1 EXHIBIT 13.1 [COVER] [photo: Sign stating "AutoZone, Discount Auto Parts"] 1996 Annual Report 2 COMPANY DESCRIPTION AutoZone is the nation's leading retail auto parts chain. We sell a broad line of replacement parts, accessories, chemicals and motor oil. With 1,423 stores in 27 states, we operate more stores than any auto parts retailer in America, And on average, we put our mark on a new store nearly every day. Our primary customers are do-it-yourselfers who repair their cars out of economic necessity. We also sell and deliver parts to professional repair shops who install them on their customers' cars. The first AutoZone opened in Forrest City, Arkansas, on July 4, 1979. Now more than 17 years later, we still attribute much of our success to our unwavering commitment to customer satisfaction. And as a constant reminder of that commitment, we start every company meeting with the AutoZone pledge: AutoZoners always put customers first. We know our parts and products. Our stores look great. And we've got the best merchandise at the right price. 3 FINANCIAL HIGHLIGHTS 1996* 1995 % Change Sales $2,242,633,000 $1,808,131,000 +24% Operating Profit $ 268,934,000 $ 227,658,000 +18% Net Income $ 167,165,000 $ 138,781,000 +20% Earnings Per Share $ 1.11 $ 0.93 +19% Shareholders' Equity $ 865,582,000 $ 684,710,000 +26% Number of Stores 1,423 1,143 +24% *includes a 53rd week [photos: painters painting AutoZone sign] 4 SALES ($ in millions) [Bar Graph: 92: $1,002 93: $1,217 94: $1,508 95: $1,808 96: $2,243] OPERATING PROFIT ($ in millions) [Bar Graph: 92: $104 93: $141 94: $191 95: $228 96: $269] NET INCOME ($ in millions) [Bar Graph: 92: $63 93: $87 94: $116 95: $139 96: $167] EARNINGS PER SHARE [Bar Graph: 92: $.43 93: $.59 94: $.78 95: $.93 96: $1.11] TO OUR CUSTOMERS, AUTOZONERS AND SHAREHOLDERS: In fiscal 1996, AutoZone solidified its position as the leader in the do-it- yourself retail auto parts market, started delivering parts to professional repair shops and began exploring opportunities in the international market. For the year, AutoZone: - Opened 280 new stores - a 33% increase over last year. - Increased store square footage by 26%. - Rolled out a new commercial sales program to almost all of our stores. We'll complete the rollout in the first quarter of fiscal 1997. - Acquired ALLDATA, the nation's leading automotive diagnostic and repair software company. - Began shipments from our new 550,000-square-foot distribution center in Zanesville, Ohio. - Opened our second call center in Houston, Texas. - Moved into a new corporate headquarters in downtown Memphis. While making these investments for our future, we completed another record year financially: - Sales rose 24% to $2.24 billion - more than double our sales just four years ago. Fiscal 1996 included a 53rd week. - Net income increased 20% to $167 million. - Earnings per share increased 19% to $1.11. - Comparable store sales, or sales at stores open at the start of the previous fiscal year, rose 6% for the 52 weeks. We're pleased with our accomplishments last year, considering that unfavorable weather contributed to soft comparable store sales to do-it-yourselfers. And we're optimistic about the coming year. Our commercial sales program should have a favorable impact on comparable store sales, and we're also continuing to focus on increasing sales in our base DIY business. For the past several years, AutoZone's record store openings have outpaced the competition by a wide margin. And we see no reason why fiscal 1997 should be any different. We are projecting a record 335 new stores for this coming fiscal year. As cars become more complex, it's more important than ever for AutoZone to retain our position as the leader in providing the most comprehensive automotive information to our customers. Our March acquisition of ALLDATA, which sells repair and diagnostic information to professional repair shops on CD-ROM, will keep us on the cutting edge. Several promotions further strengthened a management team second to none in the industry. John Adams, formerly our executive 5 vice president - distribution, became vice chairman and chief operating officer. Reporting to John are: Tim Vargo, formerly executive vice president - merchandising, who became vice chairman and took over the responsibility for day-to-day operation of our stores; and President Tom Hanemann, who shifted his focus from domestic store operations to development of AutoZone's prospects in the international market. While we don't have a firm timetable for international expansion, Tom will lay the groundwork for expanding the AutoZone concept outside U.S. borders. Fiscal 1997 will be a challenging year, but I'm confident AutoZoners will respond to the challenge with characteristic enthusiasm. To our customers, many thanks for letting us earn your business and for making us the leading auto parts retailer in America. To our AutoZoners, you and your ideas built this company. Thank you for your many contributions. To our shareholders, thank you for your continued support. With your business, ideas and support, we look forward to an even more profitable and productive 1997. Best regards, /s/ Pitt Hyde - ------------- J.R. Hyde III (from left) PITT HYDE Chairman & CEO Customer Satisfaction JOHN ADAMS Vice Chairman & COO Customer Satisfaction TIM VARGO Vice Chairman Customer Satisfaction TOM HANEMANN President Customer Satisfaction [Photo of Hyde, Adams, Vargo and Hanemann] 6 AutoZone is the leader in the $32 billion market serving the do-it-yourself customer. Our fiscal 1996 sales represent less than 7% of this growing industry. That means AutoZone, the largest auto parts retailer in America, still serves only about one out of every 15 do-it-yourselfers. Considering that the top 10 retail chains combined control only about a fifth of the $32 billion do-it-yourself market, we believe there's plenty of room to grow. Industry trends are favorable for our business. Recent statistics show the average age of cars on the road is 8.3 years-the oldest it's been since 1948. The number of cars on the road is steadily rising. People are driving more each year. And the market we serve - vehicles that are at least 5 years old, out of warranty and into the repair cycle - now numbers 127 million. While typical AutoZone customers repair their own cars, millions of others are having their vehicles repaired by professional technicians. And selling parts to the professional is a $42 billion market we're just beginning to tap. There are 127 million vehicles on the road today that are at least five years old, out of warranty and into the repair cycle. 7 RECORD-BREAKING STORE GROWTH The opening of 280 new stores in fiscal 1996 was no small task. Our record store openings brought AutoZone's total store count to 1,423 - more than double what it was just four years ago. And in only six years, our total square footage more than tripled. Last year's pace of store openings meant we added a new AutoZone almost every 31 hours. Next year, we expect to increase the new store count to 335, or one every 26 hours. While we added Pennsylvania as our 27th state, much of our store growth in the first half of the year was devoted to filling in our existing markets. In some instances, these new stores take sales away from older stores. In the long run, however, we believe they help solidify AutoZone's competitive position in the marketplace. Perhaps our new store growth is best put in perspective this way: had they stood alone as a chain, our 280 new stores would rank among the nation's top 10 auto parts retailers. Needless to say, we're extremely proud of the effort put forth by the many AutoZoners who helped open so many stores this year. [Photo of exterior of AutoZone store] 8 SERVING PROFESSIONAL REPAIR SHOPS Fiscal 1996 marked the beginning of a new growth opportunity for AutoZone - selling and delivering parts to professional repair shops. We started an aggressive rollout of a program to serve these commercial customers in September, and by fiscal year-end it was up and running in over 80% of our stores. We'll complete the rollout in the first quarter of fiscal 1997. By selling and delivering parts to professional repair shops, we're able to greatly expand the sales potential of our stores with only a small incremental investment: delivery trucks, dedicated commercial account specialists and drivers. And by leveraging our existing store base and inventory, we believe the program has the potential to offer very good returns over time. The commercial market is a large one - $42 billion. And the customers we're targeting account for about two-thirds of that market. We already know how to take care of them. Our approach to serving professional customers is the very same one we've used for years with DIYers: providing value, quality and - most importantly - outstanding customer service. We offer our professional customers the same high quality parts at the By selling and delivering parts to professional repair shops, we're able to greatly expand the sales potential of each store. 