<PAGE>   1

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K


[X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
          EXCHANGE ACT OF 1934

For the year ended December 31, 1998

[ ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
          SECURITIES EXCHANGE ACT OF 1934

For the transition period from______________________ to _____________________

                          COMMISSION FILE NO. 1-14308

                             THE PARTS SOURCE, INC.
             (Exact name of Registrant as specified in its charter)
<TABLE>
<S>                                             <C>
                 FLORIDA                                       59-3149403  
-------------------------------------------     ---------------------------------------
   (State of incorporation or organization)     (I.R.S. Employer Identification Number)

1751 S. MISSOURI AVENUE, CLEARWATER, FL                           33756 
----------------------------------------                       ----------
(Address of principal executive offices)                       (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:          (727) 588-0377
                                                   ------------------------------------
</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, 
$.001 PAR VALUE

         Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes X   No
                                              ---    ---

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [X]

         The aggregate market value of the voting stock of the registrant held
by non-affiliates (1,499,873 shares) as of March 17, 1999 was approximately
$4,030,909 based on the market price at that date.

         As of March 1, 1999, 3,412,273 shares of the Registrant's Common
Stock were outstanding.

                      DOCUMENT INCORPORATED BY REFERENCE.

None.




<PAGE>   2




                             THE PARTS SOURCE, INC.
                             (D/B/A ACE AUTO PARTS)

                                   FORM 10-K
                          YEAR ENDED DECEMBER 31, 1998


                               TABLE OF CONTENTS
<TABLE>
<CAPTION>


                                                                                                              Page 
                                                                                                             Number
                                                                                                             ------
<S>       <C>      <C>                                                                                       <C>  
PART I ......................................................................................................   3
          Item 1.   Business.................................................................................   3
          Item 2.   Properties...............................................................................   8
          Item 3.   Legal Proceedings........................................................................   8
          Item 4.   Submission of Matters to a Vote of Security Holders......................................   8

PART II .....................................................................................................   9
          Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters....................   9
          Item 6.   Selected Financial Data..................................................................  10 
          Item 7.   Management's Discussion and Analysis of Financial Condition and Results
                    of Operations............................................................................  11
          Item 7A.  Quantitative and Qualitative Disclosures About Market Risk...............................  15
          Item 8.   Financial Statements and Supplementary Data..............................................  15
          Item 9.   Changes in and Disagreements with Accountants on Accounting and 
                    Financial Disclosure.....................................................................  37

PART III ....................................................................................................  37
          Item 10.  Directors and Executive Officers of the Registrant.......................................  37
          Item 11.  Executive Compensation...................................................................  38
          Item 12.  Security Ownership of Certain Beneficial Owners and Management...........................  39
          Item 13.  Certain Relationships and Related Transactions...........................................  41

PART IV .....................................................................................................  42
          Item 14.  Exhibits, Financial Statements, Schedules and Reports on Form 8-K........................  42

</TABLE>





                                       2
<PAGE>   3


                                     PART I

ITEM 1. BUSINESS

GENERAL

On February 16, 1999, The Parts Source, Inc., d/b/a Ace Auto Parts (the
"Company") entered into an agreement with General Parts, Inc., a privately owned
company headquartered in Raleigh, North Carolina, whereby General Parts, Inc.
will acquire all of the outstanding shares of Common Stock of the Company for
$3.00 per share, subject to adjustments as set forth in the merger agreement.
Consummation of the agreement is subject to approval by the Company's
shareholders and certain other conditions. Pursuant to the terms of the merger
agreement, the principal shareholders of the Company, owning 54.4% of all
outstanding shares of common stock, have agreed to vote all of their shares for
the adoption of this merger agreement.

The Company is a specialty supplier and retailer of automotive replacement
parts, tools, supplies, equipment and accessories ("Product" or "Merchandise")
to both the professional mechanics, garages or service technicians
("Professional Installers") and the "Do-It-Yourself" ("DIY") customers, as well
as other independently owned auto parts stores ("Independent Parts Stores"). The
Company operates one distribution center ("DC") and 41 auto parts stores
("Company Stores") in the State of Florida of which 22 are wholesale stores
selling primarily to the Professional Installers and 19 are traditional stores
selling both to the Professional Installer and DIY customers. The Company also
maintains approximately 210 radio-dispatched trucks that can make most
deliveries to its Professional Installers within 30 minutes. Stores carry an
extensive product line of "hard" parts including brakes, belts, hoses, filters,
cooling system parts, tune-up parts, shock absorbers, gaskets, batteries,
bearings, engine parts, remanufactured alternators and starters, chassis parts
and exhaust systems, for domestic and imported cars, vans and trucks, as well as
brand name maintenance items and accessories. For the year ended December 31,
1998, approximately 92% of the Company's stores sales was derived from hard
parts. Approximately 83% of the Company's 1998 sales was derived from
Professional Installers, 9% from DIY customers and 8% from the Independent Parts
Stores. The Company is not in the business of selling tires or performing
automotive repairs.

In September 1998, the Company acquired its own distribution center and began
purchasing Product directly from the manufacturers, thereby eliminating one
middleman from the supply chain and reducing its product costs. This DC allows
the Company to offer an improved variety of product lines to its customers. In
addition, this DC has opened up a new market of product sales to Independent
Parts Stores across the State of Florida and Southern Georgia. The total net
sales to Independent Parts Stores were approximately $3.4 million from the date
of acquisition through December 31, 1998. The aggregate purchase price for this
operation, which approximated $5.9 million, was paid primarily from the
Company's credit facility.

OPERATIONS

The Company's DC, located in Ocala, Florida, carries approximately 80,000 stock
keeping units ("SKUs") and covers 100,000 square foot with a 30 foot ceiling,
allowing for approximately 3 million cubic feet of storage space and enables the
Company to offer an improved variety of product lines to its customers. This DC
should be capable of servicing approximately 160 stores. Nightly deliveries are
made from the DC by the Company's fleet of trucks and trailers to both Company
Stores as well as Independent Parts Stores.





                                       3


<PAGE>   4
Company Stores generally range in size from 3,000 to 8,000 square feet. The
Company believes that its traditional stores are "destination stores" generating
their own traffic rather than relying on traffic created by the presence of
other stores in the immediate vicinity. Consequently most traditional stores are
freestanding buildings situated on or near major traffic thoroughfares, which
offer ample parking and easy customer access. Most wholesale stores are located
in commercial warehouse parks, near major traffic thoroughfares, which offer
efficient delivery routes to the professional installers' shops. Each
traditional store carries a mixture of hard parts and accessories. The inventory
of a wholesale store consists only of hard parts. Traditional stores carry
18,000-20,000 different SKUs of which 13,000 to 15,000 represent hard parts,
whereas a wholesale store will carry 17,000-19,000 different hard part SKUs.
Both the traditional store and wholesale store sales are generated by a
full-time sales force, knowledgeable employees, and free delivery service.

Company Stores service two distinct types of customers - the Professional
Installer (wholesale) customer and the DIY (retail) customer. The Company's
traditional stores average 80% to 90% in Professional Installer sales and 10% to
20% in DIY sales. The Company's wholesale stores sell only to the Professional
Installer. In addition, because wholesale stores carry a greater selection of
hard part SKUs, including certain lower turnover hard parts not generally
carried in the traditional store, a wholesale store also provides the
traditional stores within its area with access to a greater selection of hard
part SKUs on a same day basis. The Company also provides a delivery service to
its wholesale customers with approximately 210 radio-dispatched trucks. The
Company's 41 stores receive the major portion of its inventory deliveries
nightly from the Company's distribution center. The deliveries replenish each
store with the inventory sold the previous day and also provides a store with
the ability to special order SKUs not normally stocked by the Company's stores.
This enables the Company to provide next day service to both the wholesale and
DIY customers.

CUSTOMER SERVICE

The Company believes it is not only in the business of selling auto parts, but
as important, is in the service business. Heavy emphasis is placed on having
professional personnel to provide responsive customer service. Employees receive
extensive on-the-job training and participate in a cash incentive program,
allowing them to share in their store's success.

The Company's number one priority is customer satisfaction. The Company's
distribution center seeks to attract new independently owned auto parts store
customers and to retain existing customers by conducting a variety of
promotional programs and by offering an extensive selection of quality product
lines at competitive prices with nightly delivery service of over 80,000 SKUs.

The Company Stores seek to attract new Professional Installers, DIY customers
and to retain existing customers by conducting a variety of advertising and
promotional programs and by offering (i) superior in-store service through
highly-motivated, technically-proficient sales people using advanced
point-of-sale and electronic cataloging systems, (ii) an extensive selection of
SKUs stocked in each store (iii) same day or next day delivery of over 80,000
SKUs, (iv) attractive stores in convenient locations, (v) competitive pricing,
and (vi) a national warranty program.

Each of the Company's store sales personnel is required to be technically
proficient in the workings and application of automotive products. See
"Personnel Training" below. This degree of technical proficiency is essential
because of the significant portion of the Company's business represented by the
Professional Installer. The Company has found that the typical DIY customer
often seeks assistance from sales people, particularly in connection with the
purchase of hard parts. The Company believes that the ability of its sales
personnel to provide such assistance is valued by the DIY customer, and
therefore is likely to result in repeat DIY business. To assist the Company's
sales personnel in providing customer service, the Company has installed
advanced point-of-sale and electronic cataloging systems. These systems provide
individual stores with access to the Company's database of manufacturer
recommended parts and the ability to locate parts at other stores.




                                       4
<PAGE>   5

PURCHASING AND DISTRIBUTION

Since September 1998, when the distribution center was acquired, the Company
purchases Product directly from over 200 suppliers who ship merchandise to the
DC. Nightly deliveries are made from the DC by the Company's fleet of trucks and
trailers to both Company Stores as well as Independent Parts Stores.

The Company acquired the distribution center from APS, Inc., a national
distributor of a broad array of "Big A" brand and manufacturers' branded
automotive replacement parts, as well as tools, equipment, supplies and
accessories and who also was the Company's previous primary supplier. For 1996,
1997 and 1998, purchases from APS accounted for approximately 78%, 79% and 41%,
respectively, of the Company's total inventory purchases. In February 1998, APS,
along with its parent and affiliated companies, filed for protection under
Chapter 11 of the United States Bankruptcy Code. In November 1998, the Parent
Company of APS filed a Form 8-K with the Securities and Exchange Commission
reporting that the net assets of the company would be liquidated and the
operations ceased.

This DC, located in Ocala, Florida, carries approximately 80,000 SKUs and covers
100,000 square foot with a 30 foot ceiling allowing for approximately 3 million
cubic feet of storage space. This DC should be capable of servicing
approximately 160 stores. The DC utilizes computer assisted technology to
electronically receive orders from computers located in the stores and is
equipped with highly automated conveyor and sorting systems which expedites the
movement of Merchandise to loading areas for shipment to stores on a nightly
basis. These systems enable the DC personnel to efficiently pick, assemble,
palletize and bill merchandise for shipment to each store.

In August 1998, when the Company determined it would begin purchasing Product
directly from the manufacturers, the Company became a member of Auto Value
Associates, Inc. ("Auto Value Associates"), a non-profit buying and marketing
group consisting of approximately 41 members, engaged in the distribution or
sale of automotive products. Although the Company is not obligated to make
purchases through Auto Value Associates, it assists the Company in negotiating
purchases of merchandise from a variety of vendors. Because of its volume
purchases of Merchandise, the Company believes that its long-term ability to buy
merchandise on favorable terms would not be materially adversely affected if the
Company ceased to be a member of Auto Value Associates.

The Company believes that its relationships with its suppliers are excellent.
The Company also believes that alternative sources of supply exist at similar
cost and on similar terms, for substantially all types of Products sold.

INVENTORY MANAGEMENT AND MERCHANDISING

The Company maintains an inventory management department that assures the
inventory in the DC and stores is current and up-to-date. The department is
constantly adding new SKUs, which are increasing in demand and deleting SKUs
that have become less popular. The Company utilizes statistics published by
manufacturers, in addition to its own evaluation criteria, for each SKU carried
at the distribution center and stores which identifies and classifies each SKU
by demand. Refinements to inventory levels to be carried in the DC and stores
are made continuously based on the sales movement shown by the Company's
computerized inventory management system and on management's assessment of the
changes and trends in the marketplace.

The Company's inventory management system, which electronically links each
Company Store to the corporate headquarters, provides an efficient and
sophisticated means of inventory control and management. The computer system at
each Company Store records each sale, makes a corresponding inventory adjustment
and orders replacement inventory from the distribution center.





                                       5



<PAGE>   6
Automotive replacement parts manufacturers generally accept obsolete inventory
for full return credit on an annual or more frequent basis. The Company has
historically not incurred any significant losses as a result of slow moving or
obsolete inventory.

