FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 1, 1998
Commission file number 1-11276
DISCOUNT AUTO PARTS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-1447420
- ------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
4900 Frontage Road, South
Lakeland, Florida 33815
_____________________________ _____________________________
(Address of principal executive offices) (zip code)
(941) 687-9226
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock $.01 Par Value - 16,637,983 shares as of September 1, 1998
<PAGE>
Discount Auto Parts, Inc.
Index
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - September 1, 1998 and June 2,
1998 .....................................................................3
Condensed Consolidated Statements of Income - for the thirteen weeks
ended September 1, 1998 and the thirteen weeks ended September 2, 1997 ...4
Condensed Consolidated Statements of Cash Flows - for the thirteen
weeks ended September 1, 1998 and the thirteen weeks ended September
2,1997 ...................................................................5
Notes to Condensed Consolidated Financial Statements......................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................10
Item 6. Exhibits and Reports on Form 8-K......................................10
SIGNATURES................................................................... 11
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<TABLE>
PART I - FINANCIAL INFORMATION
Discount Auto Parts, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
<CAPTION>
September 1 June 2
1998 1998
------------------- -----------------
ASSETS (In thousands)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 4,830 $ 5,064
Inventories 178,071 172,027
Prepaid expenses and other current assets 22,081 17,657
------------------- -----------------
Total current assets 204,982 194,748
Property and equipment 400,820 379,991
Less allowances for depreciation and amortization (69,378) (65,472)
------------------- -----------------
331,442 314,519
Other assets 2,433 2,468
------------------- -----------------
Total assets $ 538,857 $ 511,735
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 58,507 $ 67,083
Other current liabilities 22,031 19,603
Current maturities of long-term debt 2,400 2,400
------------------- -----------------
Total current liabilities 82,938 89,086
Deferred income taxes 5,069 5,069
Long-term debt 186,479 160,695
Stockholders' equity:
Preferred stock - -
Common stock 166 166
Additional paid-in capital 141,301 141,163
Retained earnings 122,904 115,556
------------------- -----------------
Total stockholders' equity 264,371 256,885
------------------- -----------------
Total liabilities and stockholders' equity $ 538,857 $ 511,735
=================== =================
See accompanying notes.
</TABLE>
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<TABLE>
Discount Auto Parts, Inc.
Condensed Consolidated Statements of Income (Unaudited)
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
---------------------------- ----------------------------
September 1 September 2
1998 1997
---------------------------- ----------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Net sales $ 123,039 $ 109,737
Cost of sales, including distribution costs 73,365 67,335
---------------------------- ----------------------------
Gross profit 49,674 42,402
Selling, general and administrative expenses 35,069 29,577
---------------------------- ----------------------------
Income from operations 14,605 12,825
Other income (expense), net 24 (276)
Interest expense (2,662) (2,053)
---------------------------- ----------------------------
Income before income taxes 11,967 10,496
Income taxes 4,619 4,046
---------------------------- ----------------------------
Net income $ 7,348 $ 6,450
============================ ============================
Net income per share:
Basic net income per common share $ 0.44 $ 0.39
============================ ============================
Diluted net income per common share $ 0.44 $ 0.39
============================ ============================
Average common shares outstanding 16,634 16,594
Dilutive effect of stock options 194 56
---------------------------- ----------------------------
Average common shares outstanding -
assuming dilution 16,828 16,650
============================ ============================
See accompanying notes.
</TABLE>
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<TABLE>
Discount Auto Parts, Inc.
Condensed Consolidated Statements Of Cash Flows (Unaudited)
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
-------------------------------------------
September 1 September 2
Operating activities 1998 1997
-------------------- -----------------
<S> <C> <C>
Net income $ 7,348 $ 6,450
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 4,312 3,616
Deferred income taxes - 546
Changes in operating assets and liabilities:
(Increase) in inventories (6,044) (4,894)
(Increase) in prepaid expenses and other
current assets (4,424) (372)
(Increase) in other assets (1) (1,811)
(Decrease) in trade accounts payable (8,576) (12,804)
Increase in other current liabilities 2,428 3,606
-------------------- -----------------
Net cash used in operating activities (4,957) (5,663)
Investing activities
Proceeds from sales of property and equipment 1,157 -
Purchases of property and equipment (22,356) (12,745)
-------------------- -----------------
Net cash used in investing activities (21,199) (12,745)
Financing activities
Proceeds from short-term borrowings and long-term debt 35,503 124,400
Payments of short-term borrowings and long-term debt (9,719) (104,517)
Proceeds from issuance of common stock 138 5
-------------------- -----------------
Net cash provided by financing activities 25,922 19,888
Net (decrease) increase in cash and cash equivalents (234) 1,480
Cash and cash equivalents at beginning of period 5,064 6,409
-------------------- -----------------
Cash and cash equivalents at end of period $ 4,830 $ 7,889
==================== =================
</TABLE>
<PAGE>
Discount Auto Parts, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 1, 1998
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Discount Auto Parts, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended June 2,
1998.
