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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 FISCAL YEAR ENDED FEBRUARY 1, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-22511
CSK AUTO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
ARIZONA 86-0221312
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
645 E. MISSOURI AVE. SUITE 400, PHOENIX, ARIZONA 85012
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Securities registered pursuant to Section 12 (b) of the Act:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED:
- ------------------------------------------------ ------------------------------------------------
NONE NONE
</TABLE>
Securities registered pursuant to Section 12 (g) of the Act: NONE
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 the 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]
At April 28, 1998, 2,000 shares of the Company's common stock have been
issued and are outstanding. All such common stock is held by the Company's
parent, CSK Auto Corporation, a Delaware corporation. There is no public market
for the Company's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated by reference herein are the Company's Registration Statement
on Form S-4 (File No. 333-22511).
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C> <C>
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 9
Item 6. Selected Consolidated Financial Data........................ 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 8. Consolidated Financial Statements and Supplementary Data.... 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 45
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 45
Item 11. Executive Compensation...................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 52
Item 13. Certain Relationships and Related Transactions.............. 54
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 58
</TABLE>
Note Concerning Forward-Looking Information
This Report contains various forward-looking statements and information
that are based upon information currently available to management. Such
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or expected. Such forward-looking statements may be
identified by the use of forward-looking terminology such as "may," "will,"
"should," "expect," "intend," "estimate" or "continue" or the negative thereof
or comparable terminology and may include, among other things, expected growth,
store openings, relocations and expansions, business strategies, future revenues
and future operating performance. Factors that might cause actual results to
differ materially from those in such forward-looking statements include, but are
not limited to, those discussed in Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
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PART I
ITEM 1. BUSINESS
GENERAL
The Company is the largest retailer of automotive parts and accessories in
the Western United States and one of the largest such retailers in the United
States based, in each case, on its number of stores. As of February 1, 1998, the
Company operated 718 stores as one fully integrated company primarily under
three brand names: Checker Auto Parts, founded in 1968 and operating in the
Southwestern and Rocky Mountain states; Schuck's Auto Supply, founded in 1917
and operating in the Pacific Northwest; and Kragen Auto Parts, founded in 1947
and operating primarily in California. Each has a long operating history,
established name recognition and a loyal customer base. Based on store count,
the Company believes it is the largest retailer of automotive parts and
accessories in 20 of its 27 markets. The Company is a wholly-owned subsidiary of
CSK Auto Corporation ("Holdings").
The Company is a consumer-oriented, specialty retailer primarily servicing
the do-it-yourself ("DIY") customer, with a significant and increasing emphasis
on the commercial customer. The Company offers a broad selection of national
brand name and private label automotive products for domestic and imported cars,
vans and light trucks, including new and remanufactured automotive replacement
parts, maintenance items and accessories. The Company's stores typically offer
between 13,000 and 16,000 stock keeping units ("SKUs"), and more than 565 of the
Company's stores can provide customers, on a same-day delivery basis, an
additional 200,000 SKUs not regularly stocked in these stores. The Company's
operating strategy is to offer its products at everyday low prices and at
conveniently located and attractively designed stores, supported by highly
trained, efficient and courteous customer service personnel. As a specialty
retailer, the Company has chosen not to sell tires or perform automotive
repairs.
RECENT TRANSACTIONS
In October 1996, certain affiliates of Investcorp and certain other
investors (collectively with Investcorp, the "Investcorp Group") acquired a 51%
common equity interest in Holdings for $105.0 million in cash from the Carmel
Trust, a trust governed by the laws of Canada ("Carmel"), which previously had
held 100% of the common equity interests in Holdings. A corporation in which an
affiliate of Investcorp held a minority interest also purchased $40.0 million in
aggregate principal amount of Holdings' 12% Subordinated Notes for $40.0 million
in cash, and Holdings in turn purchased $40.0 million of preferred stock of the
Company. Transatlantic Finance, Ltd., an affiliate of Carmel ("Transatlantic,"
and with Carmel, the "Carmel Group") purchased $10.0 million in aggregate
principal amount of Holdings' 12% Subordinated Notes, and Holdings in turn
purchased $10.0 million of preferred stock of the Company. The Company then
borrowed $100.0 million under its new senior credit facility (the "Senior Credit
Facility"), which together with the net proceeds from the sale of $125.0 million
of 11% Senior Subordinated Notes due 2006 and the net proceeds from the sale by
the Company to Holdings of $50.0 million of preferred stock, following a
dividend to Holdings by the Company, was used to redeem the stock of Holdings
held by Carmel for $238.5 million. Carmel then purchased from Holdings for
$100.9 million a 49% common equity interest in Holdings. The Company then repaid
amounts outstanding under a then existing credit agreement, which was
terminated, and paid $9.9 million to members of management pursuant to
previously existing equity participation agreements and incurred additional
expenses of $22.7 million related to the foregoing. The foregoing transactions
are referred to collectively as the "Acquisition and Financings." Following the
Acquisition and Financings, the Investcorp Group owned a 51% common equity
interest in Holdings, a corporation in which an affiliate of Investcorp held a
minority interest owned $40.0 million in aggregate principal amount of Holdings'
12% Subordinated Notes, Carmel owned a 49% common equity interest in Holdings,
Transatlantic owned $10.0 million in aggregate principal amount of Holdings' 12%
Subordinated Notes and Holdings owned 100% of the common equity and $50.0
million of preferred stock of the Company. See Item 12. Security Ownership of
Certain Beneficial Owners and Management.
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On December 8, 1997, the Company acquired 82 stores (the "Trak West"
stores) located in the Los Angeles market from Trak Auto Corporation (the "Trak
West Acquisition") for a total cost of approximately $34.5 million, which was
funded with a $22.0 million equity investment by affiliates of Holdings'
existing stockholders and additional bank borrowings. The Company has converted
the Trak West stores to the Kragen name and store format and integrated these
stores into the Company's operations. The Trak West Acquisition provides the
Company with a greater presence (a total of 147 stores) in the large,
strategically important Los Angeles market, without adding additional retail
square footage to the market.
On March 17, 1998, the Company's parent entity, Holdings, completed an
initial public offering of approximately 8.6 million shares of its common stock
(the "Offering"). The Offering generated net proceeds of approximately $159.1
million which were used to reduce outstanding debt of Holdings and of the
Company. See Item 7. Management's Discussion and Analysis of Financial
Conditions of Results of Operations -- Liquidity and Capital Resources.
MARKETING AND MERCHANDISING STRATEGY
The Company's marketing and merchandising strategy is to build market share
by providing a broad selection of national brand name and private label products
at everyday low prices. The Company offers these products at conveniently
located and attractively designed stores, supported by highly trained, efficient
and courteous customer service personnel.
CUSTOMER SERVICE
The Company is a customer-oriented retailer dedicated primarily to DIY
consumers with a significant and increasing focus on the commercial customer.
The Company's sophisticated, centralized infrastructure and store-based
information systems, as well as its extensive training programs, are designed to
enhance customer service.
The Company believes that recruiting, training and retaining high quality
sales associates is a major component of successful retailing. The Company has
implemented training programs and incentives to encourage the development of
technical expertise by its sales associates, which then enables them to
effectively advise customers on product selection and use. In addition to
providing a high level of customer satisfaction, well trained associates
increase productivity and thereby reduce labor costs. CSK University, the
Company's sales associate development program, is dedicated to the continuous
improvement of store associates through structured on-the-job training and
formal classroom education. The curriculum focuses on four areas of the
associates' development: (i) customer service skills; (ii) basic automotive
systems; (iii) advanced automotive systems; and (iv) management development.
Much of the training is delivered through formal classes in 16 training centers
that are fully equipped with the same systems as are in the Company's stores.
The Company believes that its training programs enable sales associates to
provide a high level of service to a wide variety of customers ranging from less
informed DIY consumers to more sophisticated purchasers requiring diagnostic
advice. The Company also provides continuing training programs for store
managers and district managers designed to assist them in increasing store-level
efficiency and improving their potential for promotion. In addition, the Company
requires periodic meetings of district and store managers to facilitate and
enhance communications within the organization.
In order to satisfy its customers, the Company has adopted several service
initiatives including free testing of starters, alternators and batteries; free
charging of batteries; installation assistance for batteries, windshield wipers
and other selected products; "no hassle" return policies; and electronically
maintained lifetime warranties, which eliminate the need for consumer record
keeping. The Company's significant investments in store associate training and
store-level information systems have enabled its in-store personnel to devote
more time to attending to their customers' automotive needs.
PRODUCT SELECTION
The Company's objective is to carry a broad selection of national brand
name products that generate customer traffic and have strong appeal to its
commercial customers. In addition, the Company stocks a wide
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selection of high quality private label products that appeal to value conscious
customers. Each store offers an extensive product line, including automotive
replacement parts such as starters, alternators, shock absorbers, mufflers,
brakes, spark plugs, filters and batteries, as well as a wide variety of
maintenance items, such as motor oil, lubricants, waxes, cleaners, polishes and
antifreeze. In addition, each store offers general accessories such as car
stereos, alarms, trim, floor mats, tools and seat covers.
The Company's stores, which average approximately 6,900 square feet in
size, offer between 13,000 and 16,000 SKUs of well-known national brand name and
private label automotive products. In the event that a store does not carry a
specific part, associates are able to utilize the Company's recently implemented
Surround Store Inventory Program or access the Company's Priority Parts
operation. In June 1997, the Company implemented its Surround Store Inventory
Program which, in the event a particular product is unavailable at a store,
enables a sales associate at that store to attempt to locate the requested
product from stores in the same market and the Priority Parts depots. This
program enables an associate to record the sale, reserve the part at the
neighboring store and direct the customer to pick it up. Additionally, the
Company has continued to expand its Priority Parts operation by improving its
delivery system and increasing to 19 from 2 its number of strategically located
Priority Parts depots, which has enabled the Company to (i) better serve its
customers by making available through supplier relationships to more than 565 of
its stores up to an additional 200,000 SKUs on a same-day delivery basis and
1,000,000 SKUs on a next-day delivery basis to all of its stores and (ii)
increase sales to commercial accounts due to broader availability of automotive
replacement parts.
PRICING
The Company's pricing philosophy is to not lose a customer because of
price. The Company's pricing strategy is to offer everyday low prices at each of
its stores. The Company offers to beat by 5% any competitor's lower price. As a
result, the Company closely monitors its competitors' pricing levels to ensure
competitive pricing in all of the Company's stores.
ADVERTISING
The Company supports its marketing and merchandising strategy through print
advertising, in-store promotional displays and an increasing emphasis on radio
and television. The Company advertises in print through the use of monthly color
circulars. The circulars, which are produced by the Company's in-house
advertising department, emphasize specific products and contain redeemable
coupons. The Company advertises on radio, television and billboards primarily to
reinforce the Company's image and name recognition. Television advertising is
targeted to sports programming and radio advertising primarily is aired during
drive time. The Company's in-store signs and displays are used to promote
products and identify departments, as well as to announce store specials. The
Company also has web sites on the Internet at: (i) http://www.checkerauto.com,
(ii) http://www.schucks.com and (iii) http://www.kragen.com.
STORE-BASED INFORMATION SYSTEMS
Over the past several years, the Company has installed several store-level
information systems, which have improved store labor productivity and customer
service. The Company's store-based information systems are described below.
The Company has installed a point of sale system ("POS") consisting of
sophisticated cash registers and software in all of its stores, which
electronically capture and report customer transactions. The Company has
upgraded and expanded the capabilities of its Electronic Parts Catalog ("EPC"),
which is installed in each of its stores. The EPC is a software based system
that identifies the location and availability of over one and a half million
parts. The EPC is a user-friendly tool that enables the Company's sales
associates to assist customers in parts selection and ordering based on simple
input of the year, model and engine type and application needed. Once provided
with this basic information, the EPC displays which part is needed and whether
it is located in the store. The EPC also displays related parts that the sales
associates can recommend to the customer for purchase and prints parts lists for
the customer. The Company's EPC system is integrated
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with its POS system and centralized Company database. The Company's satellite
communications network links all of its stores with its corporate office. The
satellite network enables the Company to efficiently obtain and deliver to its
stores all file transfers, including pricing down-loads, sales information
updates and interactive transactions such as electronic parts ordering, and
significantly increases the speed of credit card and check authorization. The
system also broadcasts common files to all stores simultaneously to update the
EPC.
STORE OPERATIONS
The Company operates as one business segment, with stores divided into
seven geographic regions: Southwest, Rocky Mountain, Northwest, Los Angeles,
Coastal California, Southern California and Northern California. Each region is
administered by a regional manager that oversees six to nine district managers.
Each of the Company's district managers has responsibility for between 8 and 19
stores.
As of February 1, 1998, the geographic distribution of the Company's stores
and the tradenames under which they operate are set forth in the table below.
<TABLE>
<CAPTION>
SCHUCK'S CHECKER KRAGEN COMPANY
AUTO SUPPLY AUTO PARTS AUTO PARTS TOTAL
----------- ---------- ---------- -------
<S> <C> <C> <C> <C>
California...................................... 1 1 358(1) 360(1)
Washington...................................... 83 -- -- 83
Arizona......................................... -- 77 -- 77
Colorado........................................ -- 56 -- 56
Utah............................................ -- 28 -- 28
Oregon.......................................... 24 -- -- 24
Texas........................................... -- 21 -- 21
Nevada.......................................... -- 14 7 21
New Mexico...................................... -- 20 -- 20
Idaho........................................... 13 3 -- 16
Montana......................................... -- 9 -- 9
Wyoming......................................... -- 3 -- 3
--- --- --- ---
Total................................. 121 232 365 718
=== === === ===
</TABLE>
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(1) Includes the 82 Trak West stores that have been converted to the Kragen name
and store format.
Stores generally are open seven days a week, with hours from 8:00 a.m. to
9:00 p.m. (9:00 a.m. to 6:00 p.m. on Sundays). Each store employs approximately
10 to 20 associates, including a store manager, two assistant store managers and
a staff of full-time and part-time associates.
STORE FORMATS
The Company's stores generally are located in high visibility, high traffic
strip shopping centers or in free-standing units adjacent to strip shopping
centers. The stores, which range in size from 2,800 to 27,000 square feet,
average approximately 6,900 square feet in size and offer between 13,000 and
16,000 SKUs.
The Company has designed four prototype stores of 6,000, 7,000, 8,000 and
12,000 square feet in size. The following table sets forth the Company's stores,
by size, as of February 1, 1998:
<TABLE>
<CAPTION>
NUMBER OF
STORE SIZE STORES
---------- ---------
<S> <C>
10,000 sq. ft. or greater................................. 75
8,000-9,999 sq. ft........................................ 122
6,000-7,999 sq. ft........................................ 181
5,000-5,999 sq. ft........................................ 209
Less than 5,000 sq. ft.................................... 131
</TABLE>
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Approximately 57% of the Company's stores are freestanding, with the
balance principally located within strip shopping centers. Approximately 85% to
90% of each store's square footage is selling space, of which approximately 40%
to 50% is dedicated to automotive replacement parts inventory.
STORE GROWTH STRATEGY
The Company's store growth strategy is focused on the Company's existing
markets and includes (i) opening new stores, (ii) relocating smaller stores to
larger stores at better locations, and (iii) expanding selected stores. The
Company has identified most of its stores smaller than 5,000 square feet as
future relocation or expansion priorities.
The following table sets forth the Company's store development activities
during the periods indicated.
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Beginning stores........................................ 544 566 580
New stores.............................................. 24 19 65
Relocated stores........................................ 30 37 36
Acquired Trak West stores............................... -- -- 82
Closed stores (including relocated stores).............. (32) (42) (45)
--- --- ---
Ending stores........................................... 566 580 718
=== === ===
Expanded stores......................................... 9 8 3
Total new and relocated stores.......................... 54 56 101
</TABLE>
On November 18, 1997, the Company entered into an agreement with an
unrelated third party for the establishment of a leasing facility that will
provide $125.0 million of financing for the acquisition and development of
approximately 100 to 125 new stores over the period of February 1, 1998 through
May 31, 1999. This facility is on terms that are generally more favorable than
the Company's prior facility.
COMMERCIAL SALES PROGRAM
In addition to its primary focus on serving the DIY consumer, the Company
has significantly increased its marketing efforts to commercial customers within
the automotive replacement parts market. The Commercial Sales Program, which is
intended to facilitate penetration of this market, is targeted to professional
mechanics, auto repair shops, auto dealers, fleet owners, mass and general
merchandisers with auto repair facilities and other commercial repair outlets
located near the Company's stores. At February 1, 1998, the Company had
Commercial Sales Centers ("CSCs") in 360 of its stores. The Company intends to
continue installing CSCs in selected existing stores, in approximately half of
its new stores, and in 43 of the recently acquired Trak West stores (which did
not actively pursue commercial customers under prior ownership).
PURCHASING
Merchandise is selected and purchased for all stores by personnel at the
Company's corporate headquarters in Phoenix, Arizona from over 300 suppliers. No
one class of product and no single supplier accounted for as much as 10% of the
Company's purchases in fiscal 1997.
ASSOCIATES
As of February 1, 1998, the Company employed approximately 6,600 full-time
associates and 3,125 part-time associates. Approximately 85% of these personnel
are employed in store level operations, 8% in distribution and 7% in the
Company's corporate headquarters, including its Call Center and Priority Parts
operation.
The Company has never experienced any material labor disruption and
believes that its labor relations are excellent. Except for 402 employees
located at approximately 36 stores in the San Jose, California market,
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who have been represented by a union for more than 18 years, none of the
Company's personnel is represented by a labor union.
COMPETITION
The Company competes principally in the DIY market of the automotive
aftermarket. Although the number of competitors and the level of competition
vary by market area, the DIY market is highly fragmented and generally very
competitive. The Company competes primarily with national and regional retail
automotive parts chains, wholesalers or jobber stores (some of which are
associated with national automotive parts distributors or associations),
automobile dealers, and mass merchandisers that carry automotive replacement
parts, maintenance items and accessories. The Company believes that chains of
automotive parts stores, such as that operated by the Company, with multiple
locations in regional markets, have competitive advantages in marketing, product
selection, purchasing and distribution, as compared to independent retailers and
jobbers that are not part of a chain or associated with other retailers or
jobbers. The Company believes that, as a result of these advantages, national
and regional chains have been gaining market share in recent years at the
expense of independent retailers and jobbers.
The principal competitive factors that affect the Company's business are
store location, customer service, product selection, availability, quality and
price. While the Company believes that it competes effectively in its various
geographic areas, certain competitors are larger in terms of sales volume, have
greater financial and management resources and have been operating longer in
certain geographic areas.
TRADE NAMES, SERVICE MARKS AND TRADEMARKS
The Company owns and has registered the service mark "Schuck's" with the
United States Patent and Trademark Office for use in connection with the
automotive parts retailing business. The Company owns the rights to use the
tradenames "Checker" (in connection with the automotive parts retailing business
in the West and Southwest regions of the United States) and "Kragen." In
addition, the Company owns and has registered numerous trademarks with respect
to many of its private label products. The Company believes that its various
tradenames, service marks and trademarks are important to its merchandising
strategy, but that its business is not otherwise dependent on any particular
service mark, tradename or trademark. There are no infringing uses known by the
Company that materially affect the use of such marks.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local laws and
governmental regulations relating to the operation of its business, including
those governing recycling of batteries and used lubricants, and regarding
ownership and operation of real property. The Company handles hazardous
materials during its operations, and its customers may also bring or use
hazardous materials or used oil onto the Company's properties. Additionally,
while the Company does not service automobiles, it does sublease pre-existing
service bays at a small number of store locations to third parties. The
operators of these service bays are required to dispose of certain items,
including used batteries, lubricants and oils in accordance with applicable
environmental regulations. The Company also currently provides a recycling
program for batteries and for the collection of used lubricants at certain of
its stores as a service to its customers pursuant to agreements with third-party
vendors. Pursuant to the agreements, the batteries and used lubricants are
collected by Company employees, deposited into vendor-supplied
containers/pallets and then disposed of by the third-party vendors. The
Company's agreements with such vendors are designed to limit its potential
liability under applicable environmental regulations for any harm caused by the
batteries and lubricants to off-site properties or even on-site when such
failure is the fault of the vendor. Many of the agreements provide for
indemnification of the Company against liability that it may incur in connection
with the disposal of such items.
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ITEM 2. PROPERTIES
The following table sets forth certain information concerning the Company's
principal properties:
<TABLE>
<CAPTION>
PRIMARY USE LOCATION SQ. FOOTAGE NATURE OF OCCUPANCY
----------- ------------ ----------- -------------------
<S> <C> <C> <C>
Corporate Office...................... Phoenix, AZ 96,000 Leased(1)
Distribution center................... Dixon, CA 325,500 Leased
Distribution center................... Phoenix, AZ 273,520 Leased
Regional distribution center.......... Auburn, WA 52,400 Leased
Regional distribution center.......... Denver, CO 34,800 Leased
Regional distribution center.......... Salt Lake, 32,000 Leased
UT
Regional distribution center.......... Commerce, CA 48,400 Leased
</TABLE>
- ---------------
(1) This facility is owned by Missouri Falls Partners, an affiliate of Carmel.