9 everyday low prices that have turned millions of DIYers into loyal AutoZone customers. We've found these professionals to be very receptive to trying AutoZone because our everyday prices are typically lower than even the discounted prices they get from their current suppliers. They're enthusiastic about the lifetime warranty we offer on so many parts. And as they gain firsthand knowledge of the quality of our parts, we're able to win an even larger share of their business. It should come as no surprise that we believe our commitment to customer service is what will ultimately distinguish us in the professional market. By dedicating AutoZoners to satisfying their needs, serving a select number of accounts and limiting the distances we drive, we can offer professional shops much quicker delivery than they're used to - 30 minutes or less, in most cases. And that's where our densely located 1,423 stores give AutoZone a competitive advantage in serving these customers. MORE PARTS, IMPROVED SYSTEMS We added over 1,000 parts to the typical store's inventory this year, bringing our average SKU count to 17,500. By using our proprietary flexogram system, we were able to tailor the inventory based on the vehicles driven by each individual store's customer base. We now have a wider range of inventory levels across the chain, from a low of 16,000 SKUs to a high of 19,000. We added over 1,000 parts to the typical store's inventory this year, bringing our average SKU count to 17,500. [Photo of AutoZone commercial delivery truck] 10 We continue to expand and refine our electronic parts catalog, already the superior system in the industry. In the past year alone, we've doubled the amount of information available. Our electronic catalog now spans 67 years, dating back to 1930. More diagnostic features were included, and several other improvements were made that help AutoZoners serve customers better, faster and more knowledgeably. HOUSTON CALL CENTER OPENS Our new Houston call center, which opened in October of 1995, is now serving 160 stores in our bilingual markets. As in our Memphis center, agents in Houston can access the same information as AutoZoners in the stores through our satellite system. By diverting calls from our busiest stores to these call centers, we eliminate the age-old retail conflict of deciding which customer to help first: the one at the parts counter or the one on the phone. ALLDATA ACQUISITION In March, we acquired ALLDATA Corp., the nation's premier automotive diagnostic and repair software development company. ALLDATA, under the leadership of Founder and President Rod Georgiu, provides more than 17,000 professional repair shops across the country with information either on CD-ROM or on-line. Our electronics parts catalog now spans 67 years, dating back to 1930. Our new Houston call center now serves 160 stores in our bilingual markets. 11 ALLDATA turned profitable last year, and we see strong growth opportunities in its base business. There are over 230,000 garages and service centers in the U.S., yet only about 30,000 have an electronic diagnostic and repair system in place. AutoZone's association with ALLDATA will provide the financial resources to build on its current leadership position in the industry. We believe joining forces with ALLDATA further strengthens our own position as the information leader in our industry. As the number of parts continues to increase and cars become more complex, we believe information will become even more of a competitive advantage for AutoZone. By adding features like technical service bulletins, recall information and specifications to our electronic catalog, we'll be in an even better position to help our customers solve their problems. In the meantime, we continue to search for new products, services and innovations that will distinguish AutoZone in the marketplace. And we remain confident that more and more customers will continue to reward us with their business. The aquisition of ALLDATA further strengthens our position as the information leader in our industry. [Photo of AutoZone employee and customer at parts counter] 12 TEN YEAR REVIEW ---------------------------------------------------------------- (in thousands, except per share data and selected operating data) 5-Year Compound --------------------------- Growth 1996* 1995 INCOME STATEMENT DATA -------- ---------- ---------- Net sales..................................................... 22% $2,242,633 $1,808,131 Cost of sales, including warehouse and delivery expenses....................................... 1,307,638 1,057,033 Operating, selling, general and administrative expenses................................. 666,061 523,440 ---------- ---------- Operating profit.............................................. 28% 268,934 227,658 Interest income (expense)..................................... (1,969) 623 ---------- ---------- Income before income taxes.................................... 30% 266,965 228,281 Income taxes.................................................. 99,800 89,500 ---------- ---------- Net income.................................................... 31% $ 167,165 $ 138,781 ========== ========== Net income per share.......................................... 27% $ 1.11 $ 0.93 ========== ========== Average shares outstanding, including common stock equivalents................................ 151,238 149,302 BALANCE SHEET DATA Current assets................................................ $ 613,097 $ 447,822 Working capital............................................... 219 30,273 Total assets.................................................. 1,498,397 1,111,778 Current liabilities........................................... 612,878 417,549 Debt.......................................................... 94,400 13,503 Shareholders' equity.......................................... 865,582 684,710 SELECTED OPERATING DATA Number of stores at beginning of year......................... 1,143 933 New stores.............................................. 280 210 Replacement stores...................................... 31 29 Closed stores........................................... 0 0 Net new stores.......................................... 280 210 Number of stores at end of year............................... 1,423 1,143 Total store square footage (000's)............................ 9,437 7,480 Increase in square footage - percentage....................... 26% 26% Increase in comparable store net sales - percentage........... 6% 6% Average net sales per store (000's)........................... $ 1,702 $ 1,742 Average net sales per store square foot....................... $ 258 $ 269 Total employment.............................................. 26,800 20,200 Gross profit - percentage of sales............................ 41.7% 41.5% Operating profit - percentage of sales........................ 12.0% 12.6% Net income - percentage of sales.............................. 7.5% 7.7% Debt-to-capital - percentage.................................. 9.8% 1.9% Inventory turnover............................................ 2.7x 2.9x Return on average equity...................................... 22% 23% * 53 weeks. Comparable store sales, average net sales per store and average net sales per store square foot for fiscal year 1996 and 1991 have been adjusted to exclude net sales for the 53rd week. 10 13 Fiscal Year Ended August ------------------------------------------------------------------------------------ 1994 1993 1992 1991 1990 1989 ----------- ----------- ----------- ----------- ----------- ----------- INCOME STATEMENT DATA Net sales............................... $1,508,029 $1,216,793 $1,002,327 $817,962 $671,725 $535,843 Cost of sales, including warehouse and delivery expenses............. 