<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1998
REGISTRATION NO. 333-43211
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
CSK AUTO CORPORATION
(Exact Name of Registrant as Specified in its Charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 5531 86-0765798
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
645 E. MISSOURI AVENUE MAYNARD L. JENKINS
PHOENIX, ARIZONA 85012 645 E. MISSOURI AVENUE
(602) 265-9200 PHOENIX, ARIZONA 85012
(Address, including Zip Code, and Telephone (602) 265-9200
Number, including Area Code, of Registrant's (Name, Address, including Zip Code, and
Principal Executive Offices) Telephone Number, including Area Code,
of Agent for Service)
</TABLE>
---------------------
Copies of communications to:
<TABLE>
<S> <C>
CHARLES K. MARQUIS, ESQ. JEFFREY SMALL, ESQ.
GIBSON, DUNN & CRUTCHER LLP DAVIS POLK & WARDWELL
200 PARK AVENUE 450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10166 NEW YORK, NEW YORK 10017
(212) 351-4000 (212) 450-4000
(FACSIMILE) (212) 351-4035 (FACSIMILE) (212) 450-4800
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 10, 1998
PROSPECTUS
, 1998
7,500,000 SHARES
[CSK AUTO LOGO]
COMMON STOCK
All of the shares of Common Stock, par value $.01 (the "Common Stock"),
offered hereby (the "Offering") are being issued and sold by CSK Auto
Corporation (the "Company"). Of the 7,500,000 shares of Common Stock offered
hereby, up to 50,000 shares will be reserved for sale to officers and employees
of the Company and its subsidiaries.
Prior to the Offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will be
between $19.00 and $21.00 per share. See "Underwriting" for information relating
to the factors considered in determining the initial public offering price.
The Common Stock has been approved for listing on the New York Stock
Exchange (the "NYSE") under the symbol "CAO," subject to notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................... $ $ $
Total(1)(4)................. $ $ $
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Up to 50,000 shares reserved for sale to officers and employees of the
Company and its subsidiaries are being sold at $ per share, the Price to
the Public less Underwriting Discounts and Commissions. The Underwriters
have agreed to waive Underwriting Discounts and Commissions with respect to
such shares. If such parties purchase shares, the total Price to the Public
and the total Underwriting Discounts and Commissions, but not the total
Proceeds to the Company, will be less than those shown above.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses, payable by the Company, estimated at $875,000.
(4) The Company has granted the Underwriters a 30-day option to purchase up to
1,125,000 additional shares at the Price to the Public less Underwriting
Discounts and Commissions, solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to the Public, Underwriting
Discounts and Commissions, and Proceeds to the Company will be $ ,
$ and $ , respectively. See "Underwriting."
The shares are being offered by the several Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, subject to
various prior conditions, including their right to reject orders in whole or in
part. It is expected that delivery of the share certificates will be made in New
York, New York, on or about , 1998.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FURMAN SELZ LEHMAN BROTHERS MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER SALOMON SMITH BARNEY
<PAGE> 3
[MAP OF WESTERN UNITED STATES SHOWING THE DISTRIBUTION OF THE COMPANY'S 718
STORES BY CHAIN]
Information in this Prospectus contains "forward-looking statements," which
are subject to risks and uncertainties. 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 performance. The matters set forth under the caption "Risk Factors"
in the Prospectus constitute cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements. Other factors that might cause such a
difference include, but are not limited to, those discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements and quarterly reports
containing unaudited interim financial information for the first three quarters
of each fiscal year of the Company.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus. Unless the context otherwise requires, references to the "Company"
refer to CSK Auto Corporation, a Delaware corporation (formerly known as CSK
Group, Ltd.), and its wholly-owned direct and indirect subsidiaries, including
CSK Auto, Inc., an Arizona corporation ("Auto"). The term "fiscal year" and
"fiscal" refer to the Company's fiscal year, which consists of 52 or 53 weeks
ending on the Sunday nearest to January 31 of the following calendar year (e.g.,
a reference to "fiscal 1996" is a reference to the fiscal year ended February 2,
1997). Unless the context otherwise requires, the information contained herein
(i) gives effect to a 17.105-for-one split of the Common Stock and the
conversion of all outstanding Class A Common Stock, Class B Common Stock, Class
C Common Stock, Class D Common Stock and Class E Common Stock of the Company
into an equivalent number of shares of Common Stock in conjunction with the
Offering, and (ii) assumes that the over-allotment option is not exercised. See
"Underwriting." The Company's address is 645 E. Missouri Avenue, Suite 400,
Phoenix, Arizona 85012, and its telephone number is (602) 265-9200.
THE COMPANY
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 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.
On December 8, 1997, the Company completed the acquisition of 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
$34.8 million, which was funded with a $22.0 million equity investment by
affiliates of the Company's existing stockholders and additional bank
borrowings. By the end of the first quarter of fiscal 1998, the Company expects
to complete the conversion of the Trak West stores to the Kragen name and store
format and the integration of these stores into the Company's operations. The
Trak West Acquisition provides the Company with a leading market position and 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. The Company intends to increase the revenues and profitability of the
acquired stores by improving their stocking levels, merchandising and customer
service. The Company also intends to introduce its profitable and highly
successful commercial sales program (the "Commercial Sales Program") to 43 of
the Trak West stores and its Priority Parts operation to all of the Trak West
stores. The Trak West Acquisition will enable the Company to capitalize on
significant economies of scale because the Company's existing warehouse and
distribution network will service the acquired stores. In addition, the Company
believes that by increasing its advertising presence in the Los Angeles market
it will improve the financial performance of the acquired stores as well as the
Company's 65 existing Los Angeles stores.
3
<PAGE> 5
OPERATING AND GROWTH STRATEGY
Over the past several years, the Company has introduced a variety of
operating initiatives which have enabled it to significantly increase its
productivity and the level and quality of service provided to customers. These
initiatives include the implementation of a highly efficient, centralized
infrastructure, the installation of sophisticated store-level information
systems, the expansion of a rapidly growing and profitable Commercial Sales
Program, and an accelerating new store opening and relocation program. The
Company believes that its operating initiatives have provided the foundation for
continued and profitable growth.
Several of the operating initiatives that have been implemented by the
Company are summarized below.
- Expanded Product Selection -- The Priority Parts operation allows the
Company to better serve its customers by making available to more than
565 of its stores, on a same-day delivery basis, an additional 200,000
SKUs not regularly stocked in these stores, and on a next-day delivery
basis to all of its stores, an additional 1,000,000 SKUs. The Priority
Parts operation has also enabled the Company to increase sales to
commercial accounts due to the broader availability of automotive
replacement parts. The Company has expanded its Priority Parts operation
by improving its delivery system and adding 17 strategically located
Priority Parts depots to its two original Priority Parts depots. The
Company believes that its Priority Parts operation provides the Company
with an important competitive advantage.
- Warehouse and Distribution System -- The Company has completed the
conversion of its warehouse and distribution facilities from a manual,
labor-intensive, paper-based system to a technologically advanced, fully
integrated system. This system, which became fully operational during the
fourth quarter of fiscal 1995, has improved the Company's in-stock levels
and accuracy to the highest rates in recent years. The Company has
sufficient warehouse and distribution capacity to meet the requirements
of its growth plans for the foreseeable future. The Company has reduced
warehouse and distribution expense as a percentage of net sales from 4.9%
for fiscal 1995 to 3.8% for fiscal 1996 and 3.4% for the thirty-nine
weeks ended November 2, 1997.