See Notes 4 and 7 to Item 8. Consolidated Financial Statements.
At February 1, 1998, all but two of the Company's stores were leased. The
expiration dates (including renewal options) of the store leases are summarized
as follows:
<TABLE>
<CAPTION>
YEARS STORES(1)
----- ---------
<S> <C>
1996-2000.......................................... 27
2001-2005.......................................... 67
2006-2010.......................................... 76
2011-2020.......................................... 293
2021-2030.......................................... 210
2031-thereafter.................................... 43
</TABLE>
- ---------------
(1) Of these stores, 30 are owned by affiliates of Carmel. See Notes 4 and 7 to
Item 8. Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business. The damages claimed against the
Company in some of these litigations are substantial. Although the amount of
liability that may result from these matters cannot be ascertained, the Company
does not currently believe that, in the aggregate, they will result in
liabilities material to the Company's consolidated financial condition, results
of operations or cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal
year ended February 1, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
At April 28, 1998, 2,000 shares of the Company's common stock have been
issued and are outstanding. All such common stock is held by the Company's
parent, CSK Auto Corporation, a Delaware corporation. There is no public market
for the Company's common stock.
RECENT SALES OF UNREGISTERED SECURITIES
The Company has not issued or sold securities within the past three years
pursuant to offerings that were not registered under the Securities Act of 1933,
as amended (the "Securities Act") except as follows:
(a) On October 30, 1996, in connection with the Acquisition and
Financings, the Company issued and sold 50,000 shares of its preferred
stock to Holdings for $50,000,000.
(b) On October 30, 1996, in connection with the Acquisition and
Financings, the Company issued and sold $125,000,000 aggregate principal
amount of its 11% Senior Subordinated Notes due 2006 to Donaldson, Lufkin &
Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner and Smith
Incorporated.
The transactions set forth above were undertaken in reliance upon the
exemption from the registration requirements of the Securities Act afforded by
Section 4(2) thereof and/or Regulation D promulgated thereunder, as sales not
involving a public offering. The purchasers of the securities described above
acquired such securities for their own account and not with a view to any
distribution thereof to the public. On May 13, 1997, the Company consummated a
registered exchange offer with respect to the securities discussed in paragraph
(b) above, pursuant to which all such privately placed securities were
exchanged.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated statement of
operations, balance sheet and operating data of the Company. The selected
statement of operations and balance sheet data for the two fiscal years ended
February 1, 1998 are derived from the Company's Consolidated Financial
Statements, which have been audited by Coopers & Lybrand L.L.P., independent
accountants, and appear elsewhere herein. The selected statement of operations
and balance sheet data for each of the three fiscal years during the period
ended January 28, 1996 are derived from the Company's Consolidated Financial
Statements, which have been audited by Price Waterhouse LLP, independent
accountants, and which, in the case of fiscal year 1995, appears elsewhere
herein. The data presented below should be read in conjunction with Item 8.
Consolidated Financial Statements and Notes thereto included elsewhere herein,
the other financial information included herein and Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
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<TABLE>
<CAPTION>
FISCAL YEAR(1)
--------------------------------------------------------
FEB. 1, FEB. 2, JAN. 28, JAN. 29, JAN. 30,
1998 1997(2) 1996(3) 1995(4) 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales........................... $845,815 $793,092 $718,352 $688,135 $645,426
Cost of sales....................... 468,171 463,374 433,817 410,358 397,565
Operating and administrative
expenses.......................... 326,198 298,004 281,387 255,922 233,785
Store closing costs................. 1,640 14,904 3,310 2,678 3,526
Transition and integration
expenses.......................... 3,407 -- -- -- --
Stock-based compensation............ 909 -- -- -- --
Acquisition charge -- equity
participation agreements.......... -- 20,174 -- -- --
-------- -------- -------- -------- --------
Operating profit (loss)............. 45,490 (3,364) (162) 19,177 10,550
Other Acquisition and Financings
expenses.......................... 1,009 12,463 -- -- --
Interest expense.................... 34,279 19,025 14,379 10,343 11,731
-------- -------- -------- -------- --------
Income (loss) before taxes and
extraordinary item................ 10,202 (34,852) (14,541) 8,834 (1,181)
Income tax expense (benefit)........ 4,179 (11,318) (5,447) 68 (531)
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item.............................. 6,023 (23,534) (9,094) 8,038 (650)
Extraordinary loss (gain), net of
income taxes...................... 3,015 -- -- (97,186) --
-------- -------- -------- -------- --------
Net income (loss)................... $ 3,008 $(23,534) $ (9,094) $105,952 $ (650)
======== ======== ======== ======== ========
OTHER DATA:
EBITDA(5)........................... 70,173 50,544 16,099 32,282 22,726
EBITDAR(5).......................... 124,695 98,450 61,453 70,964 58,595
Capital expenditures................ 20,132 6,317 11,640 14,597 14,910
Net cash provided by (used in)
operating activities.............. (56,570) (38,366) (3,361) 15,120 17,569
Net cash used in investing
activities........................ (56,727) (10,686) (7,888) (18,983) (14,943)
Net cash provided by (used in)
financing activities.............. 112,926 49,911 12,743 (5,383) 227
SELECTED ADDITIONAL OPERATING DATA:
Total store square footage (at
period end) (000s)(6)(8).......... 4,277 3,631 3,329 3,097 2,992
Average net sales per store(6)(8)... $ 1,313 $ 1,384 $ 1,294 $ 1,272 $ 1,215
Average net sales per store square
foot(6)(8)........................ $ 211 $ 228 $ 224 $ 226 $ 223
Percentage increase in comparable
store net sales(7)................ 4% 6% 2% 5% 10%
Stores open at end of period........ 718 580 566 544 538
</TABLE>
10
<PAGE> 12
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------
FEB. 1, FEB. 2, JAN. 28, JAN. 29, JAN. 30,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net working capital................. $235,651 $121,157 $ 81,048 $ 77,627 $ 78,003
Total assets........................ 557,116 439,543 391,319 350,830 294,806
Current liabilities................. 190,694 196,901 203,754 174,924 140,115
Total debt (including current
maturities)....................... 389,962 285,680 122,003 105,601 187,807
Stockholder's equity (deficit)...... (31,190) (56,706) 59,997 64,376 (41,576)
</TABLE>
- ---------------
(1) The Company's fiscal year consists of 52 or 53 weeks ending on the Sunday
nearest to January 31 of the following calendar year. All fiscal years
presented are 52 weeks except for the fiscal year ended February 2, 1997
which consists of 53 weeks.
(2) Amounts hereunder reflect certain non-recurring charges which were incurred
in October 1996 when the Acquisition and Financings were consummated,
including the following: (i) amounts paid to members of management pursuant
to existing equity participation agreements of $19.9 million ($20.2 million
including a provision for estimated payroll taxes thereon), of which $9.9
million was paid in October 1996 (the remaining balance was paid in November
1997), and (ii) expenses incurred in connection with the Acquisition and
Financings of $12.5 million. Amounts hereunder also include a charge of
$12.9 million for store closing costs. See Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations and Note 12 to
Item 8. Consolidated Financial Statements.
(3) Results of operations in fiscal 1995 include the following non-recurring
items: (i) cost of sales includes preopening expenses of $1.6 million
associated with the opening of the new distribution center in Phoenix,
Arizona; and (ii) operating and administrative expenses include $5.3 million
of non-recurring software development costs associated with the new
store-level information systems installed by the Company during fiscal 1995.
In addition, the Company believes that its operations and operating results
were adversely impacted during fiscal 1995 as a result of the start up costs
associated with the implementation of many new initiatives. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
(4) Net income in fiscal 1994 includes an extraordinary gain of $97.2 million
resulting from cancellation of a portion of the Company's long-term debt.
(5) EBITDA represents income before net interest expense, provision for income
taxes, depreciation and amortization expense, other non-cash charges,
extraordinary items and non-recurring charges. While EBITDA is not intended
to represent cash flow from operations as defined by GAAP (and should not be
considered as an indicator of operating performance or an alternative to
cash flow (as measured by GAAP)), it is included herein because the
Company's management believes it is a meaningful measure which provides
additional information with respect to the ability of the Company to meet
its future debt service, capital expenditure and working capital
requirements. EBITDA has been calculated as described above in accordance
with the terms of the indenture under which the 11% Senior Subordinated
Notes were issued and may differ in method of calculation from similarly
titled measures used by other companies. See Item 7. Management's Discussion
and Analysis of Financial Condition and Results of
11
<PAGE> 13
Operations. The computation of EBITDA for each of the respective periods
shown is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------------
1997 1996 1995 1994 1993
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Income (loss) before income
taxes and extraordinary
item......................... $10,202 $(34,852) $(14,541) $ 8,834 $(1,181)
Plus:
Interest expense, net.......... 34,279 19,025 14,379 10,343 11,731
Depreciation and amortization
expense...................... 20,367 19,225 16,261 13,105 12,176
Non-recurring Acquisition &
Financings and conversion
expenses..................... 4,416 32,637 -- -- --
Other non-recurring and
non-cash charges............. 909 14,509 -- -- --
------- -------- -------- ------- -------
Total................ $70,173 $ 50,544 $ 16,099 $32,282 $22,726
======= ======== ======== ======= =======
</TABLE>
EBITDAR represents EBITDA plus operating lease rental expense. Because the
proportion of stores leased versus owned varies among the industry
competitors, the Company believes that EBITDAR permits a meaningful
comparison of operating performance among industry competitors. The Company
leases substantially all of its stores.
(6) Total store square footage is based on the Company's actual store formats
which include normal selling, office, stockroom and receiving space. Average
net sales per store and average net sales per store square foot are based on
the average of beginning and ending number of stores and store square
footage and are not weighted to take into consideration the actual dates of
store openings, closings or expansions.
(7) Comparable store net sales data is calculated based on the change in net
sales commencing after the time a new store has been open twelve months. The
first twelve months a new store is open are not included in the comparable
store calculation. Relocations are included in comparable store net sales
from the date of opening.
(8) Excludes the store count and square footage of the Trak West stores acquired
on December 8, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As used in this section, fiscal 1997 represents the 52 weeks ended February
1, 1998; fiscal 1996 represents the 53 weeks ended February 2, 1997 and fiscal
1995 represents the 52 weeks ended January 28, 1996.
GENERAL
The Company is the largest retailer of automotive parts and accessories in
the Western United States and one of the largest such retailers in the United
States based, in each case, on its number of stores. As of February 1, 1998, the
Company operated 718 stores as one fully integrated company primarily under
three brand names: Checker Auto Parts, founded in 1968 and operating in the
Southwestern and Rocky Mountain states; Schuck's Auto Supply, founded in 1917
and operating in the Pacific Northwest; and Kragen Auto Parts, founded in 1947
and operating primarily in California. Each has a long operating history,
established name recognition and a loyal customer base. Based on store count,
the Company believes that it is the largest retailer of automotive parts and
accessories in 20 of its 27 markets.
Upon the consummation of the Offering, the Company recorded an
extraordinary loss of approximately $4.7 million, net of taxes. Such
extraordinary loss consists primarily of the premiums paid in connection with
the redemption of indebtedness and the write-off of a portion of deferred debt
issuance costs. In addition, upon the consummation of the Offering, the Company
recorded a one-time charge of approximately $3.6 million relating to the
unamortized portion of deferred management fees written-off in connection with
the termination of a management advisory and consulting services agreement with
Investcorp International Inc. Additionally, in connection with the amendment and
restatement of the Senior Credit Facility on December 8,
12
<PAGE> 14
1997, the Company recorded an extraordinary loss of approximately $3.0 million,
net of taxes, attributable to the write-off of a portion of deferred debt
issuance costs. In addition, the Company expects to incur certain one-time
charges in connection with the Trak West Acquisition. See "Trak West
Acquisition."
In the fourth quarter of fiscal 1997, Holdings issued 180,600 shares of its
common stock and options to purchase 135,991 shares of its common stock to
certain of the Company's executives. In connection with the issuance of such
common stock and options, the Company recognized a charge to earnings in the
fourth quarter of fiscal 1997 totaling $0.9 million for the difference between
the issuance price and the fair market value of the common stock at the date of
sale. In addition, the Company recorded deferred compensation totaling $0.5
million for the difference between the exercise price and the fair market value
at the date of grant of the aforementioned options. The deferred compensation
will produce a charge to earnings over the vesting period of the options.
TRAK WEST ACQUISITION
On December 8, 1997, the Company acquired the 82 Trak West stores located
in the Los Angeles market from Trak Auto Corporation. The Trak West Acquisition
provides the Company with a much greater presence (a total of 147 stores) in the
large, strategically important Los Angeles market, without adding additional
retail square footage to the market. The Company has completed the conversion of
these stores to the Kragen name and store format and the integration of these
stores into the Company's operations. The Company acquired these stores for a
total cost of approximately $34.5 million. The Trak West Acquisition was funded
with a $22.0 million equity investment by affiliates of Holdings' existing
stockholders and additional bank borrowings and was accounted for under the
purchase method of accounting.
In connection with the integration of the Trak West stores, the Company
will incur one-time transition expenses of up to $6.0 million, consisting
primarily of grand opening advertising, training and re-merchandising costs.
Approximately $3.4 million of such expenses were incurred during the fourth
quarter of fiscal 1997 with the balance to be incurred during the first quarter
of fiscal 1998. In addition, the Company will incur one-time capital
expenditures of approximately $6.0 million, consisting primarily of expenditures
related to equipment, store fixtures, signage and the installation of the
Company's store-level information systems in the Trak West stores. Approximately
$3.7 million of such capital expenditures were incurred during the fourth
quarter of fiscal 1997 and the balance will be incurred during first quarter of
fiscal 1998.
EFFECT OF THE ACQUISITION AND FINANCINGS
As a result of the Acquisition and Financings, the Company incurred
approximately $12.5 million in fees and charges which were expensed in the
fourth quarter of 1996 when the Acquisition and Financings were consummated.
Such expenses were comprised of advisory and financing fees and expenses of
approximately $11.5 million and an accrual for financing fees to an affiliate of
Carmel of $1.0 million, which was paid in April 1998.
In addition, the Company became obligated to certain members of its
management in the amount of approximately $19.9 million under its then existing
equity participation agreements. The Company expensed this full amount plus a
provision for estimated payroll taxes thereon during the fourth quarter of
fiscal 1996 when the Acquisition and Financings were consummated and paid $9.9
million (approximately 50% of the total obligation) with proceeds from the
Financings. The Company paid the remaining balance in November 1997, and Carmel
reimbursed the Company for approximately 60% (the estimated after tax cost to
the Company) of the amount of such final payment. Such reimbursement was
recorded as a contribution of capital.
There was no change to the Company's historical carrying value of assets
and liabilities as a result of the Acquisition and Financings, as purchase
accounting was not applicable.
13
<PAGE> 15
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data for the
Company expressed as a percentage of net sales for the fiscal years indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales................................................. 100.0% 100.0% 100.0%
Cost of sales............................................. 55.4 58.4 60.4
----- ----- -----
Gross profit......................................... 44.6 41.6 39.6
Operating and administrative expenses..................... 38.6 37.6 39.2
Store closing costs....................................... 0.2 1.9 0.5
Transition and integration expenses....................... 0.4 -- --
Stock-based compensation.................................. 0.1 -- --
Acquisition charge -- equity participation agreements..... -- 2.5 --
----- ----- -----
Operating profit (loss)................................. 5.3 (0.4) (0.1)
Acquisition fees.......................................... 0.1 1.6 --
Interest expense.......................................... 4.0 2.4 2.0
Income tax expense (benefit).............................. 0.5 (1.4) (0.8)
----- ----- -----
Income (loss) before extraordinary item................... 0.7 (3.0) (1.3)
Extraordinary loss, net of income taxes................... 0.4 -- --
----- ----- -----
Net income (loss)......................................... 0.3% (3.0)% (1.3)%
===== ===== =====
</TABLE>
Gross profit consists primarily of net sales less the cost of sales and
warehouse and distribution expenses. Gross profit as a percentage of net sales
may be affected by variations in the Company's product mix, price changes in
response to competitive factors and fluctuations in merchandise costs and vendor
programs.
Operating and administrative expenses are comprised of store payroll, store
occupancy, advertising expenses, other store expenses and general and
administrative expenses, including salaries and related benefits of corporate
employees, administrative office occupancy expenses, data processing,
professional expenses and other related expenses.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for fiscal 1997 increased $52.7 million, or 7%, over net sales
for fiscal 1996. Comparable store sales increased $29.9 million, or 4%, and new
stores contributed $22.2 million to the increase in net sales for the fiscal
year. The former Trak West stores, which were acquired on December 8, 1997,
produced $10.6 million in net sales during the seven week period of fiscal 1997
that they were owned by the Company, which is included in the $22.2 million of
new store sales for fiscal 1997. During fiscal 1997, the Company opened 65 new
stores, relocated 36 stores to larger facilities, expanded 3 stores at their
existing locations, sold 4 stores, closed 5 stores in addition to those closed
due to relocations and acquired 82 stores. At February 1, 1998, the Company had
718 stores in operation.
Gross profit for fiscal 1997 was $377.6 million, or 44.6% of net sales,
compared to $329.7 million, or 41.6% of net sales, for fiscal 1996. The increase
in gross profit percentage resulted from the Company's ability to obtain
generally better pricing and more favorable terms from its vendors as a result
of the Company's improving operating results and financial condition. In
addition, the Company has realized an increase in sales of automotive
replacement parts which produce a higher gross profit percentage than other
product categories. Gross profit percentage was also favorably affected by
efficiencies produced by the Company's warehousing and distribution systems.
Operating and administrative expenses increased by $28.2 million to $326.2
million, or 38.6% of net sales, for fiscal 1997 from $298.0 million, or 37.6% of
net sales, for fiscal 1996. The increase in this expense as a
14
<PAGE> 16
percentage of net sales is primarily the result of the incremental operating
costs of new stores that are in the early stages of maturation. In addition, the
Company incurred increased advertising costs of approximately $1.9 million in
fiscal 1997 as a result of a shift in the mix of its advertising media from
primarily print to a greater usage of radio and television. Also, the Company
incurred approximately $0.9 million of stock based compensation expense in
fiscal 1997 as the result of the sale of stock to certain members of management
at a discount to its fair market value.
Operating profit increased to $45.5 million, or 5.3% of net sales, for
fiscal 1997, compared to an operating loss of $3.4 million, or 0.4% of net
sales, for fiscal 1996. Significant items that affect the comparability of these
operating results include: $1.6 million of store closing costs in fiscal 1997
compared to $14.9 million of store closing costs in fiscal 1996; $3.4 million of
transition and integration expense in fiscal 1997 associated with the Trak West
Acquisition with no such expense occurring in fiscal 1996; and $20.2 million of
Acquisition charges in fiscal 1996 in connection with certain equity
participation agreements with no such charges occurring in fiscal 1997. The 1996
store closing cost includes a charge of $12.9 million to reflect the store
closing costs of 91 specific store sites that were included in an update of the
Company's strategic plan for store relocation and expansion as more fully
discussed later herein.
Interest expense for fiscal 1997 totaled $34.3 million, compared to $19.0
million for fiscal 1996. The increase is the result of the issuance on October
30, 1996 of $125.0 million of 11% Senior Subordinated Notes due 2006, and
increased borrowings under the Company's Senior Credit Facility.
Income tax expense totaled $4.2 million in fiscal 1997, an effective tax
rate of 41%, compared to an income tax benefit of $11.3 million for fiscal 1996.
An extraordinary loss of $3.0 million, net of income taxes, was incurred in
fiscal 1997 as the result of the write-off of the deferred financing costs
associated with the Company's Senior Credit Facility. Such write-off was
incurred in connection with the amendment and restatement of the facility, which
is more fully discussed herein. See "Liquidity and Capital Resources."
As a result of the above factors, net income increased to $3.0 million for
fiscal 1997, compared to a net loss of $23.5 million for fiscal 1996.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased by $19.7 million to $70.2 million for fiscal 1997, compared to $50.5
million for fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales for fiscal 1996 increased by $74.7 million, or 10.4%, over net
sales for fiscal 1995. This increase was due to an increase in comparable store
sales of 6%, or $42.5 million, and an increase in net sales from new stores of
$32.2 million. The Company believes its comparable store sales have benefited
from the installation of its new store-level information systems, implementation
of its Commercial Sales Program, its store relocation program and its expanded
Priority Parts operation. During fiscal 1996, the Company opened 19 new stores,
relocated 37 stores to larger facilities, expanded eight stores at existing
locations and closed five stores in addition to relocations.
Gross profit for fiscal 1996 was $329.7 million, or 41.6% of net sales,
compared with $284.5 million, or 39.6% of net sales, during fiscal 1995. The
increase in gross profit percentage resulted from an increase in the sales of
automotive replacement parts which produce a higher gross profit percentage than
other product categories. Gross profit was also favorably impacted due to
efficiencies gained from the Company's new warehouse and distribution systems
which became fully operational in the fourth quarter of fiscal 1995. The Company
believes that it was able to obtain better pricing from its vendors as a result
of improvement in its financial performance and access to credit during fiscal
1996. These favorable factors were slightly offset in fiscal 1996 by the lower
gross margins on commercial sales as compared to retail sales.
