10-Q 1 g71888e10-q.txt DISCOUNT AUTO PARTS, INC 1 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 August 28, 2001 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) (863) 687-9226 -------------------------------------------------------------------------------- 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 - 16,707,923 shares as of August 28, 2001 2 DISCOUNT AUTO PARTS, INC. INDEX

2 3 ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) DISCOUNT AUTO PARTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

See accompanying notes. 3 4 DISCOUNT AUTO PARTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

See accompanying notes. 4 5 DISCOUNT AUTO PARTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See accompanying notes. 5 6 DISCOUNT AUTO PARTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AUGUST 28, 2001 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 May 29, 2001. Operating results for the thirteen-week period ended August 28, 2001 are not necessarily indicative of the results that may be expected for the entire fiscal year. 2. SALE/LEASEBACK TRANSACTION On February 27, 2001, the Company completed a sale/leaseback transaction. Under the terms of the transaction, the Company sold 101 properties, including land, buildings, and improvements, for a net price of approximately $62.2 million. The stores were leased back from the purchaser under non-cancelable operating leases with lease terms of 22.5 years each. The sale of the properties generated a gain for financial reporting purposes, net of expenses incurred, of $6.0 million, which gain has been deferred and is being amortized over the lease term. 3. LONG-TERM DEBT Long-term debt consists of the following (in thousands):

