[COVER: PICTURE OF KEYCHAIN WITH "AUTOZONE" AND "FY 98" KEY RINGS]




                              1998 ANNUAL REPORT

COMPANY DESCRIPTION AutoZone is more than just the nation's leading auto parts chain. We sell auto and light truck parts, chemicals and accessories in 38 states through 2,657 AutoZone and Chief stores. We also sell heavy-duty truck parts and accessories through 43 TruckPro stores in 14 states, plus automotive diagnostic and repair software through ALLDATA. We cater to a broad range of customers. Our core customers are the do-it-yourselfers, who work on their family cars. They're driven by a need for transportation and to save money. We also sell to professional technicians who work on other people's vehicles. They're driven by the need to make a living. Both rely on us for quality, service, value and information. AutoZone turned 19 years old on July 4, 1998. Our first store was in Forrest City, Arkansas, and was the laboratory for developing many of our customer service ideas. Those ideas became the foundation of 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. Today over 38,000 people work for AutoZone, TruckPro and ALLDATA. All share the pride and responsibility of working for the leader in their respective industries.

[BAR GRAPHS APPEAR HERE WITH THE FOLLOWING DATA:] Sales Operating Net ($ millions) Profit Income ($ millions) ($ millions 3,243 382 228 2,691 321 195 2,243 269 167 1,808 228 139 1,508 191 116 94 95 96 97 98 94 95 96 97 98 94 95 96 97 98 Earnings Per Share After Tax Return on Capital ($) 1.48 1.28 19% 19% 1.11 18% .93 16% .78 14% 94 95 96 97 98 94 95 96 97 98 [PHOTO OF AUTOZONE STORE SIGN APPEARS HERE] Financial Highlights 1998 1997 % Change Sales $3,242,922,000 $2,691,440,000 +20% Operating Profit $382,307,000 $321,351,000 +19% Net Income $227,903,000 $195,008,000 +17% Earnings Per Share $1.48 $1.28 +16% Stockholders' Equity $1,302,057,000 $1,075,208,000 +21% Number of Auto Parts Stores 2,657 1,728 +54%

To our Customers, AutoZoners and Stockholders, Fiscal 1998 will be remembered as the year AutoZone took the lead in industry consolidation. ALLDATA was our only major acquisition entering the year, but we ended with three new acquisitions on the books. We bought these companies with the intention of either boosting our customer base or reaching an entirely new segment of the parts market. We took a very strategic approach to potential purchases. In fact, we turned down opportunities that didn't meet thecriteria and value we needed. [PHOTO OF TIM VARGO AND JOHN ADAMS APPEARS HERE] [CAPTION] President Tim Vargo and Chairman John Adams Here's an overview of this past year's acquisitions: * Auto Palace with 112 stores in six states on February 17, 1998 * TruckPro with 43 stores in 14 states on May 1, 1998 * Chief Auto Parts with 560 stores in five states on June 29, 1998 We're pleased to say we completed these acquisitions without sacrificing our focus on the core business. Concentrating on a more efficient operation and our trademark customer service continues to show strong returns on earnings. Sales, despite the dreaded El Nino and a winter that didn't take place, kept pace with the growth we've seen in past years. Specifically: * Sales rose 20% to $3.24 billion * Comparable store sales increased by 2% * Net income increased 17% to $228 million Our internal growth plans remain on track as well. Acquiring nearly 700 net stores did divert some resources, but we still opened 275 net new AutoZone stores during the year. We also entered six new states and the District of Columbia during FY98. Next year we plan to open 225 net new AutoZone stores while also remodeling and converting the Chief stores. While DIY customers will continue to drive our core business, we've begun tapping markets that offer new opportunities for sales. These will become our future legs for growth. The commercial business was an early taste of this. While we've only been selling to professional accounts for two years, we've already become one of the top five wholesalers in the country. Of course we're not satisfied with that. Learning better ways to serve the professional technician is a daily process that shows lots of opportunities. 2

TruckPro is another business that will help support our growth. The heavy-duty truck parts industry is large and fragmented. If this sounds familiar, it should. These are characteristics that described the DIY market back when AutoZone first took the industry by storm. The international auto parts market is without a big-name player. And while we're careful to study each potential country individually, many have some very attractive qualities in common. Lots of old cars and trucks. Emerging economies that give families the opportunity to own their first vehicles and very few places to get parts for those vehicles. And the incredible number of big trucks on the roads outside of our borders presents another avenue of growth for our TruckPro business. These new ventures plus the continued growth of our store base offer greater opportunities to leverage our systems and buying power. As we approach the year 2000, we're making diligent efforts to see that our computer systems will make that transition smoothly. We're also working with a number of business partners, including external consultants, insurers, vendors and financial institutions to address Y2K related issues. If you're interested in more details about this plan, see the financial section in this annual report. We've been challenging the status quo for 19 years and being the industry leader hasn't changed that strategy. In fact, our position in the industry took a giant leap forward this year. Our acquisitions added stores and market share, but more importantly they added talented people. AutoZone is now 38,000 people strong, and they are the driving force behind the most efficient operation in auto parts. /s/ John Adams /s/ Tim Vargo John Adams Tim Vargo Chairman & CEO President & COO Customer Satisfaction Customer Satisfaction [PHOTO OF KEYCHAIN APPEARS HERE WITH "AUTOZONE" ON KEYRING]

Buckle up and turn the key. We're just getting started.

[PHOTO OF IGNITION SWITCH AND DASHBOARD OF CAR APPEARS HERE; KEYCHAIN SAYS: "AutoZone" AND "FY 98"]

WHAT DRIVES US A cheer, some catchy acronyms and a pledge to put customers first. We even throw in a line or two about keeping our stores clean and offering great parts at great prices. It's what drives us, what keeps our eyes on the road. Does that make us different from the other guys? No. Not the act of saying it, anyway. [PHOTO OF AUTOZONE EMPLOYEE WITH CUSTOMER USING TESTER ON CAR APPEARS HERE] [CAPTION] Customers rely on us for more than just quality parts at great prices. Just as there's more to owning a new car than learning the fancy gadgets and soaking up that "new car" smell, there's more to giving great customer service than a friendly smile and spit-shined linoleum. It takes a healthy disrespect for the status quo. A general disgust with keeping up with the Joneses. We rely on innovation as our fuel for growth and let others run on imitation. We make sure the objects in our rear-view mirror aren't closer than they appear because we keep moving faster. What's more, because we're constantly fine-tuning the business, we're squeezing more horsepower out of the same fuel-efficient engine. We're experts on getting more for less. We have to be, because when the rubber hits the road, a customer with grease up to his elbows will tell you he doesn't care about anything but the right part at the right price, right now. Yes, there are other places he could go for that. But he comes to AutoZone because we give him all of that plus a level of service that helps make that tough job a littler easier. [PHOTO OF EXTERIOR OF AUTOZONE STORE APPEARS HERE] [CAPTION] AutoZone's clean, well-lit stores broke the stereotype for the auto parts business. So when we say we're set on customer service, we're not just yanking your timing chain. It's the foundation of our culture, and it's ours alone. It's what drives us. 6

[PHOTO OF KEYCHAIN APPEARS HERE; KEYRING SAYS "CUSTOMER # 1"] A guide to catchy acronyms WITTDTJR - What It Takes To Do The Job Right GOTTChA - Go Out To The Customer's Automobile Drop/Stop-30/30- Drop what's in your hands and stop what you're doing to greet customers before They're 30 feet or 30 seconds into the store. 7