Operating and administrative expenses for fiscal 1996 increased by $16.6
million over such expenses for fiscal 1995 but, as a percentage of net sales,
decreased to 37.6% from 39.2%. This decrease reflects the Company's ability to
leverage its overhead and fixed expenses with higher sales volume despite an
increase of
15
<PAGE> 17
approximately $3.0 million in depreciation and amortization expense associated
with the equipment installed as part of its investment in store-based
information systems.
In January 1997, the Company updated its strategic plan relating to the
relocation of certain stores. The Acquisition and Financings provided the
Company with greater access to capital resources and the availability of a
sale-leaseback facility, and thereby enhanced the Company's ability to implement
such relocations. While the Company believes that there will be long-term
operating benefits from its store relocation strategy, the Company will incur
costs for early lease terminations or negative sub-lease rentals for stores
vacated under this plan and, accordingly, a charge to earnings of $12.9 million
was recorded in January 1997 to increase the provision for store closing costs
to $14.9 million for fiscal 1996 from $3.3 million for fiscal 1995.
The $12.9 million charge reflects store closing costs associated with 91
specific store sites included in the strategic plan. The store sites have been
selected for relocation on the basis of their operating performance relative to
their size. The Company has selected these stores for relocation because of
their inability to realize future sales growth because of their relatively small
size. Stores have been included in the plan for relocation because a larger, or
otherwise more favorable, site within its market area has been identified.
Stores are scheduled to be closed at specific dates under the plan consistent
with the commencement of operations of the new store. The Company has
historically experienced sales growth shortly after opening the relocated
stores.
The $12.9 million charge consists principally of future lease costs under
non-cancelable leases for the 91 specifically identified store locations (from
the planned vacancy date), related estimates for vacancy periods, writeoffs of
certain fixed assets and leasehold improvements, and estimated credit losses
with respect to sub-lease arrangements. Significant changes to the strategic
plan are not considered likely, as all relocations are anticipated to be
completed within 18 months of the plan's adoption. Future rents will be incurred
through the expiration of the non-cancelable leases, which range from August
1998 to May 2008.
To recognize all of the Company's obligations under certain pre-existing
equity participation agreements with members of management which arose due to
the Acquisition and Financings, the Company recorded a charge of approximately
$20.2 million in the fourth quarter of fiscal 1996. (See Note 2 to Item 8.
Consolidated Financial Statements.) In addition, the Company incurred
non-recurring Acquisition and Financings expenses totaling $12.5 million which
consisted primarily of consulting, legal and accounting fees.
Interest expense for fiscal 1996 was $19.0 million compared to $14.4
million for fiscal 1995. The increase in interest expense was the result of
higher average effective interest rates and the issuance of approximately $131.9
million of new debt in connection with the Acquisition and Financings.
As a result of the above factors, a net loss of $23.5 million was recorded
for fiscal 1996 as compared to a net loss of $9.1 million for fiscal 1995.
EBITDA for fiscal 1996 increased by $34.4 million to $50.5 million compared
to $16.1 million for fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements include working capital (primarily
inventory), debt service obligations and store fixtures and leasehold
improvements associated with its store growth strategy. The Company intends to
finance such requirements with cash flow from operations, funds from a recently
established leasing facility and borrowings under its revolving credit facility,
which provides total borrowing capacity of $125.0 million, of which $60.0
million was available as of February 1, 1998. On November 18, 1997, the Company
entered into an agreement with an unrelated third party for the establishment of
a $125.0 million leasing facility that will provide financing for the
acquisition and development of approximately 100 to 125 new stores over the
period from February 1, 1998 through May 31, 1999. The Company believes that
cash flow from operations combined with the availability of funds under the
recently established leasing facility and the revolving credit facility will be
sufficient to support its operations and liquidity requirements for the
foreseeable future.
16
<PAGE> 18
On December 8, 1997, in connection with the consummation of the Trak West
Acquisition, the Company amended and restated the Senior Credit Facility to
provide maximum borrowings of $300.0 million, subject to the limitations on the
incurrence of indebtedness under the indenture governing the 11% Senior
Subordinated Notes. As amended and restated, the Senior Credit Facility provides
for a $175.0 million term loan and a revolving credit facility with maximum
borrowings of $125.0 million. In addition to increasing the term loan and
revolving credit facility availability by $75.5 million and $25.0 million,
respectively, the amendment and restatement primarily provided for: (i) an
initial reduction in the interest rate for the term loan and the revolving
credit facility and the introduction of a pricing grid which periodically
permits adjustment based upon the Company's degree of leverage; (ii) the
elimination of the previous borrowing base restrictions on revolving credit
borrowings; (iii) capital expenditure "baskets" for the Trak West Acquisition
and for up to $50.0 million of other acquisitions, subject to pro forma
compliance with financial covenants; and (iv) a $50.0 million revolving capital
expenditure "basket" of funds that can be used by the Company to finance store
purchase and development activities. The term loan portion of the Senior Credit
Facility matures on October 31, 2003 and the revolving credit portion matures on
October 31, 2001.
In fiscal 1997, net cash used in operating activities was $56.6 million,
which consisted primarily of $3.0 million of net income, $22.1 million of
non-cash depreciation and amortization expenses, a $3.0 million non-cash
extraordinary loss and a $4.2 million decrease in deferred tax assets, offset by
a $88.9 million increase in working capital. During this period, the Company
used $63.8 million of cash to increase inventory levels, primarily for funding
new store openings and for expanding the offering of replacement parts SKUs in
its stores. Net cash used in investing activities totaled $56.7 million and
consisted primarily of $34.5 million with respect to the Trak West Acquisition
and $20.1 million of capital expenditures. Net cash provided by financing
activities totaled $112.9 million and consisted primarily of net borrowings
under the Senior Credit Facility and $21.7 million of contributions from
Holdings. At February 1, 1998, the Company had approximately $19.3 million of
net operating loss carryforwards available which will reduce future cash
requirements for the payment of federal income taxes.
In fiscal 1996, net cash used by operating activities was $38.4 million,
which consisted primarily of a $23.5 million net loss, an $11.3 million increase
in deferred tax assets and a $34.8 million increase in working capital,
partially offset by non-cash expenses of $20.6 million for depreciation and
amortization and $10.5 million for store closing costs. Net cash used for
investing activities was $10.7 million and was comprised of $6.3 million of
funds used for capital expenditures and a net $4.4 million of purchases in
excess of proceeds for assets held for sale. Net cash provided by financing
activities was $49.9 million and was primarily the result of the Acquisition and
Financings.
On March 17, 1998, the Company's parent entity, Holdings, completed an
initial public offering of approximately 8.6 million shares of its common stock.
The Offering generated net proceeds of approximately $159.1 million which were
used to reduce outstanding debt of Holdings and of the Company, as follows, (in
millions):
<TABLE>
<S> <C>
Holdings' 12% Subordinated Notes............................ $ 50.0
11% Senior Subordinated Notes............................... 43.8
Senior Credit Facility...................................... 53.8
Premiums on retirement...................................... 4.9
Accrued interest............................................ 6.6
------
$159.1
======
</TABLE>
Upon the retirement of Holdings' 12% Subordinated Notes, all of the
Company's outstanding preferred stock was cancelled.
YEAR 2000 CONVERSION
The Company uses one Hitachi Data System EX33 Mainframe, four IBM AS/400's
("AS/400") and over 400 personal computers which are connected to a local area
network. A satellite communications network provides the connectivity from the
centralized Company database to the stores.
17
<PAGE> 19
The Company's store-based information systems are on a UNIX based platform
with full connectivity between the EPC and the POS systems. This includes
electronic ordering from the EPC via the corporate office AS/400 to the
Company's Priority Parts depots, third-party warehouse distributors and directly
to vendors.
Based on a recent assessment, the Company determined that it will be
required to modify or replace certain portions of its software so that its
computer systems will properly utilize dates beyond December 31, 1999 (the "Year
2000 Conversion"). The Company presently believes that with modifications to
existing software and conversions to new software, the cost of its Year 2000
Conversion can be mitigated. However, if such modifications and conversions are
not made, or are not completed in a timely manner, the failure of its Year 2000
Conversion could have a material adverse effect on the operations of the
Company.
The Company has initiated formal communications with all of its significant
business partners to determine the extent to which the Company is exposed to
failure by those third parties to remediate their own Year 2000 Conversion
issues. The Company's total Year 2000 Conversion project cost and its estimates
to complete necessary actions include the estimated costs and time associated
with the impact of its business partners' Year 2000 Conversion issues and are
based on information presently available. There can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted, or that a failure to convert by another company, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company. The Company does not believe that it has a material
contingency related to its Year 2000 Conversion for the products it has sold.
The Company will utilize both internal and external resources to reprogram,
replace and test its software for its Year 2000 Conversion. The Company plans to
complete its Year 2000 Conversion not later than June 30, 1999. The total
remaining cost of its Year 2000 Conversion is estimated at $8.9 million and is
being funded with lease financing and operating cash flows. Of the total project
cost, approximately $6.7 million is attributable to the purchase of new software
which will be capitalized. The remaining $2.2 million will be expensed as
incurred over the next two fiscal years. To date, the Company has incurred and
expensed approximately $0.3 million related to the assessment of and preliminary
efforts in connection with its Year 2000 Conversion project. To date,
approximately $1.0 million has been capitalized in connection with the
replacement of certain software applications.
The costs of the Year 2000 Conversion and the date on which the Company
plans to complete the project are based upon management's best estimates, which
were derived utilizing numerous assumptions of future events. There can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that could cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes and similar uncertainties.
NEW ACCOUNTING STANDARDS
During fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure," which
had no effect on the Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," and No. 131, "Disclosures about Segments of an Enterprise and Related
Information." In February 1998, the FASB issued No. 132, "Employers Disclosures
about Pensions and Other Postretirement Benefits." The Company will adopt these
statements during fiscal 1998. As these statements only require additional
disclosures in the Company's financial statements, their adoption will not have
any effect on the Company's financial position or results of operations.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1," Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use". The SOP defines the characteristics of internal-use
18
<PAGE> 20
computer software, criteria for capitalization, and financial statement
disclosure requirements. The SOP is effective for fiscal years beginning after
December 15, 1998, with earlier application encouraged. The Company is in the
process of evaluating the impact of early adoption of SOP 98-1 upon its
financial position and results of operations.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-5, "Reporting on the Cost of Start-up Activities." The SOP broadly defines
start-up activities as those one-time activities related to opening a new
facility, introducing a new product or service, conducting business in a new
territory, or commencing some new operation. The SOP requires that the costs of
start-up activities be expensed as incurred and is effective for financial
statements for fiscal years beginning after December 15, 1998, with earlier
application encouraged. The Company's current accounting policy with respect to
the cost of start-up activities is to defer such costs for the approximately
three month period of time that it takes to develop a new store facility and to
expense such costs during the month that the new store opens. The Company is in
the process of evaluating the impact of early adoption of SOP 98-5 upon its
financial position and results of operations.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
19
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CSK Auto, Inc. (a wholly-owned subsidiary of
CSK Auto Corporation)
We have audited the accompanying consolidated balance sheets of CSK Auto,
Inc. (the "Company") as of February 1, 1998 and February 2, 1997 and the related
consolidated statement of operations, stockholder's equity, cash flows and
financial statement schedules for the years then ended as listed in item 14(a-2)
of this Form 10-K. These financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CSK Auto, Inc.
as of February 1, 1998 and February 2, 1997, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
April 10, 1998
20
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
CSK Auto, Inc. (a wholly-owned subsidiary of CSK Auto Corporation)
In our opinion, the accompanying consolidated statements of operations, of
stockholder's equity (deficit) and of cash flows for the year ended January 28,
1996 present fairly, in all material respects, the financial position of CSK
Auto, Inc. (a wholly-owned subsidiary of CSK Auto Corporation) and its
subsidiaries for the year ended January 28, 1996, in conformity with generally
accepted accounting principles. 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 audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of CSK Auto, Inc. for any period subsequent to
January 28, 1996.
PRICE WATERHOUSE LLP
Phoenix, Arizona
May 21, 1996
21
<PAGE> 23
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................. $845,815 $793,092 $718,352
Cost and expenses:
Cost of sales........................................... 468,171 463,374 433,817
Operating and administrative............................ 326,198 298,004 281,387
Store closing costs..................................... 1,640 14,904 3,310
Transition and integration expenses..................... 3,407 -- --
Stock-based compensation................................ 909 -- --
Acquisition charge -- equity participation agreements... -- 20,174 --
-------- -------- --------
800,325 796,456 718,514
-------- -------- --------
Operating profit (loss)................................... 45,490 (3,364) (162)
Other Acquisition and Financings fees..................... 1,009 12,463 --
Interest expense.......................................... 34,279 19,025 14,379
-------- -------- --------
Income (loss) before income taxes and extraordinary
item.................................................... 10,202 (34,852) (14,541)
Income tax expense (benefit).............................. 4,179 (11,318) (5,447)
-------- -------- --------
Income (loss) before extraordinary item................... 6,023 (23,534) (9,094)
Extraordinary loss, net of $2,091 of income taxes......... 3,015 -- --
-------- -------- --------
Net income (loss)......................................... $ 3,008 $(23,534) $ (9,094)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE> 24
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 2,
1998 1997
------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 4,852 $ 5,223
Receivables, net of allowances of $2,403 and $1,768,
respectively.............................................. 37,566 28,511
Inventories................................................. 367,366 268,214
Assets held for sale........................................ 2,418 5,971
Prepaid expenses and other current assets................... 14,143 10,139
-------- --------
Total current assets.............................. 426,345 318,058
-------- --------
Property and equipment, net................................. 85,940 71,363
Leasehold interests, net.................................... 10,934 12,683
Deferred income taxes....................................... 19,470 18,089
Other assets, net........................................... 14,427 19,350
-------- --------
Total assets...................................... $557,116 $439,543
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Accounts payable............................................ $109,962 $120,998
Outstanding checks.......................................... 4,308 7,004
Accrued payroll and related expenses........................ 20,869 15,851
Accrued expenses and other current liabilities.............. 40,818 44,444
Due to affiliates........................................... 1,000 --
Current maturities of amounts due under Senior Credit
Facility.................................................. 1,000 1,000
Current maturities of capital lease obligations............. 8,671 7,007
Deferred income taxes....................................... 4,066 597
-------- --------
Total current liabilities......................... 190,694 196,901
-------- --------
Amounts due under Senior Credit Facility.................... 239,050 137,000
Obligations under 11% Senior Subordinated Notes............. 125,000 125,000
Obligations under capital leases............................ 16,241 15,673
Due to affiliates........................................... -- 1,000
Other....................................................... 17,321 20,675
-------- --------
Total non-current liabilities..................... 397,612 299,348
-------- --------
Commitments and contingencies
Stockholder's equity (deficit):
Redeemable preferred stock, $0.01 par value, 206,500 shares
authorized, 50,000 shares issued and outstanding,
liquidation preference redeemable at $1,000 per share, 12%
cumulative dividend....................................... 1 1
Common stock, $0.01 par value, 20,000 shares authorized,
2,000 shares issued and outstanding....................... 1 1
Additional paid-in capital.................................. 25,954 1,501
Stockholder receivable...................................... (1,168) (5,966)
Deferred compensation....................................... (675) --
Accumulated deficit......................................... (55,303) (52,243)
-------- --------
Total stockholder's deficit....................... (31,190) (56,706)
-------- --------
Total liabilities and stockholder's deficit....... $557,116 $439,543
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE> 25
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
REDEEMABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- --------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------ ------ ------ ------ ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 29,
1995..................... -- $-- 2,000 $1 $ 82,407 $(18,032)
Contribution from
Holdings................. -- -- -- -- 4,715 --
Net loss................... (9,094)
------ -- ----- -- --------- --------
Balance at January 28,
1996..................... -- -- 2,000 1 87,122 (27,126)
Redeemable preferred shares
issued................... 50,000 1 -- -- 45,999 --
Stockholder receivable..... -- -- -- -- 5,966 --
Dividend to affiliate...... -- -- -- -- (238,468) --
Contribution from
Holdings................. -- -- -- -- 100,882 --
Net loss................... -- -- -- -- -- (23,534)
Accrual of dividend on
preferred stock.......... -- -- -- -- -- (1,583)
------ -- ----- -- --------- --------
Balance at February 2,
1997..................... 50,000 1 2,000 1 1,501 (52,243)
Recovery of stockholder
receivable............... -- -- -- -- -- --
Contribution from
Holdings................. -- -- -- -- 22,610 --
Stockholder receivable..... -- -- -- -- 1,168 --
Deferred compensation...... -- -- -- -- 675 --
Accrual of dividend on
preferred stock.......... -- -- -- -- -- (6,068)
Net income................. -- -- -- -- -- 3,008
------ -- ----- -- --------- --------
Balance at February 1,
1998..................... 50,000 1 2,000 $1 $ 25,954 $(55,303)
====== == ===== == ========= ========
<CAPTION>
STOCKHOLDER DEFERRED TOTAL EQUITY
RECEIVABLE COMPENSATION (DEFICIT)
----------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Balance at January 29,
1995..................... $ -- $ -- $ 64,376
Contribution from
Holdings................. -- -- 4,715
Net loss................... (9,094)
------- ----- ---------
Balance at January 28,
1996..................... -- -- 59,997
Redeemable preferred shares
issued................... -- -- 46,000
Stockholder receivable..... (5,966) -- --
Dividend to affiliate...... -- -- (238,468)
Contribution from
Holdings................. -- -- 100,882
Net loss................... -- -- (23,534)
Accrual of dividend on
preferred stock.......... -- -- (1,583)
------- ----- ---------
Balance at February 2,
1997..................... (5,966) -- (56,706)
Recovery of stockholder
receivable............... 5,966 -- 5,966
Contribution from
Holdings................. -- -- 22,610
Stockholder receivable..... (1,168) -- --
Deferred compensation...... -- (675) --
Accrual of dividend on
preferred stock.......... -- -- (6,068)
Net income................. -- -- 3,008
------- ----- ---------
Balance at February 1,
1998..................... $(1,168) $(675) $ (31,190)
======= ===== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 26
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss)....................................... $ 3,008 $ (23,534) $ (9,094)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and
equipment.......................................... 18,078 17,290 14,343
Amortization of leasehold interests.................. 1,176 1,749 1,647
Amortization of other deferred charges............... 1,113 186 271
Amortization of deferred financing costs............. 1,710 1,421 737
Extraordinary loss on early retirement of debt,
net................................................ 3,015 -- --
Deferred income taxes................................ 4,179 (11,318) (5,448)
Change in operating assets and liabilities, net of
effects of Trak West Acquisition:
Accounts receivable................................ (9,055) (3,063) (11,772)
Inventories........................................ (63,830) (19,250) (23,081)
Prepaid expenses and other current assets.......... (4,057) (5,316) 542
Accounts payable................................... (11,036) (24,250) 14,170
Outstanding checks................................. (2,696) (1,457) 8,461
Accrued payroll, accrued expenses and other current
liabilities..................................... 2,021 16,993 (496)
Due to affiliate................................... -- (4,530) 5,530
Store closing costs................................ (3,781) 10,544 (447)
Other.............................................. 3,585 6,169 1,276
--------- --------- ---------
Net cash used in operating activities................ (56,570) (38,366) (3,361)
--------- --------- ---------
Cash flows used in investing activities:
Capital expenditures.................................... (20,132) (6,317) (11,640)
Expenditures for assets held for sale................... (12,335) (19,023) (24,203)
Proceeds from sale of property and equipment and assets
held for sale........................................ 10,966 14,667 28,257
Acquisition of the Trak West stores..................... (34,504) -- --
Other investing activities.............................. (722) (13) (302)
--------- --------- ---------
Net cash used in investing activities................... (56,727) (10,686) (7,888)
--------- --------- ---------
Cash flows provided by financing activities:
Borrowings under Senior Credit Facility................. 325,550 805,242 809,663
Payments of debt........................................ (223,500) (763,304) (795,807)
Issuance of 11% Senior Subordinated Notes............... -- 125,000 --
Issuance of preferred stock............................. -- 46,000 --
Payments on capital lease obligations................... (7,478) (5,888) (4,976)
Dividend paid to affiliate.............................. -- (238,468) --
Payment of dividends on preferred stock................. (6,133) -- --
Contributions from parent company....................... 21,714 100,882 4,715
Recovery of stockholder receivable...................... 5,966 -- --
Note issuance costs..................................... -- (18,632) --
Other................................................... (3,193) (921) (852)
--------- --------- ---------
Net cash provided by financing activities................. 112,926 49,911 12,743
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents...... (371) 859 1,494
Cash and cash equivalents, beginning of period............ 5,223 4,364 2,870
--------- --------- ---------
Cash and cash equivalents, end of period.................. $ 4,852 $ 5,223 $ 4,364
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 27
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CSK Auto, Inc. (the "Company") is a specialty retailer of automotive
aftermarket parts and accessories. At February 1, 1998, the Company operated 718
stores in 12 Western states as a fully integrated company under three brand
names: Checker Auto Parts, founded in 1968 and operating in the Southwestern and
Rocky Mountain states; Schuck's Auto Supply, founded in 1917 and operating in
the Pacific Northwest; and Kragen Auto Parts, founded in 1947 and operating
primarily in California. The Company is a wholly-owned subsidiary of CSK Auto
Corporation ("Holdings").