Operating results for the thirteen week period ended September 1, 1998 are not
necessarily indicative of the results that may be expected for the entire fiscal
year.
2. Net Income Per Share
In 1997, the Financial Accounting Standards Board Issued Statement 128,
"Earnings Per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share. All
earnings per share amounts for all periods presented have been restated to
conform to the Statement 128 requirements.
Options to purchase 503,000 shares and 562,000 shares of common stock were
excluded from the calculation of fully diluted earnings per share for the
thirteen week periods ended September 1, 1998 and September 2, 1997,
respectively, because the options' exercise price was greater than the average
market price of the common shares during those periods and, therefore, the
effect would be antidilutive.
3. Long-Term Debt
Long-term debt consists of the following (in thousands):
September 1 June 2
1998 1998
Revolving credit agreement $ 129,279 $ 103,495
Senior term notes 50,000 50,000
Senior secured notes 9,600 9,600
188,879 163,095
Less current maturities (2,400) (2,400)
$ 186,479 $ 160,695
Effective July 16, 1997, the Company entered into a three year $175 million
unsecured revolving credit agreement (the "Revolver"). 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 syndication 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 completed the placement of a separate $50
million senior term notes facility (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 on July 15, 2004. The net proceeds from the
Notes were used to reduce the Company's indebtedness under the Revolver.
At both September 1, 1998 and June 2, 1998, the Company's weighted average
interest rate on its borrowing under the Revolver was 6.0%.
As of September 1, 1998, the Company had approximately $45.7 million of
available borrowings under the Revolver.
The Company has issued two senior secured notes, each for an original principal
amount of $12 million, with an insurance company. The notes are collateralized
by a first mortgage on certain retail store properties, equipment and fixtures.
The agreements provide for interest at fixed rates of 10.11% and 9.8%, payable
quarterly, with annual principal payments of $1.2 million on each December 15
and May 31.
The Company's debt agreements contain various restrictions, including the
maintenance of certain financial ratios and restrictions on dividends, with
which the Company was in compliance as of September 1, 1998.
4. Subsequent Event-Asset Acquisition
On September 28, 1998, the Company acquired, pursuant to a definitive purchase
agreement dated September 21, 1998, all the Rose Auto Parts stores through an
asset purchase from Eastern Automotive Warehouse, Inc., a wholly-owned
subsidiary of National Auto Parts Warehouse, Inc. The acquisition included 39
leased retail store locations, primarily located in southeast Florida, and a
leased warehouse facility in Miami. The acquisition involved the purchase of
inventory and furniture and equipment at these various locations and the
assumption of the respective leases. The Rose Auto Parts stores will be
converted to Discount Auto Parts stores over the next several months, with
selected stores likely to be closed as a result of market overlap.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Thirteen Weeks Ended September 1, 1998 Compared to Thirteen Weeks Ended
September 2, 1997
Total sales for the first quarter of fiscal 1999 were $123.0 million as compared
to $109.7 million a year earlier. Comparable store sales (which include sales
under the Company's commercial delivery program) increased 2.7% for the first
quarter of fiscal 1999 as compared to the first quarter of fiscal 1998. The
balance of the increase in total sales for the fiscal 1999 first quarter was
attributable to net sales from new stores opened since the beginning of fiscal
1998.
At September 1, 1998, the Company had 472 stores in operation, compared with 452
stores at June 2, 1998 and 409 stores at September 2, 1997.
Gross profit for the first quarter of fiscal 1999 increased to $49.7 million, or
40.4% of net sales, as compared to $42.4 million, or 38.6% of net sales, for the
comparable period of fiscal 1998. The improvement in gross margins for the first
quarter of fiscal 1999 was due in part to overall lower product cost, a shift in
merchandising strategies to promote higher gross margin product offerings,
reduced levels of promotional pricing for certain high volume products such as
oil and a shift in vendor cooperative advertising allowances to direct product
cost reductions.
Selling, general and administrative (SG&A) expenses increased as a percentage of
sales from 27.0% in the first quarter of fiscal 1998 to 28.5% in the first
quarter of fiscal 1999. The increase is primarily due to the expenses incurred
related to the development and roll-out of the Company's commercial delivery
program and the shift in cooperative advertising credits to direct product
purchase price reductions.