WHO'S ON BOARD [PHOTO OF CD-ROM APPEARS HERE] [CAPTION] We now sell a consumer version of ALLDATA's repair software under the Popular Mechanics label. Over 38,000 AutoZoners, thousands of stockholders and millions of customers. And that's only the beginning. ALLDATA. Commercial Accounts. Auto Palace. TruckPro. Chief. AutoZoners satisfy customers, stockholders invest in our growth and customers keep us in business. But what about the others? ALLDATA is information - something every technician needs. And since acquiring ALLDATA in 1996, we've increased the amount of information in their electronic database by almost 300%. [PHOTO OF AUTOZONE EMPLOYEE WITH COMMERCIAL CUSTOMER APPEARS HERE] [CAPTION] Our Commercial Accounts help their customers faster thanks to our 30-minute delivery. Commercial Accounts let us serve a different customer base. Although it hasn't reached its potential, it has become an integral part of our business. Every day we're learning better ways to serve our professional customers. [PHOTO OF AUTO PALACE STORE APPEARS HERE] [CAPTION] We acquired AutoPalace with 112 stores in six states and gained an instant presence in the Northeast. Auto Palace offered a chance to quickly and economically establish ourselves in a market that had never seen an AutoZone store before this year. We've gained customer loyalty and completely transformed their stores into AutoZone stores in less than a year. [PHOTO OF TRUCKPRO EMPLOYEE APPEARS HERE] [CAPTION] TruckPro's 43 stores in 14 states took us into the heavy- duty truck parts business. TruckPro might have been our smallest acquisition, but it's big in terms of strategy. The heavy-duty truck parts market is fragmented and lacks a clear industry leader, putting TruckPro in a very similar position to AutoZone 19 years ago. With our guidance and their established position in the industry, we hope TruckPro's growth is equally impressive. [PHOTO OF CHIEF AUTO PARTS STORE APPEARS HERE, WITH AUTOZONE STORE SIGN] [CAPTION] Nearly 400 of the 560 stores we acquired through Chief are located in California. Last year we touted our first California store. This year we're operating over 400 California stores, thanks in large part to the acquisition of Chief Auto Parts. The acquisition took some by surprise, but not those who follow AutoZone closely. It has become AutoZone's way to seize opportunities to acquire in markets where organic growth would take too long and cost too much. Chief, TruckPro, Auto Palace, Commercial Accounts, ALLDATA, customers, stockholders and over 38,000 AutoZoners. That's who's on board. 8

[PHOTO OF KEYCHAIN APPEARS HERE; KEYRINGS SAY: TruckPro, ALLDATA Corporation, Auto Palace, Chief, and Commercial Accounts] Last year, our commercial trucks logged over 42 million miles delivering parts to our professional customers. That's the equivalent of driving round trip from our San Diego store to our Boston store nearly 7,000 times. 9

WHERE WE'RE HEADED We've called it an odyssey. If you don't have a dictionary handy, it's defined as an adventurous voyage or trip. For a more practical definition, you can look at the landmarks we've seen during the past year alone. The opening of our 2,000th store, three acquisitions and the entry into an entirely new segment of the parts business. [PHOTO OF AUTOZONE STORE APPEARS HERE] [CAPTION] We're constantly looking for ways to streamline our distribution network to make it among the most efficient in retailing Are we going fast? We have to. Are we going too fast? We don't think so. By keeping an eye on the charts and gauges that have guided things to this point, we've managed to increase the speed without spinning out of control. So what's around the next bend? Where are we headed? One possibility has us setting down that U.S. atlas we know so well and picking up a globe. Markets abroad have very real potential for the AutoZone concept. In fact, our research is showing that we can fit as many stores outside of the United States borders as we can within. Our trip outside the U.S. will begin this fiscal year. At the same time, we've increased our projection for store capacity inside the United States to over 5,000. One reason for this upgrade is our small store prototype that hit the market this past year. This 3,800 square foot building is a model of efficiency and was designed to reach towns and neighborhoods that lack the space or population needed for our typical 7,700 square foot store. After finding creative ways to maximize the space, we've managed to pack almost as many parts into this streamlined store. [PHOTO OF AUTOZONE STORE UNDER CONSTRUCTION APPEARS HERE] [CAPTION] We're only halfway to the 5,000 stores we believe the U.S. can support. We currently operate 2,657 auto parts stores. A smaller store means a smaller investment. And a smaller store with a lot of parts means higher returns. We'll also take advantage of these efficiencies as we remodel the Chief stores, which, on average, come in smaller buildings. We're traveling to wherever our customers need us, whether it's down dusty country roads or across sweltering city asphalt. We plot our odyssey around those customers because they're the ones who decide where we're headed. 10

[PHOTO OF GLOBE AND ATLAS APPEARS HERE] It's no coincidence that this globe shows Mexico on top. This fall, AutoZone will open its first international store in Nuevo Laredo, a city just across the border from Laredo, TX. 11

TEN-YEAR REVIEW (in thousands, except per share data and selected operating data) <TABLE> <CAPTION> 5-Year 10-Year Fiscal Year Ended August Compound Compound -------------------------- Growth Growth 1998 1997 -------------------------- <S> <C> <C> <C> <C> INCOME STATEMENT DATA Net sales........................................................... 22% 22% $3,242,922 $2,691,440 Cost of sales, including warehouse and delivery expenses............ 1,889,847 1,559,296 Operating, selling, general and administrative expenses............. 970,768 810,793 ------------------------- Operating profit.................................................... 22% 36% 382,307 321,351 Interest income (expense)........................................... (18,204) (8,843) ------------------------- Income before income taxes.......................................... 21% 45% 364,103 312,508 Income taxes........................................................ 136,200 117,500 ------------------------- Net income.......................................................... 21% 47% $ 227,903 $ 195,008 ========================= Diluted earnings per share.......................................... 20% 44% $ 1.48 $ 1.28 ========================= Adjusted weighted average shares for diluted earnings per share..... 154,070 152,535 BALANCE SHEET DATA Current assets...................................................... $1,117,090 $ 778,802 Working capital..................................................... 257,261 186,350 Total assets........................................................ 2,748,113 1,884,017 Current liabilities................................................. 859,829 592,452 Debt................................................................ 545,067 198,400 Stockholders' equity................................................ 1,302,057 1,075,208 SELECTED OPERATING DATA Number of auto parts stores at beginning of year.................... 1,728 1,423 New stores...................................................... 952 308 Replacement stores.............................................. 12 17 Closed stores................................................... 23 3 Net new stores.................................................. 929 305 Number of auto parts stores at end of year.......................... 2,657 1,728 Total auto parts store square footage (000's)....................... 16,499 11,611 Percentage increase in auto parts square footage.................... 42% 23% Percentage increase in auto parts comparable store net sales........ 2% 8% Average net sales per auto parts store (000's)...................... $ 1,568 $ 1,691 Average net sales per auto parts store square foot.................. $ 238 $ 253 Total employment.................................................... 38,526 28,700 Gross profit - percentage of sales.................................. 41.7% 42.0% Operating profit - percentage of sales.............................. 11.8% 11.9% Net income - percentage of sales.................................... 7.0% 7.2% Debt-to-capital - percentage........................................ 29.5% 15.6% Inventory turnover.................................................. 2.3x 2.5x Return on average equity............................................ 19% 20% </TABLE> 12