886,068 731,971 602,956 491,261 416,846 341,130 Operating, selling, general and administrative expenses........... 431,219 344,060 295,701 247,355 205,609 169,786 ---------- ---------- ---------- -------- -------- -------- Operating profit........................ 190,742 140,762 103,670 79,346 49,270 24,927 Interest income (expense)............... 2,244 2,473 818 (7,295) (10,936) (9,799) ---------- ---------- ---------- -------- -------- -------- Income before income taxes.............. 192,986 143,235 104,488 72,051 38,334 15,128 Income taxes............................ 76,600 56,300 41,200 27,900 14,840 6,200 ---------- ---------- ---------- -------- -------- -------- Net income.............................. $ 116,386 $ 86,935 $ 63,288 $ 44,151 $ 23,494 $ 8,928 ========== ========== ========== ======== ======== ======== Net income per share.................... $ 0.78 $ 0.59 $ 0.43 $ 0.33 $ 0.19 $ 0.07 ========== ========== ========== ======== ======== ======== Average shares outstanding, including common stock equivalents....................... 148,726 147,608 145,940 134,656 121,212 119,320 BALANCE SHEET DATA Current assets.......................... $ 424,402 $ 378,467 $ 279,350 $233,439 $191,736 $177,824 Working capital......................... 85,373 92,331 72,270 55,807 26,803 35,831 Total assets............................ 882,102 696,547 501,048 397,776 327,368 296,546 Current liabilities..................... 339,029 286,136 207,080 177,632 164,933 141,993 Debt.................................... 4,252 4,458 7,057 7,246 74,851 93,293 Shareholders' equity.................... 528,377 396,613 278,120 204,628 80,356 54,592 SELECTED OPERATING DATA Number of stores at beginning of year........................... 783 678 598 538 504 440 New stores........................ 151 107 82 60 38 70 Replacement stores................ 20 20 14 4 7 7 Closed stores..................... (1) (2) (2) 0 (4) (6) Net new stores.................... 150 105 80 60 34 64 Number of stores at end of year......... 933 783 678 598 538 504 Total store square footage (000's)...... 5,949 4,839 4,043 3,458 3,031 2,758 Increase in square footage - percentage. 23% 20% 17% 14% 10% 19% Increase in comparable store net sales - percentage........................ 9% 9% 15% 12% 13% 10% Average net sales per store (000's)..... $ 1,758 $ 1,666 $ 1,570 $ 1,408 $ 1,289 $ 1,135 Average net sales per store square foot. $ 280 $ 274 $ 267 $ 246 $ 232 $ 211 Total employment........................ 17,400 15,700 13,200 11,700 9,300 7,900 Gross profit - percentage of sales...... 41.2% 39.8% 39.8% 39.9% 37.9% 36.3% Operating profit - percentage of sales.. 12.6% 11.5% 10.3% 9.7% 7.3% 4.6% Net income - percentage of sales........ 7.7% 7.1% 6.3% 5.4% 3.5% 1.7% Debt-to-capital - percentage............ 0.8% 1.1% 2.5% 3.4% 48.2% 63.1% Inventory turnover...................... 3.0x 3.2x 3.0x 2.6x 2.4x 2.4x Return on average equity................ 25% 26% 26% 31% 35% 18% Fiscal Year Ended August -------------------------- 1988 1987 ----------- ----------- INCOME STATEMENT DATA Net sales............................... $437,399 $354,205 Cost of sales, including warehouse and delivery expenses............. 277,043 224,878 Operating, selling, general and administrative expenses........... 142,868 113,123 -------- -------- Operating profit........................ 17,488 16,204 Interest income (expense)............... (8,826) (7,107) -------- -------- Income before income taxes.............. 8,662 9,097 Income taxes............................ 3,770 4,980 -------- -------- Net income.............................. $ 4,892 $ 4,117 ======== ======== Net income per share.................... $ 0.04 $ 0.03 ======== ======== Average shares outstanding, including common stock equivalents....................... 119,936 119,096 BALANCE SHEET DATA Current assets.......................... $137,098 $124,569 Working capital......................... 35,226 26,760 Total assets............................ 232,977 213,076 Current liabilities..................... 101,872 97,809 Debt.................................... 77,138 65,500 Shareholders' equity.................... 45,608 40,795 SELECTED OPERATING DATA Number of stores at beginning of year........................... 396 313 New stores........................ 47 84 Replacement stores................ 1 0 Closed stores..................... (3) (1) Net new stores.................... 44 83 Number of stores at end of year......... 440 396 Total store square footage (000's)...... 2,318 2,029 Increase in square footage - percentage. 14% 30% Increase in comparable store net sales - percentage........................ 6% 10% Average net sales per store (000's)..... $ 1,046 $ 999 Average net sales per store square foot. $ 201 $ 198 Total employment........................ 7,100 6,300 Gross profit - percentage of sales...... 36.6% 36.5% Operating profit - percentage of sales.. 4.0% 4.6% Net income - percentage of sales........ 1.1% 1.2% Debt-to-capital - percentage............ 62.8% 61.6% Inventory turnover...................... 2.3x 2.3x Return on average equity................ 11% 11% . 11 14 Quarterly Summary (unaudited) Seventeen Twelve Weeks Ended Weeks Ended --------------------------------------------- ----------- (in thousands, except per share data) November 18, February 10, May 4, August 31, 1995 1996 1996 1996 ----------- ----------- ---------- ---------- Net sales..................................... $463,029 $425,838 $524,175 $829,591 Increase in comparable store sales............ 5% 3% 8% 7% Gross profit.................................. $193,220 $176,033 $215,531 $350,211 Operating profit.............................. 55,397 43,424 60,432 109,681 Income before income taxes.................... 55,397 43,424 59,705 108.439 Net income.................................... 34,797 27,324 37,605 67,439 Net income per share.......................... 0.23 0.18 0.25 0.44 Stock price range: High..................................... $29.63 $30.13 $37.50 $37.13 Low...................................... $24.75 $24.13 $25.75 $27.00 Sixteen Weeks Ended ----------- November 19, February 11, May 6, August 26, 1994 1995 1995 1995 ----------- ----------- ---------- ---------- Net sales..................................... $389,763 $364,061 $425,483 $628,824 Increase in comparable store sales............ 8% 7% 5% 5% Gross profit.................................. $158,818 $149,080 $177,091 $266,109 Operating profit.............................. 45,408 39,201 53,114 89,935 Income before income taxes.................... 45,834 39,398 53,114 89,935 Net income.................................... 27,634 23,836 32,414 54,897 Net income per share.......................... 0.19 0.16 0.22 0.37 Stock price range: High..................................... $27.00 $26.88 $26.50 $27.50 Low...................................... $21.75 $23.38 $23.00 $22.00 12 15 FINANCIAL REVIEW RESULTS OF OPERATIONS The following table sets forth income statement data of AutoZone expressed as a percentage of net sales for the periods indicated: FISCAL YEAR ENDED ------------------------------------------ AUGUST 31, AUGUST 26, AUGUST 27, 1996 1995 1994 ---------- ---------- ---------- Net sales 100.0% 100.0% 100.0% Cost of sales, including warehouse and delivery expenses 58.3 58.5 58.8 ----- ----- ----- Gross profit 41.7 41.5 41.2 Operating, selling, general and administrative expenses 29.7 28.9 28.6 ----- ----- ----- Operating profit 12.0 12.6 12.6 Interest income (expense) - net (0.1) 0.1 Income taxes 4.4 4.9 5.0 ----- ----- ----- Net income 7.5% 7.7% 7.7% ===== ===== ===== FISCAL 1996 COMPARED TO FISCAL 1995 Net sales for fiscal 1996 increased by $434.5 million or 24.0% over net sales for fiscal 1995. This increase was due to a comparable store net sales increase of 6% (which was primarily due to sales growth in the Company's newer stores and added sales of the Company's commercial program), an increase in net sales of $275.1 million for stores opened since