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries Schuck's Distribution Co. and Kragen Auto
Supply Co. for all years presented. In addition, the accounts of TRK Socal, Inc.
(the former Trak West stores) are included from December 9, 1997 through
February 1, 1998. All intercompany accounts and transactions are eliminated in
consolidation. On April 8, 1998, Schuck's Distribution Co., Kragen Auto Supply
Co. and TRK Socal, Inc. were merged into the Company.
Fiscal Year
The Company's fiscal year-end is on the Sunday nearest to January 31 of the
following calendar year. The years ended February 1, 1998 (fiscal "1997") and
January 28, 1996 (fiscal "1995") consisted of 52 weeks, while the year ended
February 2, 1997 (fiscal "1996") consisted of 53 weeks.
Cash Equivalents
Cash equivalents consist primarily of certificates of deposit with
maturities of three months or less when purchased.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents
and trade receivables. As of February 1, 1998, the Company had cash and cash
equivalents on deposit with a major financial institution which were in excess
of FDIC insured limits. Historically, the Company has not experienced any losses
of its cash and cash equivalents due to such concentration of credit risk.
The Company does not hold collateral to secure payment of its trade
accounts receivable. However, management performs ongoing credit evaluations of
its customers' financial condition and provides an allowance for estimated
potential losses. Exposure to credit loss is limited to the carrying amount.
Accounts receivable is primarily comprised of amounts due from vendors for
rebates or allowances and from commercial sales customers.
Inventories and Cost of Sales
Inventories are valued at the lower of cost or market, cost being
determined utilizing the last-in, first-out method. Cost of sales includes
product cost, net of earned vendor rebates, discounts and allowances. The
Company recognizes vendor rebates, discounts and allowances based on the terms
of the underlying agreements. Such amounts may be recognized immediately,
amortized over the life of the applicable agreements, or recognized as inventory
is sold. Certain operating and administrative costs are capitalized in
inventories. The amounts of capitalized operating and administrative costs
included in inventory as of February 1, 1998 and February 2, 1997 were
approximately $11.8 million and $9.7 million, respectively. The
26
<PAGE> 28
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
replacement cost of inventories approximated $316.2 million at February 1, 1998
and $225.6 million at February 2, 1997.
Property and Equipment
Property, equipment and purchased software are recorded at cost.
Depreciation and amortization are computed for financial reporting purposes
utilizing primarily the straight line method over the estimated useful lives of
the related assets which range from 5 to 25 years, or for leasehold improvements
and property under capital lease, the base lease term or estimated useful life,
if shorter. Maintenance and repairs are charged to earnings when incurred.
Store Preopening Costs
Store preopening costs, consisting primarily of incremental labor, supplies
and occupancy costs directly related to the opening of specific stores, are
capitalized as prepaid expenses and other current assets and expensed during the
month in which the store is opened.
Internal Software Development Costs
Internal software development costs, consisting primarily of incremental
internal labor costs and benefits, are expensed as incurred. Total amounts
charged to operations for fiscal years 1997, 1996 and 1995 were approximately
$1.3 million, $1.5 million and $6.2 million, respectively.
Leasehold Interests
Leasehold interests represent the discounted net present value of the
excess of the fair rental value over the respective contractual rent of
facilities under operating leases acquired in business combinations.
Amortization expense is computed on a straight-line basis over the respective
lease terms. Accumulated amortization totaled $16.2 million and $16.3 million at
February 1, 1998 and February 2, 1997, respectively.
Store Closing Costs
The company provides an allowance for estimated costs and losses to be
incurred in connection with store closures and losses on the disposal of
store-related assets, which is net of anticipated sublease income. See Note 12.
Advertising
The Company expenses all advertising costs as such costs are incurred.
Amounts due under vendor cooperative advertising agreements are recorded as
receivables until their collection. Advertising expense for fiscal years 1997,
1996 and 1995 totaled approximately $23.7 million, $21.8 million and $19.8
million, respectively.
Assets Held for Sale
Assets held for sale consist of newly acquired land, buildings and store
fixtures owned by the Company which the Company intends in the next twelve
months to sell to and lease back from third parties under operating lease
arrangements.
27
<PAGE> 29
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Long-lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of"
("SFAS 121"), issued in March 1995 and effective for fiscal years beginning
after December 15, 1995, requires recognition of impairment losses whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company evaluates the carrying value of long-lived
assets under the provisions of SFAS 121 on a quarterly basis. Based upon such
evaluations, no impairment loss has been recognized in the accompanying
consolidated financial statements.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax basis of assets and liabilities ("temporary
differences") and their financial reporting amounts at each year end based on
enacted tax laws and statutory rates applicable to the period in which the
temporary differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable for the
period and the change during the period in deferred tax assets and liabilities.
Stock-based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations thereof. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock. See Note 9.
Earnings per Share
Historical earnings per share have not been presented due to the fact that
the information is not considered meaningful because the Company is a
wholly-owned subsidiary of Holdings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Reclassifications
Certain prior year financial statement amounts have been reclassified to
conform to the current year presentation.
28
<PAGE> 30
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
New Accounting Standards
During fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure," which
had no effect on the Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," and No. 131, "Disclosures about Segments of an Enterprise and Related
Information." In February 1998, the FASB issued No. 132, "Employers Disclosures
about Pensions and Other Postretirement Benefits." The Company will adopt these
statements during fiscal 1998. As these statements only require additional
disclosures in the Company's financial statements, their adoption will not have
any effect on the Company's financial position or results of operations.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1, "Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use". The SOP defines the characteristics of internal-use computer
software, criteria for capitalization, and financial statement disclosure
requirements. The SOP is effective for fiscal years beginning after December 15,
1998, with earlier application encouraged. The Company is in the process of
evaluating the impact of early adoption of SOP 98-1 upon its financial position
and results of operations.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-5, "Reporting on the Cost of Start-up Activities." The SOP broadly defines
start-up activities as those one-time activities related to opening a new
facility, introducing a new product or service, conducting business in a new
territory, or commencing some new operation. The SOP requires that the costs of
start-up activities be expensed as incurred and is effective for financial
statements for fiscal years beginning after December 15, 1998, with earlier
application encouraged. The Company's current accounting policy with respect to
the cost of start-up activities is to defer such costs for the approximately
three month period of time that it takes to develop a new store facility and to
expense such costs during the month that the new store opens. The Company is in
the process of evaluating the impact of early adoption of SOP 98-5 upon its
financial position and results of operations.
NOTE 2 -- ACQUISITION AND FINANCINGS
In October 1996, certain affiliates of Investcorp and certain other
investors (collectively with Investcorp, the "Investcorp Group") acquired a 51%
common equity interest in Holdings for $105.0 million in cash from Carmel, which
previously had held 100% of the common equity interests in Holdings. A
corporation in which an affiliate of Investcorp held a minority interest also
purchased $40.0 million in aggregate principal amount of Holdings' 12%
Subordinated Notes for $40.0 million in cash, and Holdings in turn purchased
$40.0 million of preferred stock of the Company. Transatlantic Finance, Ltd., an
affiliate of Carmel ("Transatlantic," and with Carmel, the "Carmel Group")
purchased $10.0 million in aggregate principal amount of Holdings' 12%
Subordinated Notes, and Holdings in turn purchased $10.0 million of preferred
stock of the Company. The Company then borrowed $100.0 million under the Senior
Credit Facility, which together with the net proceeds from the sale of $125.0
million of 11% Senior Subordinated Notes due 2006 and the net proceeds from the
sale by the Company to Holdings of $50.0 million of preferred stock, following a
dividend to Holdings by the Company, was used to redeem the stock of Holdings
held by Carmel for $238.5 million. Carmel then purchased from Holdings for
$100.9 million a 49% common equity interest in Holdings. The Company then repaid
amounts outstanding under a then existing credit agreement, which was
terminated, and paid $9.9
29
<PAGE> 31
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- ACQUISITION AND FINANCINGS -- CONTINUED
million to members of management pursuant to previously existing equity
participation agreements and incurred additional expenses of $22.7 million
related to the foregoing. The foregoing transactions are referred to
collectively as the "Acquisition and Financings." Following the Acquisition and
Financings, the Investcorp Group owned a 51% common equity interest in Holdings,
a corporation in which an affiliate of Investcorp held a minority interest owned
$40.0 million in aggregate principal amount of Holdings' 12% Subordinated Notes,
Carmel owned a 49% common equity interest in Holdings, Transatlantic owned $10.0
million in aggregate principal amount of Holdings' 12% Subordinated Notes and
Holdings owned 100% of the common equity and $50.0 million of preferred stock of
the Company.
Prior to the Acquisition and Financings, Holdings had entered into
incentive compensation agreements with certain of its executives pursuant to
which they would be compensated in a sale of Holdings' equity securities as if
they owned specified percentages of Holdings' outstanding common stock. Pursuant
to these agreements, two former and five current executive officers received
certain payments in connection with the Acquisition and Financings based upon
the consideration they would have been entitled to if they had owned an
aggregate of 6.4% of Holdings' common stock and had sold all of such common
stock in connection with the Acquisition at the price per share paid for such
shares in the Acquisition and Financings. Upon closing of the Acquisition, the
Company became obligated in the amount of approximately $19.9 million under
these equity participation agreements. The Company expensed this full amount
plus a provision for estimated payroll taxes thereon during the fourth quarter
of fiscal 1996 when the Acquisition and Financings were consummated and paid
$9.9 million (approximately 50% of the total obligation) with proceeds from the
Financings. The Company paid the remaining balance in November 1997 and Carmel
reimbursed the Company for approximately 60% (the estimated after-tax cost to
the Company) of the amount of such final payment. Such estimated reimbursement
has been recorded as a "Stockholder Receivable" and as "Additional Paid-in
Capital".
In addition, the Company incurred legal, accounting, consulting, bridge
loan commitment and other Acquisition and Financings fees and expenses of
approximately $12.5 million.
The sources and uses of cash in the Acquisition and Financings which
transpired on October 30, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
SOURCES OF CASH
Issuance of 11% Senior Subordinated Notes................... $125,000
Senior Credit Facility -- Term Loan......................... 100,000
Issuance of Holdings' 12% Subordinated Notes................ 50,000
Capital Contribution from Carmel............................ 100,882
--------
$375,882
========
USES OF CASH
Redemption of stock held by Carmel.......................... $238,468
Payments under Equity Participation Agreements.............. 10,121
Retirement of then existing credit agreement................ 93,072
Payments for debt issuance costs............................ 18,632
Payments for advisory and financing fees.................... 14,542
Increase in working capital................................. 1,047
--------
$375,882
========
</TABLE>
30
<PAGE> 32
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- TRAK WEST ACQUISITION
On December 8, 1997, the Company acquired a newly formed subsidiary ("Trak
West") of Trak Auto Corporation ("Trak Auto"). Upon its formation, Trak Auto
contributed to Trak West the fixtures and equipment, merchandise inventories and
store leases of 82 specific store sites in Southern California, together with
the merchandise inventory of the Ontario, California distribution center
operated by Trak Auto. After this contribution, Trak West had no liabilities and
owned no other assets than those previously described.
The Company acquired Trak West for a total cost of approximately $34.5
million and financed its acquisition with a $22.0 million equity investment by
affiliates of Holdings' existing stockholders and borrowings under the Senior
Credit Facility. In connection with the sale of capital stock to the Investcorp
Group, an affiliate of Investcorp was paid a $1.0 million placement fee. In
connection with the negotiation of the Trak West Acquisition, TG Investments,
Ltd., an affiliate of Carmel, was paid a $1.0 million consulting fee.
The Trak West Acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of operations of these stores are included
in the consolidated operating results of the Company from December 9, 1997, the
first day of operations subsequent to the acquisition, and were not material.
The purchase price was allocated based upon the fair market values of
assets acquired at December 8, 1997 as follows (in thousands):
<TABLE>
<S> <C>
Inventories................................................. $35,322
Closed store reserves....................................... (625)
Benefits costs.............................................. (193)
-------
Total............................................. $34,504
=======
</TABLE>
No goodwill was recorded in connection with this acquisition.
NOTE 4 -- TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES
During the years ended January 28, 1996 and February 2, 1997, the Company
received approximately $14.1 million and $18.5 million, respectively, of
proceeds from the sale of realty and fixtures to an affiliate at amounts that
equaled the Company's cost, which approximated fair market value. The related
assets were subsequently leased back by the Company under operating lease
arrangements. No such transactions occurred during fiscal 1997.
In October 1989, the Company entered into a nine year lease (the "Initial
Lease") for its corporate headquarters in Phoenix, Arizona, with an unaffiliated
landlord. The lease relates to approximately 78,577 square feet and provides for
a current base rent of approximately $1,490,000 per year. During January 1994,
Missouri Falls Holdings Corp., an affiliate of the Company, acquired an interest
in the partnership ("Missouri Falls Partners") which acquired the building and
assumed the lease between the Company and the former landlord. In April 1995,
the Company assumed a lease (the "Subsequent Lease") between a former tenant and
Missouri Falls Partners for approximately 11,683 square feet of additional
office space at a current lease rent of $148,958 per year. In connection with
the Acquisition and Financings, both the Initial Lease and the Subsequent Lease
were extended through October 2006 and, at its originally scheduled termination
in April 1998, rent under the Subsequent Lease will increase to the same per
square foot rent as is charged under the Initial Lease. Additionally, the
Company rents approximately 5,754 square feet of additional space at these
premises for an annual rental of $106,449 under two separate lease documents
with expiration dates of February and March, 2000, respectively. The Company
also leases certain other facilities from related parties (see Note 7). The
Company also leases from MFP Holdings, LLC, an affiliate of Carmel, a parking
lot
31
<PAGE> 33
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES -- CONTINUED
adjacent to its corporate headquarters for an annual rental of $62,506 under a
separate lease document with an expiration date of October 2006.
The sum of approximately $15.5 million was paid to Transatlantic as of
December 27, 1996 pursuant to the Company's promissory note dated July 24, 1996.
The promissory note was issued to evidence a loan to the Company in the amount
of $15.0 million, the proceeds of which were used for the payment of vendors.
The Company paid Transatlantic, in April of 1998, the sum of $1.0 million
on account of fees for past financings.
Pursuant to an agreement (the "Real Estate Agreement") entered into at the
closing of the Acquisition and Financings, Transatlantic Finance, Ltd., an
affiliate of Carmel or one or more of its affiliates (each a "Funding Company"
and, collectively the "Funding Companies") may acquire and develop land and
buildings on sites selected by the Company and lease such sites to the Company
under operating leases. At the closing of each land purchase, a Funding Company,
as landlord, and the Company, as tenant, will enter into a triple net lease with
respect to such land, and the buildings and improvements erected or to be
erected thereon. The obligation of the Funding Companies to acquire and develop
additional properties will cease when the cost of all such acquisitions
(including construction costs) would exceed $50.0 million, provided that as
leased properties are disposed of to third parties by the Funding Companies,
funds available to purchase additional properties will be replenished. The term
of the commitment for the investment in such land purchases and leases commenced
on October 30, 1996 and on October 30, 1997, the Company notified Transatlantic
of its intent to terminate its participation in the facility. As of February 1,
1998, the Funding Company had 35 properties in various stages of completion
which reduced availability under this facility by approximately $25.5 million.
In connection with the Acquisition and Financings, $40.0 million of
Holdings' 12% Senior Subordinated Notes were acquired by a designee of the
Investcorp Group, Southwest Finance Limited ("Southwest Finance"), a company in
which an affiliate of Investcorp holds a minority interest. In connection with
the purchase of the 12% Subordinated Notes, Southwest Finance Limited received a
fee of $4.0 million. In addition, Transatlantic acquired $10.0 million of
Holdings' 12% Subordinated Notes. Also, in connection with the Acquisition,
Invifin S.A., an affiliate of Investcorp ("Invifin"), received a fee of $1.575
million for providing a standby commitment to fund the amount of the Senior
Credit Facility and the Company paid Investcorp International Inc.
("International") advisory fees of $1.275 million. The Company also paid $3.15
million to International for arranging the Senior Credit Facility.
In addition, in connection with the Acquisition, the Company entered into a
five year agreement for management advisory and consulting services (the
"Management Agreement") with International pursuant to which the Company paid
International at the closing of the Acquisition $5.0 million for the entire term
of the Management Agreement in accordance with its terms. The Management
Agreement was terminated in connection with the completion of an initial public
offering of the common stock of Holdings (the "Offering"), as more fully
described in Note 6. In connection with the termination of the agreement, the
Company will recognize a charge to earnings of approximately $3.6 million in
fiscal 1998.
32
<PAGE> 34
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 2,
1998 1997 ESTIMATED USEFUL LIFE
----------- ----------- ---------------------------
<S> <C> <C> <C>
Land................................. $ 921 $ 1,114
Buildings............................ 1,155 1,301 25 years
Leasehold Improvements............... 47,136 43,694 15 years or life of lease
Furniture, fixtures and equipment.... 70,150 53,889 10 years
Property under capital leases........ 45,013 46,488 5-15 years or life of lease
Purchased software................... 5,720 5,009 5 years
-------- --------
170,095 151,495
Less accumulated depreciation and
amortization....................... (84,155) (80,132)
-------- --------
Property & equipment, net............ $ 85,940 $ 71,363
======== ========
</TABLE>
Accumulated amortization of property under capital leases totaled $22.3
million and $25.8 million at February 1, 1998 and February 2, 1997,
respectively.
NOTE 6 -- LONG TERM DEBT
Senior Credit Facility
Amendment of Senior Credit Facility
On December 8, 1997, in connection with the consummation of the Trak West
Acquisition, the Company amended and restated the Senior Credit Facility to
provide maximum borrowings of $300.0 million, subject to the limitations on the
incurrence of indebtedness under the Indenture for the 11% Senior Subordinated
Notes. As amended and restated, the Senior Credit Facility provides for a $175.0
million term loan and a revolving credit facility with maximum borrowings of
$125.0 million. In addition to increasing the term loan and revolving credit
facility availability by $75.5 million and $25.0 million, respectively, the
amendment and restatement primarily provided for: (i) an initial reduction in
the interest rate for the term loan and the revolving credit facility and the
introduction of a pricing grid which periodically permits adjustment based upon
the Company's degree of leverage; (ii) the elimination of the previous borrowing
base restrictions on revolving credit borrowings; (iii) capital expenditure
"baskets" for the Trak West Acquisition and for up to $50.0 million of other
acquisitions subject to pro forma compliance with financial covenants; and (iv)
a $50.0 million revolving capital expenditure "basket" of funds that can be used
by the Company to finance store purchase and development activities. The term
loan portion of the Senior Credit Facility matures on October 31, 2003 and the
revolving credit portion matures on October 31, 2001.
The Company recognized an extraordinary charge of $5.1 million ($3.0
million net of income taxes) in the fourth quarter of fiscal 1997 to reflect the
write-off of certain deferred financing costs associated with the early
extinguishment of the original Senior Credit Facility.
Borrowings under the Senior Credit Facility are collateralized by a first
priority security interest in substantially all of the personal property of the
Company, subject to certain permitted liens. Holdings also issued a guarantee of
such borrowings under the Senior Credit Facility, which guarantee is
collateralized by a pledge by Holdings of all issued and outstanding capital
stock of the Company. Each of the U.S. subsidiaries of the Company, Schuck's
Distribution Co., Kragen Auto Supply Co. and TRK Socal, Inc., also issued a
guarantee under the Senior Credit Facility which is collateralized by a first
priority security interest in
33
<PAGE> 35
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- LONG TERM DEBT -- CONTINUED
substantially all personal property of such subsidiary, and the Company pledged
the issued and outstanding capital stock of each of these subsidiaries. On April
8, 1998, Schuck's Distribution Co., Kragen Auto Supply Co. and TRK Socal, Inc.
were merged into the Company.
In addition, the Senior Credit Facility prohibits, with certain limited
exceptions, the optional or mandatory prepayment or other defeasance of the 11%
Senior Subordinated Notes. The Senior Credit Facility further requires that,
under certain circumstances, the Company make prepayments of the Term Loans
outstanding thereunder with (i) 75% of any Excess Cash Flow (as defined in the
Facility) and (ii) 50% of the Net Proceeds (as defined therein) from certain
offerings of the Company's or Holdings' voting stock.
Borrowings under the Senior Credit Facility are as follows (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 2,
1998 1997
----------- -----------
<S> <C> <C>
Term Loan, variable interest rates, average 8.7% and 8.6%
for fiscal 1997 and 1996, respectively, semi-annual
installments payable June 30 and December 31 through 2003,
final installment is due October 31, 2003................. $175,000 $100,000
Revolving Credit Commitment, variable interest rates,
average rate 8.2% and 8.1% for fiscal 1997 and 1996,
respectively, $125.0 million maximum capacity at February
1, 1998, $59.95 million undrawn availability at February
1, 1998................................................... 65,050 38,000
-------- --------
Total............................................. 240,050 138,000
Less: Current maturities.................................... 1,000 1,000
-------- --------
$239,050 $137,000
======== ========
</TABLE>
Commitment fees on available funds under the Revolving Credit Commitment
are payable quarterly in arrears on the average daily unused amount of the total
commitment at the rate of 1/2 of 1% per annum. Commitment fees totaling $194,000
and $104,000 were incurred in fiscal 1997 and 1996, respectively.