Ten-Year Review (in thousands, except per share data and selected operating data) <TABLE> Fiscal Year Ended August <CAPTION> -------------------------------------------------------- 1996* 1995 1994 1993 -------------------------------------------------------- <S> <C> <C> <C> <C> INCOME STATEMENT DATA Net sales........................................................... $2,242,633 $1,808,131 $1,508,029 $1,216,793 Cost of sales, including warehouse and delivery expenses............ 1,307,638 1,057,033 886,068 731,971 Operating, selling, general and administrative expenses............. 666,061 523,440 431,219 344,060 ------------------------------------------------------- Operating profit.................................................... 268,934 227,658 190,742 140,762 Interest income (expense)........................................... (1,969) 623 2,244 2,473 ------------------------------------------------------- Income before income taxes.......................................... 266,965 228,281 192,986 143,235 Income taxes........................................................ 99,800 89,500 76,600 56,300 ------------------------------------------------------- Net income.......................................................... $ 167,165 $ 138,781 $ 116,386 $ 86,935 ======================================================= Diluted earnings per share.......................................... $ 1.11 $ 0.93 $ 0.78 $ 0.59 ======================================================= Adjusted weighted average shares for diluted earnings per share..... 151,238 149,302 148,726 147,608 BALANCE SHEET DATA Current assets...................................................... $ 613,097 $ 447,822 $ 424,402 $ 378,467 Working capital..................................................... 219 30,273 85,373 92,331 Total assets........................................................ 1,498,397 1,111,778 882,102 696,547 Current liabilities................................................. 612,878 417,549 339,029 286,136 Debt................................................................ 94,400 13,503 4,252 4,458 Stockholders' equity................................................ 865,582 684,710 528,377 396,613 SELECTED OPERATING DATA Number of auto parts stores at beginning of year.................... 1,143 933 783 678 New stores...................................................... 280 210 151 107 Replacement stores.............................................. 31 29 20 20 Closed stores................................................... 0 0 1 2 Net new stores.................................................. 280 210 150 105 Number of auto parts stores at end of year.......................... 1,423 1,143 933 783 Total auto parts store square footage (000's)....................... 9,437 7,480 5,949 4,839 Percentage increase in auto parts square footage.................... 26% 26% 23% 20% Percentage increase in auto parts comparable store net sales........ 6% 6% 9% 9% Average net sales per auto parts store (000's)...................... $ 1,702 $ 1,742 $ 1,758 $ 1,666 Average net sales per auto parts store square foot.................. $ 258 $ 269 $ 280 $ 274 Total employment.................................................... 26,800 20,200 17,400 15,700 Gross profit - percentage of sales.................................. 41.7% 41.5% 41.2% 39.8% Operating profit - percentage of sales.............................. 12.0% 12.6% 12.6% 11.5% Net income - percentage of sales.................................... 7.5% 7.7% 7.7% 7.1% Debt-to-capital - percentage........................................ 9.8% 1.9% 0.8% 1.1% Inventory turnover.................................................. 2.7x 2.9x 3.0x 3.2x Return on average equity............................................ 22% 23% 25% 26% </TABLE> <TABLE> Fiscal Year Ended August <CAPTION> ----------------------------------------------------- 1992 1991* 1990 1989 ----------------------------------------------------- <S> <C> <C> <C> <C> INCOME STATEMENT DATA Net sales........................................................... $1,002,327 $817,962 $671,725 $535,843 Cost of sales, including warehouse and delivery expenses............ 602,956 491,261 416,846 341,130 Operating, selling, general and administrative expenses............. 295,701 247,355 205,609 169,786 ----------------------------------------------------- Operating profit.................................................... 103,670 79,346 49,270 24,927 Interest income (expense)........................................... 818 (7,295) (10,936) (9,799) ----------------------------------------------------- Income before income taxes.......................................... 104,488 72,051 38,334 15,128 Income taxes........................................................ 41,200 27,900 14,840 6,200 ----------------------------------------------------- Net income.......................................................... $ 63,288 $ 44,151 $ 23,494 $ 8,928 ===================================================== Diluted earnings per share.......................................... $ 0.43 $ 0.33 $ 0.19 $ 0.07 ===================================================== Adjusted weighted average shares for diluted earnings per share..... 145,940 134,656 121,212 119,320 BALANCE SHEET DATA Current assets...................................................... $ 279,350 $233,439 $191,736 $177,824 Working capital..................................................... 72,270 55,807 26,803 35,831 Total assets........................................................ 501,048 397,776 327,368 296,546 Current liabilities................................................. 207,080 177,632 164,933 141,993 Debt................................................................ 7,057 7,246 74,851 93,293 Stockholders' equity................................................ 278,120 204,628 80,356 54,592 SELECTED OPERATING DATA Number of auto parts stores at beginning of year.................... 598 538 504 440 New stores...................................................... 82 60 38 70 Replacement stores.............................................. 14 4 7 7 Closed stores................................................... 2 0 4 6 Net new stores.................................................. 80 60 34 64 Number of auto parts stores at end of year.......................... 678 598 538 504 Total auto parts store square footage (000's)....................... 4,043 3,458 3,031 2,758 Percentage increase in auto parts square footage.................... 17% 14% 10% 19% Percentage increase in auto parts comparable store net sales........ 15% 12% 13% 10% Average net sales per auto parts store (000's)...................... $ 1,570 $ 1,408 $ 1,289 $ 1,135 Average net sales per auto parts store square foot.................. $ 267 $ 246 $ 232 $ 211 Total employment.................................................... 13,200 11,700 9,300 7,900 Gross profit - percentage of sales.................................. 39.8% 39.9% 37.9% 36.6% Operating profit - percentage of sales.............................. 10.3% 9.7% 7.3% 4.6% Net income - percentage of sales.................................... 6.3% 5.4% 3.5% 1.7% Debt-to-capital - percentage........................................ 2.5% 3.4% 48.2% 63.1% Inventory turnover.................................................. 3.0x 2.6x 2.4x 2.4x Return on average equity............................................ 26% 31% 35% 18% </TABLE> <TABLE> <CAPTION> Fiscal Year Ended August --------- 1988 --------- <S> <C> INCOME STATEMENT DATA Net sales........................................................... $437,399 Cost of sales, including warehouse and delivery expenses............ 277,043 Operating, selling, general and administrative expenses............. 142,868 -------- Operating profit.................................................... 17,488 Interest income (expense)........................................... (8,826) -------- Income before income taxes.......................................... 8,662 Income taxes........................................................ 3,770 -------- Net income.......................................................... $ 4,892 ======== Diluted earnings per share.......................................... $ 0.04 ======== Adjusted weighted average shares for diluted earnings per share..... 119,936 BALANCE SHEET DATA Current assets...................................................... $137,098 Working capital..................................................... 35,226 Total assets........................................................ 232,977 Current liabilities................................................. 101,872 Debt................................................................ 77,138 Stockholders' equity................................................ 45,608 SELECTED OPERATING DATA Number of auto parts stores at beginning of year.................... 396 New stores...................................................... 47 Replacement stores.............................................. 1 Closed stores................................................... 3 Net new stores.................................................. 44 Number of auto parts store at end of year........................... 440 Total auto parts store square footage (000's)...................... 2,318 Percentage increase in auto parts square footage.................... 14% Percentage increase in auto parts comparable store net sales........ 6% Average net sales per auto parts store (000's)...................... $ 1,046 Average net sales per auto parts store square foot.................. $ 201 Total employment.................................................... 7,100 Gross profit - percentage of sales.................................. 36.6% Operating profit - percentage of sales.............................. 4.0% Net income - percentage of sales.................................... 1.1% Debt-to-capital - percentage........................................ 62.8% Inventory turnover.................................................. 2.3x Return on average equity............................................ 11% </TABLE> * 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. 13

QUARTERLY SUMMARY (Unaudited) <TABLE> <CAPTION> Sixteen Twelve Weeks Ended Weeks Ended ---------------------------------------------------------------------------------- (in thousands, except per share data) November 22, February 14, May 9, August 29, 1997 1998 1998 1998 ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales ..................................... $675,274 $607,097 $743,661 $1,216,890 Increase in comparable store sales ............ 7% 2% 2% 0% Gross profit .................................. $280,441 $253,681 $311,080 $ 507,873 Operating profit .............................. 78,648 58,082 90,457 155,120 Income before income taxes .................... 76,146 55,054 86,240 146,663 Net income .................................... 47,546 34,354 53,940 92,063 Basic earnings per share ...................... 0.31 0.23 0.35 0.60 Diluted earnings per share .................... 0.31 0.22 0.35 0.60 Stock price range: High ....................................... $ 32.75 $ 32.06 $ 36.25 $ 38.00 Low ........................................ $ 27.00 $ 23.75 $ 29.00 $ 26.63 </TABLE> <TABLE> <CAPTION> November 23, February 15, May, 10 August 30, 1996 1997 1997 1997 ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales ..................................... $569,145 $538,012 $637,895 $ 946,388 Increase in comparable store sales ............ 7% 10% 7% 8% Gross profit .................................. $240,298 $226,956 $268,975 $ 395,915 Operating profit .............................. 61,898 49,217 76,775 133,461 Income before income taxes .................... 60,725 47,107 74,103 130,573 Net income .................................... 37,975 29,407 46,103 81,523 Basic earnings per share ...................... 0.25 0.20 0.31 0.54 Diluted earnings per share .................... 0.25 0.19 0.30 0.53 Stock price range: High ....................................... $ 30.63 $ 27.50 $ 26.13 $ 29.50 Low ........................................ $ 24.50 $ 20.13 $ 22.25 $ 22.25 </TABLE> 14