- Store-Level Information Systems -- The Company has installed several
store-level information systems, which have improved store labor
productivity and customer service. These initiatives include installing a
point of sale system ("POS"), integrating the POS with the Company's
Electronic Parts Catalog ("EPC"), implementing its Surround Store
Inventory Program, its Retail Paperless Management System and a
sophisticated store labor scheduling system, and installing a
Company-wide satellite communications network. The enhanced information
system capabilities have enabled the Company to achieve higher average
transaction amounts by allowing sales associates to suggest appropriate
add-on products, including higher margin replacement parts. In addition,
the significant investment in information systems has been integral to
the successful penetration of the commercial market.
- Training and Technical Expertise -- In order to better develop its
associates' technical expertise and customer service skills, the Company
has increased its focus on formal classroom training and on-the-job
training, customer service measurement systems and incentive programs for
its district managers, store managers, and sales associates.
Approximately 1,400 of the Company's associates have passed the ASE-P2
test, a nationally recognized certification for parts technicians. The
Company believes these programs have resulted in an increased level of
customer service and store-level efficiency.
- Centralized Call Center -- The Company's centralized call center (the
"Call Center") provides store personnel at selected high-volume stores
the option to reroute customer calls to a central location during the
store's busiest hours of operation. Call Center associates perform all
functions that store personnel normally handle, such as store specific
parts look-up, price look-up and inventory availability verification in a
manner that is transparent to the call-in customer. Associates in the
Call Center can take an order from a customer and electronically transmit
it to the store, enabling the requested product to be picked up by the
customer. Use of the Call Center allows sales associates to give their
4
<PAGE> 6
undivided attention to customers at the store while call-in customers are
serviced directly by Call Center associates.
- Precision Pricing Program -- The Company has recently implemented a new
pricing program (the "Precision Pricing Program"), which allows the
Company to establish pricing zones at the store level rather than the
market or chain level. This initiative enables the Company to establish
pricing levels at each store based upon that store's local market
competition, thereby providing competitive prices for customers. The
Company introduced the Precision Pricing Program in the third quarter of
fiscal 1997 and believes that, once fully implemented, it will provide
the Company with the opportunity to improve its gross profit margin.
The Company is currently generating growth in sales and operating profits
through: (i) an accelerating new store opening, relocation and acquisition
program; (ii) continued maturation and expansion of the Company's Commercial
Sales Program; and (iii) increasing operating profit margins as a result of
continued improvement in gross profit margins and continued realization of
operating efficiencies. The Company believes that it can realize accelerating
and profitable growth by continuing to aggressively pursue these strategies:
- Accelerating New Store Opening, Relocation and Acquisition Program -- The
Company's store growth strategy is focused on existing markets and
includes: opening new stores, relocating smaller stores to larger stores
at better locations and expanding selected stores. The Company believes
that its existing markets are highly fragmented and that its store growth
strategy will enable it to effectively and profitably increase its name
recognition and market penetration while benefiting from economies of
scale in advertising, management and distribution costs. In addition to
the Trak West Acquisition, the Company opened 101 stores (including 36
relocations) in fiscal 1997 as compared to 56 stores (including 37
relocations) in fiscal 1996. The Company plans to continue the
acceleration of its store growth strategy and expects to open or relocate
approximately 130 stores in fiscal 1998 and approximately 150 stores in
fiscal 1999. Additionally, the Company believes that the fragmented
nature of the industry has enabled it to effectively pursue an
opportunistic acquisition strategy. The Company focuses its acquisition
efforts in (i) existing markets to achieve further market penetration in
a timely and cost-effective manner without adding additional retail
square footage (as was done in the Trak West Acquisition), and (ii)
contiguous markets to permit further leveraging of its established
infrastructure over an increasing sales base.
- Further Penetration of the Commercial Segment -- The Company believes
that it can continue to expand its profitable and highly successful
Commercial Sales Program. The commercial segment constitutes in excess of
50% of the approximately $78 billion of annual sales in the automotive
aftermarket and is currently growing at a faster rate than the DIY
segment of the market. The Company believes it has significant
competitive advantages in servicing the commercial segment because of its
experienced sales associates, conveniently located stores, attractive
pricing and ability to consistently deliver a broad product offering with
an emphasis on national brand names. Commercial Sales Centers ("CSCs")
have been implemented in 360 of the Company's stores as of February 1,
1998. The Company's sales to commercial accounts (including sales by
stores without CSCs) have increased 32.6% to $87.7 million, or 13.8% of
total sales, in the thirty-nine weeks ended November 2, 1997, from $66.1
million, or 11.2% of total sales, in the comparable period in fiscal
1996. The Company believes that significant opportunities exist to
increase sales at its existing CSCs by focusing on the penetration of
certain segments of the commercial market such as fleet owners,
municipalities and national accounts. In addition, 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).
- Increasing Operating Profit Margin -- The Company has significantly
increased its operating profit margin to 5.7% in the thirty-nine weeks
ended November 2, 1997, from 3.6% in the comparable period in fiscal
1996. The Company believes that significant opportunities exist to
continue to increase its operating profit margin. The Company has
increased its gross profit margin primarily as a result of more favorable
vendor terms, taking advantage of cash discounts from vendors,
efficiencies from its
5
<PAGE> 7
new warehouse and distribution system and improvements in product mix.
The Company believes that the improved vendor terms are primarily the
result of the Company's improved financial performance, a reduction in
overall vendor payables and growth in its store count. The Company
believes that it can further improve its operating profit margin through:
(i) the continued focus on the initiatives described above; (ii)
effectively leveraging its fixed costs over an increasing sales base; and
(iii) obtaining improved vendor and landlord terms due to the significant
deleveraging resulting from the Offering.
The increase in the store base, combined with the success of the operating
initiatives described above, has resulted in a 68.5% increase in operating
profit to $36.2 million for the thirty-nine weeks ended November 2, 1997, from
$21.5 million in the comparable period in fiscal 1996. The Company believes it
can realize accelerating and profitable growth by continuing to aggressively
pursue its operating and growth strategies.
RECENT FINANCIAL RESULTS
The following information is based upon the books and records of the
Company which have not yet been fully subjected to the Company's routine closing
procedures and is subject to audit. Complete financial statements for fiscal
1997 are not presently available. The following information includes the effect
of the Trak West Acquisition, which was completed on December 8, 1997, on the
operating results of the Company.