the beginning of fiscal 1995 and net sales for the 53rd week of fiscal 1996. At August 31, 1996, the Company had 1,423 stores in operation, a net increase of 280 stores, or approximately 26% in new store square footage for the year. Gross profit for fiscal 1996 was $935.0 million, or 41.7% of net sales, compared with $751.1 million, or 41.5% of net sales, for fiscal 1995. The increase in gross profit percentage was due primarily to improved leveraging of warehouse and delivery expenses, favorable results of store and distribution center inventories and the added sales of higher margin ALLDATA products. Operating, selling, general and administrative expenses for fiscal 1996 increased by $142.6 million over such expenses for fiscal 1995 and increased as a percentage of net sales from 28.9% to 29.7%. The increase in the expense ratio was primarily due to acquisition and operating costs of ALLDATA and to costs of the Company's commercial program. Net interest expense for fiscal 1996 was $2.0 million compared with interest income of $0.6 million for fiscal 1995. The increase in interest expense was primarily due to higher levels of borrowing. At August 31, 1996, the Company had short-term borrowings, net of short-term investments, of $94.3 million compared with short-term borrowings, net of short term investments, of $10.8 million at August 26, 1995. AutoZone's effective income tax rate was 37.4% of pre-tax income for fiscal 1996 and 39.2% for fiscal 1995. The decrease in the tax rate was primarily due to a reduction in state income taxes. FISCAL 1995 COMPARED TO FISCAL 1994 Net sales for fiscal 1995 increased by $300.1 million or 19.9% over net sales for fiscal 1994. This increase was due to a comparable store net sales increase of 6%, which was primarily due to sales growth in the Company's newer stores, and an increase in net sales of $214.1 million for stores opened since the beginning of fiscal 1994. At August 26, 1995, the Company had 1,143 stores in operation, a net increase of 210 stores, or approximately 26% in new store square footage for the year. Gross profit for fiscal 1995 was $751.1 million, or 41.5% of net sales, compared with $622.0 million, or 41.2% of net sales, for fiscal 1994. The increases in gross profit were due primarily to improved leveraging of warehouse and delivery expenses. OPERATING PROFIT (% of sales) [Bar Graph: 92: 10.3% 93: 11.5% 94: 12.6% 95: 12.6% 96: 12.0%] NET INCOME (% of sales) [Bar Graph: 92: 6.3% 93: 7.1% 94: 7.7% 95: 7.7% 96: 7.5%] TOTAL ASSETS ($ in millions) [Bar Graph: 92: $501 93: $697 94: $882 95: $1,112 96: $1,498] 13 16 NUMBER OF STORES AT YEAR-END [Bar Graph: 92:678 93:783 94:933 95:1,143 96:1,423] NEW STORES [Bar Graph: 92:80 93:105 94:150 95:210 96:280] TOTAL STORE SQ. FOOTAGE (% increase) [Bar Graph: 92:17% 93:20% 94:23% 95:26% 96:26%] Operating, selling, general and administrative expenses for fiscal 1995 increased by $92.2 million over such expenses for fiscal 1994 and increased as a percentage of net sales from 28.6% to 28.9%. The increase in the expense ratio was primarily due to expenses incurred in connection with the introduction of the call center and flexogram programs and increased net advertising expenses. Net interest income for fiscal 1995 was $0.6 million compared with $2.2 million for fiscal 1994. The decrease in interest income was primarily due to lower levels of invested cash. At August 26, 1995, the Company had short-term borrowings, net of short-term investments, of $10.8 million compared with short-term investments, net of short-term borrowings, of $53.9 million at August 27, 1994. AutoZone's effective income tax rate was 39.2% of pre-tax income for fiscal 1995 and 39.7% for fiscal 1994. The decrease in the tax rate was primarily due to a change in the effective state tax rate due to expansion in lower tax rate states. LIQUIDITY AND CAPITAL RESOURCES The Company's primary capital requirements have been the funding of its continued new store expansion program, the increase in distribution centers and inventory requirements. The Company has opened 825 stores and constructed six new distribution centers from the beginning of fiscal 1992 to August 31, 1996. The Company has financed this growth through a combination of internally generated funds and, to a lesser degree, borrowings. Net cash provided by operating activities was $174.2 million in fiscal 1996, $180.1 million in fiscal 1995 and $128.3 million in fiscal 1994. Capital expenditures were $288.2 million in fiscal 1996, $258.1 million in fiscal 1995 and $173.0 million in fiscal 1994. The Company opened 280 stores in fiscal 1996 and completed construction of a new distribution center in Zanesville, Ohio, which commenced operations in February 1996. The Company completed the construction of and relocation to its new Memphis headquarters in the fall of 1995. Construction commitments totaled approximately $48 million at August 31, 1996. The Company's new store development program requires significant working capital, principally for inventories. Historically, the Company has negotiated extended payment terms from suppliers, minimizing the working capital required by its expansion. The Company believes that it will be able to continue financing much of its inventory growth by favorable payment terms from suppliers, but there can be no assurance that the Company will be successful in doing so. The Company anticipates that it will rely on internally generated funds to support a majority of its capital expenditures and working capital requirements; the balance of such requirements will be funded through borrowings. The Company has revolving credit agreements with several banks providing for lines of credit in an aggregate amount of $125 million, including an increase of $50 million in January 1996. At August 31, 1996, the Company had available borrowings under these agreements of $30.6 million. At August 31, 1996, the Company had outstanding stock options to purchase 9,759,756 shares of Common Stock. Assuming all such options become vested and are exercised, such options would result in proceeds of $175.3 million to the Company. Such proceeds constitute an additional source for liquidity and capital resources for the Company. For fiscal 1996, proceeds from sales of stock under stock option and employee stock purchase plans were $17.7 million, including related tax benefits. 14 17 RECENT ACCOUNTING PRONOUNCEMENTS In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) was issued. SFAS 123 encourages companies to adopt a fair value based method of accounting for stock-based compensation plans in place of the intrinsic value based method provided for by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Companies which continue to apply the provisions of APB 25 must make pro forma disclosures in the notes to their financial statements of net income and earnings per share as if the fair value based method of accounting defined in SFAS 123 had been applied. The Company plans to adopt the pro forma disclosure provisions of SFAS 123 in fiscal year 1997. In March 1995, Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121) was issued. SFAS 121 establishes accounting standards for the recognition of the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used, or to be disposed of. The Company does not believe the adoption of SFAS 121 in fiscal year 1997 will have a significant impact on the Company's financial condition or results of operations. INFLATION The Company does not believe its operations have been materially affected by inflation. The Company has been successful, in many cases, in mitigating the effects of merchandise cost increases principally due to economies of scale resulting from increased volumes of purchases, selective forward buying and the use of alternative suppliers. SEASONALITY AND QUARTERLY PERIODS The Company's business is somewhat seasonal in nature, with the highest sales occurring in the summer months of June through August, in which average weekly per store sales historically have run about 20% to 30% higher than in the slowest months of December through February. The Company's business is also affected by weather conditions. Extremely hot or extremely cold weather tends to enhance sales by causing parts to fail and spurring sales of