The terms of the Senior Credit Facility include restrictions on
investments, capital expenditures, dividends and certain other payments and
require the Company to meet certain financial covenants. The Company was in
compliance with all such covenants at February 1, 1998.
11% Senior Subordinated Notes Due 2006
On October 30, 1996, the Company issued and sold in a private placement
$125.0 million aggregate principal amount of 11% Senior Subordinated Notes due
2006 (the "Old 11% Notes") pursuant to an Indenture (the "Auto Indenture"),
between the Company and The Bank of New York (as successor to Wells Fargo Bank,
N.A.), as Trustee. On March 13, 1997, the Company offered to exchange up to all
outstanding Old 11% Notes for a like principal amount of its 11% Series A Senior
Subordinated Notes due 2006 (the "11% Senior Subordinated Notes") issued
pursuant to the Indenture in a transaction registered under the Securities Act
of 1933, as amended. The Company consummated the exchange offer on June 18,
1997, with all of the Old 11% Notes being exchanged for the 11% Senior
Subordinated Notes.
The 11% Senior Subordinated Notes bear interest at 11% per year, payable
semiannually in arrears on each May 1 and November 1, and mature on November 1,
2006. The 11% Senior Subordinated Notes are general, unsecured senior
subordinated obligations. The 11% Senior Subordinated Notes were guaranteed
fully, unconditionally and jointly and severally by all of the Company's
subsidiaries and will be similarly guaranteed by any future United States
subsidiaries of the Company, on a senior subordinated basis. On
34
<PAGE> 36
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- LONG TERM DEBT -- CONTINUED
April 8, 1998, Schuck's Distribution Co., Kragen Auto Supply Co. and TRK Socal,
Inc. were merged into the Company.
On and after November 1, 2001, the 11% Senior Subordinated Notes will be
redeemable, at the option of the Company, in whole or in part, upon not less
than 30 nor more than 60 day's notice, at the redemption prices set forth below
(expressed in percentages of principal amount), plus accrued and unpaid interest
thereon, if any, to the applicable redemption date, if redeemed during the
12-month period beginning on November 1 of the years indicated below:
<TABLE>
<CAPTION>
PERIOD REDEMPTION PRICE
------ ----------------
<S> <C>
2001......................................... 105.500%
2002......................................... 103.667%
2003......................................... 101.833%
2004 and thereafter.......................... 100.000%
</TABLE>
In addition, at any time on or prior to November 1, 1999, the Company may
(but will not have the obligation to) redeem up to 35% of the aggregate
principal amount of the 11% Senior Subordinated Notes at a redemption price of
110% of the principal amount thereof, in each case plus accrued and unpaid
interest thereon, if any, to the redemption date, with the net proceeds of an
Equity Offering (as defined in the Indenture); provided that at least 65% of the
original aggregate principal amount of the 11% Senior Subordinated Notes remain
outstanding immediately after the occurrence of such redemption; and provided
further, that such redemption will occur within 60 days of the date of the
closing of such Equity Offering.
Included in other assets are the following charges associated with the
Acquisition and Financings which have been deferred and are being amortized over
the life of the related debt instrument (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 2,
1998 1997
----------- -----------
<S> <C> <C>
11% Senior Subordinated Notes......................... $7,711 $ 7,369
Senior Credit Facility................................ 1,418 6,263
------ -------
Accumulated amortization.............................. (806) (282)
------ -------
Total....................................... $8,323 $13,350
====== =======
</TABLE>
At February 1, 1998, the estimated maturities of long term debt were (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
----------- --------------
<S> <C>
1998........................................... $ 1,000
1999........................................... 1,000
2000........................................... 1,000
2001........................................... 111,050
2002........................................... 63,000
Thereafter..................................... 188,000
--------
$365,050
========
</TABLE>
On March 17, 1998, the Company's parent entity, Holdings, completed an
initial public offering of approximately 8.6 million shares of its common stock.
The Offering generated net proceeds of approximately
35
<PAGE> 37
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- LONG TERM DEBT -- CONTINUED
$159.1 million which were used to reduce outstanding debt of Holdings and of the
Company, as follows, (in millions):
<TABLE>
<S> <C>
Holdings' 12% Subordinated Notes.................... $ 50.0
11% Senior Subordinated Notes....................... 43.8
Senior Credit Facility.............................. 53.8
Premiums on retirement.............................. 4.9
Accrued interest.................................... 6.6
------
$159.1
======
</TABLE>
Upon the retirement of Holdings' 12% Subordinated Notes, all of the
Company's outstanding preferred stock was cancelled. Upon the consummation of
the Offering, the Company recorded an extraordinary loss of approximately $4.7
million, net of taxes. Such extraordinary loss consists primarily of the
premiums paid in connection with the redemption of indebtedness and the
write-off of a portion of deferred debt issuance costs.
NOTE 7 -- LEASES
The Company leases its office and warehouse facilities and a majority of
its stores and equipment. Generally, store leases provide for minimum rentals
and the payments of utilities, maintenance, insurance and taxes. Certain store
leases also provide for contingent rentals based upon a percentage of sales in
excess of a stipulated minimum. The majority of lease agreements are for base
lease periods ranging from 15 to 20 years, with three to five renewal options of
five years each.
Operating lease rental expense is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Minimum rentals............................... $57,900 $51,214 $48,629
Contingent rentals............................ 1,251 1,455 1,094
Sublease rentals.............................. (4,629) (4,763) (4,369)
------- ------- -------
$54,522 $47,906 $45,354
======= ======= =======
</TABLE>
36
<PAGE> 38
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- LEASES -- CONTINUED
Future minimum lease obligations under non-cancelable leases at February 1,
1998, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
FOR FISCAL YEARS LEASES LEASES
---------------- --------- -------
<S> <C> <C>
1998.................................................... $ 64,325 $11,571
1999.................................................... 59,126 9,720
2000.................................................... 54,289 3,785
2001.................................................... 51,726 2,854
2002.................................................... 44,551 2,157
Thereafter.............................................. 239,703 1,051
-------- -------
$513,720 31,138
========
Less amounts representing interest...................... (6,226)
-------
Present value of obligations............................ 24,912
Less current portion.................................... (8,671)
-------
Long term obligation.................................... $16,241
=======
</TABLE>
The above amounts include future minimum lease obligations under operating
leases with affiliates totaling $61.9 million at February 1, 1998. Operating
lease rental expense under leases with affiliates totaled $2.4 million for the
year ended February 1, 1998, $3.2 million for the year ended February 2, 1997
and $1.8 million for the year ended January 28, 1996.
The implicit interest rate of capital leases varies from 4.3% to 14.8% with
an average implicit rate of approximately 11.0%.
NOTE 8 -- CAPITAL STOCK
Redeemable Preferred Stock
The Board of Directors (the "Board") is authorized to issue up to 206,500
shares of Redeemable Preferred Stock, per share par value $0.01 and liquidation
preference $1,000. Dividends accrue from the date of issuance at a rate of 12%
per annum computed on the basis of a 360 day year. All dividends are cumulative
and shall be paid semi-annually in arrears on April 30 and October 31 of each
year. Dividends are payable in cash or by issuing additional shares. The shares
may be redeemed at any time or from time to time at the option of the Company,
at a per share redemption price of one thousand and ten dollars ($1,010) plus
accrued and unpaid dividends to the date fixed for redemption.
In connection with the initial public offering of the common stock of
Holdings completed on March 17, 1998 and the redemption of Holdings' 12%
Subordinated Notes, all of the then outstanding shares of Redeemable Preferred
Stock (50,000 shares in total) were canceled.
Common Stock
The Board is authorized to issue up to 20,000 shares of common stock, par
value $0.01. Shares of common stock entitle the holder to one vote for each
share held with respect to all matters voted on by the stockholders of the
Company.
37
<PAGE> 39
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- EMPLOYEE BENEFIT PLANS
The Company provides various health, welfare and disability benefits to its
full-time employees which are funded primarily by Company contributions. The
Company does not provide post-employment or post-retirement health care or life
insurance benefits to its employees.
Retirement Program
The Company sponsors a 401(k) plan which is available to all employees of
the Company who have completed one year of continuous service. The Company
matches from 40% to 60% of employee contributions in 10% increments, based on
years of service with the Company, up to 6% of the participant's base salary.
Participant contributions are subject to certain restrictions as set forth in
the Internal Revenue Code. The Company's matching contributions totaled
$394,500, $288,000 and $267,000 for fiscal years 1997, 1996 and 1995,
respectively.
1996 Stock Option Plans
In connection with the Offering, the Board of Directors of Holdings
approved a 17.105 to 1 stock split, subject to shareholder approval, which was
subsequently obtained. Accordingly, all share and option information contained
herein has been adjusted to give retroactive effect to such stock split. In
addition, under the terms of the restated Certificate of Incorporation of
Holdings in effect at the time of the Offering, each share of each class of
issued and outstanding capital stock of Holdings automatically converted to
common stock upon the consummation of the Offering. Consequently, all Holdings
Class B Stock referred to throughout Note 9 automatically converted to Holdings
common stock on March 17, 1998.
On October 30, 1996, Holdings awarded options to purchase shares of Class B
Stock of Holdings under its Associate Stock Option Plan (the "Associate Plan")
and its Executive Stock Option Plan (the "Executive Plan" and together with the
Associate Plan, the "Plans") in order to provide incentives to store managers
and salaried corporate and warehouse employees of the Company. In October 1996
and February 1997, the Company's Board of Directors approved the Associate Plan
and the Executive Plan, respectively.
The Plans may be administered by a committee of the Board of Directors of
Holdings, which would have broad authority in administering and interpreting the
Plans, or, if a committee has not been appointed, by the entire Board of
Directors. The Plans provide that, at such time as Holdings has a class of
equity securities registered under Section 12 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the committee must consist entirely of
"Non-Employee Directors" (as defined in Rule 16b-3 under the Exchange Act). A
committee has not yet been appointed to administer the Plans.
Options to purchase up to an aggregate of 1,026,300 and 684,200 shares of
Holdings' Class B Stock may be granted under the Associate Plan and the
Executive Plan, respectively. Options granted under the Plans may be options
intended to qualify as incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended, or options not intended to so qualify. In the
event of a sale of more than 80% of the outstanding shares of capital stock of
Holdings or 80% of its assets, the vested portion of an option and, under
circumstances, the unvested portion will be purchased by Holdings. All options
expire on the seventh anniversary of the date of grant (or, under certain
circumstances, 30 days later).
As a result of the Offering, each option granted under the Plans will
become exercisable upon vesting. Options granted under the Associate Plan vest
in three equal installments on the second, third and fourth anniversaries of the
date of their grant, assuming the associate's employment continues during this
period ("Four Year Vesting"). Options granted under the Executive Plan are
subject to the Four Year Vesting as to 84% of such options and performance
vesting (over the same four years) as to the remaining 16%. The performance
vesting criteria is based upon achieving specified operating results. Partial
vesting of options
38
<PAGE> 40
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- EMPLOYEE BENEFIT PLANS -- CONTINUED
subject to performance vesting occurs if the Company achieves less than 95% of
the specified operating results. Any portion of options granted under the
Executive Plan which are subject to performance vesting and which do not vest
during the four years will automatically vest 90 days prior to the end of the
option's term. If the specified operating results are exceeded for any year by
at least 10%, the executive will receive options for up to an additional 5% (20%
on a cumulative basis) of his or her original option grant (no such additional
options have been granted).
As of February 1, 1998, Holdings has granted options to purchase 679,151
shares under the Associate Plan and 385,622 shares under the Executive Plan, net
of cancellations. The exercise price applicable to these options is $12.04 per
share with respect to 993,833 shares and the exercise price is $20.00 with
respect to 70,940 shares. Except for 96,062 options granted under the Executive
Plan (see "Employment Agreements" below), these exercise prices represent the
fair market value at the date of grant based upon the price paid for such shares
in the Acquisition and other valuation analyses performed by the Company, or the
Offering, as applicable.
Employment Agreements
The Company has entered into employment agreements with the Chairman and
the President pursuant to which they are paid fixed base salaries and are
eligible for bonuses based upon the earnings before interest, taxes,
depreciation and amortization ("EBITDA") and, in the case of the Chairman, an
additional bonus at the discretion of the Board of Directors. The agreements do
not contain stated termination dates, but rather are terminable at will by
either party. If the Company were to terminate the employment of the Chairman
and President without cause, or if they terminate their employment for good
reason, the Company has agreed to pay to the Chairman his base salary and
performance bonus for a period of 24 months and to the President his base salary
for one year. The Chairman also received a loan of $550,000 from the Company,
bearing interest at 4.535% and due in 1999.
In connection with the commencement of his employment, the Company agreed
to pay the Chairman $1,000,000 which, in turn, was used by the Chairman to
purchase 83,079 shares of Holdings' Class B Stock from a member of the
Investcorp Group, reflecting a share value of $12.04, the fair market value at
the date of the agreement, based on the price paid for such shares in the
Acquisition. Under the Chairman's employment agreement, the shares vested 50%
upon commencement of employment with an additional 25% vesting at each of the
first and second anniversary of the agreement. The Company has also loaned the
Chairman approximately $440,000 to pay the income tax consequences of the award.
The loan bears interest at the rate applicable to borrowings under the Revolving
Credit Commitment, and is due in 2000.
In connection with the execution of his employment agreement, the Company's
Chairman received an option for 401,967 shares of Holdings' Class B Stock,
exercisable at $12.04 per share. As a result of vesting acceleration triggered
by an initial public offering, this option will generally vest and become
exercisable on the second anniversary of the Offering, subject to earlier
vesting based upon the achievement of certain EBITDA targets and the occurrence
of other specified events. In connection with the Trak West Acquisition, the
Company's Chairman received an option for 39,940 shares of Holdings' Class B
Stock, exercisable at $12.04 per share, effective as of February 1, 1998. This
option will vest and become exercisable in four equal annual installments
beginning in April 1999. In connection with the issuance of these options, the
Company will recognize a charge to earnings of approximately $0.2 million over
the vesting period for the difference between the exercise price and the fair
market value of the Holdings' Class B Stock at the date of grant. In connection
with the Offering, the Company's Chairman received an option for 216,634 shares
of Holdings' common stock, exercisable at $20.00 per share, the fair market
value at the date of grant based on the
39
<PAGE> 41
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- EMPLOYEE BENEFIT PLANS -- CONTINUED
Offering. This option will vest and become exercisable in three equal annual
installments beginning in April 2000.
In connection with the execution of his employment agreement, the Company's
President received an option for 299,337 shares of Holdings' Class B Stock,
exercisable at $12.04 per share. This option has both vested and become
exercisable to the extent of 42,762 shares. As a result of vesting acceleration
triggered by an initial public offering, the remainder of this option will
generally vest and become exercisable on the second anniversary of the Offering,
subject to earlier vesting based upon the achievement of certain EBITDA targets
and the occurrence of other specified events.
In December 1997, Holdings entered into stock purchase agreements with
certain executives of the Company. Under the terms of the agreements, Holdings
agreed to issue a total of 180,600 shares of its Class B Stock at a price of
$12.04 per share, the same price paid in the Acquisition. In addition, Holdings
granted certain executives non-qualified options to purchase 96,062 shares of
its Class B Stock, also at a price of $12.04 per share. The options contain
similar terms and vesting provisions as existing options under the Company's
Executive Stock Option Plan. In connection with issuance of these shares, the
Company recognized a charge to earnings of $0.9 million in the fourth quarter of
fiscal 1997 for the difference between the issuance price and the fair market
value of the stock at the date of sale. In addition, in the fourth quarter of
fiscal 1997, the Company recorded deferred compensation of approximately $0.5
million to reflect the difference between the exercise price and the fair market
value of stock associated with the options granted to certain executives. The
deferred compensation will produce a charge to earnings over the vesting period
of the options.
Of the total consideration paid to the Company of $2.2 million in
connection with the purchase of Holdings' Class B Stock by certain executives,
approximately $1.0 million was loaned by the Company to certain executives to
purchase 84,550 of the shares (the "Stock Loans"). The Stock Loans were
collateralized by the stock under pledge agreements, provide full recourse to
the executive, bear interest at the average rate paid by the Company under the
revolving portion of its Senior Credit Facility, and mature in December 2003.
Options activity is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICE
--------- ---------------
<S> <C> <C>
Balance at Jan. 28, 1996........................ --
Granted....................................... 1,549,441 $12.04
Exercised..................................... --
Canceled...................................... (8,980) 12.04
--------- ---------------
Balance at Feb. 2, 1997......................... 1,540,461 12.04
Granted....................................... 561,709 12.04 - 20.00
Exercised..................................... --
Canceled...................................... (79,518) 12.04
--------- ---------------
Balance at Feb. 1, 1998......................... 2,022,652 $12.04 - $20.00
========= ===============
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Had compensation costs for the
Company's stock option plan been determined based on the
40
<PAGE> 42
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- EMPLOYEE BENEFIT PLANS -- CONTINUED
fair value at the grant date for awards, consistent with the provisions of SFAS
No. 123, net income (loss) would have been changed to the pro forma amounts
indicated below (in thousands):
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
----------- -----------
<S> <C> <C>
Net income (loss):
As reported......................................... 3,008 (23,534)
Pro forma........................................... 2,549 (23,678)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Minimum Value Method of option pricing, based upon the following input
assumptions:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
----------- -----------
<S> <C> <C>
Dividend yield........................................ 0% 0%
Risk free interest rate............................... 5.95% 6.07%
Expected life of options.............................. 4 years 5 years
</TABLE>
NOTE 10 -- SUPPLEMENTAL SCHEDULE OF CASH FLOWS
Interest paid during fiscal years 1997, 1996 and 1995 amounted to $31.7
million, $13.4 million and $13.4 million, respectively. No income taxes were
paid in fiscal years 1997, 1996 and 1995.
The Company acquired certain fixtures and other equipment under capital
lease arrangements totaling approximately $9.7 million, $2.6 million and $5.8
million in fiscal 1997, 1996 and 1995, respectively.
NOTE 11 -- INCOME TAXES
The provision (benefit) for income taxes (exclusive of extraordinary items)
is comprised of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------
1997 1996 1995
------ -------- -------
<S> <C> <C> <C>
Current:
Federal..................................... $ -- $ -- $(1,801)
State....................................... -- -- (406)
------ -------- -------
-- -- (2,207)
Deferred:
Federal..................................... 3,422 (9,209) (2,922)
State....................................... 757 (2,109) (318)
------ -------- -------
4,179 (11,318) (3,240)
------ -------- -------
Total............................... $4,179 $(11,318) $(5,447)
====== ======== =======
</TABLE>
41
<PAGE> 43
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- INCOME TAXES -- CONTINUED
The following table summarizes the differences between the Company's
provision (benefit) for income taxes and the expected provision (benefit),
exclusive of extraordinary items (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Income before taxes......................... $10,202 $(34,852) $(14,541)
Federal income tax rate..................... 34% 34% 34%
------- -------- --------
Expected provision for income taxes......... 3,469 (11,850) (4,944)
State taxes, net of federal benefit......... 500 (1,634) (671)
Other....................................... 210 2,166 168
------- -------- --------
Actual (benefit) provision for income
taxes..................................... $ 4,179 $(11,318) $ (5,447)
======= ======== ========
</TABLE>
The current and non-current deferred tax assets and liabilities consist of
the following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
------------------
1997 1996
------- -------
<S> <C> <C>
Gross deferred tax assets:
Store closing costs...................................... $ 4,503 $ 6,118
Salaries and benefits.................................... 3,481 7,710
Capital lease expenditures............................... 824 743
Internally developed software............................ 2,798 2,538
Preopening costs......................................... 360 2,267
Provision for site selection costs....................... 1,783 3,243
Provision for bad debts.................................. 953 684
Tax loss carryforwards................................... 7,665 3,616
Other.................................................... 2,184 716
------- -------
Total gross deferred tax assets................ 24,551 27,635
------- -------
Gross deferred tax liabilities:
Inventory................................................ 8,500 8,991
Depreciation............................................. 647 1,152
------- -------
Total gross deferred tax liabilities........... 9,147 10,143
------- -------
Net deferred tax asset................................... $15,404 $17,492
======= =======
</TABLE>
The net deferred tax asset is reflected in the accompanying balance sheets
as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Current deferred tax liability, net...................... $(4,066) $ (597)
Non-current deferred tax asset, net...................... 19,470 18,089
------- -------
Net deferred tax asset................................... $15,404 $17,492
======= =======
</TABLE>
The Company has recorded a deferred tax asset of approximately $7.7 million
as of February 1, 1998 reflecting the benefit of tax loss carryforwards totaling
$19.3 million which expire in 2013. Realization is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards.