Financial Review 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 29, August 30, August 31, 1998 1997 1996 -------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales, including warehouse and delivery expenses 58.3 58.0 58.3 -------------------------------------- Gross profit 41.7 42.0 41.7 Operating, selling, general and administrative expenses 29.9 30.1 29.7 -------------------------------------- Operating profit 11.8 11.9 12.0 Interest expense - net 0.6 0.3 0.1 Income taxes 4.2 4.4 4.4 -------------------------------------- Net income 7.0% 7.2% 7.5% ====================================== RESULTS OF OPERATIONS For an understanding of the significant factors that influenced the Company's performance during the past three fiscal years, the following Financial Review should be read in conjunction with the consolidated financial statements presented in this annual report. FISCAL 1998 COMPARED TO FISCAL 1997 Net sales for fiscal 1998 increased by $551.5 million or 20.5% over net sales for fiscal 1997. This increase was due to a comparable store net sales increase of 2% (which was primarily due to sales growth in the Company's newer auto parts stores and the added sales of the Company's commercial program) and an increase in net sales of $485.7 million for stores opened or acquired since the beginning of fiscal 1997. At August 29, 1998, the Company had 2,657 auto parts stores in operation, a net increase of 929 stores, including the acquisition of 112 and 560 auto parts stores acquired in February and June 1998 respectively. Gross profit for fiscal 1998 was $1,353.1 million, or 41.7% of net sales, compared with $1,132.1 million, or 42.0% of net sales, for fiscal 1997. The decrease in gross profit percentage was due primarily to lower commodities gross margins coupled with lower gross margins in certain recently acquired stores. Operating, selling, general and administrative expenses for fiscal 1998 increased by $160.0 million over such expenses for fiscal 1997 and decreased as a percentage of net sales from 30.1% to 29.9%. The decrease in the expense ratio was primarily due to commercial expense leverage and additional cooperative advertising funds received from vendors partially offset by higher occupancy costs primarily in recently acquired stores. Net interest expense for fiscal 1998 was $18.2 million compared with $8.8 million for fiscal 1997. The increase in interest expense was primarily due to higher levels of borrowings as a result of the acquisitions. AutoZone's effective income tax rate was 37.4% of pre-tax income for fiscal 1998 and 37.6% for fiscal 1997. FISCAL 1997 COMPARED TO FISCAL 1996 Net sales for fiscal 1997 increased by $448.8 million or 20.0% over net sales for fiscal 1996. This increase was due to a comparable store net sales increase of 8% (which was primarily due to sales growth in the Company's newer stores and the added sales of the Company's commercial program) and an increase in net sales of $313.1 million for stores opened since the beginning of fiscal 1996, offset by net sales for the 53rd week of fiscal 1996. At August 30, 1997, the Company had 1,728 stores in operation, a net increase of 305 stores, or approximately 23% in new store square footage for the year. Gross profit for fiscal 1997 was $1,132.1 million, or 42.0% of net sales, compared with $935.0 million, or 41.7% of net sales, for fiscal 1996. The increase in gross profit percentage was due primarily to improved leveraging of warehouse and delivery expenses. Operating, selling, general and administrative expenses for fiscal 1997 increased by $144.7 million over such expenses for fiscal 1996 and increased as a percentage of net sales from 29.7% to 30.1%. The increase in the expense ratio was primarily due to operating costs of ALLDATA and to costs of the Company's commercial program. Net interest expense for fiscal 1997 was $8.8 million compared with $2.0 million for fiscal 1996. The increase in interest expense was primarily due to higher levels of borrowings. AutoZone's effective income tax rate was 37.6% of pre-tax income for fiscal 1997 and 37.4% for fiscal 1996. 15

FINANCIAL MARKET RISK Financial market risks relating to the Company's operations result primarily from changes in interest rates. The Company enters into interest rate swaps to minimize the risk associated with its financing activities. The swap agreements are contracts to exchange fixed or variable rates for floating interest rate payments periodically over the life of the instruments. LIQUIDITY AND CAPITAL RESOURCES The Company's primary capital requirements have been the funding of its continued new store expansion program, inventory requirements and more recently, acquisitions. The Company has opened or acquired 1,874 net new auto parts stores and constructed four new distribution centers from the beginning of fiscal 1994 to August 29, 1998. Cash flow generated from store operations provides the Company with a significant source of liquidity. Net cash provided by operating activities was $366.8 million in fiscal 1998, $177.6 million in fiscal 1997, and $174.9 million in fiscal 1996. The significant increase in net cash provided by operating activities in fiscal 1998 is due primarily to improved inventory turnover, excluding acquisitions, coupled with favorable payment terms. In fiscal 1998, the Company invested $337.2 million in capital assets and had a net cash outlay of $365.5 million for acquisitions including the retirement of the acquired companies' debt. Acquisitions included Chief Auto Parts, with stores primarily in California, Auto Palace, with stores primarily in the Northeast, and a truck parts chain, TruckPro. Capital expenditures were $337.2 million in fiscal 1998, $295.4 million in fiscal 1997, and $280.2 million in fiscal 1996. The Company opened or acquired 929 net new auto parts stores and 43 truck parts stores in fiscal 1998. Construction commitments totaled approximately $76 million at August 29, 1998. 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 obtaining such terms. In July 1998, the Company sold $200 million of 6.5% Debentures due July 15, 2008 at a discount. Interest on the Debentures is payable semi-annually on January 15 and July 15 of each year, beginning January 15, 1999. The Debentures may be redeemed at any time at the option of the Company. Proceeds were used to repay portions of the Company's long-term variable rate bank debt and for general corporate purposes. The Company has a commercial paper program that allows borrowing up to $500 million. As of August 29, 1998, there were borrowings of $305 million outstanding under the program. In connection with the program, the Company has a credit facility with a group of banks for up to $350 million and a 364-day $150 million credit facility with another group of banks. Borrowings under the commercial paper program reduce availability under the credit facilities. As of August 29, 1998, the Company had $34 million outstanding under the $350 million credit facility which expires in December 2001. There were no amounts outstanding under the $150 million credit facility at August 29,1998. Both of the revolving credit facilities contain a covenant limiting the amount of debt the Company may incur relative to its total capitalization. In fiscal 1998, the Company announced plans to repurchase up to $100 million of the Company's common stock in the open market. Under this plan, in fiscal 1998 the Company repurchased nearly one million shares of its common stock for $28.7 million. Subsequent to year end, the Company announced an agreement to acquire real estate and real estate leases for approximately 100 Express auto parts stores from Pep Boys for approximately $108 million. If consummated, the transaction would not have a material impact on the fiscal 1999 financial position or consolidated operating results. The Company anticipates that it will rely primarily on internally generated funds to support a majority of its capital expenditures, working capital requirements, and treasury stock repurchases. The balance will be funded through borrowings. The Company anticipates no difficulty in obtaining such long-term financing in view of its credit rating and favorable experiences in the debt market in the past. In addition to the available credit lines mentioned above, the Company may sell up to $200 million of public debt under shelf registration statements filed with the Securities and Exchange Commission. YEAR 200 CONVERSION The Company began addressing the Year 2000 issue in June 1996 and implemented a formal Year 2000 project office in May 1997. As of August 29, 1998, the Company had completed over half of its conversion efforts. The Company anticipates completing the conversion and testing of all known remaining programs by July 31, 1999. The total estimated cost of the Year 2000 project is $12 million, which is being expensed as incurred. As of August 29, 1998, approximately $3 million of the $12 million cost of conversion had been incurred. All of the related costs are being funded through operating cash flows. These costs are an immaterial part of the overall information technology budget. No major information technology projects or programs have been deferred. 16