MARKETING

Since a majority of the Company's revenues are derived from the sale of
automotive products to the Professional Installer, the Company devotes
substantial time and energy to the development of its Professional Installer
business. The Company's Vice President of Sales and Marketing is primarily
responsible for the development and maintenance of the Company's Professional
Installer business. There are 21 full-time outside sales people operating from
the Company's traditional and wholesale stores dedicated solely to calling upon
and selling to the Professional Installer. Moreover, each store manager
participates in these activities by calling on existing and potential new
Professional Installers on a regular and periodic basis. The Company has
approximately 210 radio-dispatched trucks to provide prompt delivery service to
the Professional Installer. Approximately 153 inside technically trained sales
personnel market Products to retail and wholesale customers.

The Company promotes sales to DIY consumers through an advertising program which
includes direct mail, newspaper and limited radio and television advertising in
selected markets. Newspaper advertisements are generally directed toward
specific Merchandise and price promotions, frequently in connection with
specific sales events and promotions. The Company also sponsors several
automotive related events in its market area each year in an effort to reach
wholesale and retail customers. The Company believes that its advertising and
promotional activities have resulted in significant name recognition in its
market area.

Along with the operation of the DC and the distribution of Product to the
Company Stores, the Company also sells Merchandise to Independent Parts Stores
whose stores are generally located in areas not serviced by a Company Store. The
Company seeks to attract new Independent Parts Store customers and to retain
existing customers by conducting a variety of promotional programs and by
offering an extensive selection of quality product lines at competitive prices
with nightly delivery service of over 80,000 SKUs.

The Company believes that a competitive pricing policy is essential within
product categories in order to compete successfully. Product pricing is
established by senior management at the corporate headquarters, with input from
store management, in a manner designed to meet product prices charged by the
competitors in the market. Most automotive products sold by the Company are
priced at discounts from the manufacturer's suggested list prices and additional
savings are offered through volume discounts and special promotional pricing.

In an effort to offer competitive prices to its customers, the Company
continually seeks to reduce the purchasing and distribution costs of its
merchandise. The Company achieves such cost reductions by working with its
vendors to secure product cost savings and other benefits, making volume
purchases and achieving efficiencies in its distribution system and higher
productivity at the DC and store level.

PERSONNEL TRAINING

The Company is committed to developing and retaining employees who are highly
motivated and knowledgeable team players. The Company considers itself to be a
highly selective employer, screening prospective employees to identify
individuals of high integrity who are motivated to succeed. The Company
considers its ability to recruit, train and retain its employees a key aspect of
its success.

The Company encourages its employees to propose any new ideas which will help
the Company run more efficiently and/or improve customer satisfaction. The
Company believes that a high level of involvement from its employees increases
motivation, company loyalty and overall performance.




                                       6


<PAGE>   7
The Company provides training programs that focus on providing superior customer
service, automotive parts knowledge, selling skills, store operational
procedures and personal development. The Company's training function is led and
managed by its Regional Management Teams through a series of weekly and monthly
sessions for store managers and sales personnel. Management believes that if it
trains, develops, manages and motivates the Company's employees properly, then
customers, in turn, will receive the superior service the Company views as its
competitive advantage in the marketplace.

COMPETITION

The automotive parts aftermarket is highly competitive. Automotive products,
similar or identical to those sold at the Company's stores, are generally
available from a variety of different competitors in the communities served by
Company Stores. The number of competitors and the level of competition faced by
the Company Stores varies by market area. The principal competitive factors that
affect the Company's business are customer service, product selection, product
quality, product availability, store location, timeliness of deliveries and
price.

The Company's major competitors in the Professional Installer portion of its
business include independent warehouse distributors and independently owned
parts stores, automobile dealers and national warehouse distributors and
associations, such as National Automotive Parts Association (NAPA), General
Parts (Carquest), Steego and Parts Plus. Discount Auto Parts, Pep Boys and Auto
Zone have recently entered into certain of the Company's Professional Installer
markets as well.

Competitors in the DIY portion of its business within its current market area
include automotive parts chains such as Discount Auto, Auto Zone, Parts America
(formerly known as Western Auto) and Pep Boys, independently owned parts stores,
automobile dealerships and mass or general merchandise, discount and convenience
chains that carry automotive products.

Although the Company believes that it competes effectively in its market area,
many of its competitors, or their parent organizations, are larger in terms of
sales volume and have access to greater capital and management resources.

EMPLOYEES

As of December 31, 1998, the Company had 554 employees, 86 of whom work at the
Company's traditional stores, 67 work at the Company's wholesale stores, 50 work
at the Company's distribution center, 24 were engaged as outside sales
personnel, 283 were engaged as delivery personnel, 7 work as regional store
management and 37 work at the corporate and administrative headquarters. The
Company's employees are not subject to a collective bargaining agreement. The
Company considers its relations with its employees to be excellent, and strives
to promote good employee relations through various programs designed for such
purposes.

SERVICE MARKS AND TRADEMARKS

The name Ace Auto Parts has been used by the Company and its predecessor
corporations since 1923. The Company has registered the service mark Ace Auto
Parts in the State of Florida. The Company believes that its business is not
materially dependent on any patent, trademark, service mark or copyright. The
Company is not aware of any infringing uses or, any assertion of infringing uses
in any of its current market areas that, in the opinion of the Company, could
materially affect the Company's use of its name.





                                       7


<PAGE>   8

REGULATION

Although subject to various laws and governmental regulations relating to its
business, including those related to the environment, the Company does not
believe that compliance with such laws and regulations has a material adverse
effect on its operations. Further, the Company is unaware of any failure to
comply with any such laws and regulations that could have a material adverse
effect on its operations. No assurance can be given, however, that significant
expenses could not be incurred by the Company to comply with any such law or
regulation in the future.

ITEM 2.  PROPERTIES

The Company operates 41 auto parts stores in the State of Florida. Of such
stores, two are owned by the Company, ten are leased from entities owned by the
two majority shareholders, and one is leased from Joan Z. Cox, Trustee, mother
of the two majority shareholders. The remaining 28 stores are leased from
non-affiliated parties. In addition, the Company leases from an affiliate of the
two majority shareholders a 4,000 square foot facility used as a battery
distribution center for the Company. The Company stores generally range in size
from 3,000 to 8,000 square feet. The Company's executive offices are located in
one of the Company's traditional stores located at 1751 S. Missouri Avenue,
Clearwater, Florida.

Most of the Company store's leases provide for the payment of a fixed base rent,
payment of certain taxes, insurance and maintenance costs. The leases are
generally for a term of five years, with the Company having the right to renew
for one or more additional five-year terms. The leases in existence at December
31, 1998 will expire between 1999 and 2003 (not including the renewals). The
Company will continue to evaluate additional lease alternatives as market
conditions dictate.

The Company's distribution center, located in Ocala, Florida, covers 100,000
square foot with a 30 foot ceiling allowing for approximately 3 million cubic
feet of storage space. This DC should be capable of servicing approximately 160
stores within a 450-mile radius. The DC is located in an industrial park area,
nearby Interstate 75, the north south expressway that runs through the State of
Florida. The DC is occupied under the terms of a lease expiring in 2003 with an
unaffiliated party, subject to a cancellation clause in 2000 at the option of
the Company.

The Company believes that its present facilities are in good condition, are
adequately insured, are suitable and adequate for the conduct of its current
operations.

ITEM 3.  LEGAL PROCEEDINGS

On March 20, 1997, Automotive One Parts Stores, Inc., a Florida corporation,
filed an action in the Circuit Court in and for Orange County, Florida, against
the Company and certain of its employees. The action follows the termination in
October 1996 of negotiations for the sale of the assets of Automotive One Parts
Stores, Inc. to the Company. The Plaintiff alleges that the Company (i)
interfered with its business relations by inducing certain employees to
terminate their employment with the Plaintiff and become employees of the
Company and (ii) misused confidential information obtained during the
negotiations for the sale of the assets. The Plaintiff is seeking damages in
excess of $400,000. There has been no activity in this case since May, 1998. The
Company denies the allegations and intends to vigorously defend the action. At
this time, management believes the resolution of this matter will not have a
material effect on the Company's financial position or results of operations.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None



                                       8


<PAGE>   9

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

From the effective date of the Company's initial public offering on April 8,
1996, the Company's Common Stock has been traded on the over-the-counter market
and is included for quotation on the Small Cap Market of the National
Association of Securities Dealers, Inc. Automated Quotation System ("Nasdaq").

The following table sets forth the range of high and low bid information for the
Company's Common Stock for the period from the initial public offering to the
end of 1998. 

<TABLE>
<CAPTION>


                                              1998                 1997                  1996
                                       -----------------     -----------------     -----------------
                                        High        Low       High        Low       High       Low
                                       ------      -----     ------      -----     -------    -----
<S>                                    <C>         <C>       <C>         <C>       <C>         <C>

  First Quarter                         4 3/8          2     22 3/8         16        N/A        N/A
  Second Quarter                            3      1 3/4     16 1/4      9 1/2     13 3/4      8 1/2
  Third Quarter                        2 7/32      1 1/8      4 5/8      3 3/8     13 3/4         10
  Fourth Quarter                       1 7/16        3/4      2 7/8      1 3/4         16      9 1/2

</TABLE>

The market information above is derived from quotations on the National Market
System of Nasdaq. Such market quotations reflect inter-dealer prices, without
retail mark-ups, mark-downs, or commission and may not necessarily represent
actual transactions.

HOLDERS

As of December 31, 1998, the approximate number of holders of record of the
Company's Common Stock was 200 and the number of beneficial holders was
approximately 2,000.

DIVIDENDS

The Company has not paid any cash dividends to date and does not anticipate or
contemplate paying cash dividends in the foreseeable future. It is the present
intention of the management of the Company to utilize all available funds for
working capital requirements.







                                       9
<PAGE>   10

ITEM 6.  SELECTED FINANCIAL DATA

The following table summarizes selected financial data of the Company and
should be read in conjunction with the Financial Statements and Notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.

<TABLE>
<CAPTION> 
                                                                                Year Ended December 31,
                                                           -----------------------------------------------------------------
                                                              1998         1997          1996          1995           1994
                                                           ---------     ---------     ---------     ---------       -------
                                                                    (In thousands, except shares and per share data)
<S>                                                        <C>           <C>           <C>           <C>          <C>
      OPERATING STATEMENT DATA:
      Net sales                                              $46,050       $40,053      $ 26,756       $22,943       $17,003
      Cost of goods sold                                      29,212        25,936        16,998        14,428        10,409
                                                             -------       -------      --------       -------       -------
           Gross profit                                       16,838        14,117         9,758         8,515         6,594

      Operating, selling, general and
           administrative expenses                            16,368        13,920         9,117         7,731         6,104
                                                             -------       -------      --------       -------       ------- 
           Operating income                                      470           197           641           784           490
                                                             -------       -------      --------       -------       -------

      Other income (expense)
           Interest expense                                   (1,009)         (648)         (330)         (668)         (458)
           Other, net                                             29            25            46            36            51
                                                             -------       -------      --------       -------       -------
                                                                (980)         (623)         (284)         (632)         (407)
                                                             -------       -------      --------       -------       -------

      Earnings (loss) before income taxes                       (510)         (426)          357           152            83
      Provision (benefit) for income taxes                      (166)         (166)          118             -            -
                                                             -------       -------      --------       -------       -------
      Net earnings (loss)                                    $  (344)      $  (260)     $    239       $   152       $    83
                                                             =======       =======      ========       =======       =======

      Historical net earnings (loss) per 
      common share - basic                                   $  (.10)      $  (.08)     $    .08       $   .08       $   .04
                                                             =======       =======      ========       =======       =======

      Historical net earnings (loss) per 
      common share - diluted                                 $  (.10)      $  (.08)     $    .08       $   .08       $   .04
                                                             =======       =======      ========       =======       =======

      Pro forma information (1)
        Historical earnings before income taxes                                         $    357       $   152       $    83
        Provision for income taxes                                                           132            43            25
                                                                                        --------       -------       -------
        Pro forma net earnings                                                          $    225       $   109       $    58
                                                                                        ========       =======       =======
        Pro forma net earnings per common share                                         $    .08       $   .05        $  .03
                                                                                        ========       =======       =======

      Weighted average common shares outstanding:
           Basic                                           3,412,273     3,412,273     2,907,452     2,000,000     2,000,000
                                                           =========     =========     =========     =========     =========
           Diluted                                         3,412,273     3,412,273     2,950,717     2,000,000     2,000,000
                                                           =========     =========     =========     =========     =========

      BALANCE SHEET DATA:
      Working capital                                        $20,982       $15,138       $11,829       $ 3,830       $ 4,288
      Total assets                                            34,195        26,253        20,062        12,018        10,065
      Total long-term debt                                    16,708        10,423         5,853         6,129         6,166
      Stockholders' equity (deficit)                           9,347         9,691         9,953          (667)         (819)

</TABLE>

----------

(1) Prior to the completion of its initial public offering on April 8, 1996, the
    Company was taxed as a S Corporation.