seasonal products. Mild or rainy weather tends to soften sales as parts' failure rates are lower in mild weather and elective maintenance is deferred during periods of rainy weather. Each of the first three quarters of AutoZone's fiscal year consists of twelve weeks and the fourth quarter consists of sixteen weeks (seventeen weeks in fiscal 1996). Because the fourth quarter contains seasonally high sales volume and consists of sixteen weeks (seventeen weeks in fiscal 1996) compared to twelve weeks for each of the first three quarters, the Company's fourth quarter represents a disproportionate share of the annual net sales and net income. For fiscal 1996 and 1995, the fourth quarter represented 37.0% and 34.8%, respectively, of annual net sales and 40.3% and 39.6%, respectively, of net income. AFTER TAX RETURN ON CAPITAL [Bar Graph: 92: 17% 93: 18% 94: 19% 95: 19% 96: 18%] SHAREHOLDERS' EQUITY ($ in millions) [Bar Graph: 92: $278 93: $397 94: $528 95: $685 96: $866] 15 18 CONSOLIDATED STATEMENTS OF INCOME ---------------------------------------------- Year Ended ---------------------------------------------- August 31, August 26, August 27, 1996 1995 1994 (53 Weeks) (52 Weeks) (52 Weeks) ---------- ---------- ---------- (in thousands, except per share data) Net sales........................................................ $2,242,633 $1,808,131 $1,508,029 Cost of sales, including warehouse and delivery expenses......... 1,307,638 1,057,033 886,068 Operating, selling, general and administrative expenses.......... 666,061 523,440 431,219 ---------- ---------- ---------- Operating profit................................................. 268,934 227,658 190,742 Interest income (expense) - net.................................. (1,969) 623 2,244 ---------- ---------- ---------- Income before income taxes................................. 266,965 228,281 192,986 Income taxes..................................................... 99,800 89,500 76,600 ---------- ---------- ---------- Net income................................................. $ 167,165 $ 138,781 $ 116,386 ========== ========== ========== Net income per share............................................. $ 1.11 $ 0.93 $ 0.78 ========== ========== ========== Average shares outstanding, including common stock equivalents.......................................... 151,238 149,302 148,726 ========== ========== ========== See Notes to Consolidated Financial Statements. 16 19 CONSOLIDATED BALANCE SHEETS ---------------------------------------------------- August 31, August 26, 1996 1995 ---------- ---------- (in thousands except per share data) ASSETS Current assets: Cash and cash equivalents.................................................... $ 3,904 $ 6,411 Accounts receivable.......................................................... 15,466 9,690 Merchandise inventories...................................................... 555,894 395,751 Prepaid expenses............................................................. 19,225 13,329 Deferred income taxes........................................................ 18,608 22,641 ---------- ---------- Total current assets................................................... 613,097 447,822 Property and equipment: Land ........................................................................ 190,660 140,953 Buildings and improvements................................................... 523,240 328,398 Equipment.................................................................... 248,275 188,351 Leasehold improvements and interests......................................... 36,708 29,785 Construction in progress..................................................... 62,283 104,869 ---------- ---------- 1,061,166 792,356 Less accumulated depreciation and amortization............................... 198,292 148,148 ---------- ---------- 862,874 644,208 Other assets: Cost in excess of net assets acquired, net of accumulated amortization of $7,467 in 1996 and $6,851 in 1995....................................... 17,187 17,803 Deferred income taxes........................................................ 2,938 Other assets................................................................. 2,301 1,945 ---------- ---------- 22,426 19,748 ---------- ---------- $1,498,397 $1,111,778 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable............................................................. $ 381,304 $ 300,578 Accrued expenses............................................................. 104,909 91,838 Checks outstanding, net...................................................... 20,005 5,863 Income taxes payable......................................................... 12,260 5,767 Revolving credit agreements.................................................. 94,400 9,500 Current portion of long-term debt............................................ 4,003 ---------- ---------- Total current liabilities.............................................. 612,878 417,549 Other liabilities.................................................................. 19,937 8,318 Deferred income taxes.............................................................. 1,201 Commitments and contingencies...................................................... Shareholders' equity: Preferred Stock, authorized 1,000 shares; no shares issued and outstanding in 1996 and 1995........................................... Common Stock, par value $.01 per share, authorized 200,000 shares; issued and outstanding 150,137 shares in 1996 and 147,052 shares in 1995.................................................... 1,501 1,471 Additional paid-in capital................................................... 235,247 196,625 Retained earnings............................................................ 628,834 486,614 ---------- ---------- 865,582 684,710 ---------- ---------- $1,498,397 $1,111,778 ========== ========== See Notes to Consolidated Financial Statements. 17 20 CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------ Year Ended ---------------------------------------- August 31, August 26, August 27, 1996 1995 1994 (53 Weeks) (52 Weeks) (52 Weeks) ---------- ---------- ---------- (in thousands) Cash flows from operating activities: Net income.................................................... $167,165 $138,781 $116,386 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment....................................... 62,919 47,733 32,429 Amortization of intangible and other assets............ 622 616 637 Deferred income tax expense (benefit).................. 6,082 (7,240) (331) Net loss (gain) on disposals of property and equipment....................................... (735) 832 632 Net increase in accounts receivable and prepaid expenses.................................... (7,564) (6,091) (1,236) Net increase in merchandise inventories................ (158,673) (61,687) (73,996) Net increase in accounts payable, accrued expenses and checks outstanding.............................. 94,916 64,666 57,348 Net increase (decrease) in income taxes payable..................... 6,493 578 (4,477) Net change in other assets and liabilities............. 2,930 1,880 885 -------- -------- -------- Net cash provided by operating activities........... 174,155 180,068 128,277 Cash flows from investing activities: Cash outflows for property and equipment...................... (288,182) (258,060) (172,975) Proceeds from disposals of property and equipment............. 8,680 1,364 1,237 -------- -------- -------- Net cash used in investing activities............... (279,502) (256,696) (171,738) Cash flows from financing activities: Repayment of long-term debt................................... (4,003) (249) (206) Net increase in revolving credit agreements................... 84,900 9,500 Net proceeds from sale of Common Stock, including related tax benefit........................................ 17,699 17,552 14,078 Principal collections on subscription notes receivable........ 1,300 -------- -------- -------- Net cash provided by financing activities........... 98,596 26,803 15,172 -------- -------- -------- Net decrease in cash and cash equivalents........................... (6,751) (49,825) (28,289) Cash and cash equivalents at beginning of year...................... 6,411 56,236 84,525 Beginning cash balance of pooled entity............................. 