In addition to internal system activities, the Company is addressing Year 2000 issues which do not normally fall under information technology such as embedded chip equipment and the compliance status of business partners. Although the Company believes that the ongoing assessment and testing will minimize the Company's risks, there is no guarantee that there will not be an adverse effect on the Company if third parties, such as merchandise vendors, service providers, or utility companies are not Year 2000 compliant. Although the Company does not anticipate any major business disruptions as a result of Year 2000 issues, it is possible that certain disruptions may occur including loss of communications with stores, distribution centers, or business partners; inability to process transactions in a timely manner or loss of power. The Company is currently developing contingency plans which should be finalized by July 31, 1999. Elements of the Company's contingency plans may include: switching vendors, back-up systems or manual processes, and the stockpiling of certain products prior to the Year 2000. The cost of conversion and the completion date are based on management's best estimates and may be updated as additional information becomes available. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," and No. 131, "Disclosures about Segments of an Enterprise and Related Information." In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." All statements are effective for financial statements issued for fiscal years beginning after December 15, 1997. The Company plans to adopt all three statements in the 1999 fiscal year. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components. Adoption of this statement will have no impact on the Company's consolidated financial position or results of operations. SFAS No. 131 revises existing guidelines about the level of financial disclosure of a Company's operations by requiring inclusion of selected information about operating segments in financial statements. The adoption of this statement requires only additional reporting and will not have an impact on the Company's reported results. SFAS No. 132 establishes standards for the reporting of information about pensions and other postretirement benefits. Adoption of this statement will not materially change the Company's current reporting of pension and other postretirement benefits. 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 been 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. Because the fourth quarter contains the seasonally high sales volume and consists of sixteen weeks, 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. The fourth quarter of fiscal 1998 represented 37.5% of annual net sales and 40.4% of net income; the fourth quarter of fiscal 1997 represented 35.2% of annual net sales and 41.8% of net income. FORWARD LOOKING STATEMENTS Certain statements contained in the Financial Review and elsewhere in this annual report are forward-looking statements. These statements discuss, among other things, expected growth, domestic and international development and expansion strategy, business strategies, future revenues and future performance. The forward-looking statements are subject to risks, uncertainties and assumptions including, but not limited to competition, product demand, domestic and international economies, government approvals and regulations, the ability to hire and retain qualified employees, the ability to convert acquired stores in a timely and profitable manner, inflation and the weather. Actual results may materially differ from anticipated results. 17

CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Year Ended -------------------------------------------- August 29, August 30, August 31, 1998 1997 1996 (52 Weeks) (52 Weeks) (53 Weeks) -------------------------------------------- (in thousands, except per share data) <S> <C> <C> <C> Net sales $3,242,922 $2,691,440 $2,242,633 Cost of sales, including warehouse and delivery expenses 1,889,847 1,559,296 1,307,638 Operating, selling, general and administrative expenses 970,768 810,793 666,061 --------------------------------------------------------------------------------------------------------------- Operating profit 382,307 321,351 268,934 Interest expense - net 18,204 8,843 1,969 --------------------------------------------------------------------------------------------------------------- Income before income taxes 364,103 312,508 266,965 Income taxes 136,200 117,500 99,800 --------------------------------------------------------------------------------------------------------------- Net income $ 227,903 $ 195,008 $ 167,165 --------------------------------------------------------------------------------------------------------------- Weighted average shares for basic earnings per share 152,160 150,726 148,476 Effect of dilutive stock options 1,910 1,809 2,762 --------------------------------------------------------------------------------------------------------------- Adjusted weighted average shares for diluted earnings per share 154,070 152,535 151,238 --------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 1.50 $ 1.29 $ 1.13 --------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 1.48 $ 1.28 $ 1.11 --------------------------------------------------------------------------------------------------------------- </TABLE> See Notes to Consolidated Financial Statements. 18

CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> August 29, August 30, 1998 1997 ------------------------------------- (in thousands, except per share data) <S> <C> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 6,631 $ 4,668 Accounts receivable 42,252 18,713 Merchandise inventories 966,560 709,446 Prepaid expenses 37,532 20,987 Deferred income taxes 61,964 24,988 Income taxes receivable 2,151 ------------------------------------------------------------------------------------------------- Total current assets 1,117,090 778,802 Property and equipment: Land 320,203 243,587 Buildings and improvements 851,083 682,710 Equipment 374,465 267,536 Leasehold improvements and interests 82,273 45,667 Construction in progress 150,461 97,411 ------------------------------------------------------------------------------------------------- 1,778,485 1,336,911 Less accumulated depreciation and amortization 350,979 255,783 ------------------------------------------------------------------------------------------------- 1,427,506 1,081,128 Other assets: Cost in excess of net assets acquired, net of accumulated amortization of $9,096 in 1998 and $8,084 in 1997 181,315 16,570 Deferred income taxes 3,510 4,339 Other assets 18,692 3,178 ------------------------------------------------------------------------------------------------- 203,517 24,087 ------------------------------------------------------------------------------------------------- $2,748,113 $1,884,017 ------------------------------------------------------------------------------------------------- LIABILITIES AND Current liabilities: STOCKHOLDERS' Accounts payable $ 683,372 $ 449,793 EQUITY Accrued expenses 176,457 122,580 Income taxes payable 20,079 ------------------------------------------------------------------------------------------------- Total current liabilities 859,829 592,452 Long-term debt 545,067 198,400 Other liabilities 41,160 17,957 Commitments and contingencies (See notes G and H) Stockholders' equity: Preferred Stock, authorized 1,000 shares; no shares issued Common Stock, par value $.01 per share, authorized 200,000 shares; 153,039 shares issued and 152,086 shares outstanding in 1998 and 151,313 issued and outstanding shares in 1997 1,530 1,513 Additional paid-in-capital 277,528 249,853 Retained earnings 1,051,745 823,842 Treasury stock, at cost (28,746) ------------------------------------------------------------------------------------------------- Total stockholders' equity 1,302,057 1,075,208 ------------------------------------------------------------------------------------------------- $2,748,113 $1,884,017 ------------------------------------------------------------------------------------------------- </TABLE> See Notes to Consolidated Financial Statements. 19

CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Year Ended ------------------------------------- August 29, August 30, August 31, 1998 1997 1996 (52 Weeks) (52 Weeks) (53 Weeks) ------------------------------------- (in thousands) <S> <C> <C> <C> Cash flows from operating activities: Net income $ 227,903 $ 195,008 $ 167,165 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 95,464 77,163 62,919 Amortization of intangible and other assets 1,135 658 622 Deferred income tax expense (benefit) 20,241 (7,781) 6,082 Net increase in accounts receivable and prepaid expenses (15,260) (5,009) (7,564) Net increase in merchandise inventories (47,285) (153,552) (158,673) Net increase in accounts payable and accrued expenses 127,683 66,155 94,916 Net change in income taxes payable and receivable (22,230) 7,819 6,493 Net change in other assets and liabilities (20,813) (2,898) 2,930 --------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 366,838 177,563 174,890 Cash flows from investing activities: Acquisitions (100,031) Capital expenditures (337,202) (295,417) (280,237) --------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (437,233) (295,417) (280,237) Cash flows from financing activities: Repayment of acquired companies' debt (265,429) Increase in commercial paper 305,000 Proceeds from debentures 197,751 Net increase (decrease) in revolver (164,350) 104,000 84,900 Repayment of long-term debt (4,003) Net proceeds from sale of Common Stock, including related tax benefit 27,692 14,618 17,699 Purchase of Treasury Stock (28,746) Other 173 --------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 72,091 118,618 98,596 --------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 1,696 764 (6,751) Cash and cash equivalents at beginning of year 4,668 3,904 6,411 Cash provided by acquisitions/mergers 267 4,244 --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 6,631 $ 4,668 $ 3,904 --------------------------------------------------------------------------------------------------------------------- Supplemental cash flow information: Interest paid, net of interest cost capitalized $ 17,042 $ 8,779 $ 1,971 Income taxes paid $ 122,529 $ 109,681 $ 69,791 </TABLE> See Notes to Consolidated Financial Statements. 20