Income from operations for the first quarter of fiscal 1999 was $14.6 million as
compared to $12.8 million in the first quarter of fiscal 1998. Operating margins
for the first quarter of fiscal 1999 were 11.9% as compared to 11.7% for the
first quarter of fiscal 1998. Operating margins for the fiscal 1999 quarter were
somewhat negatively impacted by the roll-out of the Company's commercial
delivery program. Excluding the impact of the commercial delivery program,
operating margins were 12.5% for the first quarter of fiscal 1999.
Interest expense for the first quarter of fiscal 1999 was $2.7 million, compared
to $2.1 million for the first quarter of fiscal 1998. The increase in interest
expense was primarily the result of increased borrowings associated with new
store growth and the costs associated with the expansion of the Company's
existing distribution center. Borrowings under the Company's revolving credit
line were used to fund the Rose Auto Parts acquisition which was completed
subsequent to the first quarter of fiscal 1999. These additional borrowings will
necessarily result in a greater growth in interest expense in the second quarter
of fiscal 1999 and thereafter.
The Company's effective tax rate for the first quarter of fiscal 1999 was 38.6%
as compared to 38.5% for the first quarter fiscal 1998.
As a result of the above factors, net income was $7.3 million or $.44 per
diluted share for the first quarter of fiscal 1999 as compared to net income of
$6.5 million or $.39 per diluted share for the first quarter of fiscal 1998.
Liquidity and Capital Resources
For the thirteen weeks ended September 1, 1998, net cash of $5.0 million was
utilized by the Company's operations versus $5.7 million utilized by the
Company's operations for the comparable thirteen week period of fiscal 1998.
During the thirteen weeks ended September 1, 1998, this net use of cash was due
primarily to a reduction in trade accounts payable (which was largely a result
of fiscal 1998 year-end extended vendor terms coming due), an increase in
inventories resulting primarily from new store growth and an increase in other
current assets primarily associated with an increase in amounts due from
vendors. These uses of cash were offset in part by current period earnings,
depreciation, and an increase in other current liabilities.
Capital expenditures for the thirteen weeks ended September 1, 1998 were $22.4
million. The majority of the capital expenditures related to the 20 stores
opened during that period and costs associated with the expansion of the
Company's distribution center. For all of fiscal 1999, the Company expects to
open approximately 100 to 110 new stores.
In July 1998, the Company completed the expansion of its distribution center to
double its size. The expanded distribution center, which comprises approximately
600,000 square feet, should be capable of serving approximately 675 stores.
Additional office space, support facilities and extension of the merchandising
handling systems are in the process of being completed. When the expanded center
becomes fully operational in the fall of 1998, it will also provide service to
the Company's express warehouses, and will be utilized to support the commercial
delivery program.
The Company also continued the roll-out of a commercial delivery service, which
began 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 and such
parts will be delivered from, or can be picked up from, nearby Discount Auto
Parts stores. The commercial delivery program can be expected to require the
Company to extend trade credit to certain of the commercial account customers as
part of the ordinary course of business. The extension of such trade credit will
increase the capital requirements associated with the roll-out of the program
and will expose the Company to credit risk from uncollectible accounts. The
Company has established systems to manage and control such credit risk. The
amount of capital that is needed to cover 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 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 all of fiscal 1999
including the costs associated with 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.
As of September 1, 1998, the Company had $45.7 million of additional
availability under its existing financing agreements.
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 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.
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. Particularly in light of
the use of available borrowings to fund the recently completed Rose Auto Parts
stores acquisition, availability under the existing financing agreements is not
expected to be sufficient to support the new store growth capital needs past the
middle of fiscal year 2000. However, although there can be no assurance, the
Company believes that it will be able to secure expanded borrowing facilities or
establish other financing programs to fund its long term capital needs for store
growth.
Year 2000 Issue
The Year 2000 issue results from computer programs and electronic circuitry that
do not differentiate between the year 1900 and the year 2000 because they are
written using two rather than four digit dates to define the applicable year. If
not corrected, many computer applications and date-sensitive devices could fail
or produce erroneous results when processing dates after December 31, 1999. The
Year 2000 issue affects virtually all companies and organizations, including the
Company.
The Company employs a number of information technology systems in its
operations, including, without limitation, computer networking systems,
financial systems and other similar systems, some of which are internally
developed and others are licensed from outside vendors. A number of these
systems have been recently implemented by the Company and thus most of these
recently implemented systems are believed to be Year 2000 compliant. Management
developed and has been pursing a plan to modify the Company's other information
technology systems and has begun the process of converting these other critical
data processing systems. Management currently expects this plan to be
substantially complete by early 1999.