The Company expects that it will report net sales of $845.7 million for
fiscal 1997, an increase of 6.6% in total and 4.0% on a comparable store basis,
compared to net sales in fiscal 1996. Sales from the Trak West stores, which
were operated by the Company for approximately seven weeks in fiscal 1997, are
expected to be approximately $10.6 million. Commercial sales produced by the
Company's stores are expected to be $115.3 million for fiscal 1997, an increase
of $25.7 million or 28.7% over commercial sales for fiscal 1996. Commercial
sales are expected to account for 13.6% of net sales for fiscal 1997, compared
to 11.3% for fiscal 1996. Operating profit is expected to increase to $45.1
million for fiscal 1997 ($49.1 million excluding an estimate of $4 million for
one-time transition costs associated with Trak West). Excluding the impact of
the one-time transition costs, this represents, an increase of $52.5 million
over the operating loss of $3.4 million for fiscal 1996. The 1996 operating loss
includes a $20.2 million charge related to certain Acquisition and Financing
activities and a $12.9 million provision for store closing costs. The Company
expects that it will report EBITDA (as defined herein) for fiscal 1997 of $66.0
million ($70.0 million excluding the estimated impact of the Trak West one-time
transition costs). Excluding the impact of the one-time transition costs, this
represents, an increase of $19.5 million or 38.6% over EBITDA for fiscal 1996.
In addition, as disclosed elsewhere herein, the Company expects to record in the
fourth quarter of fiscal 1997 (i) a charge to earnings of $1.1 million in
connection with the issuance of shares of Common Stock and options to purchase
Common Stock to certain of the Company's executives; and (ii) an extraordinary
charge of $3.3 million, net of taxes, with respect to the early extinguishment
of debt.
The transitional efforts that the Company commenced on December 8, 1997 to
integrate the Trak West stores into the Company's procedures and systems are
progressing in accordance with the schedule established by the Company upon the
acquisition of the stores. At this date, however, the integration is not
entirely complete. Because the stores are not fully integrated into the
Company's systems, financial results for the Trak West stores are preliminary
and subject to adjustment. However, as indicated above, and due to the fact that
the stores were operated by the Company for only seven weeks in fiscal 1997, the
Company does not expect that the results of operations of the Trak West stores
will have a material impact upon the profitability of the Company in fiscal 1997
other than the effect of estimated one-time transition costs. Such one-time
transition costs are estimated to be $6 million, of which $4 million is
estimated to have been incurred during the fourth quarter of fiscal 1997 and the
balance is expected to be incurred in the first quarter of fiscal 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Trak West Acquisition"
6
<PAGE> 8
THE OFFERING
Common Stock being offered.......... 7,500,000 shares of Common Stock
Common Stock outstanding after the
Offering............................ 26,613,388 shares of Common Stock(1)
Use of proceeds..................... The net proceeds from the Offering will
be used to repay indebtedness.
NYSE symbol......................... CAO
- ---------------
(1) Excludes 2,037,120 shares subject to options (with a weighted average
exercise price of $13.17 per share) outstanding upon the consummation of the
Offering and 631,260 additional shares reserved for issuance pursuant to
options available for grant under the Company's 1996 Associate and Executive
Stock Option Plans. See "Management -- 1996 Associate and Executive Stock
Option Plans."
RISK FACTORS
See "Risk Factors" beginning on page 10 for a description of certain risks
relevant to an investment in the Common Stock. Such risk factors include, among
others, risks related to the Company's growth strategy, the Company's
substantial degree of leverage, the Company's history of previous losses during
four of the last five fiscal years, the need to comply with restrictive
covenants imposed by the Company's loan documents, as well as competition.
7
<PAGE> 9
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following summary historical and pro forma financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Consolidated Financial Statements and
Notes thereto and the Unaudited Pro Forma Condensed Consolidated Financial Data
and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS
ENDED(2)
FISCAL YEAR(1) ----------------------
--------------------------------- OCT. 27, NOV. 2,
1994(3) 1995(4) 1996(5) 1996 1997
-------- -------- ----------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE,
SQUARE FOOT AND STORE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales................................................. $688,135 $718,352 $ 793,092 $592,415 $ 636,465
Gross profit.............................................. 277,777 284,535 329,718 242,749 277,548
Operating and administrative expenses..................... 255,922 281,387 298,004 218,680 239,932
Store closing costs....................................... 2,678 3,310 14,904 2,571 1,392
Acquisition charge........................................ -- -- 20,174 -- --
Operating profit (loss)................................. 19,177 (162) (3,364) 21,498 36,224
Other Acquisition and Financings expenses................. -- -- 12,463 -- --
Interest expense, net..................................... 10,343 14,379 20,691 10,917 29,815
Income (loss) before taxes and extraordinary gain....... 8,834 (14,541) (36,518) 10,581 6,409
Income tax (benefit) expense.............................. 68 (5,447) (11,859) 4,148 2,471
Extraordinary gain........................................ 97,186 -- -- -- --
Net income (loss)....................................... 105,952 (9,094) (24,659) 6,433 3,938
Pro forma net income(6)................................. (3,303) 11,705
Pro forma net income per share(6)....................... $ (0.13) $ 0.45
OTHER DATA
EBITDA(7)................................................. $ 32,282 $ 16,099 $ 50,544 $ 36,036 $ 51,674
EBITDAR(7)................................................ 70,964 61,453 98,450 74,243 94,403
Capital expenditures...................................... 14,597 11,640 6,317 3,426 12,468
Commercial sales(8)....................................... 32,630 60,840 89,551 66,155 87,703
Net cash provided by (used in) operating activities....... 15,120 1,354 (38,366) 15,855 (16,139)
Net cash (used in) investing activities................... (18,983) (7,888) (10,686) (5,397) (14,297)
Net cash provided by (used in) financing activities....... (5,383) 8,028 49,911 (9,310) 31,529
SELECTED ADDITIONAL OPERATING DATA
Average net sales per store(9)............................ $ 1,272 $ 1,294 $ 1,384 $ 1,039 $ 1,073
Average net sales per store square foot(9)................ 226 224 228 172 167
Percentage increase in comparable store net sales(10)..... 5% 2% 6% 6% 5%
SELECTED STORE DATA
New and relocated stores.................................. 22 54 56 35 63
Number of stores (end of period).......................... 544 566 580 575 606
Stores with Commercial Sales Centers (end of period)...... 59 176 292 276 330
Total store square footage (000s) (end of period)......... 3,097 3,329 3,631 3,527 4,014
</TABLE>
<TABLE>
<CAPTION>
AT NOVEMBER 2, 1997
-------------------------------------------
AS FURTHER
ACTUAL AS ADJUSTED(11) ADJUSTED(12)
-------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................... $ 6,316 $ 6,316 $ 6,316
Net working capital......................................... 156,808 156,808 156,808
Total assets................................................ 490,268 521,059 510,074
Total debt (including current maturities)................... 369,044 383,344 249,219
Stockholders' equity (deficit).............................. (92,359) (74,624) 54,930
</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) The summary financial data for the thirty-nine weeks ended October 27, 1996
and November 2, 1997, are unaudited and include, in the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the data for such periods, and are
not necessarily indicative of the results expected for a full fiscal year
or for any future period.
(3) 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.
See Notes 5 and 11 to Consolidated Financial Statements.
(4) Results of operations in fiscal 1995 include the following non-recurring
items: (i) cost of sales includes pre-opening 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
8
<PAGE> 10
the start-up costs associated with the implementation of many new
initiatives. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(5) 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
"Management -- Equity Participation Agreements," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 12
to Consolidated Financial Statements.