                                       10

<PAGE>   11

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND RESULTS 
         OF OPERATIONS

OVERVIEW

On February 16, 1999, the Company entered into an agreement with General Parts,
Inc., a privately owned company headquartered in Raleigh, North Carolina,
whereby General Parts, Inc. will acquire all of the outstanding shares of
Common Stock of the Company for $3.00 per share, subject to adjustments as set
forth in the merger agreement. Consummation of the agreement is subject to
approval by the Company's shareholders and certain other conditions. Pursuant
to the terms of the merger agreement, the principal shareholders of the
Company, owning 54.4% of all outstanding shares of common stock, have agreed to
vote all of their shares for the adoption of this merger agreement.


RESULTS OF OPERATIONS

         The following table sets forth certain selected historical operating
results of the Company as a percentage of net sales.


<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                            ------------------------------------
                                                                              1998          1997          1996
                                                                            --------      --------      --------
<S>                                                                         <C>           <C>           <C>
Net sales                                                                    100.0%        100.0%        100.0%
Cost of goods sold                                                            63.4          64.8          63.5
                                                                             -----         -----         -----
     Gross profit                                                             36.6          35.2          36.5
Operating, selling, general and administrative expenses                       35.6          34.7          34.1
                                                                             -----         -----         -----
     Operating income                                                          1.0            .5           2.4

Other income (expense)
  Interest expense                                                            (2.2)         (1.6)         (1.2)
  Other, net                                                                    .1             -            .1
                                                                             -----         -----         -----
Earnings (loss) before income taxes                                           (1.1)         (1.1)          1.3
Provision (benefit) for income taxes                                           (.4)          (.4)           .4
                                                                             -----         -----         -----
Net earnings (loss)                                                            (.7)%         (.7)%          .9%
                                                                             =====         =====         =====
Pro forma information
  Historical earnings before income taxes                                                                  1.3
  Provision for income taxes                                                                                .5
                                                                                                         -----
  Net earnings                                                                                              .8%
                                                                                                         =====

</TABLE>

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

Net Sales. Product sales increased $6 million, or 15%, from $40.1 million in
1997 to $46.1 million in 1998. Of this increase, $6.7 million in sales was
generated from the distribution center and the first full year of operations in
1998 for 10 stores acquired and opened during 1997. This increase was partially
offset by a $.7 million or 2.1% decrease in same store sales. The same store
sales decrease is calculated based on the change in net sales of only those
stores that were operational for the entire periods being compared. The same
store sales decrease resulted primarily from new competitors entering the
wholesale market. The threat of increasing complexity of automobiles to retail
sales is partially offset by owners keeping their cars longer and the increasing
price of the more complex replacement parts. A current trend which poses a
threat to both retail and wholesale sales is the auto manufacturers' attention
to improving the quality of new cars which may result in fewer aftermarket
repairs. The Company intends to overcome this improved new car quality threat by
capturing and retaining wholesale market share by providing superior customer
service.





                                       11
<PAGE>   12
Cost of Goods Sold. Cost of goods sold increased from $25.9 million (or 64.8%
of net sales) in 1997 to $29.2 million (or 63.4% of net sales) in 1998. This
$3.3 million increase was primarily attributable to sales increases. Cost of
goods sold as a percentage of sales decrease primarily from favorable pricing
from vendors and was partially offset from sales increases in lower gross margin
wholesale sales and warehousing and distribution expenses incurred in 1998.

Operating, Selling, General and Administrative ("OSG&A") Expenses. OSG&A
expenses increased from $13.9 million (or 34.7% of net sales) in 1997 to $16.4
million (or 35.6% of net sales) in 1998. This $2.5 million increase resulted
primarily from additional store personnel and corporate overhead to support the
increased sales volume and a reduction in reimbursements of promotional expenses
received from suppliers. OSG&A expenses as a percentage of sales increased
primarily from a reduction in reimbursements of promotional expenses received
from suppliers in 1998.

Interest Expense. Interest expense increased from $647,973 in 1997 (or 1.6% of
net sales) to $1,008,987 in 1998 (or 2.2% of net sales). This increase resulted
primarily from the increased level of debt incurred to acquire the distribution
center, as well as for working capital.

Provision for Income Taxes. The Company's effective income tax rates were 32.6%
and 39.1% in 1998 and 1997, respectively.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

Net Sales. Product sales increased $13.3 million, or 49.7%, from $26.8 million
in 1996 to $40.1 million in 1997. $10.4 million of this increase was due to ten
new stores acquired and opened during 1997 and the first full year of operations
in 1997 for 14 stores acquired and opened during 1996, of which four of these
new stores acquired were either closed or consolidated into another store. There
was no goodwill associated with the stores that were closed or consolidated. The
remaining $2.9 million increase in net sales resulted from same store sales
growth. Same store sales growth is calculated based on the change in net sales
of only those stores that were operational for the entire periods being
compared. Since the Company operates in a very competitive environment, price
changes are often made. For the years ended 1996 and 1997, certain product lines
experienced price decreases, however these have been offset with other product
line price increases. Overall, price changes have had an immaterial effect on
revenues. Of the 44 stores the Company operated at December 31, 1997, 22 stores
have retail and wholesale sales and, for these stores, the retail sales
generally account for 10% to 25% of total revenues. For the years ended 1996 and
1997, the majority of these stores have experienced 5% to 15% decreases in
retail revenues. However, these decreases have been offset by 5% to 40%
increases in wholesale revenues. Store relocations will be considered if the
retail business does not meet profit goals. The remaining 22 stores are 100%
wholesale stores. For the years ended 1996 and 1997, the majority of these
stores have experienced 5% to 40% increases in wholesale revenues. While the
increasing complexity and sophistication of automobiles reduces the number of
owners who can repair their own cars and poses a threat for retail sales, this
complexity also creates an opportunity for wholesale sales that the Company is
well positioned to take advantage of. In addition, the threat of increasing
complexity of automobiles to retail sales is partially offset by owners keeping
their cars longer and the increasing price of the more complex replacement
parts. A current trend which poses a threat to both retail and wholesale sales
is the auto manufacturers' attention to improving the quality of new cars which
may result in fewer aftermarket repairs. The Company intends to overcome this
improved new car quality threat by capturing and retaining wholesale market
share by providing superior customer service.




                                      12



<PAGE>   13
Cost of Goods Sold. Cost of goods sold increased from $17 million (or 63.5% of
net sales) in 1996 to $25.9 million (or 64.8% of net sales) in 1997. This $8.9
million increase was primarily attributable to sales increases. Cost of goods
sold as a percentage of sales increased primarily from sales increases in lower
gross margin wholesale sales and new store sales that initially operate at lower
gross margins. These increases were partially offset by favorable pricing from
vendors. 20 of the Company's 44 store locations were opened during the periods
being compared. These new stores' cost of goods sold as a percentage of net
sales should gradually decrease as these new stores mature and sales volumes
increase.

Operating, Selling, General and Administrative ("OSG&A") Expenses. OSG&A
expenses increased from $9.1 million (or 34.1% of net sales) in 1996 to $13.9
million (or 34.7% of net sales) in 1997. This $4.8 million increase resulted
primarily from additional store personnel and corporate overhead to support the
increased sales volume. OSG&A expenses as a percentage of sales increased
primarily from certain new stores that initially operate at a higher expense
percentage. This increase was partially offset by reimbursements of promotional
expenses received from suppliers. 20 of the Company's 44 store locations were
opened during the periods being compared. These new stores' expenses as a
percentage of net sales should gradually decrease as these new stores mature and
sales volumes increase.

Interest Expense. Interest expense increased from $329,517 in 1996 (or 1.2% of
net sales) to $647,973 in 1997 (or 1.6% of net sales). This increase resulted
primarily from the increased level of debt incurred to expand operations, as
well as for working capital. This increase was partially offset by an interest
rate reduction of almost 2.5 percentage points from the comparable 1996 period.

Provision for Income Taxes. The Company was taxed as an S Corporation prior to
the completion of its initial public offering on April 8, 1996. In conjunction
with the completion of the initial public offering, the Company was required to
record the cumulative tax effect of its net deferred income taxes of $44,400 on
this date. As a result, the provision for income taxes for the year ended
December 31, 1996 includes this one-time charge and the income taxes related to
the net earnings recorded subsequent to April 8, 1996. In 1997, the Company
reported a loss before income taxes which resulted in an income tax benefit.





                                      13


<PAGE>   14

YEAR 2000 ("Y2K")

The Company is currently addressing a universal situation commonly referred to
as the "Year 2000 Problem". The year 2000 issue is the result of computer
programs being written using two digits rather than four digits to define the
year. Any programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could cause computer
systems to perform inaccurate calculations. Using internal personnel, the
Company has completed an assessment of all significant information technology
("IT") and non-IT systems to ensure that critical operations will not be
adversely affected or lose any business functionality due to the Y2K problems.
Financial packages, including the Company's general ledger, accounts payable and
payroll systems, at the corporate office are warranted to be fully capable of
date handling which ensures our readiness. The Company's stores and corporate
office point of sale, accounts receivable and inventory software has been
guaranteed to be year 2000 compliant and has written assurances of support and
the timely resolution of any problems. The operating systems at the corporate
office are fully tested and are year 2000 compliant. The operating systems at
the store level are not year 2000 compliant. The conversion of the stores'
operating systems has begun and will be complete by mid to late 1999. This is
part of the perpetual upgrade of hardware and software. The cost of the
conversion is expected to be insignificant. The Company's warehouse point of
sale, accounts receivable and inventory software is not Y2K compliant. These
systems are scheduled to be replaced with fully compliant hardware and software
in mid 1999. The cost of this year 2000 initiative, principally including
internal costs, will not be material to the Company's result of operations or
financial position. Furthermore, the project is not expected to have a
significant effect on operations. Should there be any failure of systems, either
at the corporate or store level, operations would continue with manual
processing. Significant vendors have been contacted to ensure that they too are
making progress on this issue. Most of them are making substantial advancements.
In the event of their failure to make a transition to the year 2000, the company
has many options for the successful fulfillment of orders from other sources.
The turn of the century should have no material effect on the Company's
significant computer applications. The cost and time estimated for the year 2000
project, including IT and non-IT systems, are based on the Company's best
current estimates. There can be no guarantee that these estimates will be
achieved and that the planned results will be achieved. Risk factors include,
but are not limited to, the retention of internal personnel dedicated to the
project, the timely delivery of hardware and software from vendors, and the
successful completion of Y2K projects by key business partners.

LIQUIDITY AND CAPITAL RESOURCES

The Company's operating activities generated cash of $.3 million, primarily as a
result of an increase in accounts receivable which was offset by an increase in
accounts payable. Net cash used in operating activities was $2.1 million and
$5.4 million for the years ended 1997 and 1996, respectively.

Net cash used in investing activities was $6.6 million, $2 million and $5
million for the years ended 1998, 1997 and 1996, respectively. In 1998, the
Company acquired an existing warehouse operation for approximately $5.9 million.
This warehouse acquisition was funded through the Company's line of credit.

Net cash provided by financing activities was $6.1 million, $4.3 million and
$10.2 million for the years ended 1998, 1997 and 1996, respectively. As
discussed above, in 1998 the Company used its revolving line of credit to fund
the warehouse acquisition.




                                      14


<PAGE>   15
In connection with the acquisition of the distribution center (see Note C to the
financial statements), the Company amended its revolving line of credit to
provide for borrowings of up to $18 million with an additional $1 million
overadvance facility. The amount of borrowings under the revolving line of
credit at any point in time is subject to the amount of eligible inventory and
accounts receivable. Effective twelve months after the date of acquisition of
the distribution center, the inventory advance rate of 60% is to be reduced by
one percent per month until the advance rate is reduced to 50%. The borrowings,
at the option of the Company, bear interest at the prime rate plus .5% or the
London Interbank Offered Rates (LIBOR) plus 2.75%. The Company elected the LIBOR
plus 2.75% option (8.38% as of December 31, 1998). The revolving line of credit
matures September 30, 2000. In addition with the increased borrowing capacity,
the loan covenants under the revolving line of credit were modified. The Company
is required to maintain, at a minimum, a current ratio of 2 to 1, a ratio of
liabilities to tangible net worth not to exceed 3.3 to 1, and a times interest
earned multiple of 1.25 or greater. The Company is also required to achieve a
minimum tangible net worth of $8,759,000 measured as of September 30, 1999 and
as of December 31, 1999 and each subsequent year the minimum tangible net worth
is increased by $500,000. At December 31, 1998, the Company was in compliance
with all such loan covenants. The overadvance facility is available for the
first six months after the distribution center acquisition and is reduced for
the next three months to $750,000 and the last three months to $250,000. The
overadvance facility expires September 27, 1999 and bears interest at the prime
rate plus 2%. At December 31, 1998, the Company had approximately $325,000
available under these lines.