Effective July 29, 1999, the Company entered into a five year $265 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. During the term of the Revolver, the Company is also obligated to pay a fee, which fluctuates based on the Company's debt-to-capitalization ratio, for the unused portion of the Revolver. 6 7 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. At August 28, 2001 and May 29, 2001, the Company's weighted average interest rate on its borrowings under the revolving credit agreement was 5.3% and 7.1%, respectively. As of August 28, 2001, the Company had approximately $106.6 million of available borrowings. As of August 28, 2001, the Company has outstanding a senior secured note of $2.4 million. The note provides for interest at a fixed rate of 9.8%, payable quarterly, with annual principal payments of $1.2 million due on May 31. The note is collateralized by a first mortgage on certain store properties, equipment and fixtures. 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. 4. PENDING MERGER/EXTRAORDINARY LOSS On August 7, 2001, the Company entered into a definitive agreement with Advance Holding Corporation, Advance Auto Parts, Inc., Advance Stores Company, Incorporated and AAP Acquisition Corporation (collectively "Advance") under which the Company will be acquired by Advance in a merger transaction. Terms of the agreement call for each share of Discount Auto Parts common stock to be exchanged for $7.50 in cash and 0.2577 shares of common stock of Advance Auto Parts, Inc., a holding company which has been formed to own and operate the combined companies. The transaction has been approved by the boards of directors of both companies and is subject to approval by shareholders of the Company, and other customary closing conditions. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 waiting period expired September 18, 2001. The transaction is expected to close in the fourth calendar quarter of 2001. As a result of expenses incurred in connection with the above described transaction, the Company reported an extraordinary loss in the first quarter of fiscal 2002, net of a $340,000 income tax benefit, of $603,000. Additional extraordinary expenses associated with the described transaction are expected to be incurred during the second quarter of fiscal 2002. 5. COMPREHENSIVE INCOME Comprehensive income for the periods presented equals net income. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THIRTEEN WEEKS ENDED AUGUST 28, 2001 COMPARED TO THIRTEEN WEEKS ENDED AUGUST 29, 2000 Total sales for the first quarter of fiscal 2002 increased 3.8% to $173.4 million, as compared to $167.1 million for the first quarter a year earlier. Comparable store sales increased 1.9% for the first quarter of fiscal 2002 as compared to the first quarter of fiscal 2001. Such comparable store sales growth was generated on a relatively equal basis from both do-it-yourself (DIY) and commercial sales. The balance of the increase in total sales for the first quarter was attributable to sales from new stores opened since the beginning of fiscal 2001. At August 28, 2001, the Company had 668 stores in operation, compared with 666 stores at May 29, 2001 and 653 stores at August 29, 2000. Gross profit for the first quarter of fiscal 2002 increased 8.2% to $69.2 million as compared to $63.9 million for the first quarter of fiscal 2001. As a percentage of sales, gross profit was 39.9% for the first quarter of fiscal 2002 as compared to 38.3% for the first quarter of fiscal 2001. Gross profit for the first quarter of fiscal 2002 was positively impacted by the Company's supply chain initiatives implemented in the latter half of fiscal 2001 and lower inventory shrinkage expense. These positive impacts were offset in part by lower overall vendor incentives primarily stemming from the reduced number of store openings and additional operating expenses associated with the Company's second distribution center which became operational in the fourth quarter of fiscal 2001. Selling, general and administrative ("SG&A") expenses increased as a percentage of sales from 31.6% in the first quarter of fiscal 2001 to 32.8% in the first quarter of fiscal 2002. The increase in SG&A expenses as a percentage of sales for the first quarter was primarily the result of (1) rent under the February 2001 sale/leaseback of 101 of the Company's store locations exceeding the historical cost depreciation expense associated with such store location prior to the sale/leaseback, and (2) increased health and workers' compensation insurance costs. Income from operations for the first quarter of fiscal 2002 increased 11.6% to $12.4 million as compared to $11.1 million for the first quarter of fiscal 2001. Excluding the effects of the excess of rent expense over the related depreciation expense related to the stores sold under the sale/leaseback transaction and the rent expense related to the Company's second distribution center, both of which did not exist in the first quarter of fiscal 2001, operating income for the first quarter of fiscal 2002 would have increased 28%. EBITDA (income from operations plus depreciation and amortization) for the first quarter of fiscal 2002 increased 7.1% to $18.4 million from $17.2 million for the first quarter of fiscal 2001. Excluding the effects of the excess of rent expense over the related depreciation expense related to the stores sold under the sale/leaseback transaction and the rent expense related to the Company's second distribution center, both of which did not exist in the first quarter of fiscal 2001, EBITDA for the first quarter of 2002 would have increased 20%. 8 9 Interest expense for the first quarter of fiscal 2002 decreased 40.6% to $3.3 million as compared to $5.6 million for the first quarter of fiscal 2001. The decrease was due to overall lower borrowings for the first quarter of fiscal 2002, which resulted primarily from the paydown in debt with the proceeds of the February 2001 sale/leaseback closing, and overall lower interest rates on the Company's variable rate debt. The Company's effective tax rate for both the first quarter of fiscal 2002 and the first quarter of fiscal 2001 was 36.0%. As a result of the above factors, income before extraordinary loss for the first quarter of fiscal 2002 increased 64.0% to $5.9 million or $.35 per share as compared to $3.6 million or $.21 per share for the first quarter of fiscal 2001. On August 7, 2001, the Company entered into a definitive agreement with Advance Holding Corporation, Advance Auto Parts, Inc., Advance Stores Company, Incorporated and AAP Acquisition Corporation (collectively "Advance") under which the Company will be acquired by Advance in a merger transaction. Advance is the second largest retailer and supplier of automotive replacement parts, maintenance items and accessories in the nation, with over 1,700 stores in 38 states. Terms of the agreement call for each share of Discount Auto Parts common stock to be exchanged for $7.50 in cash and 0.2577 shares of common stock of Advance Auto Parts, Inc., a holding company which has been formed to own and operate the combined companies. The transaction has been approved by the boards of directors of both companies and is subject to approval by shareholders of Discount Auto Parts, and other customary closing conditions. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 waiting period expired September 18, 2001. The transaction is expected to close in the fourth calendar quarter of 2001. As a result of expenses incurred in connection with the above described transaction, the Company reported an extraordinary loss in the first quarter of fiscal 2002, net of a $340,000 income tax benefit, of $603,000. Additional extraordinary expenses are expected to be incurred during the second quarter of fiscal 2002. Taking into account all of the above described factors, net income for the first quarter of fiscal 2002 increased 47.1% to $5.3 million or $.31 per diluted share as compared to net income of $3.6 million or $.21 per diluted share for first quarter of fiscal 2001. LIQUIDITY AND CAPITAL RESOURCES For the thirteen weeks ended August 28, 2001, net cash of $14.2 million was used in the Company's operations versus $27.5 million used by the Company's operations for the comparable thirteen week period of fiscal 2001. During both of the thirteen week periods, this net use of cash was due primarily to a reduction in trade accounts payable resulting from the repayment of normal year end extensions of credit terms. The reduction of cash used in the fiscal 2002 first quarter versus the fiscal 2001 first quarter primarily related to the timing of vendor payments. Capital expenditures for the thirteen weeks ended August 28, 2001 were $6.3 million. The majority of the capital expenditures related to the 3 new stores opened during that period plus stores opened near the end of fiscal 2001. On February 27, 2001, the Company completed a sale/leaseback transaction. Under the terms of the transaction, the Company sold 101 properties, including land, buildings, and improvements, for a net 9 10 price of approximately $62.2 million. The stores were leased back from the purchaser under non-cancelable operating leases with lease terms of 22.5 years each. The sale of the properties generated a gain for financial reporting purposes, net of expenses incurred, of $6.0 million, which gain has been deferred and is being amortized over the lease term. Net rent expense during the first five years of the lease term will be approximately $6.4 million annually, with increases periodically thereafter. Proceeds from the transaction were used to reduce outstanding borrowings under the Company's Revolving Credit Facility. Under the terms of the pending merger transaction with Advance, the Company is subject to limits on the amount of its capital expenditures through the date of closing. Accordingly, the Company expects to open no more than seven new stores prior to the anticipated closing of the merger in November or December 2001. If the merger does not close, the Company expects to open between 12 and 20 new stores for fiscal 2002. The Company has historically been able to finance most of its new store growth through unsecured lines of credit and medium and longer-term mortgage financing provided by banks and other institutional lenders, and through cash flow from operations. As of August 28, 2001, the Company had $106.6 million of additional availability under its existing financing agreements. The Company is exposed to changes in interest rates, primarily from its revolving credit agreement. The Company also has long-term debt that bears a fixed rate. As to the fixed rate debt, there is a risk that market rates will decline and the required payments will exceed those based on current market rates on the long-term debt. The Company believes that the expected cash flows from operations, available bank borrowings and trade credit, will be sufficient to fund the capital and liquidity needs of the Company for the next two to three years. 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 or 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. FORWARD LOOKING STATEMENTS The Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this quarterly report may contain forward-looking statements, which reflect the current views of the Company with respect to certain events that could have an effect on the Company's future financial performance. These statements include the words "anticipates", "should", "expect", "expected" and similar expressions. Any such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from historical results or those currently anticipated. 10 11 These risks and uncertainties include, but are not limited to, increased competition, extent of market demand for auto parts, availability of inventory supply, inventory shrinkage, 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 of types of merchandise sold, governmental regulation of products, weather, new store development, 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 implement the commercial delivery service, credit risk associated with the commercial delivery service, environmental risks, availability of expanded and extended credit facilities, ability to successfully and efficiently establish and coordinate operations at the second distribution center and other risks. In addition, specific risks and uncertainties associated with the previously announced proposed merger with Advance Auto Parts include, but are not limited to: (1) the risk that the businesses of Advance Auto Parts and the Company will not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; (2) expected efficiencies and cost savings from the merger may not be fully realized or realized within the expected time frame; (3) revenues following the merger may be lower than expected; (4) operating costs, customer loss and business disruption following the merger, including, without limitation, difficulties in maintaining relationships with suppliers and employees, may be greater than expected; (5) inability to obtain or meet conditions imposed for governmental approval for the merger or merger schedule; (6) the failure of the Company's stockholders to approve the merger; (7) recessionary trends in general or in specific areas where Advance Auto Parts and the Company operate; (8) competitive pricing and other competitive pressures; and (9) other economic, business, competitive and/or regulatory factors affecting Advance Auto Parts' and the Company's businesses generally. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK No material changes have occurred in the quantitative and qualitative market risk disclosure of the Company as presented in the Company's Annual Report on Form 10-K for the year ended May 29, 2001. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Coalition for a Level Playing Field, et. al. V. AutoZone, Inc. et. al, Case No. 00-0953 in and for the United District Court, Eastern District of New York. In February 2000, the Coalition for a Level Playing Field ("Coalition") and over one hundred independent automotive parts and accessories aftermarket warehouse distributors and and/or jobbers filed a lawsuit in the United States District for the Eastern District of New York against the Company. The plaintiffs claim that the defendants have knowingly received volume discounts, rebates, slotting and other allowances, fees, free inventory, sham advertising and promotional payments, a share in the manufacturers' profits, and excessive payments for services purportedly performed for the manufacturers in violation of the Robinson-Patman Act. The complaint seeks injunctive and declaratory relief, unspecified treble damages on behalf of each of the plaintiffs, as well as attorneys' fees and costs. The defendants, including the Company, filed a motion to dismiss in late October 2000. The plaintiff's filed their response to such motion to dismiss in January 2001 and the defendants have filed a response to the plaintiff's responsive pleadings. Any discovery would follow after 11 12 disposition by the court of such motion to dismiss, which remains pending. The Company believes the claims to be without merit and intends to vigorously defend the action. Discount Auto Parts is not a party to any other legal proceedings, other than various claims and lawsuits arising in the normal course of the Company's business. The Company does not believe that such claims and lawsuits, individually or in the aggregate, will have a material adverse effect on its financial condition or results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (b) Reports on Form 8-K A current report on Form 8-K dated August 8, 2001 was filed with the Securities and Exchange Commission reporting a merger agreement and related documents with Advance Holding Company and certain of its affiliated companies. 12 13 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: September 27, 2001 By: /s/ Peter J. Fontaine ------------------ --------------------- Peter J. Fontaine Chief Executive Officer (Principal Executive Officer) Date: September 27, 2001 By: /s/ C. Michael Moore ------------------ -------------------- C. Michael Moore Chief Financial Officer (Principal Financial and Accounting Officer) 13

DISCOUNT AUTO PARTS INC 10-Q