4,244 -------- -------- -------- Cash and cash equivalents at end of year............................ $ 3,904 $ 6,411 $ 56,236 ======== ======== ======== Supplemental cash flow information: Interest paid, net of interest cost capitalized............... $ 1,971 $ 160 $ 85 Income taxes paid............................................. $ 69,791 $ 81,862 $ 70,203 See Notes to Consolidated Financial Statements. 18 21 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -------------------------------- Additional Subscription Common Paid-in Retained Notes Stock Capital Earnings Receivable Total ------ ---------- -------- ------------ -------- (in thousands) Balance at August 28, 1993......................... $1,441 $165,025 $231,447 $ (1,300) $396,613 Net income......................................... 116,386 116,386 Principal collections on subscription notes receivable......................................... 1,300 1,300 Sale of 1,303 shares of Common Stock under stock option and stock purchase plans......... 13 2,985 2,998 Tax benefit of exercise of stock options........... 11,080 11,080 ------ --------- -------- ---------- -------- Balance at August 27, 1994......................... 1,454 179,090 347,833 - 528,377 Net income......................................... 138,781 138,781 Sale of 1,635 shares of Common Stock under stock option and stock purchase plans......... 17 5,335 5,352 Tax benefit of exercise of stock options........... 12,200 12,200 Balance at August 26, 1995......................... 1,471 196,625 486,614 - 684,710 Net income......................................... 167,165 167,165 Equity of pooled entity issued (1,697 shares)...... 17 20,936 (24,945) (3,992) Sale of 1,386 shares of Common Stock under stock option and stock purchase plans......... 13 6,836 6,849 Tax benefit of exercise of stock options........... 10,850 10,850 ------ --------- -------- ---------- -------- Balance at August 31, 1996......................... $1,501 $235,247 $628,834 $ - $865,582 ====== ========= ======== =========== ======== See Notes to Consolidated Financial Statements. 19 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------ NOTE A - SIGNIFICANT ACCOUNTING POLICIES BUSINESS: The Company is a specialty retailer of automotive parts and accessories. At the end of fiscal 1996, the Company operated 1,423 stores in 27 states. FISCAL YEAR: The Company's fiscal year consists of 52 or 53 weeks ending on the last Saturday in August. BASIS OF PRESENTATION: The consolidated financial statements include the accounts of AutoZone, Inc., and its wholly owned subsidiaries (the Company). All significant intercompany transactions and balances have been eliminated in consolidation. MERCHANDISE INVENTORIES: Inventories are stated at the lower of cost or market using the last-in, first-out (LIFO) method. The Company believes that the LIFO method of inventory valuation results in a better matching of current costs and revenues. A number of retailers use the first-in, first-out (FIFO) method of inventory valuation. Cost of sales was approximately $100,000, $3,600,000 and $4,400,000 less in fiscal 1996, 1995 and 1994, respectively than if the FIFO method had been used. PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. Leasehold interests and improvements are amortized over the terms of the leases. AMORTIZATION: The cost in excess of net assets acquired is amortized by the straight-line method over 40 years. PREOPENING EXPENSES: Preopening expenses, which consist primarily of payroll and occupancy costs, are expensed as incurred. ADVERTISING COSTS: The Company expenses advertising costs as incurred. Advertising expense, net of vendor rebates, was approximately $23,129,000, $18,531,000 and $9,306,000 in fiscal 1996, 1995 and 1994, respectively. WARRANTY COSTS: The Company provides the retail consumer with a warranty on certain products. Estimated warranty obligations are provided at the time of sale of the product. FINANCIAL INSTRUMENTS: The Company has certain financial instruments which include cash, accounts receivable, accounts payable, checks outstanding and revolving credit agreements. The carrying amounts of these financial instruments approximate fair value because of their short maturities. 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 and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. NET INCOME PER SHARE: Net income per share of common stock is computed using the weighted average number of shares of common stock outstanding during each period, including common stock equivalents, consisting of stock options calculated using the treasury stock method, when dilutive. CASH EQUIVALENTS: Cash equivalents consist of investments with maturities of 90 days or less at the date of purchase. USE OF ESTIMATES: Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. IMPAIRMENT OF LONG-LIVED ASSETS: SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," is effective for fiscal years beginning after December 15, 1995. This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Also, in general, long-lived assets and certain identifiable intangibles to be disposed of should be reported at the lower of carrying amount or fair values less cost to sell. The impact of this new standard is not expected to have a material effect on the Company's financial position or results of operations. NOTE B - ACCRUED EXPENSES Accrued expenses consist of the following: AUGUST 31, AUGUST 26, 1996 1995 --------- ------- (in thousands) Medical and casualty insurance claims $ 33,800 $36,835 Accrued compensation and related payroll taxes 18,490 19,489 Ad valorem and sales taxes 21,485 18,101 Other 31,134 17,413 --------- ------- $ 104,909 $91,838 ========= ======= NOTE C - INCOME TAXES At August 31, 1996, the Company has net operating loss carryforwards (NOLs) of approximately $14.5 million that expire in years 2000 through 2009. Those carryforwards resulted from the Company's acquisition of ALLDATA Corp. (see Note J - Business Combination). The use of the NOLs is limited to future taxable earnings of ALLDATA Corp. and is subject to annual limitations. A valuation allowance of $5,573,000 has been recognized to offset the deferred tax assets related to those carryforwards. If realized, the tax benefit for those NOLs will reduce income tax expense. The provision for income taxes consists of the following: YEAR ENDED ------------------------------------- AUGUST 31, AUGUST 26, AUGUST 27, 1996 1995 1994 --------- --------- ---------- (in thousands) Current: Federal $86,469 $81,460 $63,150 State 7,249 15,280 13,781 ------- ------- ------- 93,718 96,740 76,931 Deferred: Federal 5,531 (6,160) (250) State 551 (1,080) (81) ------- ------- ------- 6,082 (7,240) (331) ------- ------- ------- $99,800 $89,500 $76,600 ======= ======= ======= 20 23 - -------------------------------------------------------------------------------- Significant components of the Company's deferred tax assets and liabilities are as follows: AUGUST 31, AUGUST 26, 1996 1995 --------- --------- (in thousands) Deferred tax assets: Insurance reserves $11,282 $13,078 Unearned income 6,296 Net operating loss carryforwards 5,573 Other 5,767 11,874 ------- ------- 28,918 24,952 Less valuation allowance (5,573) ------- ------- 23,345 24,952 Deferred tax liabilities: Property and equipment 1,799 3,512 ------- ------- Net deferred tax assets $21,546 $21,440 ======= ======= A reconciliation of the provision for income taxes to the amount computed by applying the federal statutory tax rate of 35% to income before income taxes is as follows: Year Ended ----------------------------------- August 31, August 26, August 27, 1996 1995 1994 ------- ------- ------- (in thousands) Expected tax at statutory rate $93,438 $79,898 $67,545 State income taxes, net 5,070 9,230 8,905 Other 1,292 372 150 ------- ------- ------- $99,800 $89,500 $76,600 ======= ======= ======= Income tax benefits resulting from the exercise of certain non-qualified employee stock options were credited to additional paid-in capital because no expense was charged to income for financial reporting purposes in respect of such options. NOTE D - FINANCING ARRANGEMENTS On January 16, 1996, the Company increased