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY <TABLE> <CAPTION> Additional Common Paid-in Retained Treasury Stock Capital Earnings Stock Total ---------------------------------------------------------------------------- (in thousands) <S> <C> <C> <C> <C> <C> 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 Net income 195,008 195,008 Sale of 1,176 shares of Common Stock under stock option and stock purchase plans 12 7,676 7,688 Tax benefit of exercise of stock options 6,930 6,930 ---------------------------------------------------------------------------- Balance at August 30, 1997 1,513 249,853 823,842 1,075,208 Net income 227,903 227,903 Sale of 1,726 shares of Common Stock under stock option and stock purchase plans 17 11,475 11,492 Tax benefit of exercise of stock options 16,200 16,200 Purchase of 953 shares of Treasury Stock (28,746) (28,746) ---------------------------------------------------------------------------- Balance at August 29, 1998 $1,530 $277,528 $ 1,051,745 $ (28,746) $ 1,302,057 ---------------------------------------------------------------------------- </TABLE> See Notes to Consolidated Financial Statements. 21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - Significant Accounting Policies Business: The Company is principally a specialty retailer of automotive parts and accessories. At the end of fiscal 1998, the Company operated 2,657 auto parts stores in 38 states. In addition, the Company sells heavy duty truck parts and accessories through its 43 TruckPro stores in 14 states and automotive diagnostic and repair information software through its ALLDATA subsidiary. 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. 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 $30,109,000 in fiscal 1998, $27,271,000 in fiscal 1997 and $25,442,000 in fiscal 1996. 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 and accounts payable. The carrying amounts of these financial instruments approximate fair value because of their short maturities or variable interest rates. The Company uses derivative financial instruments for purposes other than trading to minimize the risk associated with financing activities. Settlements of interest rate swaps are accounted for by recording the net interest received or paid as an adjustment to interest expense on a current basis. Gains or losses resulting from market movements are not recognized. Contracts that effectively meet risk reduction and correlation criteria are recorded using hedge accounting. Hedges of anticipated transactions are deferred and recognized when the hedged transaction occurs. Income Taxes: The Company accounts for income taxes under the liability 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. 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 those estimates. Net Income Per Share: In fiscal 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128 replaces primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effect of options. Diluted earnings per share is based on the weighted average outstanding shares reduced by the effect of stock options. All earnings per share amounts for all periods presented have been restated to conform with SFAS No. 128 requirements. Reclassifications: Certain prior year amounts have been reclassified to conform to current year presentation. Impairment of Long-Lived Assets: The Company complies with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." 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 value less cost to sell. Comprehensive Income: In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 is effective for interim and annual periods beginning after December 15, 1997, although earlier adoption is permitted. This statement establishes standards for reporting and display of comprehensive income and its components. This statement requires only additional reporting, therefore its adoption in fiscal 1999 will have no effect on the Company's results of operations or financial position. Disclosures about Segments of an Enterprise and Related Information: In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Statement No. 131 revises existing guidelines for financial disclosure of a Company's operations and is effective for fiscal years beginning after December 15, 1997, although earlier application is permitted. The adoption of this statement requires only additional reporting and will not have any effect on the Company's consolidated financial position or results of operations. The Company will adopt this statement in fiscal 1999. Pensions and Other Postretirement Benefits: In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." Although earlier adoption is permitted, this statement is effective for periods beginning after December 15, 1997. SFAS No. 132 establishes new standards for the reporting of information about pension and other postretirement benefits. Adoption of SFAS No. 132 should not result in any significant changes in the Company's presentation of pension and other postretirement benefits. The Company will adopt SFAS No. 132 in fiscal 1999. 22

Note B - Accrued Expenses Accrued expenses consist of the following: August 29, August 30, 1998 1997 ------------------------- (in thousands) Medical and casualty insurance claims $ 40,640 $ 35,121 Accrued compensation and related payroll taxes 37,684 26,481 Property and sales taxes 38,506 27,161 Other 59,627 33,817 ------------------------- $176,457 $122,580 ========================= Note C - Income Taxes At August 29, 1998, the Company has net operating loss carryforwards (NOLs) of approximately $60 million that expire in years 2000 through 2018. These carryforwards resulted from the Company's acquisition of ALLDATA Corporation during fiscal 1996 and Chief Auto Parts Inc. and ADAP, Inc. (which had been doing business as "Auto Palace") in fiscal 1998. The use of the NOLs is limited to future taxable earnings of these companies and is subject to annual limitations. A valuation allowance of $15,902,000 in fiscal 1998 and $5,247,000 in fiscal 1997 relates to those carryforwards. The provision for income tax expense (benefit) consists of the following: Year Ended --------------------------------------- August 29, August 30, August 31, 1998 1997 1996 --------------------------------------- (in thousands) Current: Federal $103,810 $114,113 $86,469 State 12,149 11,168 7,249 --------------------------------------- 115,959 125,281 93,718 Deferred: Federal 19,665 (6,427) 5,531 State 576 (1,354) 551 --------------------------------------- 20,241 (7,781) 6,082 --------------------------------------- $136,200 $117,500 $99,800 ======================================= Significant components of the Company's deferred tax assets and liabilities are as follows: August 29, August 30, 1998 1997 ----------------------- (in thousands) Deferred tax assets: Net operating loss and credit carryforwards $26,303 $ 5,247 Insurance reserves 13,847 12,078 Warranty reserves 7,778 7,171 Deferred lease expense 6,694 Accrued vacation 4,387 2,537 Other 29,690 9,823 ----------------------- 88,699 36,856 Less valuation allowance 15,902 5,247 ----------------------- 72,797 31,609 ======================= Deferred tax liabilities: Property and equipment 4,104 Accrued property taxes 3,219 2,282 ----------------------- 7,323 2,282 ----------------------- Net deferred tax assets $65,474 $29,327 ======================= 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 29, August 30, August 31, 1998 1997 1996 -------------------------------------- (in thousands) Expected tax at statutory rate $127,436 $109,378 $93,438 State income taxes, net 8,271 6,379 5,070 Other 493 1,743 1,292 -------------------------------------- $136,200 $117,500 $99,800 ====================================== 23