(6) The pro forma data for fiscal 1996 give effect to: (i) the Offering and the
application of the estimated net proceeds therefrom; (ii) the amendment and
restatement of the Senior Credit Facility on December 8, 1997, which
resulted in a reduction in the applicable interest rates thereon; (iii) the
Acquisition and Financings; and (iv) the termination of the Management
Agreement (as defined herein) upon the consummation of the Offering, as if
all of such had been consummated at the beginning of fiscal 1996. The pro
forma data for the thirty-nine weeks ended November 2, 1997, give effect
to: (i) the Offering and the application of the estimated net proceeds
therefrom; (ii) the amendment and restatement of the Senior Credit Facility
on December 8, 1997; and (iii) the termination of the Management Agreement
upon the consummation of the Offering, as if all of such had been
consummated at the beginning of fiscal 1997. See "Use of Proceeds,"
"Capitalization," "Unaudited Pro Forma Condensed Consolidated Financial
Data," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(7) EBITDA represents income before net interest expense, provision for income
taxes, depreciation and amortization expense, other non-cash charges
(including the $12.9 million charge described in note (5) above),
extraordinary items and non-recurring charges. While EBITDA is not intended
to represent cash flow from operations as defined by generally accepted
accounting principles ("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 (as defined) were issued and
may differ in method of calculation from similarly titled measures used by
other companies. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The computation of EBITDA for each of the respective periods shown is as
follows (in thousands):
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
FISCAL YEAR -------------------------
----------------------------- OCTOBER 27, NOVEMBER 2,
1994 1995 1996 1996 1997
---- ---- ---- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes and extraordinary
gain................................................... $ 8,834 $(14,541) $(36,518) $10,581 $ 6,409
Plus: Interest expense................................... 10,343 14,379 20,691 10,917 29,815
Depreciation and amortization expenses.............. 13,105 16,261 19,225 14,538 14,866
Non-recurring Acquisition and Financings expenses... -- -- 32,637 -- 584
Other non-recurring and non-cash charges............ -- -- 14,509 -- --
------- -------- -------- ------- -------
Total............................................ $32,282 $ 16,099 $ 50,544 $36,036 $51,674
======= ======== ======== ======= =======
</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.
(8) Represents sales to commercial accounts, including sales from stores
without Commercial Sales Centers.
(9) Total store square footage is based on the Company's actual store formats
and includes 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.
(10) 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 during which 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.
(11) As adjusted to reflect the amendment and restatement of the Senior Credit
Facility on December 8, 1997, and certain equity and debt financings
associated therewith. See "Capitalization."
(12) As further adjusted to reflect the Offering and the application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
9
<PAGE> 11
RISK FACTORS
Prospective purchasers of shares of Common Stock should consider carefully
the following risk factors relating to the Offering and the business of the
Company, together with information and financial data set forth elsewhere in
this Prospectus, prior to making an investment decision.
RISKS RELATED TO GROWTH STRATEGY
In order to improve its future operating results, the Company has
undertaken certain initiatives, including implementation of the Company's store
growth strategy, which is based, in part, on expanding selected stores,
relocating existing stores and adding new stores primarily in markets currently
served by the Company. The future growth and financial performance of the
Company are, therefore, dependent upon a number of factors, including the
Company's ability to locate and obtain acceptable store sites, negotiate
favorable lease terms, complete the construction of new and relocated stores in
a timely manner, hire, train and retain competent managers and associates, and
integrate new stores into the Company's systems and operations. There can be no
assurance that the Company's opening of new stores in markets already served by
the Company will not adversely affect existing store profitability. There also
can be no assurance that the Company will be able to manage its growth
effectively. In addition, there can be no assurance that the Company will be
successful in integrating acquired stores into its systems in a timely manner.
See "Business -- Store Growth Strategy."
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
The Company is highly leveraged. After giving effect to the Offering, the
Company will have an aggregate of approximately $250.0 million of outstanding
indebtedness for borrowed money. The degree to which the Company is leveraged
could have important consequences to holders of the Common Stock, including the
following: (i) the Company's ability to obtain additional financing for working
capital, capital expenditures, acquisitions or general corporate purposes may be
impaired; (ii) a substantial portion of the Company's cash flow from operations
must be dedicated to the payment of interest on the Company's indebtedness,
thereby reducing the funds available to the Company for other purposes; (iii)
indebtedness under Auto's Amended and Restated Senior Credit Facility (the
"Senior Credit Facility") will be at variable rates of interest, which will
cause the Company to be vulnerable to increases in interest rates; (iv) the
Company may be hindered in its ability to adjust rapidly to changing market
conditions; and (v) the Company's substantial degree of leverage could make it
more vulnerable in the event of a downturn in general economic conditions or in
its business.
HISTORY OF PREVIOUS LOSSES DURING FOUR OF THE LAST FIVE FISCAL YEARS
The Company incurred net losses during four of its last five fiscal years,
including a loss of $3.9 million in fiscal 1992, $1.2 million in fiscal 1993,
$9.1 million in fiscal 1995 and $24.7 million in fiscal 1996. The Company also
incurred an operating loss of $0.2 million in fiscal 1995. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." While
income before taxes for fiscal 1996 would have been $10.6 million before
non-recurring Acquisition and Financings expenses and provisions for store
closings and other non-recurring charges, $10.6 million for the thirty-nine
weeks ended October 27, 1996 and $6.4 million for the thirty-nine weeks ended
November 2, 1997, there can be no assurance that the Company will be profitable
or achieve continued growth in operating performance.
RESTRICTIVE LOAN COVENANTS
The Senior Credit Facility imposes upon Auto certain financial and
operating covenants including, among other things, requirements that Auto
maintain certain financial ratios and satisfy certain financial tests,
limitations on capital expenditures, and restrictions on the ability of the
Company to incur indebtedness, pay dividends and take certain other corporate
actions. All of these restrictions may impair the Company's ability to expand or
to pursue its business strategies. The Senior Credit Facility requires that,
under certain circumstances, Auto make prepayments of the term loans outstanding
thereunder with (i) 50% of any Excess Cash Flow (as defined therein) and (ii) a
portion of the Net Proceeds (as defined therein) from certain
10
<PAGE> 12
offerings of the Company's voting stock, including the Offering. See "Use of
Proceeds" and "Description of Certain Indebtedness -- Senior Credit Facility."
In addition to the limits imposed by the Senior Credit Facility,
instruments evidencing future borrowings by the Company will likely contain
similar restrictions. Changes in economic or business conditions, results of
operations or other factors could in the future cause a violation of one or more
covenants in the Company's debt instruments, entitling the holders of such
indebtedness to declare the indebtedness immediately due and payable. There can
be no assurance that the assets of the Company will be sufficient to repay any
such accelerated indebtedness and any other indebtedness containing
cross-default provisions to such indebtedness.
COMPETITION
The retail sale of automotive parts and accessories is highly competitive.
The Company competes primarily with national and regional retail automotive
parts chains, wholesalers or jobber stores (some of which are associated with
national parts distributors or associations), automobile dealers that supply
manufacturer parts and mass merchandisers that carry automotive replacement
parts and accessories. Some of the Company's competitors have greater financial
resources, are more geographically diverse and have greater name recognition
than the Company. See "Business -- Competition."
DEPENDENCE ON EXECUTIVE OFFICERS
The Company's success depends on the efforts of its executive officers. No
assurance can be given that the loss of one or more of the Company's executive
officers would not have an adverse impact on the Company. The Company does not
maintain "key person" life insurance with respect to its executive officers. The
Company's continued success will also be dependent upon its ability to retain
existing, and attract additional, qualified personnel to meet the Company's
needs. See "Management -- Directors and Executive Officers."