its unsecured revolving credit agreements (the Revolver) with a group of banks by $50,000,000 for a line of credit totaling $125,000,000. The rate of interest payable under the Revolver is a function of the London Interbank Offered Rate (LIBOR) or the lending bank's base rate (or prime rate as defined by an individual bank), at the option of the Company. The commitments made under the Revolver expire on February 1, 1998, but may be extended for additional eighteen month periods with the consent of the lenders. At August 31, 1996, the Company's borrowings under the Revolver were $94,400,000 and the average interest rate was 5.67% and 6.06% at fiscal year-end 1996 and 1995, respectively. During the commitment period, the Company is obligated to pay a fee of .125% per annum for the unused portion of the $125,000,000 commitment. The Revolver contains a covenant limiting the amount of debt the Company may incur relative to its net worth. Interest costs of $2,416,000 in fiscal 1996, $981,000 in fiscal 1995 and $446,000 in fiscal 1994 were capitalized. NOTE E - EQUITY The Company has issued options to purchase Common Stock to certain shareholders and employees. A summary of outstanding stock options is as follows: EXERCISE PRICE NUMBER PER SHARE OF SHARES --------------- --------- Outstanding August 27, 1994 $ 0.63 - $29.00 9,147,829 Granted 23.38 - 26.38 2,356,855 Exercised 0.63 - 9.17 (1,532,139) Canceled 1.63 - 29.00 (468,564) --------------- --------- Outstanding August 26, 1995 0.67 - 29.00 9,503,981 Assumed 2.24 - 4.86 221,841 Granted 25.13 - 35.13 1,621,395 Exercised 0.67 - 14.31 (1,332,588) Canceled 4.89 - 28.25 (254,873) --------------- --------- Outstanding August 31, 1996 $ 0.79 - $35.13 9,759,756 =============== ========= Options to purchase 2,901,140 shares at August 31, 1996, and 3,211,405 shares at August 26, 1995, were exercisable. Shares reserved for future grants were 725,363 shares at August 31, 1996, and 2,091,885 shares at August 26, 1995. The Company also has an employee stock purchase plan under which all eligible employees may purchase Common Stock at no less than 85% of fair market value (determined quarterly) through regular payroll deductions. Annual purchases are limited to $4,000 per employee. Under the plan, 226,541 shares were sold in fiscal 1996 and 228,571 shares were sold in fiscal 1995, including 173,572 and 125,219 shares, respectively, purchased by the Company for sale under the plan. A total of 473,068 shares of Common Stock is reserved for future issuance under this plan. NOTE F - PENSION PLAN Substantially all full-time employees are covered by a defined benefit pension plan. The benefits are based on years of service and the employee's highest consecutive five-year average compensation. The Company's funding policy is to make annual contributions in amounts at least equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974. 21 24 The following table sets forth the plan's funded status and amounts recognized in the Company's financial statements (in thousands): AUGUST 31, AUGUST 26, 1996 1995 -------- -------- Actuarial present value of accumulated benefit obligation, including vested benefits of $17,225 in 1996 and $12,946 in 1995 $ 20,400 $ 15,444 ======== ======== Projected benefit obligation for service rendered to date $ 31,533 $ 23,348 Less plan assets at fair value, primarily stocks and cash equivalents 27,367 18,616 -------- -------- Projected benefit obligation in excess of plan assets 4,166 4,732 Unrecognized prior service cost (427) (564) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions (3,470) (3,799) Unrecognized net asset 268 418 -------- -------- Accrued pension cost $ 537 $ 787 ======== ======== Net pension cost included the following components (in thousands): Year Ended --------------------------------------- August 31, August 26, August 27, 1996 1995 1994 ------- ------- ------- Service cost of benefits earned during the year $ 4,580 $ 3,536 $ 2,876 Interest cost on projected benefit obligation 1,748 1,367 1,097 Actual return on plan assets (3,677) (1,289) (1,527) Net amortization and deferral 2,518 481 1,261 ------- ------- ------- Net periodic pension cost $ 5,169 $ 4,095 $ 3,707 ======= ======= ======= The actuarial present value of the projected benefit obligation was determined using weighted-average discount rates of 7.93% and 7.5% at August 31, 1996, and August 26, 1995, respectively, and assumed increases in future compensation levels of 6%. The expected long-term rate of return on plan assets was 7%. Prior service cost is amortized over the estimated average remaining service lives of the plan participants, and the unrecognized net experience gain or loss is amortized over five years. NOTE G - LEASES A substantial portion of the Company's retail stores and certain equipment are leased. Most of these leases include renewal options and some include options to purchase and provisions for percentage rent based on sales. Rental expense was $30,626,000 for fiscal 1996, $26,460,000 for fiscal 1995 and $28,113,000 for fiscal 1994. Percentage rentals were insignificant. Minimum annual rental commitments under non-cancelable operating leases are as follows (in thousands): Year Amount ---- ------ 1997 $ 29,742 1998 26,788 1999 23,130 2000 20,678 2001 16,456 Thereafter 66,520 -------- $183,314 ======== NOTE H - RELATED PARTY TRANSACTIONS Management fees of $272,000 for fiscal 1996, $371,000 for fiscal 1995 and $402,000 for fiscal 1994 were paid to KKR Associates, which directly and through several limited partnerships, of which it is a general partner, owned approximately 13% and 43% of the Company's outstanding Common Stock at August 31, 1996 and August 26, 1995, respectively. NOTE I - COMMITMENTS AND CONTINGENCIES Construction commitments, primarily for new stores, totaled approximately $48 million at August 31, 1996. The Company is a party to various claims and lawsuits arising in the normal course of business which, in the opinion of management, are not, singularly or in aggregate, material to the Company's financial position or results of operations. The Company is self-insured for workers' compensation, automobile, general and product liability losses. The Company is also self-insured for health care claims for eligible active employees. The Company maintains certain levels of stop loss coverage for each self-insured plan. Self-insurance costs are accrued based upon the aggregate of the liability for reported claims and an estimated liability for claims incurred but not reported. NOTE J - BUSINESS COMBINATION On March 29, 1996, ALLDATA Corp. (ALLDATA) became a wholly owned subsidiary of AutoZone in a stock-for-stock merger accounted for as a pooling of interests. ALLDATA has developed a database system that provides comprehensive and up-to-date automotive diagnostic, service and repair information, which it markets to professional repair shops. Under the terms of the merger agreement, AutoZone issued approximately 1.7 million shares of Common Stock and stock options covering approximately 200,000 shares of Common Stock. Financial information of ALLDATA has been included in the results of operations from the date of acquisition and is included in the balance sheet as of August 31, 1996. Financial statements for periods prior to the date of combination have not been restated as the effect is not material to the Company's financial condition and results of operations. The assets and liabilities of ALLDATA were approximately $17.4 million and $21.4 million, respectively, at the date of combination. 