Note D - Financing Arrangements The Company's long-term debt at the end of fiscal 1998 and 1997 consisted of the following: August 29, August 30, 1998 1997 ------------------------- (in thousands) 6.5% Debentures due July 15, 2008; redeemable at any time at the option of the Company $200,000 $ Commercial paper, 5.7% weighted average rate 305,000 Unsecured bank loan, floating interest rate averaging 5.8% at August 29, 1998 and August 30, 1997; payable in December 2001 34,050 198,400 Other 6,017 ------------------------- Total long term debt $545,067 $198,400 ========================= In July 1998, the Company sold $200 million of 6.5% Debentures due July 15, 2008 at a discount. Interest on the Debentures is payable semi-annually on January 15 and July 15 of each year, beginning January 15, 1999. Proceeds were used to repay portions of the Company's long-term variable rate bank debt and for general corporate purposes. The Company has a commercial paper program that allows borrowing up to $500 million. As of August 29, 1998, there were borrowings of $305 million outstanding under the program. In connection with the program, the Company has a credit facility with a group of banks for up to $350 million and a 364-day $150 million credit facility with another group of banks. Borrowings under the commercial paper program reduce availability under the credit facilities. There were no amounts outstanding under the $150 million credit facility at August 29, 1998. Outstanding commercial paper and revolver borrowings at August 29, 1998 are classified as long-term debt as it is the Company's intention to refinance them on a long-term basis. The rate of interest payable under the revolving credit agreements is a function of the London Interbank Offered Rate (LIBOR) or the lending bank's base rate (as defined in the agreement) at the option of the Company. In addition, the $350 million credit facility contains a competitive bid rate option. Both of the revolving credit facilities contain a covenant limiting the amount of debt the Company may incur relative to its total capitalization. These facilities are available to support domestic commercial paper borrowings and to meet cash requirements. Maturities of long-term debt are $339 million for fiscal 2002 and $206 million thereafter. Interest costs of $2,280,000 in fiscal 1998, $2,119,000 in fiscal 1997, and $2,416,000 in fiscal 1996 were capitalized. The estimated fair value of the 6.5% Debentures, which are publicly traded, was approximately $199 million based on the market price at August 29, 1998. The estimated fair values of all other long-term borrowings approximates their carrying value primarily because of their variable interest rates. Note E - Employee Stock Plans The Company has granted options to purchase common stock to certain employees and directors under various plans at prices equal to the market value of the stock on the dates the options were granted. Options are generally exercisable over a three to seven year period, and generally expire in 10 years after the grant. A summary of outstanding stock options is as follows: Wtd. Avg. Number Exercise Price of Shares --------------------------- Outstanding August 26, 1995 $14.77 9,503,981 Assumed 4.46 221,841 Granted 28.50 1,621,395 Exercised 4.55 (1,332,588) Canceled 24.38 (254,873) --------------------------- Outstanding August 31, 1996 17.96 9,759,756 Granted 22.69 2,707,370 Exercised 4.93 (1,032,989) Canceled 25.54 (834,883) --------------------------- Outstanding August 30, 1997 19.84 10,599,254 Granted 31.13 1,692,272 Exercised 7.39 (1,738,882) Canceled 25.40 (795,780) --------------------------- Outstanding August 29, 1998 $23.56 9,756,864 =========================== The following table summarizes information about stock options outstanding at August 29, 1998: Options Outstanding Options Exercisable ----------------------------------------------- Wtd. Avg. Wtd. Avg. Wtd. Avg. Range of Exercise No. of Exercise Contractual No. of Exercise Price Options Price Life (in years) Options Price ----------------------------------------------------------------------------- $ 1.00 - 9.17 1,053,319 $ 4.47 2.44 1,044,403 $ 4.47 14.31 - 22.69 1,454,961 18.96 7.48 294,961 14.31 22.88 - 25.13 2,325,478 24.70 7.22 117,203 25.13 25.25 - 27.25 2,130,191 25.92 6.11 380,943 25.31 27.38 - 35.13 2,792,915 30.40 8.58 105,000 28.30 ----------------------------------------------------------------------------- $ 1.00 - 35.13 9,756,864 $23.56 6.89 1,942,510 $12.59 ============================================================================= Options to purchase 1,942,510 shares at August 29, 1998, and 2,619,363 shares at August 30, 1997, were exercisable. Shares reserved for future grants were 2,699,468 shares at August 29, 1998, and 4,199,055 at August 30, 1997. 24

Pro forma information is required by SFAS No. 123, "Accounting for Stock-Based Compensation." In accordance with the provisions of SFAS No. 123, the Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans and accordingly, no compensation expense for stock options has been recognized. If the Company had elected to recognize compensation cost based on the fair value of the options granted at the grant date as prescribed in SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below. The effects of applying SFAS No. 123 and the results obtained through the use of the Black-Scholes option pricing model in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to fiscal 1996. Additional awards in future years are anticipated. Year Ended ---------------------------------- August 29, August 30, August 31, 1998 1997 1996 Net Income ---------------------------------- ($000) As reported $227,903 $195,008 $167,165 Pro forma $221,803 $191,118 $165,992 Basic Earnings per share As reported $1.50 $1.29 $1.13 Pro forma $1.46 $1.27 $1.12 Diluted Earnings per share As reported $1.48 $1.28 $1.11 Pro forma $1.44 $1.26 $1.10 The weighted-average fair value of the stock options granted during fiscal 1998 was $12.17, during fiscal 1997 was $9.26 and during fiscal 1996 was $12.25. The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions for grants in 1998, 1997 and 1996: expected price volatility of .34; risk-free interest rates ranging from 4.56 to 5.98 percent; and expected lives between 3.75 and 8.0 years. The Company also has an employee stock purchase plan under which all eligible employees may purchase Common Stock at 85% of fair market value (determined quarterly) through regular payroll deductions. Annual purchases are limited to $4,000 per employee. Under the plan, 232,389 shares were sold in fiscal 1998 and 308,141 shares were sold in fiscal 1997. The Company re-purchased 275,526 shares in fiscal 1998 and 168,362 shares in fiscal 1997 for sale under the plan. A total of 1,567,611 shares of Common Stock is reserved for future issuance under this plan. During fiscal 1998, the Company adopted the 1998 Directors Stock Option Plan. Under the stock option plan, each non-employee director was automatically granted an option to purchase 1,000 shares of common stock on the plan's adoption date. Each non-employee director will receive additional options to purchase 1,000 shares of common stock on January 1 of each year. In addition, so long as the non-employee director owns common stock valued at least equal to five times the value of the annual fee paid to such director, that director will receive an additional option to purchase 1,000 shares as of December 31 of each year. In March 1998, the Company adopted the Directors Compensation Plan. Under this plan, a director may receive no more than one-half of the annual and meeting fees immediately in cash, and the remainder of the fees must be taken in either common stock or the fees may be deferred in units with value equivalent to the value of shares of common stock as of the grant date ("stock appreciation rights"). Note F - Pension and Savings 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 makes annual contributions in amounts at least equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The following table sets forth the plan's funded status and amounts recognized in the Company's financial statements (in thousands): August 29, August 30, 1998 1997 ------------------------- Actuarial present value of accumulated benefit obligation, including vested benefits of $36,338 in 1998 and $22,005 in 1997 $43,600 $26,886 ========================= Projected benefit obligation for service rendered to date $53,971 $42,687 Less plan assets at fair value, primarily stocks and cash equivalents 54,565 39,598 ------------------------- Projected benefit obligation in excess of (less than) plan assets (594) 3,089 Unrecognized prior service cost 5,934 (289) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions (9,282) (3,721) Unrecognized net asset 118 ------------------------- Accrued pension cost $(3,942) $ (803) ========================= Net pension cost included the following components (in thousands): Year Ended --------------------------------- August 29, August 30, August 31, 1998 1997 1996 --------------------------------- Service cost of benefits earned during the year $7,001 $6,034 $4,580 Interest cost on projected benefit obligation 3,047 2,496 1,748 Actual return on plan assets (7,241) (5,616) (3,677) Net amortization and deferral 2,741 2,820 2,518 --------------------------------- Net periodic pension cost $5,548 $5,734 $5,169 ================================= The actuarial present value of the projected benefit obligation was determined using weighted-average discount rates of 6.93% and 7.94% at August 29, 1998 and August 30, 1997, respectively. The assumed increases in future compensation levels were generally 5-10% based on age in fiscal 1998 and 6% in fiscal 1997 and 1996. The expected long-term rate of return on plan assets was 9.5%, 9.5% and 7% at August 29, 1998, August 30, 1997 and August 31, 1996, respectively. 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. During fiscal 1998, the Company established a defined contribution plan ("401(k)") pursuant to Section 401(k) of the Internal Revenue Code. The 401(k) covers substantially all employees that meet certain service requirements. The Company makes matching contributions, on an annual basis, up to specified percentages of employees' contributions as approved by the Board of Directors. 25