Utilization of certain of the net operating loss carryforwards may be limited
under Section 382 of the Internal Revenue Code. Although realization is not
assured, management believes it is more likely than not that all the deferred
42
<PAGE> 44
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- INCOME TAXES -- CONTINUED
tax assets will be realized. Accordingly, the Company believes that no valuation
allowance is required for deferred tax assets in excess of deferred tax
liabilities. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
NOTE 12 -- STORE CLOSING COSTS
Activity in the provision for store closings and the related store closing
costs is as follows (in thousands):
<TABLE>
<CAPTION>
PAYMENTS
AND
FISCAL BEGINNING STORE CLOSING PURCHASE ACCOUNTING NON-CASH ENDING
YEAR BALANCE COSTS ADJUSTMENT CHARGES BALANCE
------ --------- ------------- ------------------- ----------- -------
<S> <C> <C> <C> <C> <C>
1997........................ $15,842 $ 1,640 $625 $(6,755) $11,352
1996........................ 5,298 14,904 -- (4,360) 15,842
1995........................ 5,745 3,310 -- (3,757) 5,298
</TABLE>
In January 1997, the Company updated its strategic plan relating to the
relocation of certain stores. As a result of the Acquisition and Financings, the
Company obtained greater access to capital resources including the availability
of a sale-leaseback facility for new stores, thereby improving the Company's
ability to implement such relocations. While management believes that there will
be long-term operating benefits from this strategy, the Company will incur costs
for early lease terminations or negative sub-lease rentals for stores vacated
under this plan and, accordingly, a charge to earnings of approximately $12.9
million was recorded in January 1997.
Store closing costs include estimates for vacancy periods of the related
stores through the expiration of the underlying leases, collectibility of rents
due from sub-tenants, and similar factors.
NOTE 13 -- LEGAL MATTERS
The Company is a defendant in various legal matters arising from normal
business activities. Management believes that the ultimate outcome of these
matters will not have a material effect on the Company's results of operations,
financial position or cash flows.
NOTE 14 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments, which are
determined by reference to quoted market prices, where available, or are based
upon comparisons to similar instruments of comparable maturities, are as follows
(in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, 1998 FEBRUARY 2, 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Receivables............................. $ 37,566 $ 37,566 $ 28,511 $ 28,511
Amounts due under Senior Credit
Facility.............................. 240,050 240,050 138,000 138,000
Obligations under 11% Senior
Subordinated Notes.................... 125,000 137,500 125,000 125,000
</TABLE>
43
<PAGE> 45
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- QUARTERLY RESULTS (UNAUDITED)
The following table sets forth certain quarterly operating data of the
Company for fiscal 1997, 1996 and 1995. The quarterly information includes all
adjustments which management considers necessary for a fair presentation of the
information shown (in thousands).
<TABLE>
<CAPTION>
FISCAL 1997
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales....................................... $201,613 $217,944 $216,908 $209,350
Gross profit.................................... 84,112 93,199 100,237 100,096
Transition and integration expenses............. -- -- -- 3,407
Stock-based compensation........................ -- -- -- 909
Operating income(1)............................. 7,017 12,099 17,108 9,266
Income before extraordinary item................ (1,125) 3,693 8,630 (996)
Extraordinary loss, net of tax.................. -- -- -- (3,015)
Net income(2)................................... (668) 2,248 5,301 (3,873)
EBITDA.......................................... 11,759 17,461 22,454 18,499
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER(5)
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Net sales....................................... $189,185 $200,895 $202,335 $200,677
Gross profit.................................... 75,476 82,500 84,773 86,969
Acquisition charge -- equity participation
agreements.................................... -- -- -- 20,174
Non-recurring store closing charge.............. -- -- -- 12,959
Operating income (loss)(3)...................... 6,026 7,046 8,426 (24,862)
Other Acquisition & Financing Fees.............. -- -- -- 12,463
Net income (loss)(4)............................ 1,499 2,113 2,821 (29,967)
EBITDA.......................................... 10,910 11,959 13,167 14,508
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1995
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales....................................... $172,301 $186,073 $186,054 $173,924
Gross profit.................................... 68,589 71,416 74,236 70,294
Operating income................................ 390 578 1,145 (2,275)
Net loss........................................ (1,798) (1,914) (1,645) (3,737)
EBITDA.......................................... 3,799 4,367 5,473 2,460
</TABLE>
- ---------------
(1) Operating income in the fourth quarter of fiscal 1997 was negatively
affected by $3.4 million of transition and integration expenses related to
the acquisition of 82 former Trak West stores and by $0.9 million of
stock-based compensation. See Notes 3 and 9.
(2) Net income in the fourth quarter of fiscal 1997 was negatively affected by
an extraordinary loss of $3.0 million related to the early retirement of
debt. See Note 5.
(3) Operating income in the fourth quarter of fiscal 1996 was negatively
affected by non-recurring charges of $20.2 million related to the
Acquisition and Financings (see Note 2) and by a provision for store closing
costs totaling $12.9 million. See Note 12.
44
<PAGE> 46
CSK AUTO, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF CSK AUTO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- QUARTERLY RESULTS (UNAUDITED) -- CONTINUED
(4) Net income in the fourth quarter of fiscal 1996 was negatively affected by
non-recurring charges of $32.6 million related to the Acquisition and
Financings (see Note 2) as well as by a provision for store closing costs of
$12.9 million. See Note 12.
(5) Because fiscal 1996 was a 53 week year, the fourth quarter of fiscal 1996
includes 14 weeks whereas all other quarters presented consist of 13 weeks.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
"Change in Accountants" included in the Company's Registration Statement on
Form S-4 (File No. 333-22511) is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of each of the
directors and executive officers of the Company. Each director of the Company
will hold office until the next annual meeting of stockholders of the Company or
until his or her successor has been elected and qualified. Officers of the
Company are elected by the Board of Directors of the Company and serve at the
discretion of such Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION AT THE COMPANY
---- --- -----------------------
<S> <C> <C>
Maynard Jenkins(1)................... 55 Chairman of the Board and Chief Executive Officer(2)
James Bazlen......................... 48 Director, President and Chief Operating Officer
Martin Fraser........................ 43 Senior Vice President-Merchandising and Distribution
Lon Novatt........................... 37 Senior Vice President-Real Estate, General Counsel and
Secretary
Robert Shortt........................ 37 Senior Vice President-Commercial Sales and Marketing
Henry Torres......................... 35 Senior Vice President-Information Systems and
Dale Ward............................ 48 Senior Vice President-Store Operations
Don Watson........................... 42 Senior Vice President, Chief Financial Officer and
Treasurer
Jon P. Hedley........................ 37 Director
Edward G. Lord, III.................. 49 Director
Christopher J. O'Brien............... 39 Director
Charles J. Philippin(1)(3)........... 48 Director
Robert Smith(3)...................... 60 Director
Christopher J. Stadler(1)............ 33 Director
Jules Trump(1)....................... 54 Director(4)
Eddie Trump(1)....................... 52 Director
Savio W. Tung........................ 46 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Mr. Jenkins assumed these positions on January 27, 1997.
(3) Member of the Audit Committee.
(4) Until January 27, 1997, Mr. Trump also served as the Company's Chairman of
the Board and Chief Executive Officer.
MAYNARD JENKINS has been the Chairman of the Board and Chief Executive
Officer of the Company since January 1997. Prior to joining the Company, Mr.
Jenkins served as President and Chief
45
<PAGE> 47
Executive Officer of Orchard Supply Hardware from December 1986 to January 1997.
Prior thereto Mr. Jenkins held various executive positions with Gemco.
JAMES BAZLEN has been a director of the Company since July 1994. He had
previously served as a director of the Company from November 1989 through June
1992. Prior to his June 1994 promotion to President and Chief Operating Officer,
Mr. Bazlen was Vice Chairman and Chief Financial Officer from June 1991 and also
served as Senior Vice President of the Trump Group, a private investment group,
from March 1986. Mr. Bazlen had been the Senior Vice President from April 1990
to June 1991. Prior to joining the Trump Group in 1986, Mr. Bazlen served in
various executive positions with General Electric Company and GE Capital for
thirteen years.
MARTIN FRASER has been Senior Vice President -- Merchandising and
Distribution since October 1997. Prior to that, Mr. Fraser was Vice President of
Distribution and Replenishment since August 1995. From September 1989 to August
1995, he served in several executive positions, including Vice President of
Logistics and Vice President -- Inventory Management.
LON NOVATT has been Senior Vice President -- Real Estate, General Counsel
and Secretary since June 1997. Prior to that, Mr. Novatt was Vice
President -- Legal, General Counsel and Secretary, since December 1995. From
March 1994 to November 1995, Mr. Novatt was Senior Counsel for Broadway Stores,
Inc., a department store chain. From October 1985 to February 1994, Mr. Novatt
was with the Los Angeles law firm of Freeman, Freeman & Smiley where he was a
partner from January 1992 to February 1994.
ROBERT SHORTT has been Senior Vice President -- Commercial and Marketing
since October 1997. Prior to that, Mr. Shortt was Vice
President -- Merchandising and Marketing since April 1996. From April 1995 to
April 1996, Mr. Shortt was Vice President of Marketing for the Price Pfister
division of Black & Decker Corp. From March 1993 to April 1995, Mr. Shortt was
Vice President of Marketing of the Kwikset division of Black & Decker Corp.
Prior thereto, from March 1991 to March 1993, he was Director of Marketing of
Kwikset division of Black & Decker Corp.
HENRY TORRES has been Senior Vice President -- Information Systems and
Re-Engineering since April 1997. Prior to that, Mr. Torres was Vice
President -- Information Systems and Re-Engineering since February 1996. From
September 1995 to February 1996, Mr. Torres was Vice
President -- Re-Engineering. From December 1993 to September 1995, Mr. Torres
was Director of Re-Engineering. Prior thereto, from April 1989 to December 1993,
Mr. Torres held various executive positions for Sam's Club/Wal-Mart Stores,
Inc., a discount retailer.
DALE WARD has been Senior Vice President -- Store Operations since March
1997. Prior to that Mr. Ward served as Executive Vice President and Chief
Operating Officer of Orchard Supply Hardware since April 1996. Mr. Ward served
as President and Chief Executive Officer of F&M Super Drug Stores, Inc., a drug
store chain, from 1994 to 1995. He also served as President and Chief Executive
Officer of Ben Franklin Stores, Inc., a variety and craft store chain, from 1988
to 1993 and as Chairman of Ben Franklin Crafts Inc., a craft store chain, from
1991 to 1993.
DON WATSON has been Treasurer of the Company since October 1996 and Chief
Financial Officer since December 1997. Mr. Watson has also served as Senior Vice
President -- Finance and Treasurer of the Company since April 1997. Prior to
that, Mr. Watson had been the Senior Vice President -- Finance, Controller and
Treasurer since April 1993. From June 1988 to March 1993, he was Vice President
and Controller.
JON P. HEDLEY became a director of the Company on October 30, 1996. He has
been an executive of Investcorp, its predecessor or one or more of its
wholly-owned subsidiaries since April 1990. Mr. Hedley is a director of Saks
Holdings, Inc. and Simmons Company.
EDWARD G. LORD, III became a director of the Company in April 1997. He has
been an executive of Investcorp, its predecessor or one or more of its
wholly-owned subsidiaries since November 1994. Prior to joining Investcorp, Mr.
Lord was a Managing Director of Dean Witter Realty. From 1991 until February
1992, Mr. Lord was a senior officer of the Mutual Life Insurance Company of New
York.
46
<PAGE> 48
CHRISTOPHER J. O'BRIEN became a director of the Company on October 30,
1996. He has been an executive of Investcorp, its predecessor or one or more of
its wholly-owned subsidiaries since December 1993. Prior to joining Investcorp,
Mr. O'Brien was a Managing Director of Mancuso & Company for four years. Mr.
O'Brien is a director of Falcon Building Products, Inc., Simmons Company, Star
Markets, Inc. and The William Carter Company.
CHARLES J. PHILIPPIN became a director of the Company on October 30, 1996.
He has been an executive of Investcorp, its predecessor or one or more of its
wholly-owned subsidiaries since July 1994. Prior to joining Investcorp, Mr.
Philippin was a partner of Coopers & Lybrand L.L.P. Mr. Philippin is a director
of Falcon Building Products, Inc., Saks Holdings, Inc., Simmons Company and The
William Carter Company.
ROBERT SMITH became a director of the Company on October 30, 1996. Mr.
Smith is a Protector of Carmel (see Item 12. Security Ownership of Certain
Beneficial Owners and Management). Mr. Smith has served as President of Newmark
Capital Limited, a private investment and consulting company since March 1992.
Mr. Smith also serves as a director of Rogers Cantel Mobile Communications Inc.,
PLD Telekom Inc. and Canadian World Fund Limited.
CHRISTOPHER J. STADLER became a director of the Company on October 30,
1996. He has been an executive of Investcorp, its predecessor or one or more of
its wholly-owned subsidiaries since April 1, 1996. Prior to joining Investcorp,
Mr. Stadler was a Director with CS First Boston Corporation. Mr. Stadler is a
director of Falcon Building Products, Inc. and The William Carter Company.
JULES TRUMP was the Chairman of the Board of the Company from December 1986
until January 27, 1997, its Chief Executive Officer from March 1990 until
January 27, 1997, and a director of the Company since December 1986. Mr. Trump
has also served as Chairman or Co-Chairman of The Trump Group since February
1982. Mr. Trump is a director of Boatracs, Inc. Jules Trump is Eddie Trump's
brother.
EDDIE TRUMP has been a director of the Company since July 1994. Mr. Trump
previously served as a director of the Company from December 1986 until July
1992. Since February 1982, Mr. Trump has served as President or Co-Chairman of
The Trump Group. Eddie Trump is Jules Trump's brother.
SAVIO W. TUNG became a director of the Company on October 30, 1996. He has
been an executive of Investcorp, its predecessor or one or more of its
wholly-owned subsidiaries since September 1984. Mr. Tung is a director of Saks
Holdings, Inc., Star Markets, Inc. and Simmons Company.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation earned in fiscal 1996 (which was a 53-week year) and
fiscal 1997 by the Company's Chief Executive Officer and each of
47
<PAGE> 49
the four other most highly compensated executive officers whose annual salary
and bonus during fiscal 1997 exceeded $100,000 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION ------------
--------------------- SECURITIES
FISCAL ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS COMPENSATION($)
--------------------------- ------ --------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Maynard Jenkins................... 1997 525,000 -- 39,940 1,014,807(1)
Chairman, 1996 10,100 -- 401,967 72(2)
Chief Executive Officer
James Bazlen...................... 1997 400,000 80,000 -- 6,623,419(3)
President 1996 376,000 -- 299,337 6,460,594(3)
Chief Operating Officer
Martin Fraser..................... 1997 161,731 30,500 19,756 338,207(4)
Senior Vice President -- 1996 148,500 22,522 33,868 327,065(4)
Merchandising and Distribution
Don Watson........................ 1997 159,423 33,000 6,209 178,318(5)
Senior Vice President, Chief 1996 126,500 18,600 33,868 168,824(5)
Financial Officer and Treasurer
Robert Shortt..................... 1997 185,385 36,000 8,467 73,347(6)
Senior Vice
President -- Commercial 1996 141,346 17,500 33,868 143,867(6)
Sales and Marketing
</TABLE>
- ---------------
(1) Represents cash bonus for future services, reimbursement for relocation
costs and insurance premiums paid by the Company with respect to term life
insurance covering Mr. Jenkins.
(2) Represents insurance premiums paid by the Company with respect to term life
insurance covering Mr. Jenkins.
(3) Represents insurance premiums paid by the Company with respect to term life
insurance covering Mr. Bazlen, contributions made by the Company to its
Retirement Program based upon Mr. Bazlen's contributions and payments
pursuant to an equity participation agreement (which includes accrued
interest) in connection with the Acquisition.
(4) Represents reimbursement of medical expenses in excess of insurance coverage
provided by the Company, insurance premiums with respect to term life
insurance covering Mr. Fraser, contributions made by the Company to its
Retirement Program based upon Mr. Fraser's contributions, payments pursuant
to an equity participation agreement (which includes accrued interest) in
connection with the Acquisition.
(5) Represents reimbursement of medical expenses in excess of insurance coverage
provided by the Company, insurance premiums with respect to term life
insurance covering Mr. Watson, contributions made by the Company to its
Retirement Program based upon Mr. Watson's contributions, payments pursuant
to an equity participation agreement (which includes accrued interest) in
connection with the Acquisition and additional payments related to the
Acquisition.
(6) Represents insurance premiums with respect to term life insurance covering
Mr. Shortt, reimbursements for relocation costs, contributions made by the
Company to its Retirement Program based upon Mr. Shortt's contributions,
payments pursuant to an equity participation agreement which includes
accrued interest in connection with the Acquisition.
48
<PAGE> 50
The following table provides information with respect to stock options
granted during the fiscal year ended February 1, 1998 to the Named Executive
Officers:
OPTIONS GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATE OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ---------- ------------ --------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Maynard Jenkins........... 39,940 12.4% $12.04 March 2, 2005 $195,746 $456,235
James Bazlen.............. -- -- -- -- -- --
Martin Fraser............. 19,756 6.1 12.04 January 21, 2005 96,834 225,664
Don Watson................ 6,209 1.9 12.04 January 21, 2005 30,430 70,925
Robert Shortt............. 8,467 2.6 12.04 January 21, 2005 41,497 96,718
</TABLE>
The following table contains certain information regarding options to
purchase shares of Common Stock held as of February 1, 1998 by each of the Named
Executive Officers:
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END($)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Maynard Jenkins............................ -- 441,907 -- 3,517,580
James Bazlen............................... 42,762 256,575 340,386 2,042,337
Martin Fraser.............................. -- 53,624 -- 426,847
Don Watson................................. -- 40,077 -- 319,013
Robert Shortt.............................. -- 42,335 -- 336,987
</TABLE>
Executive Employment Arrangements
The Company has entered into employment agreements with Messrs. Jenkins and
Bazlen pursuant to which they earned annual base salaries in 1997 of $525,000
and $400,000, respectively. Pursuant to these agreements, Messrs. Jenkins and
Bazlen will be eligible for bonuses based upon the EBITDA and, in the case of
Mr. Jenkins for fiscal 1997 at the discretion of its Board of Directors. These
agreements do not contain stated termination dates, but rather are terminable at
will by either party. If the Company were to terminate the employment of Mr.
Bazlen without cause or if he terminates his employment for Good Reason (as
defined), the Company has agreed to continue to pay him at a rate equal to his
annual base salary then in effect for a period of one year from his termination.
Mr. Jenkins' employment agreement provides that if he is terminated without
cause or if he terminates his employment for Good Reason, he will continue to
receive his base salary and performance bonus for a period of 24 months. In
connection with Mr. Jenkins becoming the Company's Chief Executive Officer, the
Company paid him a cash bonus for future services of $1,000,000 which he used to
purchase shares of Common Stock from the Investcorp Group (subject to vesting
restrictions expiring in full in 1999) and to make him a loan in the amount of
$441,500 to be used to pay the state and federal income taxes he incurred in
connection with receipt of the cash bonus. In connection with Mr. Jenkins
relocating to, and purchasing a home in, the Phoenix area, Mr. Jenkins received
a loan of $550,000 from the Company.
In connection with the Offering, the Board of Directors of Holdings
approved a 17.105 to 1 stock split, subject to shareholder approval, which was
subsequently obtained. Accordingly, all share and option information contained
herein has been adjusted to give retroactive effect to such stock split. In
addition, under the terms of the restated Certificate of Incorporation of
Holdings in effect at the time of the Offering, each share of each class of
issued and outstanding capital stock of Holdings automatically converted to
common
49
<PAGE> 51
stock upon the consummation of the Offering. Consequently, all Holdings Class B
Stock referred to herein automatically converted to Holdings common stock on
March 17, 1998.
In connection with the execution of his employment agreement, Mr. Jenkins
received an option for 401,967 shares of Holdings' Class B Stock, exercisable at
$12.04 per share. As a result of vesting acceleration triggered by an initial
public offering, this option will generally vest and become exercisable on the
second anniversary of the Offering, subject to earlier vesting based upon the
achievement of certain EBITDA targets and the occurrence of other specified
events. In connection with the Trak West Acquisition, Mr. Jenkins received an
option for 39,940 shares of Holdings' Class B Stock, exercisable at $12.04 per
share, effective as of February 1, 1998. This option will vest and become
exercisable in four equal annual installments beginning in April 1999. In
connection with the Offering, Mr. Jenkins received an option for 216,634 shares
of Holdings' common stock, exercisable at $20.00 per share. This option will
vest and become exercisable in three equal annual installments beginning in
April 2000.
In connection with the execution of his employment agreement, Mr. Bazlen
received an option for 299,337 shares of Holdings' Class B Stock, exercisable at
$12.04 per share. This option has both vested and become exercisable to the
extent of 42,762 shares. As a result of vesting acceleration triggered by an
initial public offering, the remainder of this option will generally vest and
become exercisable on the second anniversary of the Offering, subject to earlier
vesting based upon the achievement of certain EBITDA targets and the occurrence
of other specified events.