22 25 MANAGEMENT'S REPORT AutoZone's management takes responsibility for the integrity and objectivity of the financial statements in this annual report. These financial statements were prepared from accounting records which management believes fairly and accurately reflect the operations and financial position of AutoZone. The financial statements in this report were prepared in conformity with generally accepted accounting principles. In certain instances, management used its best estimates and judgments based upon currently available information and management's view of current conditions and circumstances. Management maintains a system of internal controls designed to provide reasonable assurance that assets are protected from improper use and accounted for in accordance with its policies and that transactions are recorded accurately in the Company's records. The concept of reasonable assurance is based upon a recognition that the cost of the controls should not exceed the benefit derived. The financial statements of AutoZone have been audited by Ernst & Young LLP, independent auditors. Their accompanying report is based on an audit conducted in accordance with generally accepted auditing standards, including a review of internal accounting controls and financial reporting matters. /s/ Robert J. Hunt - ------------------ Robert J. Hunt Executive Vice President - Finance Chief Financial Officer Customer Satisfaction REPORT OF INDEPENDENT AUDITORS Shareholders AutoZone, Inc., We have audited the accompanying consolidated balance sheets of AutoZone, Inc. as of August 31, 1996, and August 26, 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended August 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AutoZone, Inc. at August 31, 1996, and August 26, 1995, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended August 31, 1996, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Memphis, Tennessee September 23, 1996 CORPORATE INFORMATION TRANSFER AGENT AND REGISTRAR First Chicago Trust Company of New York P.O. Box 2500 Jersey City, New Jersey 07303-2500 (800) 446-2617 (201) 324-0498 STOCK EXCHANGE LISTING New York Stock Exchange Ticker Symbol: AZO AUDITORS Ernst & Young LLP Memphis, Tennessee CORPORATE OFFICES 123 South Front Street Memphis, Tennessee 38103-3607 (901) 495-6500 AUTOZONE WEB SITE http://www.autozone.com ANNUAL MEETING The Annual Meeting of Shareholders of AutoZone will be held at 10:00 a.m. on December 12, 1996, at AutoZone Corporate Offices, 123 South Front Street, Memphis, Tennessee. SEC FORM 10-K/QUARTERLY REPORTS AutoZone does not produce quarterly reports because the information is not timely and is costly to distribute. Shareholders may obtain free of charge a copy of the Company's annual report on Form 10-K as filed with the Securities and Exchange Commission or our quarterly press releases by writing to Shareholder Relations, P.O. Box 2198, Memphis, Tennessee 38101- 9842. Copies of all documents filed by the company with the Securities and Exchange Commission, including Form 10-K and Form 10-Q, are also available at the SEC's EDGAR server at http://www.sec.gov. SHAREHOLDERS OF RECORD As of August 31, 1996, there were 2,772 shareholders of record. 23 26 OFFICERS ----------------------------------------------------------------------- Executive Vice Presidents Vice Presidents HARRY L. GOLDSMITH Customer Satisfaction Customer Satisfaction General Counsel and Secretary JOSEPH R. HYDE III LAWRENCE E. EVANS RICHARD F. ADAMS JR. Chairman and CEO Store Development Business Planning Phillip J. Jackson Customer Satisfaction & Analysis Distribution ROBERT J. HUNT JOHNSTON C. ADAMS JR. Chief Financial Officer MICHAEL B. BAIRD MICHAEL E. LONGO Vice Chairman and COO Stores Distribution Customer Satisfaction SHAWN P. MCGHEE Merchandising DAVID W. BARCZAK WILLIAM R. MCCAWLEY JR. TIMOTHY D. VARGO Real Estate Stores Vice Chairman Customer Satisfaction JON A. BASCOM STEVEN R. MCCLANAHAN Senior Vice Presidents Systems Technology Stores THOMAS S. HANEMANN Customer Satisfaction & Support President GRANTLAND E. MCGEE JR. Customer Satisfaction ANTHONY D. ROSE JR. B. CRAIG BLACKWELL Stores Advertising Stores JOHN MINERVINI STEPHEN W. VALENTINE FRANCIS C. BROWN III Business Development Other Corporate Officers Systems Technology Human Resources Customer Satisfaction & Support WILLIAM E. SHULL III MICHAEL E. BUTTERICK Stores SHEILA GRACE STUEWE Controller Treasurer DAVID WILHITE MARK A. CORDOVA Merchandising DONALD R. RAWLINS Stores Assistant Secretary BRETT D. EASLEY Merchandising Systems BOARD OF DIRECTORS ------------------------------------------------------------ JOSEPH R. HYDE III DR. N. GERRY HOUSE ROBERT I. MACDONNELL GEORGE R. ROBERTS Chairman and CEO Superintendent General Partner General Partner Customer Satisfaction Memphis City Schools Kohlberg, Kravis, Roberts Kohlberg, Kravis, Roberts JOHNSTON C. ADAMS JR. JAMES F. KEEGAN MICHAEL W. MICHELSON RONALD A. TERRY Vice Chairman and COO Managing Director General Partner Retired Chairman Customer Satisfaction Weibel Huffman Keegan, Inc. Kohlberg, Kravis, Roberts First Tennessee National Corporation TIMOTHY D. VARGO HENRY R. KRAVIS JOHN E. MOLL Vice Chairman General Partner Retired President Customer Satisfaction Kohlberg, Kravis, Roberts The Fleming Companies, Inc. THOMAS S. HANEMANN President Customer Satisfaction ANDREW M. CLARKSON Chairman Finance Committee Customer Satisfaction 24 27 [Graphic: Map of United States showing number of AutoZone locations per state:] 1,423 STORES 27 STATES [Alabama 74 Arizona 52 Arkansas 37 Colorado 24 Florida 61 Georgia 87 Illinois 43 Indiana 66 Kansas 7 Kentucky 42 Louisiana 68 Michigan 9 Mississippi 58 Missouri 56 New Mexico 22 North Carolina 79 Ohio 138 Oklahoma 56 Pennsylvania 10 South Carolina 41 Tennessee 102 Texas 239 Utah 15 Virginia 23 West Virginia 12 Wisconsin 1 Wyoming 1] STORES OPENED FISCAL YEAR 1996 ALABAMA GEORGIA LOUISIANA (CONT.) OHIO SOUTH CAROLINA Anniston (R) Atlanta New Orleans Amelia Aiken Bay Minette Bainbridge Plaquemine Amherst Camden Birmingham (R) Cornelia Sulphur Boardman Darlington Clanton Decatur (2) Brunswick Laurens Florence East Point MISSISSIPPI Bucyrus Lexington Fort Payne Fayetteville Brandon Calcutta Rock Hill Gadsden Hephzibah Canton Centerville Huntsville Kennesaw Greenville (R) Chillicothe TENNESSEE Leeds Marietta Indianola Conneaut Cordova Madison Martinez Iuka Delphos Dickson (R) Monroeville Statesboro Jackson (R) East Liverpool Greeneville (R) Oneonta Thomasville (R) Lucedale Fostoria Harriman Prichard Thomson Magee Geneva Jackson Thomasville Warner Robins Olive Branch Georgetown Jefferson City Tuscaloosa Winder Philadelphia Hamilton La Follette Tuscumbia Ripley Harrison Madison (R) ILLINOIS Senatobia Heath Martin ARIZONA Belleville Tupelo Ironton Memphis (1, 2R) Casa Grande (R) Harrisburg Waynesboro Logan Morristown Coolidge Joliet West Point Lorain Murfreesboro Glendale Litchfield Marysville Nashville (2, 1R) Mesa (R) Paris MISSOURI Mason Newport Phoenix (2, 3R) Salem Aurora Mentor on the Lake Rogersville Tucson (1,1R) Waterloo Bolivar Milford Selmer Cape Girardeau (R) Mt. Vernon Sparta ARKANSAS INDIANA Carthage North Madison Fort Smith Bloomington Dexter Oxford TEXAS Harrison Boonville Florissant (R) Painesville Angleton Pine Bluff Crawfordsville Jackson Parma Arlington Russellville (R) Evansville Joplin Perrysburg Belton Siloam Springs Indianapolis (2) Lebanon Sandusky Benbrook Jeffersonville Macon St. Clairsville Clute (R) COLORADO Lawrenceburg Mehlville (1, 1R) Symmes Township Corpus Christi Aurora Martinsville Mexico Warren (2) De Soto Ft. Morgan Princeton Nevada Washington Court Hse Denison Wheat Ridge Salem Perryville Wintersville El Campo Tell City Springfield (2) Woodlawn El Paso (3, 1R) FLORIDA Troy Wooster Gainesville Bartow KANSAS Warrensburg Youngstown (4) Garland (2) Bermuda Chanute Hewitt Clermont Ft. Scott NEW MEXICO OKLAHOMA Hidalgo Crystal River Independence Deming Hugo Houston (3, 1R) Dade City Iola Farmington (R) Mustang Lancaster Deland Parsons Las Cruces Pryor Laredo Dunedin Pittsburg Tahlequah Lockhart Ensley NORTH CAROLINA Tulsa (2) Pearland Eustis KENTUCKY Asheville Wagoner San Antonio (3, 1R) Inverness Beaver Dam Belmont Weatherford Santa Fe Leesburg Cynthiana Charlotte (2, 1R) Woodward Waco Marianna Florence Dunn (R) Melbourne Harrodsburg Greensboro (4, 2R) PENNSYLVANIA VIRGINIA Ocala (2) Leitchfield Lumberton Allison Park Charlottesville Orange City London Mooresville East Rochester Cheasapeake Orlando (3) Maysville Morehead City Greenville Newport News Palm Bay Nicholasville Mount Airy Grove City Norfolk Pensacola Owensboro (2) Reidsville Hermitage Richmond Quincy Princeton Rockingham Huntingdon Sanford Roxboro New Castle WEST VIRGINIA St. Cloud LOUISIANA Smithfield Sharon Logan Winter Haven (2) Arabi (R) Tarboro Uniontown Moundsville Bastrop Washington Waynesburg New Martinsville Franklinton Wilmington Oak Hill Marrero Winston-Salem (R) - Indicates replacement store. 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