SENSITIVITY TO REGIONAL ECONOMIC AND WEATHER CONDITIONS
All of the Company's stores are located in the Western United States. As a
result, the Company's business is sensitive to the economic and weather
conditions of that region. In recent years, certain parts of that region have
experienced economic recessions and extreme weather conditions. Although
temperature extremes tend to enhance sales by causing a higher incidence of
parts failure and increasing sales of seasonal products, unusually severe
weather can reduce sales by causing deferral of elective maintenance,
particularly among the Company's DIY customers. No prediction can be made as to
future economic or weather conditions in the region in which the Company
operates or the impact that such conditions may have on the Company's results of
operations.
CONTROL BY PRINCIPAL STOCKHOLDERS; PROCEEDS TO AFFILIATES
Upon consummation of the Offering, members of the Investcorp Group (as
defined herein) and the Carmel Trust, a trust governed by the laws of Canada
("Carmel"), Transatlantic Finance, Ltd., an affiliate of Carmel ("Transatlantic"
and, with Carmel, the "Carmel Group"), and the Company's senior management will
own, in the aggregate, approximately 71.8% of the outstanding shares of Common
Stock. Until such time, if ever, that there is a significant decrease in the
percentage of outstanding shares held by such stockholders, these stockholders
will be able to control the Company through their ability to determine the
outcome of votes of stockholders regarding, among other things, election of
directors and approval of significant transactions. See "Principal Stockholders"
and "Certain Transactions -- Stockholders' Agreement." As a result of the
redemption of the 12% Subordinated Notes (as defined herein), a substantial
portion of the net proceeds of the Offering will be paid to an affiliate of
Carmel and an entity in which Investcorp formerly held a minority interest. See
"Use of Proceeds" and "Certain Transactions."
11
<PAGE> 13
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the net tangible book value of the Common Stock. As of
November 2, 1997, as adjusted to reflect the amendment and restatement of the
Senior Credit Facility on December 8, 1997, and the debt and equity financings
associated with the Trak West Acquisition, the net tangible book value per share
was a deficit of $4.55. As of such date, existing stockholders would experience
an immediate increase in net tangible book value per share of $6.19 and new
investors purchasing shares in the Offering would experience immediate dilution
in net tangible book value per share of $18.36. See "Dilution."
EFFECT OF CHANGE OF CONTROL AND STATUTORY PROVISIONS
The Senior Credit Facility and the indenture governing the 11% Senior
Subordinated Notes (as defined herein) contain provisions that, under certain
circumstances, will cause such indebtedness to become due upon the occurrence of
a change of control of the Company, including the election to the Board of
Directors of a majority of directors that were not nominated by the Investcorp
Group. Upon the consummation of the Offering, a majority of the Board of
Directors will be nominees of the Investcorp Group. See "Description of Certain
Indebtedness." These provisions could have the effect of making it more
difficult for a third party to acquire control of the Company.
The Company is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. See "Description of
Capital Stock -- Certain Provisions of Delaware Law."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY IN PRICE OF COMMON STOCK
Prior to the Offering, there has been no public market for the Common
Stock. Application will be made to list the Common Stock on the NYSE. Even if
the Common Stock is listed on the NYSE, there can be no assurance that an active
public market for the Common Stock will develop or be sustained after the
Offering. The initial public offering price will be determined by negotiations
between the Company and the representatives of the Underwriters, and may bear no
relationship to the market price of the Common Stock after the Offering. See
"Underwriting." Subsequent to the Offering, prices for the Common Stock will be
determined by the market and may be influenced by a number of factors, including
the depth and liquidity of the market for the Common Stock, investor perceptions
of the Company and other automotive parts companies and general economic and
other conditions. In addition, the stock market may experience volatility that
affects the market prices of companies in ways unrelated to the operating
performance of such companies, and such volatility could adversely affect the
market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET PRICE
Upon consummation of the Offering, 26,613,388 shares of Common Stock will
be outstanding. The 7,500,000 shares (8,625,000 if the over-allotment option is
exercised in full) sold in the Offering will be freely transferable without
restriction under the Securities Act of 1933, as amended (the "Securities Act"),
except for shares acquired by "affiliates" of the Company as that term is
defined under the Securities Act. Of the remaining 19,113,388 outstanding shares
of Common Stock, 744,401 were sold in offshore distributions under Regulation S
to members of the Investcorp Group within the past year, 7,480,647 were sold in
offshore distributions under Regulation S to members of the Investcorp Group
more than one year ago and 10,888,340 are deemed to be restricted securities.
Pursuant to Rule 701 under the Securities Act, 180,600 of the restricted
securities will be available for resale in the public market without restriction
commencing 90 days after the date of this Prospectus. Commencing 90 days after
the date of this Prospectus, all of the remaining restricted securities are
eligible for sale in the public market in compliance with Rule 144 under the
Securities Act. Subject to certain exceptions, the Company and all of the
present stockholders of the Company have agreed that they will not offer, issue,
pledge, sell, transfer or otherwise dispose of any shares of Common Stock or
12
<PAGE> 14
securities convertible into or exercisable or exchangeable for shares of Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
There can be no assurance that an increase in the number of shares of Common
Stock that are freely tradeable will not adversely affect the market price of
the Common Stock after the Offering. See "Principal Stockholders" and
"Underwriting."
At the expiration of the 180-day period described above, or earlier with
the written consent of Donaldson, Lufkin & Jenrette Securities Corporation, the
holders of 81,805 shares of Common Stock will have the right to sell shares of
the Common Stock without regard to the volume or the other limitations of Rule
144 under the Securities Act. At the expiration of the 180-day period described
above, the holders of 18,932,789 shares of Common Stock will have demand
registration rights and piggy-back registration rights with respect to such
shares. See "Certain Transactions -- Stockholders' Agreement."
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register the sale of the 1,710,500 shares of Common Stock
reserved for issuance under the Plans. As a result, any shares issued upon
exercise of stock options granted under any such plan will be available, subject
to special rules for affiliates, for resale in the public market after the
effective date of such registration statement, subject to applicable lock-up
arrangements. See "Management -- 1996 Associate and Executive Stock Option
Plans."
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of shares of Common Stock for future
sale would have on the market price of the Common Stock prevailing from time to
time. Sales of substantial amounts of Common Stock in the public market
following the Offering, or the perception that such sales could occur, could
have an adverse effect on prevailing market prices for the Common Stock. See
"Shares Eligible for Future Sale" and "Underwriting."
13
<PAGE> 15
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of 7,500,000
shares of Common Stock offered hereby are estimated to be approximately $139.0
million ($160.0 million if the Underwriters' over-allotment option is exercised
in full) after deducting estimated underwriting discounts and commissions and
estimated offering expenses and assuming an initial public offering price of
$20.00 per share. The Company intends to use the net proceeds for:
(i) the redemption of $50.0 million in aggregate principal amount of
the 12% Subordinated Notes for approximately $50.5 million
(including a redemption premium of 1%, or $0.5 million);
(ii) the redemption of $43.8 million in aggregate principal amount of
the 11% Senior Subordinated Notes for approximately $48.1 million
(including a redemption premium of 10%, or $4.4 million); and
(iii) the repayment of approximately $40.4 million of outstanding
indebtedness under the Senior Credit Facility ($61.4 million if
the Underwriters' over-allotment option is exercised in full).