Management believes that the cash expected to be provided by operating
activities, existing cash, existing bank credit facilities and trade credit will
be sufficient to fund both the short and long-term capital and liquidity needs
of the Company for the foreseeable future.

Management's Discussion and Analysis of Financial Condition and Results of
Operations contains statements regarding matters that are not historical facts
(including statements as to beliefs or expectations of the Company) which are
forward-looking statements. Because such forward-looking statements include
risks and uncertainties, the Company's actual results could differ materially
from those discussed herein.

INFLATION AND SEASONALITY

The Company does not believe its operations are materially affected by
inflation. The Company has been successful, in many cases, in reducing the
effects of merchandise cost increases principally by taking advantage of vendor
incentive programs, economies of scale resulting from increased volume of
purchases and selective forward buying.

Although store sales have historically been somewhat higher in the first quarter
(January through March), the Company does not consider its business to be
materially affected by seasonality.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not have any market risk sensitive financial instruments.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





                                      15
<PAGE>   16



                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)



                                      INDEX


<TABLE>
<CAPTION>
                                                                                                   Page
                                                                                                  ------
<S>                                                                                                <C>

Report of Independent Certified Public Accountants                                                  17

Financial Statements

         Balance Sheets                                                                             18

         Statements of Operations                                                                   19

         Statement of Stockholders' Equity                                                          20

         Statements of Cash Flows                                                                   21

         Notes to Financial Statements                                                              22

Report of Independent Certified Public Accountants on Schedule                                      35

Schedule II - Valuation and Qualifying Accounts                                                     36 

</TABLE>



                                       16

<PAGE>   17


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors and Stockholders
The Parts Source, Inc.
(d/b/a Ace Auto Parts)

We have audited the accompanying balance sheets of The Parts Source, Inc. (d/b/a
Ace Auto Parts) as of December 31, 1998 and 1997 and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 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 financial position of The Parts Source, Inc. (d/b/a
Ace Auto Parts) as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.


                                          GRANT THORNTON LLP


Tampa, Florida
February 26, 1999





                                       17

<PAGE>   18



                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)

                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                                 December 31,
                                                                                        ------------------------------
                                                                                            1998               1997
                                                                                        -----------        -----------
<S>                                                                                         <C>               <C>
                                 ASSETS

CURRENT ASSETS
  Cash                                                                                 $     32,835       $    227,564
  Accounts receivable
    Trade, net of allowance for doubtful accounts of $455,000 and $178,000,
      respectively                                                                        3,859,851          2,774,975
    Other - primarily suppliers                                                           2,383,297          1,203,292
  Inventories                                                                            22,271,470         16,488,120
  Refundable income taxes                                                                        --            130,812
  Prepaid expenses                                                                          215,371            124,010
  Deferred tax asset                                                                        295,900            190,700
                                                                                       ------------       ------------
          Total current assets                                                           29,058,724         21,139,473

PROPERTY AND EQUIPMENT, NET                                                               3,445,981          3,559,541

OTHER ASSETS
  Excess of cost over net assets acquired, net                                            1,176,135          1,280,639
  Non-compete agreement, net                                                                 99,175            151,587
  Other                                                                                     414,768            121,650
                                                                                       ------------       ------------
                                                                                       $ 34,194,783       $ 26,252,890
                                                                                       ============       ============

                          LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Current portion of
    Long-term obligations                                                              $     56,736       $     50,754
    Notes payable, related parties                                                           19,342            144,723
  Accounts payable - trade                                                                7,092,055          4,926,079
  Accrued liabilities                                                                       908,700            879,608
                                                                                       ------------       ------------
          Total current liabilities                                                       8,076,833          6,001,164

LONG-TERM OBLIGATIONS, less current portion                                              16,708,160         10,397,131
NOTES PAYABLE, RELATED PARTIES, less current portion                                             --             25,494
DEFERRED INCOME TAXES                                                                        62,500            138,200

COMMITMENTS AND CONTINGENCIES                                                                    --                 --

STOCKHOLDERS' EQUITY
  Preferred stock, $.001 par value, 2,000,000 shares authorized, no shares issued         
    and outstanding                                                                              --                 --
  Common stock, $.001 par value, 10,000,000 shares authorized, 3,412,273 shares
    issued and outstanding                                                                    3,412              3,412
  Additional paid-in capital                                                              9,825,158          9,825,158
  Accumulated deficit                                                                      (481,280)          (137,669)
                                                                                       ------------       ------------
                                                                                          9,347,290          9,690,901
                                                                                       ------------       ------------
                                                                                       $ 34,194,783       $ 26,252,890
                                                                                       ============       ============
</TABLE>

        The accompanying notes are an integral part of these statements.




                                       18

<PAGE>   19



                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                    -------------------------------------------------
                                                                        1998               1997               1996
                                                                    -----------        -----------        -----------
<S>                                                                 <C>                <C>                <C>
Net sales                                                           $46,050,132        $40,052,866        $26,755,921
Cost of goods sold                                                   29,212,547         25,935,829         16,998,364
                                                                    -----------        -----------        -----------

     Gross profit                                                    16,837,585         14,117,037          9,757,557

Operating, selling, general and administrative expenses              16,367,672         13,919,615          9,116,801
                                                                    -----------        -----------        -----------

     Operating income                                                   469,913            197,422            640,756
                                                                    -----------        -----------        -----------

Other income (expense)
  Interest expense                                                   (1,008,987)          (647,973)          (329,517)
  Other, net                                                             29,063             24,861             45,824
                                                                    -----------        -----------        -----------
                                                                       (979,924)          (623,112)          (283,693)
                                                                    -----------        -----------        -----------

     Earnings (loss) before income taxes                               (510,011)          (425,690)           357,063
Provision (benefit) for income taxes                                   (166,400)          (166,300)           117,600
                                                                    -----------        -----------        -----------

     Net earnings (loss)                                            $  (343,611)       $  (259,390)       $   239,463
                                                                    ===========        ===========        ===========

     Historical net earnings (loss) per common share - basic        $      (.10)       $      (.08)       $       .08
                                                                    ===========        ===========        ===========
     Historical net earnings (loss) per common share - diluted      $      (.10)       $      (.08)       $       .08
                                                                    ===========        ===========        ===========

     Weighted average common shares outstanding:
          Basic                                                       3,412,273          3,412,273          2,907,452
                                                                    ===========        ===========        ===========
          Diluted                                                     3,412,273          3,412,273          2,950,717
                                                                    ===========        ===========        ===========

Pro forma information
  Historical earnings before income taxes                                                                 $   357,063
  Provision for income taxes                                                                                  131,900
                                                                                                          -----------
  Pro forma net earnings                                                                                  $   225,163
                                                                                                          ===========
  Pro forma net earnings per common share - basic                                                         $       .08
                                                                                                          ===========
  Pro forma net earnings per common share - diluted                                                       $       .08
                                                                                                          ===========
</TABLE>

        The accompanying notes are an integral part of these statements.



                                       19
<PAGE>   20



                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)

                        STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                             Common Stock           Additional
                                         ---------------------        Paid-in       Accumulated
                                          Shares        Amount        Capital         Deficit           Total
                                          ------        ------      -----------       -------        -----------
<S>                                      <C>            <C>         <C>              <C>             <C>
Balance at January 1, 1996, as
  previously reported                    2,000,000      $2,000      $       --       $(668,894)      $ (666,894)

  Restatement for change in
    inventory pricing method from
    LIFO to FIFO (Note D)                       --          --              --         (61,973)         (61,973)
                                         ---------      ------      ----------       ---------       ----------
Balance at January 1, 1996, as
  restated                               2,000,000       2,000              --        (730,867)        (728,867)

  Initial public offering, net of
    offering costs of $305,000           1,185,000       1,185       7,941,670              --        7,942,855

  Recapitalization for change in
    income tax status,
    S Corporation to C Corporation              --          --        (613,125)        613,125               --

  Sale of restricted stock                 227,273         227       2,499,773              --        2,500,000

  Net earnings                                  --          --              --         239,463          239,463
                                         ---------      ------      ----------       ---------       ----------
Balance at December 31, 1996             3,412,273       3,412       9,828,318         121,721        9,953,451

  Registration fees related to sale
    of restricted stock                         --          --          (3,160)             --           (3,160)

  Net loss                                      --          --              --        (259,390)        (259,390)
                                         ---------      ------      ----------       ---------       ----------
Balance at December 31, 1997             3,412,273       3,412       9,825,158        (137,669)       9,690,901

  Net loss                                      --          --              --        (343,611)        (343,611)
                                         ---------      ------      ----------       ---------       ----------

Balance at December 31, 1998             3,412,273      $3,412      $9,825,158       $(481,280)      $9,347,290
                                         =========      ======      ==========       =========       ==========
</TABLE>

        The accompanying notes are an integral part of these statements.



                                       20
<PAGE>   21


                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)

                          STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                             Year Ended December 31,
                                                                                 ------------------------------------------------
                                                                                     1998              1997               1996
                                                                                 -----------       -----------       ------------
<S>                                                                              <C>               <C>               <C>
Cash flows from operating activities:
  Net earnings (loss)                                                            $  (343,611)      $  (259,390)      $   239,463
  Adjustments to reconcile net earnings (loss) to net cash provided by
    (used in) operating activities:
      Depreciation and amortization                                                  805,001           652,134           315,113
      Deferred income taxes, net                                                    (180,900)         (126,900)           74,400
      Other                                                                          (20,406)           (9,036)           (9,275)
      Changes in assets and liabilities, net of acquisitions of businesses:
        Accounts receivable                                                       (2,264,881)       (1,129,715)         (991,477)
        Inventories                                                                  114,400        (3,189,358)       (1,955,275)
        Refundable income taxes                                                      130,812           (84,412)          (46,400)
        Prepaid expenses                                                             (91,361)          (56,723)           (9,686)
        Other assets                                                                 (58,118)          (54,995)           81,299
        Accounts payable                                                           2,165,976         2,265,016        (3,051,487)
        Accrued liabilities                                                           55,489          (101,317)            6,843
        Other liabilities                                                                 --                --           (46,667)
                                                                                 -----------       -----------       -----------
               Net cash provided by (used in) operating activities                   312,401        (2,094,696)       (5,393,149)

Cash flows from investing activities:
  Cash paid for acquisitions of businesses                                        (6,183,677)         (700,507)       (3,831,732)
  Payment for purchase of non-compete agreement                                           --           (85,000)          (85,000)
  Purchases of property and equipment                                               (495,626)       (1,275,853)       (1,079,314)
  Proceeds from disposition of property and equipment                                112,726            59,088            31,328
                                                                                 -----------       -----------       -----------
               Net cash used in investing activities                              (6,566,577)       (2,002,272)       (4,964,718)

Cash flows from financing activities:
  Net borrowings under line of credit agreement                                    6,294,765         4,492,487         5,753,171
  Repayments of long-term obligations                                               (235,318)         (185,303)       (5,977,000)
  Net proceeds from initial public offering                                               --                --         7,942,855
  Net proceeds from sale of restricted stock                                              --                --         2,500,000
  Other                                                                                   --            (3,160)          (32,677)
                                                                                 -----------       -----------       -----------
               Net cash provided by financing activities                           6,059,447         4,304,024        10,186,349

Increase (decrease) in cash                                                         (194,729)          207,056          (171,518)
Cash, beginning of year                                                              227,564            20,508           192,026
                                                                                 -----------       -----------       -----------
Cash, end of year                                                                $    32,835       $   227,564       $    20,508
                                                                                 ===========       ===========       ===========

Supplemental disclosure of cash flow information
  Cash paid for interest                                                         $   920,503       $   647,348       $   332,308
                                                                                 ===========       ===========       ===========
  Cash paid for income taxes                                                     $        --       $    45,000       $    89,600
                                                                                 ===========       ===========       ===========

Supplemental schedule of non-cash investing activities
  Acquisitions of businesses
    Fair value of assets acquired                                                $ 6,163,160       $   599,227       $  4,511,306
    Cash paid                                                                     (6,183,677)         (700,507)        (3,831,732)
    Payment of acquisition indebtedness                                              256,168           416,950                 --
    Acquisition indebtedness                                                              --          (256,168)          (416,950)
                                                                                 -----------       -----------       ------------
    Liabilities assumed                                                          $   235,651       $    59,502       $    262,624
                                                                                 ===========       ===========       ============
</TABLE>

        The accompanying notes are an integral part of these statements.