Retirement Program
The Company sponsors the CSK Auto, Inc. Retirement Program (the "Retirement
Program"), a defined contribution plan that is qualified under Section 401(k) of
the Internal Revenue Code of 1986, as amended (the "Code"). Participation in the
Retirement Program is voluntary and available to any employee, after one year of
employment, who is 21 years of age. Each participant can elect to contribute up
to 15% of his compensation on a pre-tax basis, subject to limitations as set
forth in the Internal Revenue Code. In accordance with the provisions of the
Retirement Program, the Company may elect to make matching contributions to the
Retirement Program. For calendar year 1996, the Company matched 20% of the first
6% of compensation contributed by each participant for the year. Contributions
to the Retirement Program and Retirement Program earnings are fully vested. The
Company made matching contributions of approximately $394,500 and $288,000 to
the Retirement Program in fiscal 1997 and 1996, respectively. Effective October
1, 1997, the Company changed its matching formula under the Retirement Program
so that, of the first 4% of annual compensation contributed, 40%, 50% and 60% is
matched the Company for participants with less than 5 years of service, between
5 and 10 years of service and in excess of 10 years of service, respectively.
Equity Participation Agreements
Prior to the Acquisition, the Company had entered into incentive
compensation agreements with certain of its executives pursuant to which they
would be compensated in a sale of the Company's equity securities as if they
owned specified percentages of the Company's then outstanding common stock.
Pursuant to the agreements, Messrs. Bazlen, Fraser, Watson and Shortt, as well
as one other current executive officer and two former executive officers who are
not Named Executive Officers, became entitled to certain payments in connection
with the Acquisition based upon the consideration they would have been entitled
to if they had owned an aggregate of 6.4% of the Company's common stock and had
sold all of such common stock in connection with the Acquisition at the price
per share paid for such shares in the Acquisition. In satisfaction of all of the
Company's obligations under these agreements, such individuals received payments
on the closing of the Acquisition and Financings and in November 1997 in the
following amounts: Mr. Bazlen: $6.5 million and $6.7 million; Mr. Fraser: $0.3
million and $0.3 million; Mr. Watson: $0.1 million and $0.1 million; and Mr.
Shortt: $0.07 million and $0.07 million. Carmel reimbursed the Company for 60%
(the estimated after-tax cost to the Company) of the amount of such latter
payments made one year from the closing of the Acquisition and Financings. See
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Effect of the Acquisition and Financings.
50
<PAGE> 52
1996 Associate and Executive Stock Option Plans
On October 30, 1996, subject to approval by Holdings' Board of Directors
and Holdings' stockholders, Holdings awarded options to purchase shares of
Common Stock of Holdings under its Associate Stock Option Plan (the "Associate
Plan") and its Executive Stock Option Plan (the "Executive Plan" and together
with the Associate Plan, the "Plans") in order to provide incentives to store
managers and salaried corporate and warehouse employees of the Company.
Effective February 1997 and February 1998, respectively, Holdings' Board of
Directors and Holdings' stockholders approved the Plans and the issuance of the
above-described options. Effective October 1997, Holdings amended the Plans to
increase the number of shares for which options may be granted thereunder and
issued additional options.
The Plans may be administered by a committee of the Board of Directors of
Holdings, which would have broad authority in administering and interpreting the
Plans, or, if a committee has not been appointed, by the entire Board of
Directors. The Plans provide that, at such time as Holdings has a class of
equity securities registered under Section 12 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the committee must consist entirely of
"Non-Employee Directors" (as defined in Rule 16b-3 under the Exchange Act). A
committee has not yet been appointed to administer the Plans.
Options to purchase up to an aggregate of 1,026,300 and 684,200 shares of
common stock may be granted under the Associate Plan and the Executive Plan,
respectively. Options granted under the Plans may be options intended to qualify
as incentive stock options under Section 422 of the Internal Revenue Code of
1986, as amended, or options not intended to so qualify. In the event that an
optionee's employment with the Company is terminated, depending on the timing
and reasons for such termination, the Option may terminate, remain exercisable
for a short period or be replaced by a right to receive certain payments upon
completion of an initial public offering of Holdings' securities. In the event
of a sale of more than 80% of the outstanding shares of capital stock of
Holdings or 80% of its assets, the vested portion of an option and, under
circumstances, the unvested portion will be purchased by Holdings.
As of February 1, 1998, Holdings has granted options to purchase 679,151
shares under the Associate Plan and 385,622 shares under the Executive Plan, net
of cancellations. The exercise price applicable to these options is $12.04 per
share with respect to 993,833 shares and the exercise price is $20.00 with
respect to 70,940 shares. Except for 96,062 options granted under the Executive
Plan, these exercise prices represent the fair market value at the date of grant
based upon the price paid for such shares in the Acquisition and other valuation
analyses performed by the Company, or the Offering, as applicable. All options
expire on the seventh anniversary of the date of grant (or, under certain
circumstances, 30 days later).
As a result of the Offering, each option granted under the Plans will
become exerciseable upon vesting. Options granted under the Associate Plan vest
in three equal installments on the second, third and fourth anniversaries of the
date of their grant, assuming the associate's employment continues during this
period ("Four Year Vesting"). Options granted under the Executive Plan are
subject to the Four Year Vesting as to 84% of such options and performance
vesting (over the same four years) as to the remaining 16%. The performance
vesting criteria is based upon achieving specified operating results. Partial
vesting of options subject to performance vesting occurs if the Company achieves
less than 95% of the specified operating results. Any portion of options granted
under the Executive Plan which are subject to performance vesting and which do
not vest during the four years will automatically vest 90 days prior to the end
of the option's term. If the specified operating results are exceeded for any
year by at least 10%, the executive will receive options for up to an additional
5% (20% on a cumulative basis) of his or her original option grant.
Currently, Vice Presidents and Senior Vice Presidents are eligible for
participation in the Executive Plan. Store associates and other employees of the
Company are eligible for participation in the Associate Plan. The Company's
Chief Executive Officer and Chief Operating Officer are not covered by either of
the Plans.
Management Stock Purchase Agreements and 1997 Stock Loan Plan
The Company has established stock purchase and stock loan programs pursuant
to which members of management have purchased an aggregate of 180,600 shares of
common stock at the price per share paid in
51
<PAGE> 53
the Acquisition and Financings and have received loans from the Company to fund
a portion of the cost of such shares. Loans made pursuant to the 1997 Stock Loan
Plan are secured by a pledge of the purchased shares, mature in six years, and
bear interest at the same rate as the revolving credit portion of the Senior
Credit Facility. To the extent a loan exceeds the purchase price of all shares
purchased by the participant for cash outside of the loan program, the
participant will have to reduce the principal balance of the loan using 50% of
the after-tax portion of his or her annual bonus, commencing in 1999. Each loan
participant entered into a pledge agreement and executed a secured promissory
note. In addition, the Company has agreed to loan purchasers of shares under the
stock purchase program funds to pay any income taxes associated with such
purchases. For each share of common stock purchased by a management employee
under the stock purchase program without the benefit of the 1997 Stock Loan
Plan, such management employee received an option under the Executive Plan to
purchase one share of Common Stock.
Board of Directors and Committees
Election of directors is subject to the provisions of a stockholders'
agreement (see Item 13. Certain relationships and Related
Transactions -- Stockholders' Agreement. In April 1997, the Board of Directors
of the Company created a Compensation Committee and an Audit Committee. Messrs.
Jenkins, Philippin, Stadler, Jules Trump and Eddie Trump were appointed to the
Compensation Committee and Messrs. Philippin and Smith were appointed to the
Audit Committee. Effective April 1998, Mr. Jenkins resigned from the
Compensation Committee.
Compensation of Directors
Directors of the Company who are employees of the Company or designees of
the Investcorp Group or the Carmel Group do not receive any additional
compensation for serving as directors of the Company.
Compensation Committee Interlocks and Insider Participation
The Company did not have a compensation committee during fiscal 1996. Jules
Trump and Eddie Trump each participated in deliberations concerning executive
officer compensation. No executive officer of the Company serves as a member of
the Board of Directors or compensation committee of any entity that has one or
more executive officers serving as a member of the Company's Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
52
<PAGE> 54
PRINCIPAL STOCKHOLDERS
At April 28, 1998, 2,000 shares of the Company's common stock have been
issued and are outstanding. All such common stock is held by the Company's
parent, CSK Auto Corporation, a Delaware corporation.
The following table sets forth certain information concerning beneficial
ownership of Holdings' common stock as of April 28, 1998, by (i) each person
which is a beneficial owner of more than 5% of the outstanding common stock,
(ii) each director of Holdings who could be deemed to be the beneficial owner of
shares of Holdings' common stock, (iii) each current Named Executive Officer who
could be deemed to be the beneficial owner of shares of Holdings' common stock
and (iv) all directors and executive officers of Holdings as a group:
<TABLE>
<CAPTION>
PERCENT
OF TOTAL
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER(1) VOTING POWER(1)
------------------------------------ --------- ---------------
<S> <C> <C>
INVESTCORP S.A.(2)(3)....................................... 3,011,522 10.9%
SIPCO Limited(3)(4)(5)...................................... 3,011,522 10.9
CSK Investments Limited(5).................................. 1,217,126 4.4
Investcorp CSK Holdings L.P.(2)(5)(6)....................... 1,212,798 4.4
Auto Equity Limited(5)...................................... 1,199,487 4.3
Auto Parts Limited(5)....................................... 1,199,487 4.3
Auto Investments Limited(5)................................. 1,199,487 4.3
CSK Equity Limited(5)....................................... 1,199,487 4.3
Carmel Trust(3)(7)(8)....................................... 8,955,216 32.3
Jules Trump(8)(9)........................................... -- --
Eddie Trump(8)(9)........................................... -- --
Robert Smith(7)(8).......................................... -- --
Maynard Jenkins(10)......................................... 83,078 *
James Bazlen(10)(11)........................................ 366,619 1.3
Martin Fraser(10)........................................... 19,756 *
Robert Shortt(10)........................................... 28,787 *
Don Watson(10).............................................. 10,724 *
All directors and executive officers as a group (17
persons)(11).............................................. 546,492 2.0
</TABLE>
- ---------------
* Less than 1%.
(1) The Investcorp Group, as defined in the Stockholders' Agreement, owned
9,655,715 shares, or 36.3%, of the outstanding shares of Holdings' common
stock upon consummation of the Offering. The Carmel Group, as defined in
the Stockholders' Agreement, owned 9,277,073 shares, or 34.9%, of the
outstanding shares of Holdings' common stock upon consummation of the
Offering. The members of the Investcorp Group, the Carmel Group and their
respective transferees are party to the Stockholders' Agreement. As the
parties to the Stockholders' Agreement have agreed to vote with respect to
certain matters as set forth therein, all such stockholders may be deemed
to be a control group for such purposes, and thus each stockholder may be
deemed to beneficially own all shares of Holdings' common stock owned by
all other such stockholders. See Item 13. Certain Relationships and Related
Transactions -- Stockholders' Agreement. Because the Company believes that
it more accurately reflects ownership of Holdings' common stock, this table
does not reflect shares which may be deemed to be beneficially owned by any
entity solely by virtue of the Stockholders' Agreement.
(2) Investcorp does not own any stock in Holdings. The number of shares of
Holdings' common stock shown as owned by Investcorp includes all of the
shares beneficially owned by Investcorp Investment Equity Limited, a Cayman
Islands corporation and a wholly-owned subsidiary of Investcorp, and by
Investcorp CSK Holdings L.P., a Cayman Islands Limited Partnership in which
Investcorp both owns a majority economic ownership interest and is the sole
general partner, including 225,290 shares (net) of outstanding common stock
that Investcorp CSK Holdings L.P. has the right, pursuant to an option, to
53
<PAGE> 55
acquire from other stockholders of Holdings. Investcorp owns no stock in
Equity CSKA Limited, Equity CSKB Limited, Equity CSKC Limited, South Bay
Limited, Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited,
Noble Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline
Limited, Zinnia Limited, or the beneficial owners of these entities. Each
of Equity CSKA Limited, Equity CSKB Limited, Equity CSKC Limited, South Bay
Limited, Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited,
Noble Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline
Limited and Zinnia Limited is a Cayman Islands corporation. Investcorp may
be deemed to share beneficial ownership of the shares of voting stock held
by these entities because the entities or their shareholders or principals
have entered into revocable management services or similar agreements with
an affiliate of Investcorp pursuant to which each of such entities or their
shareholders or principals has granted such affiliate the authority to
direct the voting and disposition of the common stock owned by such entity
for so long as such agreement is in effect. Investcorp is a Luxembourg
corporation with its registered address at 37 Rue Notre Dame, Luxembourg.
(3) The stockholders of Holdings, Holdings and Auto have entered into a
Stockholders' Agreement with respect to the voting, and in certain
circumstances the disposition, of the shares of common stock of Holdings.
See Item 13. Certain Relationships and Related
Transactions -- Stockholders' Agreement.
(4) SIPCO Limited may be deemed to control Investcorp through its ownership of
a majority of a company's stock that indirectly owns a majority of
Investcorp's shares.
(5) PO Box 1111, West Wind Building, Harbour Drive, George Town, Grand Cayman,
Cayman Islands, British West Indies.
(6) Includes 315,940 shares of Holdings' outstanding common stock that
Investcorp CSK Holdings, L.P. has the right, pursuant to an option, to
acquire from other stockholders of Holdings.
(7) c/o Sonnenschein Nath & Rosenthal, Suite 8000, Sears Tower, 233 S. Wacker
Drive, Chicago, Illinois 60606.
(8) The Trustee of Carmel is Cantrade Trust Company. The agreement pursuant to
which Carmel was established in 1977 (the "Carmel Agreement") designates
certain Protectors who must authorize any action taken by the Trustee and
who have the authority to discharge the Trustee and to appoint substitute
trustees. These Protectors are Saul Tobias Bernstein, Gerrit Van Reimsdijk
and Robert Smith (who is also a director of Holdings and the Company).
These Protectors are not otherwise associated with Holdings, the Company or
Carmel. The Carmel Agreement provides that Carmel shall continue until 21
years after the death of the last survivor of the descendants of certain
persons living on the date it was established (the "Carmel Term"). Certain
members of the families of Jules Trump (a director of Holdings and the
Company) and Eddie Trump (a director of Holdings and the Company) may
appoint beneficiaries or themselves become beneficiaries (by appointment or
at the end of the Carmel Term without appointment). If there are no such
beneficiaries at the end of the Carmel Term, the assets of Carmel will be
paid out to certain charitable institutions. The number of shares shown as
owned by Carmel includes all of the shares owned by Transatlantic Finance,
Inc., an affiliate of Carmel. Jules Trump, Eddie Trump and Robert Smith
each disclaim beneficial ownership of all shares shown as owned by Carmel.
(9) c/o The Trump Group, 4000 Island Boulevard, Williams Island, Florida 33160.
(10) c/o CSK Auto Corporation, 645 E. Missouri Avenue, Suite 400, Phoenix,
Arizona 85012.
(11) Includes 42,762 shares of Holdings' common stock which Mr. Bazlen has the
right, pursuant to an option, to acquire from Holdings.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1989, the Company entered into a nine year lease (the "Initial
Lease") for its corporate headquarters in Phoenix, Arizona, with an unaffiliated
landlord. The lease relates to approximately 78,577 square feet and provides for
a current base rent of approximately $1,490,000 per year. During January 1994,
Missouri Falls Holdings Corp., an affiliate of the Company, acquired an interest
in the partnership ("Missouri Falls Partners") which acquired the building and
assumed the lease between the Company and the former
54
<PAGE> 56
landlord. In April 1995, the Company assumed a lease (the "Subsequent Lease")
between a former tenant and Missouri Falls Partners for approximately 11,683
square feet of additional office space at a current lease rent of $148,958 per
year. In connection with the Acquisition and Financings, both the Initial Lease
and the Subsequent Lease were extended through October 2006 and, at its
originally scheduled termination in April 1998, rent under the Subsequent Lease
will increase to the same per square foot rent as is charged under the Initial
Lease. Additionally, the Company rents approximately 5,754 square feet of
additional space at these premises for an annual rental of $106,449 under two
separate lease documents with expiration dates of February and March, 2000,
respectively. The Company also leases from MFP Holdings, LLC, an affiliate of
Carmel, a parking lot adjacent to its corporate headquarters for an annual
rental of $62,506 under a separate lease document with an expiration date of
October 2006.
An obligation of the Company incurred in connection with the purchase of
product from two of its vendors was subsequently sold to Transatlantic, an
affiliate of Carmel. At the time of such sale, the Company owed the sum of
approximately $16.5 million (less anticipated discounts of approximately $0.8
million) to the vendors. As of September 29, 1996, the obligation has been paid
in full.
The sum of approximately $15.5 million was paid to Transatlantic as of
December 27, 1996 pursuant to the Company's promissory note dated July 24, 1996.
The promissory note was issued to evidence a loan to the Company, in the amount
of $15.0 million, the proceeds of which were used for the payment of vendors.
The Company has paid to Transatlantic, in April of 1998, the sum of $1.0 million
on account of fees for past financings.
Transatlantic Realty, Inc. ("Realty"), another affiliate of Carmel, has
entered into a series of sale-leaseback transactions with Auto with respect to
various real property and fixtures since October 1995. The total funding
provided by Realty in these transactions through February 1, 1998 was
approximately $33.1 million, which represented the cost of such assets to the
Company (of which $27.3 million was for real property and $5.8 million was for
fixtures). The Company has replaced approximately $21.5 million of the real
property sale-leasebacks and $3.9 million of the fixture sale-leasebacks with
similar arrangements with unrelated third parties on terms set in arm's-length
negotiations which generally are not as favorable to the Company as the original
sale-leasebacks entered into with Realty. As of February 1, 1998, there were
approximately $5.8 million of real property sale-leasebacks and $1.9 million of
fixture sale-leasebacks remaining in this facility. The Company intends to
continue to replace such sale-leasebacks and has agreed to use its best efforts
to do so (including, in certain cases, increasing the rent payable under such
leases).
Since the closing of the Acquisition and Financings, Transatlantic Leasing,
Inc. ("Leasing"), another affiliate of Carmel, has entered into a series of
sale-leaseback transactions with the Company with respect to certain real
property. The net funding provided by Leasing in these transactions as of
February 1, 1998 was approximately $25.5 million. In connection with the
establishment of a new sale-leaseback facility, the Company terminated the
facility with Leasing on October 30, 1997. The terms of the leases under the
facility with Leasing were set in arm's-length negotiations. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources and Note 4 to Item 8. Consolidated
Financial Statements.
In connection with the Acquisition and Financings, $40.0 million of
Holdings' 12% Subordinated Notes were acquired by a designee of the Investcorp
Group, Southwest Finance Limited ("Southwest Finance"), a company in which an
affiliate of Investcorp held a minority interest. In connection with the
purchase of these Holdings 12% Subordinated Notes, Southwest Finance received a
fee of $4.0 million. In addition, Transatlantic acquired $10.0 million of the
Holdings 12% Subordinated Notes. Also, in connection with the Acquisition,
Invifin S.A., an affiliate of Investcorp ("Invifin"), received a fee of $1.575
million for providing a standby commitment to fund the amount of the Senior
Credit Facility and the Company paid Investcorp International Inc.
("International") advisory fees of $1.275 million. The Company also paid $3.15
million to International for arranging the Senior Credit Facility. The Company
will use $50.5 million of the net proceeds of the Offering to redeem the
Holdings' 12% Subordinated Notes, including a redemption premium of $0.5
million.
In addition, in connection with the Acquisition, the Company entered into a
five-year agreement for management advisory and consulting services (the
"Management Agreement") with International pursuant to
55
<PAGE> 57
which the Company paid International at the closing of the Acquisition $5.0
million for the entire term of the Management Agreement in accordance with its
terms. The Management Agreement was terminated in connection with the Offering.
The Company believes that the terms of the transactions with affiliated
parties described above in this section were no less favorable to the Company
than terms that may have been available from independent third parties at the
time of the applicable transaction.
In connection with his engagement as Chief Executive Officer, Mr. Jenkins
executed a note in favor of the Company in the principal amount of $550,000. The
note matures in 1999 and bears interest at a rate of 4.535%. The proceeds of the
loan were used by Mr. Jenkins to finance the purchase of the new home required
as a result of his relocation. This loan was authorized by the Board of
Directors prior to the commencement of Mr. Jenkins' employment. Mr. Jenkins also
received a loan from the Company in the amount of $441,500 to pay the state and
federal income taxes he incurred in connection with the $1,000,000 cash bonus
that he received in connection with his engagement as Chief Executive Officer
that he was required to use to purchase shares of Common Stock from a member of
the Investcorp Group. This loan has a three year term, is secured by a pledge of
83,078 shares of Common Stock and bears interest at the same rate applicable to
borrowings under the revolving credit portion of the Senior Credit Facility.
In connection with the Trak West Acquisition in December 1997, South Bay
Limited, a member of the Investcorp Group ("South Bay"), and Transatlantic,
purchased additional stock of the Company for approximately $11.2 million and
$10.8 million, respectively. After giving effect to such purchases, the
Investcorp Group, having sold a portion of its common equity interest to Mr.
