AUTO PARTS, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON OCTOBER 6, 1998
The undersigned, a stockholder of DISCOUNT AUTO PARTS, INC. (the
"Company"), does hereby appoint Peter J. Fontaine, and William C. Perkins, and
each of them acting individually, as the attorneys and proxies of the
undersigned, with power of substitution, for and on behalf of the undersigned,
to attend the Annual Meeting of Stockholders of the Company to be held at the
Lakeland Center, 700 West Lemon Street, Lakeland, Florida at 10:30 a.m., local
time, on October 6, 1998 and any adjournment or adjournments thereof (the
"Annual Meeting"), to represent the undersigned at the Annual Meeting, and
there to vote all the shares of Common Stock of the Company which the
undersigned is entitled to vote at the Annual Meeting, in any manner and with
the same effect as if the undersigned were personally present at the Annual
Meeting, all as described in the Company's Proxy Statement dated August 18,
1998 relating to the Annual Meeting, and the undersigned hereby authorizes and
instructs the above named proxies to vote as specified on the reverse side.
The shares represented by this Proxy will be voted only if this Proxy is
properly executed and timely returned. In that event, such shares will be voted
in the manner directed herein. IF NO DIRECTION IS MADE, THE SHARES WILL BE
VOTED FOR THE NOMINEES FOR DIRECTOR AND FOR OTHER MATTERS WHICH MAY PROPERLY
COME BEFORE THE ANNUAL MEETING.
(Continued and to be signed on reverse side)
FOLD AND DETACH HERE
<PAGE> 61
THE BOARD OF DIRECTORS RECOMMENDS VOTING FOR THE FOLLOWING PROPOSALS:
---
PLEASE MARK
your votes as / X /
indicated in
this example
1. ELECTION OF DIRECTORS.
Nominees for Class III Directors: Peter J. Fontaine and William C. Perkins
FOR the nominees AUTHORITY
listed above (except WITHHELD (Instruction: To withhold
as marked to the to vote for the authority to vote for any
contrary). nominees listed above. individual nominee, strike
a line through the nominee's
name in the list above).
/ / / /
2. OTHER MATTERS. Unless a line is stricken through this sentence, the proxies
herein named may in their discretion vote the shares represented by this Proxy
upon such other matters as may properly come before the Annual Meeting.
The undersigned acknowledges receipt of (1) the Company's 1998 Annual Report
to Stockholders and (2) the Company's Notice of Annual Meeting and Proxy
Statement dated August 18, 1998 relating to the Annual Meeting. The undersigned
does hereby revoke any proxy previously given with respect to the shares
represented by this Proxy.
Dated: , 1998
---------------------------------------------------------------
- - ----------------------------------------------------------------------------
Signature
- - ----------------------------------------------------------------------------
Signature if held jointly
NOTE: Your signature should appear as your name appears hereon. As to shares
held in joint names, each joint owner should sign. If the signer is a
corporation, please sign full corporate name by a duly authorized officer. If a
partnership, please sign in partnership name by an authorized person. If
signing as attorney, executor, administrator, trustee, guardian, or in other
representative capacity, please give full title as such.
PLEASE MARK, SIGN AND DATE THIS PROXY CARD
AND PROMPTLY RETURN IT USING THE ENCLOSED ENVELOPE.
FOLD AND DETACH HERE
DISCOUNT
AUTO PARTS LOGO
YOUR VOTE IS IMPORTANT TO US. PLEASE COMPLETE, DATE AND SIGN THE ABOVE PROXY
CARD AND RETURN IT PROMPTLY IN THE ACCOMPANYING ENVELOPE.