                                       21
<PAGE>   22


                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996


NOTE A - DESCRIPTION OF BUSINESS

Business

The Parts Source, Inc. (d/b/a Ace Auto Parts) (the Company) is a specialty
wholesaler and retailer of automotive replacement parts, maintenance items and
accessories for the professional installers and "do it yourself" markets. In
September 1998, the Company acquired certain assets of an auto parts
distribution center (see Note C). Through this distribution center, the Company
purchases auto parts directly from the manufacturers, and in turn supplies auto
parts to its stores and other independent stores. As of December 31, 1998, the
Company operated 41 stores and a distribution center, all of which are located
in the State of Florida.


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Cash Equivalents

The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. There were no cash equivalents for
any of the periods presented.

Inventories

Inventories, which consist of automotive hard parts, maintenance items,
accessories and tools, are stated at the lower of cost or market with cost
determined using the first-in, first-out (FIFO) method (see Note D).

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided for using the
straight-line method over their estimated service lives. Leasehold improvements
are amortized using the straight-line method over the respective leases or the
service lives of the improvements, whichever is shorter. Accelerated methods are
used for tax purposes.

Excess of Cost Over Net Assets Acquired

The excess of cost over net assets acquired is amortized using the straight-line
method over periods of ten and fifteen years. Accumulated amortization totaled
approximately $249,000 and $145,000 at December 31, 1998 and 1997, respectively.

Non-Compete Agreement

Costs incurred in connection with a non-compete agreement are amortized over an
estimated life of five years on a straight-line basis. Accumulated amortization
totaled approximately $71,000 and $18,000 at December 31, 1998 and 1997,
respectively.



                                       22
<PAGE>   23

                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Advertising and Promotional Expenses

The Company expenses its share of advertising and promotional expenses as such
costs are incurred. The portion of advertising and promotional expenditures that
are recoverable from vendors and other cooperative programs are recorded as a
receivable. The Company does not defer any portion of its share of advertising
costs.

Vendor Incentives

The Company receives from certain of its suppliers, discounts and allowances
designated for advertising, promotional and discounting activities. Such
discounts and allowances are recorded to operating, selling, general and
administrative expenses or cost of goods sold as appropriate, when earned.

Accounting for Impairment of Long-Lived Assets

The Company reviews long-lived assets and intangibles held and used for
potential impairment whenever events or changes in circumstances indicate that
the carrying amounts of the asset may not be recoverable. Impairment is
recognized when the carrying amounts of such assets cannot be recovered by the
net cash flows they will generate. No impairment exists for all periods
presented.

Income Taxes

The Company utilizes the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial reporting and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect when
these differences reverse. Deferred tax expense is the result of changes in
deferred tax assets and liabilities.

Prior to the completion of its initial public offering on April 8, 1996, the
Company was taxed as a S Corporation. As such, the Company's taxable income
through this date was included in the income tax returns of its stockholders for
federal and state income tax purposes. Upon completion of its initial public
offering, the Company terminated its S Corporation election and became subject
to federal and state income taxes as a C Corporation. As a result, on April 8,
1996, the Company recorded a net deferred tax liability of $44,400, which
represents the tax effect of the cumulative temporary differences existing on
this date with a corresponding charge to the provision for income taxes.

Revenue Recognition

Revenue within wholesale operations is recognized at the time merchandise is
shipped from the Company's distribution centers. Retail and wholesale stores
revenues are recognized at the time of sale.

Concentration of Credit Risk

The Company grants credit to customers who meet pre-established credit
requirements. The Company does not require collateral when trade credit is
granted to customers. Credit losses are provided for in the financial statements
and have been consistently within management's expectations.

Earnings Per Share

Basic earnings per share (EPS) is computed by dividing net earnings (loss) by
the weighted average common shares outstanding. Diluted EPS reflects the
potential dilution from the exercise of stock options and convertible
securities.



                                       23
<PAGE>   24

                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Basic loss per share is the same as the diluted loss per share since the Company
had net losses for the years ended December 31, 1998 and 1997. Outstanding stock
options in 1998 and 1997 have not been considered in these computations since
the effect of their inclusion are anti-dilutive. Basic and dilutive EPS were the
same for 1996 since the impact of the dilutive stock options was not
significant. The following table reconciles the numerator and denominator of the
basic and dilutive EPS computation:


<TABLE>
<CAPTION>
                                                              1998             1997            1996
                                                          ----------       ----------       ----------
         <S>                                              <C>              <C>              <C>
         Numerator:
           Historical:
             Net earnings (loss)                          $ (343,611)      $ (259,390)      $  239,463
                                                          ==========       ==========       ==========
           ProForma:
             Net earnings                                         --               --       $  255,163
                                                          ==========       ==========       ==========
         Denominator:
           Weighted average number of common
             shares used in basic EPS                      3,412,273        3,412,273        2,907,452
           Effect of dilutive stock options                       --               --           43,265
                                                          ----------       ----------       ----------
           Weighted number of common shares and
             dilutive potential common stock used in
             diluted EPS                                   3,412,273        3,412,273        2,950,717
                                                          ==========       ==========       ==========
</TABLE>

Stock Based Compensation

The Company has adopted the disclosure provisions only of Statement of Financial
Accounting Standards (SFAS) no. 123, Accounting for Stock Based Compensation,
and will continue to recognize stock-based compensation using the intrinsic
value method of accounting prescribed by APB opinion No. 25, Accounting for
Stock Issued to Employees. Under this method, compensation is recognized at the
date of grant by the amount fair value of the underlying stock exceeds the
exercise price.


NOTE C - ACQUISITIONS

In October 1996, the Company purchased substantially all of the assets and
assumed certain liabilities of six auto parts stores from APS, Inc. The
acquisition was accounted for using the purchase method and, accordingly, the
acquired business operations have been included herein since the date of
acquisition. Of the approximate $2.9 million in total costs involved in the
acquisition, approximately $2.5 million was paid in cash from the proceeds
received from the sale of 227,273 shares of unregistered stock to APS, Inc. at
$11.00 per share (see Note H), $400,000 was funded through borrowings from the
Company's line of credit, with the remainder in the form of assumption of
specified liabilities. The Company allocated approximately $1.9 million of the
purchase price to tangible assets. Approximately $1.2 million in goodwill was
recorded related to this acquisition.



                                       24
<PAGE>   25

                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

NOTE C - ACQUISITIONS - Continued

In November 1996, the Company purchased certain assets and assumed certain
liabilities of five auto parts stores from Central Motor Supply, Inc. The
acquisition was accounted for using the purchase method and, accordingly, the
acquired business operations have been included herein since the date of
acquisition. Of the approximate $931,950 in total costs involved in the
acquisition, approximately $838,000 was funded through borrowings from the
Company's line of credit, with the remainder in the form of assumption of
specified liabilities. The Company allocated approximately $832,000 to tangible
assets. Approximately $100,000 in goodwill was recorded related to this
acquisition. In addition, the Company paid approximately $170,000 for a
non-compete agreement with the key owner of the acquired business.

Also in 1996, the Company purchased certain net assets of two auto parts stores
in separate transactions. Total consideration paid amounted to approximately
$635,000 of which the purchase price was allocated to the net tangible assets
acquired.

During 1997, the Company acquired substantially all the assets of three auto
parts stores. These acquisitions were accounted for using the purchase method
and, accordingly, the acquired business operations have been included herein
since their dates of acquisition. The total purchase price was approximately
$479,000 and liabilities of approximately $59,000 were assumed in exchange for
approximately $515,000 in tangible assets. Approximately $23,000 in goodwill
relating to these acquisitions was recorded. Had the acquisitions occurred at
the beginning of 1997, the results would not have been materially different from
those reported.

In September 1998, the Company acquired certain assets, consisting of
inventories and fixed assets, of an auto parts distribution center (hereafter
referred to as the Distribution Center) operated by APS, Inc., located in Ocala,
Florida. The Distribution Center was a separate business unit of APS Holding
Corporation. The Company intends to continue the operations of this automotive
distribution center for its auto parts business and for other auto parts
suppliers in the State of Florida.

The Company has accounted for the acquisition as a purchase and, accordingly,
the purchase price was allocated to the assets and liabilities based upon
estimated fair value as of the date of the acquisition. The results of
operations of the Distribution Center are included in the Company's Statements
of Operations from the date of the acquisition. The total purchase price of the
warehouse operation was approximately $5.3 million with an additional amount of
$600,000 paid for inventory that was in-transit at the time of closing. The
purchase price was funded primarily through the Company's line of credit (see
Note F). Of the approximate $6.1 million total costs it incurred to complete the
acquisition, the Company allocated approximately $6.2 million to tangible assets
and incurred $235,651 in assumed liabilities. In this transaction, the sum of
the fair values assigned to the identifiable assets acquired less liabilities
assumed exceeded the purchase price. Such excess of $811,015 was allocated to
non-current assets.

The following unaudited pro forma financial information presents the combined
results of operations as if the acquisitions had occurred at the beginning of
all the periods presented. The unaudited pro forma financial information is not
necessarily indicative of the results that would have actually occurred had the
purchase been made on January 1, 1997 or the future results of operations.


<TABLE>
<CAPTION>
                                                                             1998              1997
                                                                         -----------       -----------
         <S>                                                             <C>               <C>
         Net sales                                                       $57,960,920       $57,037,419
         Net earnings (loss)                                             $  (832,227)      $   150,169
         Earnings (loss) per common share, basic                         $      (.24)      $       .04
         Earnings (loss) per common share, diluted                       $      (.24)      $       .04
</TABLE>



                                       25
<PAGE>   26

                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

NOTE D - INVENTORIES

Effective January 1, 1997, the Company elected to change its method of inventory
valuation from the LIFO method to the FIFO method. Under the current economic
environment of low inflation, the Company believes that the FIFO method will
result in a better measurement of operating results and is an accounting method
used in the Company's industry.

The change in the method of valuing inventories has been applied retroactively
by restating the 1996 financial statements. The effect of this restatement was
to reduce retained earnings as of January 1, 1996 by $61,973. The following
summarizes the effect of changing the accounting method for inventories on 1996
net earnings and earnings per share:


<TABLE>
<CAPTION>
                                                                                         1996
                                                                                       --------
         <S>                                                                           <C>
         Net earnings, as previously reported                                          $177,490
         Effect of change in accounting method for inventories, net of income tax        61,973
                                                                                       --------
         Net earnings, as restated                                                     $239,463
                                                                                       ========

         Pro forma net earnings per common share, as previously reported               $    .07
         Effect of change in accounting method for inventories, net of income tax           .01
                                                                                       --------
         Pro forma net earnings per share, as restated                                 $    .08
                                                                                       ========
</TABLE>


NOTE E - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                            Life       ------------------------
                                                                           (Years)        1998          1997
                                                                           -------     ----------    ----------
           <S>                                                             <C>         <C>           <C>
           Land                                                                        $  357,142    $  354,842
           Buildings and leasehold improvements                             40            442,331       415,101
           Furniture and fixtures, and signs                               10-15        1,063,695     1,030,325
           Computer equipment                                                7          1,373,949     1,151,224
           Transportation equipment                                         5-7         1,846,307     1,719,753
                                                                                       ----------    ----------
                                                                                        5,083,424     4,671,245
           Less:  accumulated depreciation and amortization                             1,637,443     1,111,704
                                                                                       ----------    ----------
                                                                                       $3,445,981    $3,559,541
                                                                                       ==========    ==========
</TABLE>

Depreciation and amortization expense was $623,555, $524,279 and $305,503 in
1998, 1997 and 1996, respectively.