For further information on the interest rates, maturity and other terms of
the Senior Credit Facility, the 11% Senior Subordinated Notes and the 12%
Subordinated Notes, see "Description of Certain Indebtedness" and "Certain
Transactions."
DIVIDEND POLICY
The Company currently does not intend to pay any dividends on the Common
Stock in the foreseeable future.
The Company is a holding company with no business operations of its own.
The Company therefore is dependent upon payments, dividends and distributions
from Auto for funds to pay dividends to stockholders of the Company. Auto
currently intends to retain any earnings for support of its working capital,
repayment of indebtedness, capital expenditures and other general corporate
purposes. Auto has no current intention of paying dividends or making other
distributions to the Company in excess of amounts necessary to pay the Company's
operating expenses and taxes. The Senior Credit Facility and the indenture
governing the 11% Senior Subordinated Notes contain restrictions on Auto's
ability to pay dividends or make payments or other distributions to the Company.
See "Description of Certain Indebtedness."
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of November 2, 1997, and is (i) "as adjusted" to reflect the
amendment and restatement of the Senior Credit Facility on December 8, 1997, the
related $22.0 million equity investment by affiliates of the Company's existing
stockholders and approximately $12.8 million of additional borrowings under the
Senior Credit Facility used in the acquisition of Trak West, and (ii) "as
further adjusted" to reflect the sale by the Company of 7,500,000 shares offered
hereby at an assumed initial public offering price of $20.00 per share and the
application of the estimated net proceeds therefrom as set forth under the
caption "Use of Proceeds":
<TABLE>
<CAPTION>
AS OF NOVEMBER 2, 1997
--------------------------------------
(IN THOUSANDS)
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED
--------- ----------- ----------
<S> <C> <C> <C>
Cash and cash equivalents............................... $ 6,316 $ 6,316 $ 6,316
========= ========= =========
Long-term debt (including current portion):
Senior Credit Facility:(1)
Revolving credit facility.......................... $ 74,000 $ 12,800 $ 12,800
Term loan.......................................... 99,500 175,000 134,625
11% Senior Subordinated Notes......................... 125,000 125,000 81,250
12% Subordinated Notes................................ 50,000 50,000 --
Capital lease obligations............................. 20,544 20,544 20,544
--------- --------- ---------
Total long-term debt.......................... 369,044 383,344 249,219
Stockholders' equity (deficit):
Common stock(2)....................................... 171 189 264
Additional paid-in capital(3)......................... 106,677 127,659 266,584
Accumulated deficit(4)................................ (199,207) (202,472) (211,918)
--------- --------- ---------
Total stockholders' equity (deficit).......... (92,359) (74,624) 54,930
--------- --------- ---------
Total capitalization.......................... $ 276,685 $ 308,720 $ 304,149
========= ========= =========
</TABLE>
- ---------------
(1) The amendment and restatement of the Senior Credit Facility on December 8,
1997, provided for, among other things, a $75.5 million increase in the term
loan to $175.0 million and a $25.0 million increase in the availability
under the revolving credit facility to $125.0 million and a reduction in the
applicable interest rates. The Company incurred approximately $1.5 million
in fees in connection with such amendment and restatement.
(2) Excludes 2,037,120 shares subject to options outstanding upon the
consummation of the Offering, 180,600 shares purchased by senior management
of the Company subsequent to November 2, 1997 and 631,260 additional shares
reserved for issuance pursuant to options available for grant under the
Company's 1996 Associate and Executive Stock Option Plans. See
"Management -- Management Stock Purchase Agreements and 1997 Stock Loan
Plan" and "Management -- 1996 Associate and Executive Stock Option Plans."
(3) The "as adjusted" amount reflects the additional equity investment by
affiliates of the Company's existing stockholders, net of applicable
placement fees. See "Certain Transactions."
(4) The Company estimates that it will record an extraordinary loss of
approximately $3.3 million, net of taxes, in connection with the write-off
of a portion of deferred debt issuance costs associated with the amendment
and restatement of the Senior Credit Facility on December 8, 1997. In
addition, the Company estimates that it will record an extraordinary loss of
approximately $6.9 million, net of taxes, upon the closing of the Offering,
consisting of the premiums to be paid in connection with the redemption of
indebtedness and the write-off of a portion of deferred debt issuance costs.
In addition, upon consummation of the Offering, the Company estimates that
it will record a one-time charge of approximately $4.0 million relating to
the unamortized portion of deferred management fees to be written-off in
connection with the termination of the Management Agreement. See "Use of
Proceeds," "Unaudited Pro Forma Condensed Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
15
<PAGE> 17
DILUTION
The net tangible book value of the Company as of November 2, 1997, as
adjusted to reflect the amendment and restatement of the Senior Credit Facility
on December 8, 1997, and the debt and equity financings associated with the Trak
West Acquisition, was a deficit of approximately $86.1 million, or approximately
$4.55 per share of Common Stock. This deficit is primarily attributable to the
redemption of the Company's stock held by Carmel in connection with the
Acquisition and Financings. Net tangible book value (deficit) per share
represents the excess of the total tangible assets of the Company over total
liabilities and divided by the number of shares of Common Stock outstanding.
After giving effect to the sale of the 7,500,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $20.00 per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses, the pro forma net tangible book value of the Company as of
November 2, 1997 would have been $43.4 million, or approximately $1.64 per share
of Common Stock. This represents an immediate increase in net tangible book
value of $6.19 per share of Common Stock to existing stockholders and an
immediate dilution of $18.36 per share to new investors purchasing shares in the
Offering. Dilution per share represents the difference between the price per
share to be paid by new investors and the net tangible book value per share of
Common Stock after giving effect to the Offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $20.00
Deficit in net tangible book value per share as of
November 2, 1997 (as adjusted)......................... $(4.55)
Increase in net tangible book value per share attributable
to the Offering........................................ 6.19
------
Pro forma net tangible book value per share, as adjusted for
the Offering.............................................. 1.64
------
Dilution per share to new investors......................... $18.36
======
</TABLE>
The following table summarizes, on a pro forma basis as of November 2,
1997, after giving effect to the Offering and the equity financings associated
with the Trak West Acquisition, the number of shares of Common Stock purchased
from the Company, the total consideration paid to the Company and the average
price per share paid by existing stockholders and the new investors in the
Offering:
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
--------------------- ------------------------ PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------- ------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 18,932,789 71.6% $227.9 60.3% $12.04
New investors.................. 7,500,000 28.4 150.0 39.7 $20.00
---------- ----- ------ -----
Total................ 26,432,789 100.0% $377.9 100.0%
========== ===== ====== =====
</TABLE>
The preceding tables exclude 180,600 shares purchased for $12.04 per share
by senior management of the Company subsequent to November 2, 1997. See
"Management -- Management Stock Purchase Agreements and 1997 Stock Loan Plan."
As of February 17, 1998, there were options outstanding to purchase a total
of 2,037,120 shares of Common Stock at a weighted average exercise price of
$13.17 per share. To the extent outstanding options are exercised, there will be
further dilution to new investors. See "Management -- 1996 Associate and
Executive Stock Option Plans" and "Shares Eligible for Future Sale."