Jenkins at its cost pursuant to a prior agreement, owned a 50.1% common equity
interest in the Company and the Carmel Group, having sold a portion of its
common equity to a different member of management of the Company at its cost
pursuant to a prior agreement, owned a 47.1% common equity interest in the
Company. In connection with the sale of capital stock to the Investcorp Group,
an affiliate of Investcorp was paid a $1.0 million placement fee. In connection
with the negotiation of the Trak West Acquisition, TG Investments, Ltd., an
affiliate of Carmel, was paid a $1.0 million consulting fee.
Stockholders' Agreement
Upon the closing of the Acquisition and Financings (the "Closing"), each of
the stockholders of Holdings at such time, the Company and Holdings entered into
a stockholders' agreement (the "Stockholders' Agreement") which imposes certain
restrictions on, and rights with respect to, the transfer of shares of capital
stock of Holdings ("Shares") held by the stockholders of Holdings from time to
time party thereto (the "Stockholders") and entitles the Stockholders to certain
rights regarding corporate governance. In addition, in December 1997, upon the
purchase of stock of Holdings, Transatlantic and South Bay became party to the
Stockholders' Agreement.
Other than transfers to affiliates and certain family members ("Permitted
Transferees") or pursuant to a registered public offering or pursuant to Rule
144, any proposed sales or other transfers of Shares by any Stockholder will be
subject to the first right of Holdings and each of the other Stockholders to
purchase such offered Shares on the same terms and conditions of the proposed
third-party sale. In addition, at any time following the second anniversary of
the date of the Closing, any Stockholder wishing to sell any of its Shares,
whether or not it has received a third-party offer, may offer to sell such
Shares to Holdings and the other Stockholders on terms and conditions
established by the selling Stockholder. In the event that Holdings and/or the
other Stockholders fail to exercise their right to purchase, the selling
Stockholder may sell such offered Shares to third parties on such terms and
conditions specified in the Stockholders' Agreement.
Under certain circumstances, if, following the first anniversary of the
Closing, members of the Original Investcorp Group or the Original Carmel Group
(each as defined below) desire to sell all of their Shares in an unaffiliated
third-party sale pursuant to an offer by such third party to acquire all of the
outstanding Shares of Holdings, then the selling Stockholders will have the
right to require each of the other Stockholders to sell all of their Shares in
the same transaction and upon the same terms and conditions as received by the
selling Stockholders; provided that the other Stockholders will have the right
to purchase, and/or have Holdings
56
<PAGE> 58
purchase, from the selling Stockholders all of the Shares held by the selling
Stockholders upon the terms and conditions such Shares were proposed to be sold
by the selling Stockholders. For purposes of this section, the "Original
Investcorp Group" shall mean the members of the Investcorp Group (except South
Bay) and each of their Permitted Transferees; the "Original Carmel Group" shall
mean Carmel and each of its Permitted Transferees; the "Investcorp Group" shall
mean the members of the Investcorp Group and each of their respective
transferees and subsequent transferees; and the "Carmel Group" shall mean Carmel
and each of its transferees and subsequent transferees.
The Stockholders' Agreement also provides that, in the event any
Stockholder (the "Proposed Transferor") proposes to transfer any Shares (other
than to Permitted Transferees, or pursuant to a registered public offering or
under Rule 144) to any person (the "Proposed Purchaser"), each of the other
Stockholders will have the right to require the Proposed Purchaser to purchase a
corresponding percentage of its Shares with a corresponding reduction in the
number of Shares to be purchased from the Proposed Transferor. Each Stockholder
will also have preemptive rights under certain circumstances to acquire a
portion of any additional Shares offered at any time by Holdings, other than in
connection with a public offering and certain non-cash issuances, in order to
enable such Stockholder to maintain its percentage equity ownership in Holdings.
The Stockholders' Agreement also provides the Stockholders with various
registration rights commencing upon the earlier of an initial public offering of
Holdings' securities or the fifth anniversary of the Closing.
Under certain circumstances, members of the Investcorp Group or the Carmel
Group will have the right to offer all of their Shares for sale to the other
Stockholders who are members of the other group (the "Offeree Stockholders") at
a price established by the offering Stockholders. If Holdings and/or the Offeree
Stockholders do not purchase the offered Shares, the offering Stockholders must
then purchase all of the Shares held by the members of the other group at the
price first offered by the offering Stockholders.
Pursuant to the Stockholders' Agreement, the Stockholders have demand
registration rights ("Demand Rights") and piggy-back registration rights
("Piggy-back Rights"). The Demand Rights entitle the Stockholders, at any time
following an initial public offering or the fifth anniversary of the
Stockholders' Agreement, to require Holdings to register all or any of the
unregistered shares held by the exercising Stockholders. The Investcorp Group as
a whole may exercise Demand Rights up to four times. The Carmel Group as a whole
may also exercise Demand Rights up to four times. The Piggy-back Rights entitle
the Stockholders, at any time that the Company proposes to sell any of its
equity securities in a transaction registered under the Securities Act, to
include a portion of their unregistered stock in such offering. The Stockholders
have agreed to waive their Piggy-back Rights with respect to the Offering.
The Stockholders' Agreement provides that the Investcorp Group will have
the right to nominate a majority of the members of the Boards of Directors of
the Company, Holdings and their respective subsidiaries so long as it holds a
greater number of Shares than the Carmel Group, and the Carmel Group will have
the right to nominate a majority of the members of such Boards of Directors
during any period in which the Carmel Group holds a greater number of Shares.
Pursuant to the Stockholders' Agreement, each of the Stockholders agrees to vote
all of its shares in favor of each of the persons nominated to such Boards by
each group.
In addition, at least one member of the Boards of Directors nominated by
each group must approve certain fundamental corporate actions proposed to be
taken by Holdings or the Company, including, without limitation, (i) the making
of any assignment for the benefit of its creditors or the commencement of any
bankruptcy or similar proceedings, (ii) the addition of certain new unrelated
lines of business, (iii) certain sales of its assets, (iv) certain significant
mergers, consolidations and acquisitions, (v) the incurrence of certain
significant indebtedness, (vi) certain transactions with affiliates, (vii) any
amendment to its certificate of incorporation or bylaws, (viii) the execution,
amendment, modification or termination of certain significant agreements, (ix)
the termination or significant change in duties of certain officers of the
Company, and (x) certain issuances of Shares by the Company.
The Stockholders' Agreement will terminate, other than with respect to the
registration rights provided for therein, at such time as either the Investcorp
Group or the Carmel Group holds Shares representing less than the lesser of (i)
5% of the then current voting power or (ii) 10% of the number of Shares having
voting
57
<PAGE> 59
power held by such group at the time of the Closing. Notwithstanding the
foregoing, the provisions of the Stockholders' Agreement requiring the consent
of at least one director nominated by each group shall terminate at such earlier
time as either (a) the Investcorp Group and the Carmel Group fail to hold in the
aggregate Shares representing more than 50% of the then current voting power or
(b) either the Original Investcorp Group or the Original Carmel Group holds less
than 50% of the number of Shares having voting power held by such group at the
time of the Closing.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a-1) The following consolidated financial statements of CSK Auto, Inc. are
included in Item 8. Of this Report on Form 10-K.
Consolidated Balance Sheets -- February 1, 1998 and February 2, 1997
Consolidated Statements of Operations -- Fiscal Years Ended February 1,
1998, February 2, 1997 and January 28, 1996
Consolidated Statements of Stockholder's Equity -- Fiscal Years Ended
February 1, 1998, February 2, 1997 and January 28, 1996
Consolidated Statements of Cash Flows -- Fiscal Years Ended February 1,
1998, February 2, 1997 and January 28, 1996
Notes to Consolidated Financial Statements
Reports of Independent Accountants
(a-2) The following financial statement schedules of CSK Auto, Inc. for the
three years ended February 1, 1998 are included in Item 8. of this Report on
Form 10-K, as required by Item 14(d): Schedule II -- Valuation and Qualifying
Accounts and report of independent accountants thereon.
(a-3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------- -----------------------
<C> <C> <S>
3.01* -- Restated Articles of Incorporation of the Company.
3.02* -- Amended and Restated By-laws of the Company.
4.01* -- Indenture, dated as of October 30, 1996, by and among the
Company, Kragen, Schuck's and The Bank of New York (as
successor to Wells Fargo Bank, N.A.), as Trustee, including
form of Note.
4.02** -- Amended and Restated Credit Agreement, dated as of December
8, 1997, among the Company, the several Lenders from time to
time parties thereto, The Chase Manhattan Bank, as
administrative agent for the Lenders, and Lehman Commercial
Paper Inc., as documentation agent for the Lenders and Chase
Securities Inc., as arranger.
10.01* -- Employment Agreement, dated June 19, 1996, between the
Company and Jules Trump.
10.02** -- Amended and Restated Employment Agreement, dated November 1,
1996, between the Company and James Bazlen.
10.03* -- Amended and Restated Employment Agreement, dated June 19,
1996, between the Company and Arthur Hicks.
10.04* -- Amended and Restated Participation Agreement, dated June 19,
1996, between the Company and James Bazlen.
10.05* -- Amended and Restated Participation Agreement, dated June 19,
1996, between the Company and Arthur Hicks.
10.06* -- 1996 Associate Stock Option Plan.
10.06.1** -- Plan Amendment to the Associate Plan.
10.06.2** -- Second Plan Amendment to the Associate Plan.
</TABLE>
58
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------- -----------------------
<C> <C> <S>
10.07* -- 1996 Executive Stock Option Plan.
10.07.1** -- Plan Amendment to the Executive Plan.
10.07.2** -- Second Plan Amendment to the Executive Plan.
10.08* -- Real Estate Financing Agreement, dated as of October 30,
1996, between Cantrade Trust Company Limited, in its
capacity as trustee of The Carmel Trust, and the Company.
10.09* -- Amended and Restated Lease, dated October 23, 1989 (the
"Missouri Falls Lease"), between the Company and Missouri
Falls Associates Limited Partnership.
10.10* -- First Amendment to the Missouri Falls Lease, dated November
22, 1991, between the Company and Missouri Falls Associates
Limited Partnership.
10.11* -- Amendment to Leases, dated as of October 30, 1996, by and
between Missouri Falls Associates Limited Partnership and
the Company.
10.12* -- Financing Advisory Agreement, dated October 30, 1996,
between the Company and Investcorp International Inc.
10.13* -- Financial Advisory Services Letter Agreement, dated October
30, 1996, between the Company and Investcorp International
Inc.
10.14* -- Standby Loan Commitment Letter Agreement, dated October 30,
1996, between the Company and Invifin S.A.
10.15* -- Agreement for Management Advisory, Strategic Planning and
Consulting Services, dated October 30, 1996, between the
Company and Investcorp International Inc.
10.16* -- Stockholders' Agreement, dated October 30, 1996, by and
among the Initial Investcorp Group, Cantrade Trust Company
Limited, in its capacity as trustee of The Carmel Trust,
Holdings and the Company.
10.16.1** -- Form of Supplemental Stockholders' Agreement Signature Page.
10.17* -- Stock Purchase Agreement, dated September 29, 1996.
10.18** -- Senior Executive Stock Loan Plan.
10.19** -- Form of Stock Purchase Agreement.
10.20** -- Promissory Note of Maynard Jenkins dated December 21, 1997.
10.21** -- Stock Pledge Agreement between Holdings and Maynard Jenkins
dated December 21, 1997.
10.22** -- Employment Agreement dated January 27, 1997 between the
Company and Maynard Jenkins.
10.23** -- Stock Acquisition Agreement dated January 27, 1997 among
Maynard Jenkins, Holdings and CSK Holdings L.P.
10.24** -- Stock Option Agreement, dated February 1, 1998, between
Holdings and Maynard Jenkins.
10.25** -- Stock Option Agreement, dated March 9, 1998, between
Holdings and Maynard Jenkins.
12.01 -- Statement re: Computation of Ratio of earnings to Fixed
Charges
16.01* -- Letter of Price Waterhouse LLP re: Change in Certifying
Accountant.
27.01 -- Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated herein by reference to the Company's Registration Statement on
Form S-4 (File No. 333-22511).
** Incorporated herein by reference to CSK Auto Corporation's Registration
Statement on Form S-1 (File No. 333-43211).
(b) Reports on Form 8-K: None.
59
<PAGE> 61
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of CSK Auto, Inc.
Our audit of the consolidated financial statements referred to in our
report dated May 21, 1996 appearing in this Annual Report on Form 10-K also
included an audit of the Financial Statement Schedule listed in item 14(b) of
this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Phoenix, Arizona
May 21, 1996
60
<PAGE> 62
CSK AUTO, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS 1997, 1996 AND 1995
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Reserve for Closed Stores
Year End January 28, 1996..................... 5,745 3,310 (3,757) 5,298
Year End February 2, 1997..................... 5,298 14,904 (4,360) 15,842
Year End February 1, 1998..................... 15,842 1,640 (6,130) 11,352
Reserve for Bad Debts
Year End January 28, 1996..................... 1,488 1,437 (972) 1,953
Year End February 2, 1997..................... 1,953 1,290 (1,475) 1,768
Year End February 1, 1998..................... 1,768 2,033 (1,398) 2,403
</TABLE>
61
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on this
4th day of May 1998.
CSK AUTO, INC.
By: /s/ MAYNARD JENKINS
------------------------------------
Maynard Jenkins
Chairman and
Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, this report has been signed by the following
persons on behalf of the registrant, and in the capacities indicated, on this
4th day of May 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ MAYNARD JENKINS Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer (Principal Executive Officer)
Maynard Jenkins
/s/ JAMES BAZLEN President, Chief Operating Officer and
- ----------------------------------------------------- Director
James Bazlen
/s/ JON P. HEDLEY Director
- -----------------------------------------------------
Jon P. Hedley
/s/ EDWARD G. LORD III Director
- -----------------------------------------------------
Edward G. Lord III
/s/ CHRISTOPHER J. O'BRIEN Director
- -----------------------------------------------------
Christopher J. O'Brien
/s/ CHARLES J. PHILIPPIN Director
- -----------------------------------------------------
Charles J. Philippin
/s/ ROBERT SMITH Director
- -----------------------------------------------------
Robert Smith
/s/ CHRISTOPHER J. STADLER Director
- -----------------------------------------------------
Christopher J. Stadler
</TABLE>
62
<PAGE> 64
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JULES TRUMP Director
- -----------------------------------------------------
Jules Trump
/s/ EDDIE TRUMP Director
- -----------------------------------------------------
Eddie Trump
/s/ SAVIO W. TUNG Director
- -----------------------------------------------------
Savio W. Tung
/s/ DON W. WATSON Senior Vice President, Chief Financial Officer
- ----------------------------------------------------- and Treasurer (Principal Financial Officer
Don W. Watson and Principal Accounting Officer)
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
Copies of this annual report of Form 10-K shall be sent to holders of the
registrant's securities subsequent to the filing hereof. No proxy material has
been or will be sent to holders of the registrant's securities with respect to
the registrant's most recently completed fiscal year.
63
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------- -----------------------
<C> <C> <S>
3.01* -- Restated Articles of Incorporation of the Company.
3.02* -- Amended and Restated By-laws of the Company.
4.01* -- Indenture, dated as of October 30, 1996, by and among the
Company, Kragen, Schuck's and The Bank of New York (as
successor to Wells Fargo Bank, N.A.), as Trustee, including
form of Note.
4.02** -- Amended and Restated Credit Agreement, dated as of December
8, 1997, among the Company, the several Lenders from time to
time parties thereto, The Chase Manhattan Bank, as
administrative agent for the Lenders, and Lehman Commercial
Paper Inc., as documentation agent for the Lenders and Chase
Securities Inc., as arranger.
10.01* -- Employment Agreement, dated June 19, 1996, between the
Company and Jules Trump.
10.02** -- Amended and Restated Employment Agreement, dated November 1,
1996, between the Company and James Bazlen.
10.03* -- Amended and Restated Employment Agreement, dated June 19,
1996, between the Company and Arthur Hicks.
10.04* -- Amended and Restated Participation Agreement, dated June 19,
1996, between the Company and James Bazlen.
10.05* -- Amended and Restated Participation Agreement, dated June 19,
1996, between the Company and Arthur Hicks.
10.06* -- 1996 Associate Stock Option Plan.
10.06.1** -- Plan Amendment to the Associate Plan.
10.06.2** -- Second Plan Amendment to the Associate Plan.
10.07* -- 1996 Executive Stock Option Plan.
10.07.1** -- Plan Amendment to the Executive Plan.
10.07.2** -- Second Plan Amendment to the Executive Plan.
10.08* -- Real Estate Financing Agreement, dated as of October 30,
1996, between Cantrade Trust Company Limited, in its
capacity as trustee of The Carmel Trust, and the Company.
10.09* -- Amended and Restated Lease, dated October 23, 1989 (the
"Missouri Falls Lease"), between the Company and Missouri
Falls Associates Limited Partnership.
10.10* -- First Amendment to the Missouri Falls Lease, dated November
22, 1991, between the Company and Missouri Falls Associates
Limited Partnership.
10.11* -- Amendment to Leases, dated as of October 30, 1996, by and
between Missouri Falls Associates Limited Partnership and
the Company.
10.12* -- Financing Advisory Agreement, dated October 30, 1996,
between the Company and Investcorp International Inc.
10.13* -- Financial Advisory Services Letter Agreement, dated October
30, 1996, between the Company and Investcorp International
Inc.
10.14* -- Standby Loan Commitment Letter Agreement, dated October 30,
1996, between the Company and Invifin S.A.
10.15* -- Agreement for Management Advisory, Strategic Planning and
Consulting Services, dated October 30, 1996, between the
Company and Investcorp International Inc.
10.16* -- Stockholders' Agreement, dated October 30, 1996, by and
among the Initial Investcorp Group, Cantrade Trust Company
Limited, in its capacity as trustee of The Carmel Trust,
Holdings and the Company.
10.16.1** -- Form of Supplemental Stockholders' Agreement Signature Page.
10.17* -- Stock Purchase Agreement, dated September 29, 1996.
10.18** -- Senior Executive Stock Loan Plan.
10.19** -- Form of Stock Purchase Agreement.
10.20** -- Promissory Note of Maynard Jenkins dated December 21, 1997.
10.21** -- Stock Pledge Agreement between Holdings and Maynard Jenkins
dated December 21, 1997.
</TABLE>
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------- -----------------------
<C> <C> <S>
10.22** -- Employment Agreement dated January 27, 1997 between the
Company and Maynard Jenkins.
10.23** -- Stock Acquisition Agreement dated January 27, 1997 among
Maynard Jenkins, Holdings and CSK Holdings L.P.
10.24** -- Stock Option Agreement, dated February 1, 1998, between
Holdings and Maynard Jenkins.
10.25** -- Stock Option Agreement, dated March 9, 1998, between
Holdings and Maynard Jenkins.
12.01 -- Statement re: Computation of Ratio of earnings to Fixed
Charges
16.01* -- Letter of Price Waterhouse LLP re: Change in Certifying
Accountant.
27.01 -- Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated herein by reference to the Company's Registration Statement on
Form S-4 (File No. 333-22511).
** Incorporated herein by reference to CSK Auto Corporation's Registration
Statement on Form S-1 (File No. 333-43211).
(b) Reports on Form 8-K: None.
<PAGE> 1
Exhibit 12.01
CSK AUTO, INC.
Statement re: Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
--------------------------------------
January 28, February 2, February 1,
1996 1997 1998
--------------------------------------
(in thousands)
<S> <C> <C> <C>
Income (loss) before taxes and extraordinary items $(14,541) $(34,852) $10,202
======================================
Fixed Charges
Interest expense 14,379 19,025 34,279
Interest portion of rentals 18,329 17,071 19,281
--------------------------------------
Total fixed charges 32,708 36,096 53,560
Earnings before income taxes and fixed charges 18,167 1,244 63,762
======================================
Ratio of earnings to fixed charges(1) -- -- 1.19
======================================
</TABLE>
(1) The ratio of earnings to fixed charges has not been computed for fiscal 1996
and 1995 since earnings were not sufficient to cover fixed charges. The coverage
deficiencies were $34,852 and $14,541, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1998
<PERIOD-START> FEB-03-1997
<PERIOD-END> FEB-01-1998
<CASH> 4,852
<SECURITIES> 0
<RECEIVABLES> 39,969
<ALLOWANCES> (2,403)
<INVENTORY> 367,366
<CURRENT-ASSETS> 426,345
<PP&E> 170,095
<DEPRECIATION> (84,155)
<TOTAL-ASSETS> 557,116
<CURRENT-LIABILITIES> 190,694
<BONDS> 125,000
0
1
<COMMON> 1
<OTHER-SE> (33,190)
<TOTAL-LIABILITY-AND-EQUITY> 557,116
<SALES> 845,815
<TOTAL-REVENUES> 845,815
<CGS> 468,171
<TOTAL-COSTS> 800,325
<OTHER-EXPENSES> 1,009
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,279
<INCOME-PRETAX> 10,202
<INCOME-TAX> 4,179
<INCOME-CONTINUING> 6,023
<DISCONTINUED> 0
<EXTRAORDINARY> (3,015)
<CHANGES> 0
<NET-INCOME> 3,008
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