Note G - Leases A 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 $56,410,000 for fiscal 1998, $39,078,000 for fiscal 1997 and $30,626,000 for fiscal 1996. Percentage rentals were insignificant. Minimum annual rental commitments under non-cancelable operating leases are as follows (in thousands): Year Amount -------------------------- 1999 $ 92,863 2000 85,232 2001 74,704 2002 60,080 2003 47,954 Thereafter 169,201 -------------------------- $530,034 ========================== Note H - Commitments and Contingencies Construction commitments, primarily for new stores, totaled approximately $76 million at August 29, 1998. Chief, a wholly owned subsidiary of the Company, is a defendant in a class action entitled "Doug Winfrey, et al. on their own behalf and on behalf of a class and all others similarly situated, v. Chief Auto Parts Inc. et al." filed in The Superior Court of California, County of San Joaquin on August 22, 1995 and then transferred to The Superior Court of California, County of San Francisco on October 26, 1995. The Superior Court denied the plaintiff's motion for class certification on December 7, 1996. On February 6, 1998, the Court of Appeal reversed the Superior Court's order denying class certification. No substantive proceedings regarding the merits of this lawsuit have yet occurred. The plaintiffs allege that Chief had a policy and practice of denying hourly employees in California mandated rest periods during their scheduled hours of work. The plaintiffs are seeking damages, restitution, disgorgement of profits, statutory penalties, declaratory relief, injunctive relief, prejudgment interest, and reasonable attorneys fees, expenses and costs. Management is unable to predict the outcome of this lawsuit at this time. The Company believes that the potential damages recoverable by any single plaintiff against Chief are minimal. However, if the plaintiff class were to prevail on all their claims, the amount of damages could be substantial. Chief is vigorously defending against this action. 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 I - Business Combinations In February 1998, the Company acquired ADAP, Inc. ("Auto Palace"). The acquisition added 112 automotive parts and accessories stores in the Northeast. In May 1998, the Company acquired the assets and liabilities of TruckPro, L.P., including the service mark "TruckPro." The 43 TruckPro stores in 14 states specialize in the sale of heavy duty truck parts. Additionally, in June 1998, the Company acquired Chief Auto Parts Inc. for approximately $280 million, including the assumption of approximately $205 million of indebtedness. Chief operated 560 auto parts stores primarily in California. The purchase price for Chief has been preliminarily allocated in the consolidated financial statements and the final adjustment may differ from the preliminary allocation. Results of operations for acquisitions are included with the Company since each respective acquisition date. The purchase method of accounting for acquisitions was utilized for all transactions and, therefore, the acquired assets and liabilities were recorded at their estimated fair values at the date of acquisition. The goodwill associated with these transactions is being amortized over 40 years. The fair value of the assets and liabilities recorded as a result of these transactions is as follows (in thousands): Cash and cash equivalents $ 267 Receivables 22,786 Inventories 209,829 Property and equipment 104,640 Goodwill 166,013 Deferred income taxes 56,388 Accounts payable (106,947) Accrued liabilities (52,826) Debt (271,273) Other (28,846) -------- Total cash purchase price $100,031 ======== The following unaudited pro forma results of operations assume that the acquisitions and the related financing transactions occurred at the beginning of the periods presented. Year Ended ------------------------------------- August 29, August 30, 1998 1997 ------------------------------------- (in thousands, except per share data) Net sales $3,758,700 $3,397,300 Net income $ 221,200 $ 189,200 Diluted earnings per share $ 1.44 $ 1.24 The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the business combinations and related transactions been consummated as of the above dates, nor is it necessarily indicative of future operating results. Note J - Subsequent Event The Company announced an agreement to acquire real estate and real estate leases for approximately 100 Express auto parts stores from Pep Boys for approximately $108 million. The transaction is subject to various contingencies and is anticipated to be closed by the end of the first quarter of fiscal 1999. If consummated, the transaction would not have a material impact on the fiscal 1999 financial position or consolidated operating results. 26

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 CORPORATE INFORMATION Transfer Agent and Registrar Auditors First Chicago Trust Company of New York Ernst & Young LLP P.O. Box 2500 Memphis, Tennessee Jersey City, New Jersey 07303-2500 (800) 756-8200 Store Support Center (201) 324-0498 Memphis, Tennessee 38103-3607 http://www.fctc.com/share.html (901) 495-6500 Stock Exchange Listing AutoZone Web Site New York Stock Exchange http://www.autozone.com Ticker Symbol:AZO REPORT OF INDEPENDENT AUDITORS Stockholders AutoZone, Inc., We have audited the accompanying consolidated balance sheets of AutoZone, Inc. as of August 29, 1998 and August 30, 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended August 29, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AutoZone, Inc. at August 29, 1998 and August 30, 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 29, 1998 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Memphis, Tennessee September 30, 1998 Annual Meeting The Annual Meeting of Stockholders of AutoZone will be held at 10 a.m. on December 17, 1998, at AutoZone's store support center, 123 South Front Street, Memphis, Tennessee. Form 10-K/Quarterly Reports Stockholders may obtain free of charge a copy of the Company's annual report on Form 10-K and quarterly reports on 10-Q as filed with the Securities and Exchange Commission or our quarterly press releases by writing to Stockholder Relations, P.O. Box 2198, Memphis, Tennessee 38101. 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. Stockholders of Record As of September 30, 1998, there were 3,218 stockholders of record, excluding the number of beneficial owners whose shares were represented by security position listings. 27

OFFICERS <TABLE> <CAPTION> <S> <C> <C> <C> <C> JOHN C. ADAMS, JR. Executive Vice Presidents Senior Vice Presidents Vice Presidents JAMES A. ETZKORN Chairman and CEO Customer Satisfaction Customer Satisfaction Customer Satisfaction Systems Technology Customer Satisfaction & Support TIMOTHY D. VARGO LAWRENCE E. EVANS GERALD E. COLLEY RICHARD F. ADAMS, JR. CLETE FADDIS President and COO Store Development Stores Stores Merchandising Analysis Stores & Support ROBERT J. HUNT HARRY L. GOLDSMITH MICHAEL B. BAIRD LARRY FUSSY Chief Financial Officer General Counsel President & COO, Stores & Secretary TruckPro MICHAEL E. LONGO DAVID W. BARCZAK WM. DAVID GILMORE Distribution Real Estate Store Design Other Corporate Officers & Construction Customer Satisfaction ANTHONY D. ROSE, JR. JON A. BASCOM FRANK B. GOODMAN, Advertising Systems Technology III EMMA JO KAUFFMAN & Support Business Panning Assistant Treasurer & Analysis DONALD R. RAWLINS STEPHEN W. VALENTINE B. CRAIG BLACKWELL CLIFFORD E. GREEN Assistant Secretary International Stores Merchandising DAVID J. WILHITE MICHAEL E. BUTTERICK PATRICIA K. GREENBERGER Merchandising Controller Financial Planning & Control WILLIAM L. CONE MARK D. HAMM Loss Prevention System Technology & Support BRETT D. EASLEY PHILLIP J. JACKSON President, ALLDATA Distribution TARA C. ELLIOTT WILLIAM R. MCCAWLEy, Jr. Treasurer Stores [Vice Presidents Customer Satisfaction continued] STEVEN R. MCCLANAHAN Stores GRANTLAND E. MCGEE, JR. Stores JOHN MINERVINI Business Development JACK MITCHELL Supplier Quality THOMAS NEWBERN Stores DAVID W. NICHOLS Stores ROBERT F. OSSWALD AutoZoner Development & Training MARK A. PALAZOLA Purchasing WILLIAM C. RHODES, III Operations Analysis & Support RICHARD C. SMITH Stores DENNIS P. TOLIVAR, SR. Stores </TABLE> BOARD OF DIRECTORS <TABLE> <S> <C> <C> <C> JOHN C. ADAMS, JR. Dr. N. GERRY HOUSE (2) JOSEPH R. HYDE, III MICHAEL W. MICHELSON (3) Chairman and CEO Superintendent Former Chairman and CEO General Partner Customer Satisfaction Memphis City Schools Customer Satisfaction Kohlberg Kravis Roberts & Co. LLC ANDREW M. CLARKSON (3*) ROBERT J. HUNT JAMES F. KEEGAN (1*,2) GEORGE R. ROBERTS Chairman Executive Vice President Chairman General Partner Finance Committee and CFO Staff Line, Inc. Kohlberg Kravis Roberts Customer Satisfaction Customer Satisfaction & Co. LLC RONALD A. TERRY (1,2*) Retired Chairman First Tennessee National Corporation TIMOTHY D. VARGO President and COO Customer Satisfaction </TABLE> (1) Audit Committee (2) Compensation Committee (3) Finance Committee (*) Committee Chairman 28

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