16
<PAGE> 18
ACQUISITION AND FINANCINGS
In October 1996, certain affiliates of INVESTCORP S.A. ("Investcorp") and
certain other investors (collectively with Investcorp, the "Investcorp Group")
acquired a 51% common equity interest in the Company for $105.0 million in cash
from Carmel, which previously had held 100% of the common equity interests in
the Company. A corporation in which an affiliate of Investcorp held a minority
interest also purchased $40.0 million in aggregate principal amount of the
Company's 12% Subordinated Notes for $40.0 million in cash, and the Company in
turn purchased $40.0 million of preferred stock of Auto. Transatlantic, an
affiliate of Carmel, purchased $10.0 million in aggregate principal amount of
the 12% Subordinated Notes, and the Company in turn purchased $10.0 million of
preferred stock of Auto. Auto then borrowed $100.0 million under the Senior
Credit Facility, which together with the net proceeds from the sale of $125.0
million of Auto's 11% Senior Subordinated Notes due 2006 and the net proceeds
from the sale by Auto to the Company of $50.0 million of preferred stock,
following a dividend to the Company by Auto, was used to redeem the stock of the
Company held by Carmel for $238.5 million. Carmel then purchased from the
Company for $100.9 million a 49% common equity interest in the Company. 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 the Company, a corporation in which an
affiliate of Investcorp held a minority interest owned $40.0 million in
aggregate principal amount of 12% Subordinated Notes, Carmel owned a 49% common
equity interest in the Company, Transatlantic owned $10.0 million in aggregate
principal amount of 12% Subordinated Notes and the Company owned 100% of the
common equity and $50.0 million of preferred stock of Auto. The Company intends
to use a portion of the net proceeds of the Offering to redeem the 12%
Subordinated Notes. See "Use of Proceeds" and "Certain Transactions."
17
<PAGE> 19
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma condensed statements of operations (the
"Pro Forma Financial Data") have been prepared by the Company's management from
the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus. The unaudited pro forma condensed consolidated
statement of operations for the fiscal year ended February 2, 1997 reflects
adjustments to give effect to the Acquisition and Financings, the amendment and
restatement of the Senior Credit Facility on December 8, 1997, and the Offering
and the application of the net proceeds therefrom, as if all of such had been
consummated and were effective as of the beginning of fiscal 1996. See
"Acquisition and Financings." The unaudited pro forma condensed statement of
operations for the thirty-nine weeks ended November 2, 1997, reflects
adjustments to give effect to the amendment and restatement of the Senior Credit
Facility on December 8, 1997, and the Offering and the application of the net
proceeds therefrom, as if each had been consummated and were effective as of the
beginning of fiscal 1997. The Pro Forma Financial Data do not give effect to the
Trak West Acquisition or the debt and equity financings associated with such
acquisition.
The financial effects of the above-described transactions as presented in
the Pro Forma Financial Data are not necessarily indicative of the Company's
results of operations which would have been obtained had the transactions
actually occurred on the date described above, nor are they necessarily
indicative of the results of future operations. The Pro Forma Financial Data
should be read in conjunction with the Notes thereto, which are an integral part
thereof, the Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED FEBRUARY 2, 1997
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales................................................. $793,092 -- $793,092
Cost of sales............................................. 463,374 -- 463,374
-------- -------- --------
Gross profit.............................................. 329,718 -- 329,718
Operating and administrative expenses..................... 298,004 -- 298,004
Store closing costs....................................... 14,904 -- 14,904
Acquisition charge -- equity participation agreements..... 20,174 $(20,174)(1) --
-------- -------- --------
Income (loss) from operations............................. (3,364) 20,174 16,810
Other Acquisition and Financings expenses................. 12,463 (12,463)(1) --
Interest expense, net..................................... 20,691 1,011(2) 21,702
-------- -------- --------
Income (loss) before provision for taxes.................. (36,518) 31,626 (4,892)
Provision (benefit) for income taxes...................... (11,859) 10,270(3) (1,589)
-------- -------- --------
Net income (loss)............................... $(24,659) $ 21,356 $ (3,303)
======== ======== ========
Net income (loss) per share..................... $ (1.36) $ (0.13)
======== ========
Weighted average shares used for computation.... 18,110 25,610
======== ========
</TABLE>
THIRTY-NINE WEEKS ENDED NOVEMBER 2, 1997
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales................................................. $636,465 -- $636,465
Cost of sales............................................. 358,917 -- 358,917
-------- -------- --------
Gross profit.............................................. 277,548 -- 277,548
Operating and administrative expenses..................... 239,932 -- 239,932
Store closing costs....................................... 1,392 -- 1,392
-------- -------- --------
Income from operations.................................... 36,224 -- 36,224
Interest expense, net..................................... 29,815 (12,640)(2) 17,175
-------- -------- --------
Income before provision for taxes......................... 6,409 12,640 19,049
Provision for income taxes................................ 2,471 4,873(3) 7,344
-------- -------- --------
Net income...................................... $ 3,938 $ 7,767 $ 11,705
======== ======== ========
Net income per share............................ $ 0.21 $ 0.45
======== ========
Weighted average shares used for computation.... 18,574 26,074
======== ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed consolidated
statement of operations.
18
<PAGE> 20
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(1) Amounts hereunder reflect certain non-recurring charges which were incurred
in October 1996 as a direct result of the consummation of the Acquisition
and Financings, 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), and (ii) expenses incurred in connection with the Acquisition and
Financings of $12.5 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Effect of Acquisition and
Financings," "Management -- Equity Participation Agreements" and Note 2 to
Consolidated Financial Statements.
(2) The interest expense adjustment is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR THIRTY-NINE
ENDED WEEKS ENDED
FEBRUARY 2, NOVEMBER 2,
1997 1997
----------- -----------
<S> <C> <C>
ACQUISITION AND FINANCINGS ADJUSTMENTS:
Historical interest expense on prior credit
agreement.......................................... $ (7,104) $ --
Amortization of deferred financing fees written-off
upon retirement of prior credit agreement.......... (950) --
Interest expense on the Senior Credit Facility
assuming a composite interest rate of 9.0%......... 9,042 --
Interest expense on the 11% Senior Subordinated
Notes.............................................. 10,313 --
Interest expense on the 12% Subordinated Notes....... 4,500 --
Amortization of deferred financing fees for the
Senior Credit Facility, the 11% Senior Subordinated
Notes and the 12% Subordinated Notes............... 2,058 --
OTHER ADJUSTMENTS:
Interest and amortization expense reduction resulting
from the Offering and repayment of approximately
$134.2 million of long term debt. See "Use of
Proceeds."......................................... (15,057) (11,195)
Interest expense reduction resulting from the
amendment and restatement of the Senior Credit
Facility........................................... (1,791) (1,445)
-------- --------
Total interest expense adjustment.......... $ 1,011 $(12,640)
======== ========
</TABLE>
(3) Represents the tax effect of the foregoing adjustments at effective tax
rates of approximately 32.5% and 38.5%, respectively.