NOTE F - LONG-TERM OBLIGATIONS

Long-term obligations consist of the following:

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                    ----------------------------
                                                                                       1998             1997
                                                                                    -----------      -----------
         <S>                                                                        <C>              <C>
         Revolving line of credit, interest at LIBOR plus 2.75% and 2%,
         respectively; due September 30, 2000; collateralized by substantially
         all the assets of the Company; personally guaranteed
         by the two majority stockholders of the Company                            $16,330,796      $10,036,032

         Note payable, requiring monthly installments of principal and
         interest of $2,192, interest at a fixed rate of 10%; due November
         2000 with a final installment of $168,078 at maturity; personally
         guaranteed by the two majority stockholders of the Company                     182,772          190,382
</TABLE>



                                       26
<PAGE>   27

                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

NOTE F - LONG-TERM OBLIGATIONS - Continued

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                     ----------------------------
                                                                                         1998             1997
                                                                                     -----------      -----------
         <S>                                                                         <C>              <C>
         Note  payable, requiring monthly installments of principal and
         interest of $1,999, interest at a fixed rate of 7%; due December 2007           159,824          172,150

         Various installment notes, requiring monthly installments of
         approximately $5,000, including interest at various rates;
         collateralized by certain equipment and vehicles                                 91,504           49,321
                                                                                     -----------      -----------
                                                                                      16,764,896       10,447,885
         Less current maturities                                                          56,736           50,754
                                                                                     -----------      -----------
                                                                                     $16,708,160      $10,397,131
                                                                                     ===========      ===========
</TABLE>

In connection with the acquisition of the Distribution Center (see Note C), the
Company amended its revolving line of credit to provide for borrowings of up to
$18 million with an additional $1 million overadvance facility. The amount of
borrowings under the revolving line of credit at any point in time is subject to
the amount of eligible inventory and accounts receivable. Effective twelve
months after the date of acquisition of the Distribution Center, the inventory
advance rate of 60% is to be reduced by one percent per month until the advance
rate is reduced to 50%. The borrowings, at the option of the Company, bear
interest at the prime rate plus .5% or the London Interbank Offered Rates
(LIBOR) plus 2.75%. The Company elected the LIBOR plus 2.75% option (8.38% as of
December 31, 1998). In addition to the increased borrowing capacity, the loan
covenants under the revolving line of credit were modified. The Company is
required to maintain, at a minimum, a current ratio of 2 to 1, a ratio of
liabilities to tangible net worth not to exceed 3.3 to 1, and a times interest
earned multiple of 1.25 or greater. The Company is also required to achieve a
minimum tangible net worth of $8,759,000 measured as of September 30, 1999 and
as of December 31, 1999 and each subsequent year the minimum tangible net worth
is increased by $500,000. At December 31, 1998, the Company was in compliance
with all such loan covenants. The Company had approximately $325,000 available
under these lines of credit at December 31, 1998.

The overadvance facility is available for the first six months after the
Distribution Center acquisition and is reduced for the next three months to
$750,000 and the last three months to $250,000. The overadvance facility expires
September 27, 1999 and bears interest at the prime rate plus 2%.

Aggregate maturities of long-term obligations are as follows for the years ended
December 31:

<TABLE>
         <S>                                                                     <C>
               1999                                                              $    56,736
               2000                                                               16,541,060
               2001                                                                   39,065
               2002                                                                   22,962
               2003                                                                   21,603
         Thereafter                                                                   83,470
                                                                                 -----------
                                                                                 $16,764,896
                                                                                 ===========
</TABLE>

NOTE G - NOTES PAYABLE, RELATED PARTIES

The notes payable to the two majority stockholders are payable upon demand but,
to the extent the related stockholders do not call for repayment, the terms of
the note require monthly installments of $3,000, including interest at 9%. In
addition, the Company assumed an unsecured promissory note in the amount of
$80,000, payable to the father of the two majority stockholders. The note is
payable on demand and bears interest at 12%. This note was paid in its entirety
in 1998.

Interest expense on these notes aggregated approximately $8,000, $21,000 and
$37,000 in 1998, 1997 and 1996, respectively.



                                       27
<PAGE>   28

                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

NOTE H - STOCKHOLDERS' EQUITY

On April 8, 1996, the Company completed an initial public offering of 1,185,000
shares of common stock, par value of $.001 per share, for $8.00 per share. The
offering generated net proceeds to the Company of $7,942,855 after deducting
offering expenses of $304,745. The proceeds, net of offering costs, were
credited to additional paid-in capital in 1996. A portion of such proceeds was
used to reduce approximately $5,600,000 of long-term indebtedness. The remaining
proceeds were used to expand operations and for general working capital
purposes.

In September 1996, the Company agreed to pay down its accounts payable balance
with its major supplier, APS, by $4 million. As a condition of this payment,
Autoparts Finance Company, Inc., a subsidiary of APS, agreed to purchase 227,273
shares of unregistered common stock of the Company for $11.00 per share (the
fair market value at that date).

The Board of Directors is authorized, without further stockholder action, to
divide any or all shares of the authorized preferred stock into series and to
fix and determine the designation, preferences and relative, participating,
option or other special rights and qualifications, limitations, or restrictions
thereon, of any series so established, including voting powers, dividend rights,
liquidation preferences, redemption rights and conversion privileges. As of
December 31, 1998, the Board had not authorized any issuances of series of
preferred stock and there are no plans, agreements or understandings for the
authorization or issuance of any shares of preferred stock.


NOTE I - COMMITMENTS AND CONTINGENCIES

Purchase Commitments

In 1997, the Company entered into a product purchase agreement with a parts
manufacturer. Under the terms of this agreement, the Company agreed, for a
period of two years commencing in December 1997 or when purchases total $13.5
million, whichever occurs first, to purchase merchandise directly from this
manufacturer. Purchases under this agreement aggregated approximately $2,338,152
in 1998. If the Company fails to comply with this agreement, it will be liable
to the manufacturer for a $520,000 penalty.

In February 1998, APS, along with its parent and affiliated companies, filed for
protection under Chapter 11 of the United States Bankruptcy Code ("Chapter 11").
In November 1998, the Parent Company of APS filed a Form 8-K with the Securities
and Exchange Commission reporting that the net assets of the company would be
liquidated and the operations ceased. Early in 1998, the Company terminated its
purchase agreement with APS and no longer purchases any product from them. With
the acquisition of the warehouse, the Company purchases directly from the parts
manufacturers. The Company has identified and continues to discuss supply and
distributor relationships directly with specific manufacturers.

In 1998, the Company entered into a product purchase agreement with another
parts manufacturer. Under the terms of this agreement, the Company agreed, for a
period of three years commencing in November 1998, to purchase specific
merchandise, as defined, exclusively from this manufacturer.

Leases

The Company leases certain stores from unrelated parties under non-cancelable
operating leases. Such leases expire during the years 1999 to 2003. In addition,
the Company leases certain stores, including its corporate offices, from
entities affiliated through common ownership. Such leases expire in the year
2000. Rent expense under leases with entities affiliated through common
ownership aggregated $535,428, $513,830 and $502,818 in 1998, 1997 and 1996,
respectively.


                                       28
<PAGE>   29

                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

NOTE I - COMMITMENTS AND CONTINGENCIES - Continued

Future minimum lease payments under non-cancelable operating leases with initial
or remaining terms of one year or more, including annual commitments of $535,428
in 1999 through 2000 in connection with the related party leases, are as
follows:

<TABLE>
         <S>                                     <C>
         1999                                    $1,467,655
         2000                                     1,291,337
         2001                                       635,073
         2002                                       442,266
         2003                                       256,838
                                                 ----------
                                                 $4,093,169
                                                 ==========  
</TABLE>

Rent expense for these real estate operating leases with unrelated parties was
$893,179, $799,771 and $377,262 in 1998, 1997 and 1996, respectively.

Year 2000

The Year 2000 issue relates to limitations in computer systems and applications
that may prevent proper recognition of the Year 2000. The potential effect of
the Year 2000 issue on the Company and its business partners will not be fully
determinable until the Year 2000 and thereafter. If Year 2000 modifications are
not properly completed either by the Company or entities with which the Company
conducts business, the Company's revenues and financial condition could be
adversely impacted.

Legal Proceedings

On March 20, 1997, Automotive One Parts Stores, Inc., a Florida Corporation,
filed an action in the Circuit Court in and for Orange County, Florida, against
the Company and certain of its employees. The action follows the termination in
October 1996 of negotiations for the sale of the assets of Automotive One Parts
Stores, Inc. to the Company. The Plaintiff alleges that the Company (i)
interfered with its business relations by inducing certain employees to
terminate their employment with the Plaintiff and become employees of the
Company and (ii) misused confidential information obtained during the
negotiations for the sale of the assets. The Plaintiff is seeking damages in
excess of $400,000. There has been no activity in this case since May 1998. The
Company denies the allegations and intends to vigorously defend this action. At
this time, management believes the resolution of this matter will not have a
material effect on the Company's financial position or results of operations.


NOTE J - INCOME TAXES

As discussed in Note B, the Company was taxed as an S Corporation prior to the
completion of its initial public offering in April 1996 and was not subject to
federal and state income taxes prior to this date.



                                       29
<PAGE>   30

                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

NOTE J - INCOME TAXES - Continued

The provision (benefit) for income taxes is summarized as follows:

<TABLE>
<CAPTION>
                                         Year Ended December 31,
                                 ----------------------------------------
                                   1998            1997           1996
                                 ---------       ---------       --------
         <S>                     <C>             <C>             <C>
         Current:
           Federal               $      --       $ (79,000)      $ 36,000
           State                        --          (9,800)         7,200
                                 ---------       ---------       --------
                                        --         (88,800)        43,200
                                 ---------       ---------       --------
   
         Deferred:
           Federal                (142,100)        (66,200)        63,500
           State                   (24,300)        (11,300)        10,900
                                 ---------       ---------       --------
                                  (166,400)        (77,500)        74,400
                                 ---------       ---------       --------
                                 $(166,400)      $(166,300)      $117,600
                                 =========       =========       ========
</TABLE>

Reconciliation of the federal statutory income tax rate of 34% to the effective
income tax rate is as follows:

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                                       ---------------------------------
                                                                        1998          1997          1996
                                                                       -----         -----         -----
         <S>                                                           <C>           <C>            <C>
         Federal income taxes, at statutory rates                      (34.0)%       (34.0)%        34.0%
         State income taxes, net of federal benefit                     (3.6)         (3.6)          3.6
         Benefit of graduated tax rates                                   --            --          (1.7)
         Tax effect of net earnings attributable to S Corporation         --            --         (11.7)
         Cumulative effect of change in tax status from an
           S Corporation to a C Corporation                               --            --           7.8
         Non-deductible expenses and other                               5.0          (1.5)           .9
                                                                       -----         -----         -----
                                                                       (32.6)%       (39.1)%        32.9%
                                                                       =====         =====         =====
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the corresponding amounts used for income tax purposes. Significant
components of deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                   December 31,
                                                            -------------------------
                                                               1998            1997
                                                            ---------       ---------
         <S>                                                <C>             <C>
         Deferred tax assets:
           Allowance for doubtful accounts                  $ 171,200       $  66,900
           Excess of cost over net assets acquired             11,800          10,400
           Inventory capitalization                           126,900          93,300
           Net operating loss carryforwards                    36,400          92,300
           Non-deductible accruals and reserves                46,000          32,800
                                                            ---------       ---------
                                                              392,300         295,700
         Deferred tax liabilities:
           basis differences of property and equipment       (158,900)       (243,200)
                                                            ---------       ---------
         Net deferred tax assets                            $ 233,400       $  52,500
                                                            =========       =========
</TABLE>

At December 31, 1998, the Company had federal and state net operating loss
carryforwards of approximately $95,000 and $295,000, respectively, that begin to
expire in the year 2012. At this time, management believes that the net deferred
tax assets will be utilized, therefore no valuation allowance has been recorded.



                                       30
<PAGE>   31

                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

NOTE K - PRO FORMA INFORMATION

Pro forma income taxes

The following information reflects the pro forma effect on income taxes as if
the Company's earnings had been subject to federal and state income taxes as a C
Corporation for the year ended December 31, 1996:

<TABLE>
         <S>                                           <C>
         Current:
           Federal                                     $ 72,200
           State                                         13,300
                                                       --------
                                                         85,500
                                                       --------
         Deferred:
           Federal                                       39,600
           State                                          6,800
                                                       --------
                                                         46,400
                                                       --------
                                                       $131,900
                                                       ========
</TABLE>

Reconciliation of the federal statutory income tax rate of 34% to the effective
income tax rate for the year ended December 31, 1996 is as follows:

<TABLE>
         <S>                                               <C>
         Federal income taxes at statutory rates           34.0%
         State income taxes, net of federal benefit         3.6
         Other                                              (.7)
                                                           ----
                                                           36.9%
                                                           ====
</TABLE>

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities consisted of the following at
December 31, 1996:

<TABLE>
         <S>                                                     <C>
         Deferred tax assets:
           Allowance for doubtful accounts                       $  43,700
           Excess of cost over net assets acquired                  13,800
           Non-deductible accruals and reserves                     26,000
                                                                 ---------
                                                                    83,500
         Deferred tax liabilities:
           Depreciation                                           (157,900)
                                                                 ---------
         Net deferred tax liabilities                            $ (74,400)
                                                                 =========
</TABLE>


NOTE L - EMPLOYEE BENEFITS

401(k) Profit Sharing Plan

The Company has a 401(k) profit sharing plan (the Plan) for the benefit of its
employees. To be eligible to participate, an employee must be twenty-one years
of age and have at least one year of employment with the Company. Participants
may contribute pre-tax earnings up to the maximum allowable under the Internal
Revenue Code, with a provision for the Company to match up to 10% of participant
contributions. Participants' rights to Company-contributed benefits vest over
three to seven years of service, as defined in the Plan. Company contributions
are voluntary and at the discretion of the Board of Directors. No contributions
were made to the Plan in 1998, 1997 and 1996.