Throughout its operations, the Company also employs electronic equipment such as
building security, product handling and other devices containing embedded
electronic circuits. The Company is in the process of identifying and
prioritizing any embedded technology devices which may be deemed to be mission
critical or that tend to have a more significant impact on normal operations. A
team of internal staff and management that has been identified to manage the
Company's Year 2000 initiative will develop a separate plan to upgrade these
higher priority embedded technology devices. Management currently expects these
activities to be substantially complete by mid 1999.
Management currently expects that the cost of implementing the Year 2000
initiatives relative to information technology systems and the higher priority
embedded technology devices, including internal costs, will not be material to
the Company's results of operations or its financial position.
The Company is also in the process of evaluating and managing the potential risk
posed by the impact of the Year 2000 issue on its major suppliers and vendors.
Formal and informal communications with these major suppliers and vendors are
being initiated, with an expectation and plan to substantially complete an
assessment in this regard by early 1999. However, it may be difficult to
determine with any certainty whether such suppliers and vendors will be able to
successfully address the Year 2000 issue with respect to their own systems and
thus be able to process purchase orders immediately following January 1, 2000.
Although the Company does not believe, based on its current evaluation of these
matters, that the Year 2000 issue will have a significant effect on its overall
operations, the Company's initiatives in this regard are subject to a variety of
risks and uncertainties some of which are beyond the Company's control. The
failure of the Company or any of its major suppliers or vendors to achieve Year
2000 readiness could adversely impact the Company's business operations, which
could in turn have an adverse effect on the Company's future financial results.
Forward Looking Statements
The Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this quarterly 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 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 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 risks.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Dexter Carson, et. al. vs. Discount Auto Parts, Inc., et. al., United States
District Court for the Southern District of Florida, Case No.
96-08833-CIV-HURLEY, Southern District of Florida
This action involves a lawsuit which was filed in the United States
District Court for the Southern District of Florida arising out of the
employment of the Plaintiffs and alleged incidents which occurred at various
Discount Auto stores. The action seeks damages and other relief as a result of
alleged discrimination under both federal and state laws, violations of the
Florida Whistleblower law, negligent misrepresentations, fraudulent
misrepresentations, negligence-personal injuries and gross negligence-personal
injuries. The Company filed numerous motions, including a Motion to Dismiss and
a Motion to Strike. On May 19, 1998, the court entered an Order Granting in Part
the Company's Motion to Dismiss and Severing Plaintiffs From Case And Dismissing
Selected Claims Without Prejudice. The order dismissed nine of the eleven
plaintiffs and left only Carson and Williamson's case remaining. The plaintiffs
filed a notice to appeal the judge's order, which they subsequently voluntarily
dismissed. The Company intends to vigorously oppose the Carson and Williamson
case. It is not clear whether the plaintiffs who have been dismissed from the
case will refile.
Automotive Supply Company vs. Discount Auto Parts et al., United States District
Court for the Central District of California, Case No. CV 98-0275 CAS (VAPx).
On or about December 9, 1997, a complaint was filed in California
against the Company by Automotive Supply Company alleging, among other things,
breach of contract, account stated, breach of implied covenant of good faith and
fair dealing, fraud and negligent misrepresentation, all in connection with the
supply by Automotive Supply Company of rotating electrical parts to the Company.
Although the complaint was initially filed in Superior Court, the Company
successfully removed the action to federal district court. The complaint seeks
compensatory damages in excess of $16,000,000 as well as punitive and exemplary
damages. The Company believes the claims in the complaint are without merit and
intends to defend the action vigorously. The Company has filed an answer denying
the essential allegations in the complaint and, by way of a counterclaim, is
seeking to recover amounts the Company asserts it is owed by Automotive Supply
Company as well as amounts representing other damages the Company has suffered
as a result of Automotive Supply Company's own actions. Discovery has commenced
and is continuing.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (For SEC Use Only)
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the thirteen
week period ended September 1, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DISCOUNT AUTO PARTS, INC.
Date: October 13, 1998 By: /s/ Peter J. Fontaine
Peter J. Fontaine
Chief Executive Officer
(Principal Executive Officer)
Date: October 13, 1998 By: /s/ C. Michael Moore
C. Michael Moore
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Jun-1-1999
<PERIOD-START> Jun-3-1998
<PERIOD-END> Sep-1-1998
<EXCHANGE-RATE> 1
<CASH> 4,830
<SECURITIES> 0
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<INVENTORY> 178,071
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<PP&E> 400,820
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<CURRENT-LIABILITIES> 82,938
<BONDS> 186,479
0
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<COMMON> 166
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<SALES> 123,039
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<TOTAL-COSTS> 73,365
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