                                       31
<PAGE>   32

                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

NOTE L - EMPLOYEE BENEFITS - Continued

Incentive Stock Option Plan

The Board of Directors adopted a stock option plan under which incentive or
non-statutory stock options may be granted to directors, officers and key
employees. A total of 300,000 shares of Common Stock have been reserved for
issuance under the plan. The exercise price on options granted shall not be less
than the fair market value of the stock on the date of grant and will expire no
later than ten years from the date of grant. Options granted pursuant to the
plan become exercisable no sooner than six months from the date of grant. In the
case of a stockholder owning more than 10% of the outstanding stock of the
Company, the exercise price of an incentive option may not be less than 110% of
the fair market value of the stock on the date of grant, and such options will
expire no later than five years from the date of grant. Also, aggregate fair
market value of the stock with respect to which incentive stock options are
exercisable for the first time by any individual in any calendar year may not
exceed $100,000.

The exercise price of each option equals the market price of the Company's stock
on the date of grant. Accordingly, no compensation cost has been recognized for
the plan. Had compensation cost for the plan been determined based on the fair
value of the options at the grant dates, the Company's historical and pro forma
net earnings and historical and pro forma net earnings per common share would
have been reduced to the pro forma amounts indicated below:


<TABLE>
<CAPTION>
                                                                          1998          1997          1996
                                                                       ---------     ---------       --------
         <S>                                         <C>               <C>           <C>             <C>
         Historical net earnings                     As reported       $(343,611)    $(259,390)      $239,463
                                                     Pro forma         $(476,370)    $(419,366)      $154,730

         Historical earnings per common share-
           basic                                     As reported       $    (.10)    $    (.08)      $    .08
                                                     Pro forma         $    (.14)    $    (.12)      $    .05

         Historical earnings per common share-
           dilutive                                  As reported       $    (.10)    $    (.08)      $    .08
                                                     Pro forma         $      --     $      --       $    .05

         Pro forma net earnings                      As reported                                     $225,163
                                                     Pro forma                                       $145,481

         Pro forma earnings per common share-
           basic                                     As reported                                     $    .08
                                                     Pro forma                                       $    .05

         Pro forma earnings per common share-
           dilutive                                  As reported                                     $    .08
                                                     Pro forma                                       $    .05
</TABLE>

The fair value of each option grant is estimated on the date of grant using
Binomial options-pricing model with the following weighted average assumptions
used for grants in 1998, 1997 and 1996, respectively: no dividend yield,
expected volatility of 43, 41 and 33 percent, risk-free interest rate of 4.56,
5.80 and 6.07 percent and expected lives of 2, 2 and 3 years.


                                       32
<PAGE>   33

                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996

NOTE L - EMPLOYEE BENEFITS - Continued

A summary of the status of the Company's stock options as of December 31, 1998,
1997 and 1996, and changes during the years ending on those dates are as
follows:

<TABLE>
<CAPTION>
                                             December 31, 1998        December 31, 1997        December 31, 1996
                                           --------------------     ---------------------    ---------------------
                                                      Weighted-                 Weighted-                Weighted-
                                                       Average                   Average                  Average
                                                      Exercise                   Exercise                 Exercise
                                                        Price                     Price                    Price
                                                      ---------                 ---------                ---------
         <S>                              <C>         <C>           <C>         <C>           <C>        <C>
         Outstanding at
           beginning of year              293,000       $6.75        175,000      $ 8.96           --      $  --
         Granted                           19,000        3.00        226,000      $ 7.61      175,000      $8.96
         Cancelled                        (30,500)       4.19       (108,000)     $12.13           --      $  --
                                          -------                   --------                  -------
         Outstanding at end of year       281,500                    293,000      $ 6.75      175,000      $8.96
                                          =======                   ========                  =======
         Options exercisable at end
           of year                         50,000       $8.96         12,000      $10.00           --      $  --
                                          =======                   ========                  =======

         Weighted average fair
           value per share of
           options granted during 
           the year                                     $ .71                     $ 1.28                   $2.18
                                                        =====                     ======                   =====
</TABLE>

The following table summarizes information about common stock options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>
                                                                             Options Outstanding
                                                             ----------------------------------------------------
                                                                 Number               Weighted          Weighted
                                                             Outstanding at            Average           Average
                                                              December 31,            Remaining          Exercise
              Exercise Prices                                    1998              Contractual Life        Price
              ---------------                                --------------        ----------------     ---------
                                                                                      (in Years)
              <S>                                            <C>                   <C>                  <C>
                 $  3.00                                        115,500                 4.06             $  3.00
                    8.00                                         86,000                 2.25                8.00
                   10.25                                         50,000                 3.76               10.25
                   12.00                                         30,000                 2.90               12.00
</TABLE>


NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS

At December 31, 1998, the carrying amount of cash, accounts receivable, accounts
payable and accrued liabilities approximate fair value because of the short-term
maturities of these items.

The carrying amounts of current and long-term portions of notes payable and
long-term obligations approximate fair market value since the interest rates on
most of these instruments change with market interest rates.



                                       33
<PAGE>   34

                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)

                    NOTES TO FINANCIAL STATEMENTS (CONCLUDED)

                        December 31, 1998, 1997 and 1996

NOTE N - SIGNIFICANT CUSTOMER AND VENDOR

For the years ended December 31, 1998 and 1997, the Company had sales to a
customer that accounted for approximately 15% and 11% of net sales,
respectively. No customer accounted for more than 10% of the Company's net sales
in 1996.

Purchases from the Company's largest single supplier were 41%, 79% and 78% for
the years ended December 31, 1998, 1997 and 1996, respectively.


NOTE O - SUBSEQUENT EVENT

On February 16, 1999, the Company entered into an agreement with General Parts,
Inc., a privately owned company headquartered in Raleigh, North Carolina,
whereby General Parts, Inc. will acquire all of the outstanding shares of Common
Stock of the Company for $3.00 per share, subject to adjustments as set forth in
the merger agreement. Consummation of the agreement is subject to approval by
the Company's shareholders and certain other conditions.





                                       34
<PAGE>   35


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
                                ON THE SCHEDULE



Board of Directors and Stockholders
The Parts Source, Inc.
(d/b/a Ace Auto Parts)



In connection with our audit of the financial statements of The Parts Source,
Inc. (d/b/a Ace Auto Parts) referred to in our report dated February 26, 1999,
which is included on page 17 of this Form 10-K for the year ended December 31,
1998, we have also audited Schedule II for each of the three years in the period
ended December 31, 1998. In our opinion, the schedule presents fairly, in all
material respects, the information required to be set forth therein.



                                              GRANT THORNTON LLP



Tampa, Florida
February 26, 1999






                                       35
<PAGE>   36
                                        
                                  SCHEDULE II
                                        
                             The Parts Source, Inc.
                             (d/b/a Ace Auto Parts)
                                        
                       VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>


              Column A                          Column B                Column C                 Column D       Column E
                                               ----------     ----------------------------     ------------     ---------
                                                                        Additions
                                                                                Charged to
                                               Balance at       Charged           Other                        Balance at
                                               Beginning        To Costs         Accounts       Deductions       End of
            Description                        of Period      and Expenses       Describe      Describe (1)      Period
                                               ----------     ------------      ----------     ------------    ----------
<S>                                            <C>            <C>               <C>            <C>             <C>
Year Ended December 31, 1996 
  Deducted from asset accounts:
    Allowance for doubtful accounts             59,971           95,555             -            (39,526)       116,000

Year Ended December 31, 1997 
  Deducted from asset accounts:
    Allowance for doubtful accounts            116,000           94,316             -            (32,316)       178,000

Year Ended December 31, 1998 
  Deducted from asset accounts:
    Allowance for doubtful accounts            178,000          327,469             -            (50,469)       455,000



(1) Write-off of accounts deemed uncollectible.

</TABLE>





                                       36
<PAGE>   37



ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

None


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a)  Directors

The Company currently has four (4) Directors, each of whose term of office will
expire at the Annual Meeting. The following sets forth for each Director, his
name and age, positions and/or offices held with the Company, the period during
which each Director served in such positions and/or offices, a description of
his business experience during the past five (5) years or more and other
biographical information. Non-employee directors receive $500 per meeting
attended. During 1998, the Board of Directors held seven meetings. Each director
attended all meetings held.

(b)  Executive Officers

The following table sets forth the names and ages of all directors and executive
officers of the Company, including all positions and offices with the Company
held by him. 

<TABLE>
<CAPTION>

                                              Served as
                                               Director
      Name                            Age       Since       Position
      ----                            ---     ---------     --------
<S>                                   <C>     <C>           <C>
      Thomas D. Cox                   50         1996       President and Chief Executive Officer, Director
      Robert A. Cox, Jr.              53         1996       Executive Vice President, Director
      M. Steven Sembler               43         1996       Director
      James M. Chadwick, Esq.         43         1996       Director
      Robert B. Morgan                33                    Vice President/Finance and Controller
      Frank M. Kelly                  55                    Vice President of Sales and Marketing
      Barry L. Herman                 36                    Vice President of Inventory Control

</TABLE>

Each of the executive officers listed above serves at the pleasure of the Board
of Directors for a term until his successor is duly elected and qualified. The
following is a summary of the business experience during the past five years of
each of the Company's directors and executive officers.

THOMAS D. COX has been President of the Company and its predecessors from 1977
to the present, except for approximately an eighteen month interval (1991-1993)
during which the predecessor company was owned by another investor. In 1992,
Thomas Cox, together with his brother, Robert Cox, opened an aftermarket auto
parts store and caused the Company to be formed. In 1993, the Company purchased
the assets and assumed certain of the liabilities of Ace/Linco. Mr. Thomas Cox
has served on numerous warehouse associations and councils, advising aftermarket
manufacturers on the needs of the auto parts industry.

ROBERT A. COX has been Vice President from 1977 to the present except for
approximately a two-year interval (1991-1993) during which the predecessor
company was owned by another investor. Mr. Cox has served as Executive Vice
President of the Company since November 1992. From 1971 to May 1977, Mr. Cox was
Vice President of Florida Outdoor, Inc., a family owned corporation specializing
in billboard advertising.





                                       37
<PAGE>   38



M. STEVEN SEMBLER has been president and owner of Sembler Investments since
1988. The company invests and holds interests in shopping centers, mobile home
parks, a medical equipment company and a construction service company.

JAMES M. CHADWICK, ESQ. is a practicing attorney and a partner in the law firm
of Renfrow & Chadwick (since 1983), specializing in representation of non-profit
organizations. He is also president of Carteret Management Corporation (since
1974) and Vice President of RGR, Inc. (since 1983). Carteret Management
Corporation provides a comprehensive management program for apartments and
skilled-nursing facilities and RGR, Inc. is a housing consulting firm which has
been responsible for the development of over 50 apartment communities, the
majority of which involve independent living for low income and/or handicapped
individuals.

ROBERT B. MORGAN is the Company's Vice President of Finance and its Controller.
Mr. Morgan has been with the Company and its predecessor since 1989. He has
served in many different capacities in finance and marketing. In 1993, Mr.
Morgan became Vice President/Finance and Controller of the Company. He holds a
Bachelor's degree in Accounting from the University of Florida and a Masters
Degree in Marketing from the University of South Florida. Mr. Morgan is a
Certified Public Accountant.

FRANK M. KELLY is the Vice President of Sales and Marketing. He manages sales
distribution, market planning, advertising and public relations. Mr. Kelly has
been employed by the company and its predecessor since 1991. Prior to becoming
Vice President, he served as a District Manager and Sales Manager. From 1988 to
1991, Mr. Kelly served as Sales Manager for Steego Auto Parts in Ft. Myers,
Florida. Mr. Kelly has over 29 years experience in the wholesale and retail
markets.

BARRY L. HERMAN is the Vice President of Inventory Control. He manages the
inventory purchasing and distribution. Mr. Herman has been employed by the
company since November of 1996. From 1990 to 1996, Mr. Herman served as Manager
of Inventory/Pricing for APS, Inc. in Houston, Texas.

COMMITTEES

The Board of Directors has established a Compensation and Audit Committee. The
members of the Compensation and Audit Committee are Messrs. M. Steven Sembler
and James Chadwick. The Compensation Committee reviews general policy matters
relating to compensation and benefits of employees generally and has
responsibility for reviewing and approving compensation and benefits for all
officers of the Company. The Compensation Committee also administers the
Company's Stock Option Plan and recommends grants of the specific options under
the Stock Option Plan.

The Audit Committee represents the Board in discharging its responsibilities
relating to the accounting, reporting and financial control practices of the
Company. The Audit Committee has general responsibility for surveillance of
financial controls, as well as for accounting and audit activities of the
Company. The Audit Committee annually reviews the qualifications of the
independent certified public accountants, makes recommendations to the Board as
to their selection, reviews the scope, fees and results of their audit and
approves their non-audit services and related fees. The Audit Committee meets
periodically with management and with the Company's independent certified public
accountants to determine the adequacy of internal controls and other financial
reporting matters.

ITEM 11.  EXECUTIVE COMPENSATION

The following table sets forth certain information relating to the compensation
earned by the Chief Executive Officer of the Company and each of the other
executive officers of the Company whose total cash compensation for the past
year exceeded $100,000.




                                       38
<PAGE>   39

<TABLE>
<CAPTION>

                                          SUMMARY COMPENSATION TABLE


    NAME AND PRINCIPAL POSITION                      YEAR        ANNUAL COMPENSATION (SALARY)
    ---------------------------                      ----        ----------------------------
<S>                                                  <C>         <C>
    Thomas D. Cox,                                   1998                  $ 118,350
      President and Chief Executive Officer          1997                    118,440
                                                     1996                    112,575

    Robert A. Cox, Jr.,                              1998                  $ 117,570
      Executive Vice President                       1997                    117,600
                                                     1996                    112,275

</TABLE>


STOCK OPTION PLAN

Under the Company's Stock Option Plan (the "Plan"), 300,000 shares of Common
Stock are currently reserved for issuance upon exercise of stock options. The
Plan is designed as a means to retain and motivate key employees. The Stock
Option Committee administers and interprets the Plan. Options may be granted to
all eligible employees of the Company, including officers and non-employee
directors and others who perform services for the Company.

The Plan provides for granting of both incentive stock options (as defined in
Section 422 of the Internal Revenue Code) and non-statutory stock options.
Options are granted under the Plan on such terms and at such prices as
determined by the Board of Directors, except that the per share exercise price
of the options cannot be less than the fair market value of the Common Stock on
the date of the grant. Each option is exercisable after the period or periods
specified in the option agreement, but no option may be exercisable after the
expiration of ten years from the date of grant. Options granted under the Plan
are not transferable other than by will or by the laws of descent and
distribution. At December 31, 1998, there was outstanding under the Plan, stock
options to purchase an aggregate of 281,500 shares of Common Stock. All such
options granted are exercisable at prices ranging from $3.00 per share to $12.00
per share.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of the outstanding
shares of the Company's common stock as of March 1, 1999 (except as noted
below), held by persons believed by the Company to beneficially own more than 5%
of the outstanding shares of the Company's common stock, by directors and
officers of the Company, and by all the directors and executive officers of the
Company as a group, and the percentage of the outstanding shares of the
Company's common stock represented thereby. Except as otherwise indicated by
footnote, the persons named in the table have sole voting and investment power
with respect to all the Company's common shares beneficially owned by them. As
of March 1, 1999, there were 3,412,273 shares of the Company's common stock
outstanding.




                                       39
<PAGE>   40
<TABLE>
<CAPTION>

      NAME AND ADDRESS                                                      AMOUNT AND NATURE        PERCENTAGE
    OF BENEFICIAL OWNER                                                  OF BENEFICIAL OWNER (1)    OF CLASS (2)
    -------------------                                                  -----------------------    ------------
<S>                                                                      <C>                        <C>

A.P.S., Inc.............................................................          227,273               6.7%
  15710 John F. Kennedy Blvd., Suite 700
  Houston, Texas 77032

Thomas D. Cox (3).......................................................          928,750              27.2%
  1751 South Missouri Avenue
  Clearwater, Florida 33756

Robert A. Cox, Jr. (3)..................................................          928,650              27.2%
  1751 South Missouri Avenue
  Clearwater, Florida 33756

James Chadwick (3)......................................................            6,000                *

Steven Sembler (3)......................................................            4,000                *

Robert Morgan (3).......................................................           54,500               1.6%
   
Frank Kelly (3).........................................................           42,000               1.2%

Barry Herman (3)........................................................           18,500                *

All Directors and Officers as a group (7 persons).......................        1,982,400              58.1%

-------------------
*  Less than one percent (1%).

(1)  In accordance with Rule 13d-3 promulgated pursuant to the Exchange Act, a
     person is deemed to be the beneficial owner of the security for purposes of
     the rule if he or she has or shares voting power or dispositive power with
     respect to such security or has the right to acquire such ownership within
     sixty (60) days. As used herein, "voting power" is the power to vote or
     direct the voting of shares, and "dispositive power" is the power to
     dispose or direct the disposition of shares, irrespective of any economic
     interest therein.

(2)  In calculating the percentage ownership for a given individual or group,
     the number of the Company's common shares outstanding includes unissued
     shares subject to options, warrants, rights or conversion privileges held
     by such individual or group and exercisable within sixty days (60) of March
     1, 1999.

(3)  The following table sets forth, as of March 1, 1999, the details of Parts
     Source common stock deemed beneficially owned by each of the Company's
     directors and executive officers, and by all directors and executive
     officers of the Company as a group:

</TABLE>

<TABLE>
<CAPTION>
                                                                                                TOTAL
                                                                       COMMON STOCK          COMMON STOCK
                                                  COMMON STOCK      EQUIVALENTS (1)(2)    BENEFICIALLY OWNED
                                                  ------------      ------------------    ------------------
<S>                                               <C>               <C>                   <C>  
      Thomas D. Cox.................                 928,750                   -               928,750
      Robert A. Cox, Jr. ...........                 928,650                   -               928,650
      James Chadwick................                   3,000               3,000                 6,000
      Steven Sembler................                   1,000               3,000                 4,000
      Robert Morgan.................                  12,500              42,000                54,500
      Frank Kelly...................                       -              42,000                42,000
      Barry Herman..................                   1,500              17,000                18,500
      All officers and directors as a group        1,875,400             107,000             1,982,400

------------
(1)   Includes shares of the Company's common stock issuable under options
      currently exercisable or exercisable within 60 days of March 1, 1999.

(2)   Exercise price of all stock options greater than or equal to $3.00 per
      share.

</TABLE>





                                       40
<PAGE>   41



ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In connection with an acquisition made by the Company in 1993, the Company
assumed a note payable to the father of the two majority shareholders in the
amount of $779,157. In December 1993, the two majority shareholders substituted
their personal note for the assumed note. The note had been reduced to $551,932
and the Company issued a new note to the two majority shareholders for the
outstanding balance. The note is a demand note bearing interest at the rate of
nine percent per annum. At December 31, 1998, the balance due under the notes
was $19,342.

In connection with another acquisition made by the Company in 1995, the Company 
assumed an unsecured promissory note in the amount of $80,000 payable to the 
father of the two majority shareholders. The note is payable on demand and 
bears interest at twelve percent per annum. This note was paid in its entirety 
in 1998.

During 1998, the Company acquired an existing warehouse operation from APS, 
Inc, who owns 227,273 shares of unregistered Common Stock of the Company. See 
"Item 1 Business."

The Company leases ten of its traditional stores and one battery distribution
center from entities affiliated through the common ownership of the two majority
shareholders. One traditional store which contains the corporate offices is
leased from Mrs. Joan Z. Cox, Trustee, the mother the two majority shareholders.
Each of the leases expires in December 2000. Rent expense under such leases
aggregated $535,428, $513,830 and $502,818 in 1998, 1997 and 1996, respectively.
The Company believes that the lease terms are at least as comparable to those
that could be obtained from unaffiliated parties.

All transactions between the Company and its officers, directors and 5%
shareholders are on terms no less favorable than could be obtained from
unaffiliated third parties and must be approved by majority of the independent,
disinterested directors of the Company.




                                       41
<PAGE>   42



                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
<S>    <C>      <C>
(a)    Exhibits

         3(a)   Articles of Incorporation, as amended* 
          (b)   By-laws* 
        10(a)   Copy of Stock Option Plan* 
          (b)   Copy of Underwriter's Warrant Agreement* 
          (c)   Copy of Supply Agreement between the Registrant and A.P.S., Inc.* 
          (d)   Copy of Lease Agreement between Linco Auto Parts, Inc. and the Registrant 
                (Seminole, Florida)*
          (e)   Copy of Lease Agreement between Linco Auto Parts, Inc. and the Registrant
                (Pinellas Park, Florida)* 
          (f)   Copy of Lease Agreement between Linco Auto Parts, Inc. and the Registrant 
                (Bradenton, Florida)* 
          (g)   Copy of Lease Agreement between Joan Z. Cox, Trust, Inc. and the Registrant 
                (Clearwater, Florida)* 
          (h)   Copy of Lease Agreement between Linco Auto Parts, Inc. and the Registrant 
                (St. Petersburg, Florida)* 
          (i)   Copy of Lease Agreement between Linco Auto Parts, Inc. and the Registrant 
                (St. Petersburg, Florida)* 
          (j)   Copy of Lease Agreement between Cozer Enterprises and the Registrant 
                (Dunedin, Florida)* 
          (k)   Copy of Lease Agreement between Cozer Enterprises and the Registrant 
                (Largo, Florida)* 
          (l)   Copy of Lease Agreement between Cozer Enterprises and the Registrant 
                (Sarasota, Florida)* 
          (m)   Copy of Lease Agreement between Cozer Enterprises and the Registrant 
                (Spring Hill, Florida)*
          (n)   Copy of Lease Agreement between Cozer Enterprises and the Registrant
                (Winter Haven, Florida)* 
          (o)   Copy of Lease Agreement between Linco Auto Parts, Inc. and the Registrant 
                (St. Petersburg, Florida)* 
          (p)   Copy of Amended and Restated Continuing Credit and Security Agreement* 
          (q)   Agreement of Sale by and between The Parts Source, Inc. and A.P.S. Inc. 
                (Incorporated by reference to the Company's Form 8-K Report 
                dated September 17, 1997 - File No. 1-14308) 
          (r)   Stock Purchase Agreement of The Parts Source, Inc. by General Parts, Inc.
                (Incorporated by reference to the Company's Form 8-K Report 
                dated February 16, 1999 - File No. 1-14308) 
        23      Copy of Consent of Independent Certified Public Accountants 
        27      Financial Data Schedule (for SEC use only)

</TABLE>

--------------------- 
*  Incorporated  by reference  to  the  Exhibits  to the Company's  Registration
   Statement filed  with  the Securities and Exchange Commission (File No.
   333-1568A) on February 21, 1996.

(b) Reports on Form 8-K
    -------------------
    Report on Form 8-K, dated September 17, 1998, reporting the acquisition from
    APS, Inc., the business (consisting of certain assets, principally inventory
    and fixed assets) of one distribution center located in Ocala, Florida.




                                       42
<PAGE>   43



    Report on Form 8-KA, dated November 13, 1998, to amend report on Form 8-K,
    dated September 17, 1998, reporting the Registrant's acquisition from APS,
    Inc., the business (consisting of certain assets, principally inventory and
    fixed assets) of one distribution center located in Ocala, Florida.

    Report on Form 8-K, dated February 16, 1999, reporting the Registrant
    entering into a stock purchase agreement with General Parts, Inc. pursuant
    to which General Parts, Inc. will acquire all outstanding common stock of
    The Parts Source, Inc.



                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

THE PARTS SOURCE, INC. 
D/B/A ACE AUTO PARTS

/s/ Thomas D. Cox                                                 March 25, 1999
-----------------------------------------------------             --------------
THOMAS D. COX, President and Chief Executive Officer,             Date
(principal executive officer)

/s/ Robert B. Morgan                                              March 25, 1999
-----------------------------------------------------             --------------
ROBERT B. MORGAN, Chief Financial Officer,                        Date
(principal financial and accounting officer)

Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.


/s/ Thomas D. Cox                                                 March 25, 1999
-----------------------------------------------------             --------------
THOMAS D. COX, Director,                                          Date

/s/ Robert A. Cox, Jr.                                            March 25, 1999
-----------------------------------------------------             --------------
ROBERT A. COX, JR., Director                                      Date

/s/ M. Steven Sembler                                             March 25, 1999
-----------------------------------------------------             --------------
M. STEVEN SEMBLER, Director                                       Date

/s/ James M. Chadwick                                             March 25, 1999
-----------------------------------------------------             --------------
JAMES M. CHADWICK, Esq., Director                                 Date




                                       43