19
<PAGE> 21
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 fiscal year ended
February 2, 1997 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 two 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 appear elsewhere herein. The selected statements of operations
and balance sheet data for each of the two fiscal years during the period ended
January 30, 1994 are derived from the Company's unaudited Consolidated Financial
Statements. The selected statements of operations and balance sheet data for the
thirty-nine weeks ended October 27, 1996 and November 2, 1997 have been derived
from the Company's unaudited Consolidated Financial Statements and include, in
the opinion of the Company's management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the data for such
periods and are not necessarily indicative of the results to be expected for a
full fiscal year or for any future period. The data presented below should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus, the other financial information included
herein and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
FISCAL YEAR(1) -----------------------
-------------------------------------------------------------- OCT. 27, NOV. 2,
1992(2) 1993(2) 1994(3) 1995(4) 1996(5) 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE, SQUARE FOOT AND STORE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales........................... $ 704,606 $ 744,541 $ 688,135 $ 718,352 $ 793,092 $ 592,415 $ 636,465
Costs and expenses:
Cost of sales..................... 431,861 456,263 410,358 433,817 463,374 349,666 358,917
Operating and administrative...... 263,384 273,836 255,922 281,387 298,004 218,680 239,932
Store closing costs............... 943 3,526 2,678 3,310 14,904 2,571 1,392
Acquisition charge................ -- -- -- -- 20,174 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating profit (loss)............. 8,418 10,916 19,177 (162) (3,364) 21,498 36,224
Other Acquisition and Financings
expenses.......................... -- -- -- -- 12,463 -- --
Loss on sale of subsidiary.......... -- 1,056 -- -- -- -- --
Interest expense, net............... 12,362 11,752 10,343 14,379 20,691 10,917 29,815
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before taxes and
extraordinary gain................ (3,944) (1,892) 8,834 (14,541) (36,518) 10,581 6,409
Income tax expense (benefit)........ -- (731) 68 (5,447) (11,859) 4,148 2,471
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
gain.............................. (3,944) (1,161) 8,766 (9,094) (24,659) 6,433 3,938
Extraordinary gain.................. -- -- 97,186 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................... $ (3,944) $ (1,161) $ 105,952 $ (9,094) $ (24,659) $ 6,433 $ 3,938
========== ========== ========== ========== ========== ========== ==========
Net income (loss) per share......... $ (1.36) $ 0.36 $ 0.21
Weighted average shares used for
computation....................... 18,110 17,917 18,574
OTHER DATA
EBITDA (6).......................... $ 21,406 $ 23,102 $ 32,282 $ 16,099 $ 50,544 $ 36,036 $ 51,674
EBITDAR (6)......................... 60,922 58,595 70,964 61,453 98,450 74,243 94,403
Capital expenditures................ 5,031 14,910 14,597 11,640 6,317 3,426 12,468
Commercial sales (7)................ 7,531 18,602 32,630 60,840 89,551 66,155 87,703
Net cash provided by (used in)
operating activities.............. 10,481 17,569 15,120 1,354 (38,366) 15,855 (16,139)
Net cash (used in) investing
activities........................ (4,582) (14,943) (18,983) (7,888) (10,686) (5,397) (14,297)
Net cash provided by (used in)
financing activities.............. (4,503) 227 (5,383) 8,028 49,911 (9,310) 31,529
SELECTED ADDITIONAL OPERATING DATA
Number of stores (end of period).... 524 538 544 566 580 575 606
Total store square footage (000s)
(end of period)................... 2,789 2,992 3,097 3,329 3,631 3,527 4,014
Average net sales per store (8)..... $ 1,098 $ 1,215 $ 1,272 $ 1,294 $ 1,384 $ 1,039 $ 1,073
Average net sales per store square
foot (8).......................... 207 223 226 224 228 172 167
Percentage increase in comparable
store net sales (9)............... 14% 10% 5% 2% 6% 6% 5%
BALANCE SHEET DATA
Net working capital.....................$ 90,653 $ 78,003 $ 77,627 $ 81,048 $121,157 $ 91,184 $156,808
Total assets............................ 334,739 294,806 350,830 391,319 443,986 393,530 490,268
Total debt (including current
maturities)........................... 198,593 187,807 105,601 122,003 285,680 116,172 369,044
Stockholders' equity (deficit).......... (35,700) (36,861) 69,091 59,997 (102,263) 66,431 (92,359)
</TABLE>
20
<PAGE> 22
- ---------------
(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) The Company was formed in July 1993 as a holding company for an entity which
owned (i) Auto, (ii) another retailer of automotive parts and accessories,
and (iii) other immaterial operations. The information provided for fiscal
1992 and fiscal 1993 prior to the formation of the Company reflects the
operations of this entity on a predecessor basis, all of which operations
other than Auto were sold, liquidated or disposed of prior to December 31,
1993.
(3) 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.
See Notes 5 and 11 to Consolidated Financial Statements.
(4) 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(5) 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 "Management -- Equity
Participation Agreements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 12 to Consolidated
Financial Statements.
(6) EBITDA represents income before net interest expense, provision for income
taxes, depreciation and amortization expense, other non-cash charges
(including the $12.9 million charge described in note (5) above),
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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The computation of EBITDA for each of the respective periods shown is as
follows (in thousands):
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS
ENDED
FISCAL YEAR ------------------
------------------------------------------------- OCT. 27, NOV. 2,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes and
extraordinary gain....................... $(3,944) $(1,892) $ 8,834 $(14,541) $(36,518) $10,581 $ 6,409
Plus:
Interest expense, net...................... 12,362 11,762 10,343 14,379 20,691 10,917 29,815
Depreciation and amortization expense...... 12,988 12,176 13,105 16,261 19,225 14,538 14,866
Non-recurring Acquisition and Financings
expenses................................. -- -- -- -- 32,637 -- 584
Other non-recurring and non-cash charges... -- 1,056 -- -- 14,509 -- --
------- ------- ------- -------- -------- ------- -------
Total:............................. $21,406 $23,102 $32,282 $ 16,099 $ 50,544 $36,036 $51,674
======= ======= ======= ======== ======== ======= =======
</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.
(7) Represents sales to commercial accounts, including sales from stores without
Commercial Sales Centers.
(8) 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.
(9) 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.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As used in this section, fiscal 1996 represents the 53 weeks ended February
2, 1997; fiscal 1995 represents the 52 weeks ended January 28, 1996; fiscal 1994
represents the 52 weeks ended January 29, 1995.
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.
Over the past several years, the Company has introduced a variety of
operating initiatives which have enabled it to significantly increase its
productivity and the level and quality of service provided to customers. These
initiatives include the implementation of a highly efficient, centralized
infrastructure, the installation of sophisticated store-level information
systems, the expansion of a rapidly growing and profitable Commercial Sales
Program, and an accelerating new store opening and relocation program. Largely
as a result of the success of these programs, the Company's profitability has
increased, with operating profit increasing 68.5% to $36.2 million in the
thirty-nine weeks ended November 2, 1997, from $21.5 million in the comparable
period in fiscal 1996. The Company believes that these initiatives have provided
the foundation for continued and profitable growth.
Upon the consummation of the Offering, the Company estimates that it will
record an extraordinary loss of approximately $6.9 million, net of taxes. Such
extraordinary loss will consist primarily of the premiums to be 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 estimates that it will record a one-time charge of
approximately $4.0 million relating to the unamortized portion of deferred
management fees to be written-off in connection with the termination of the
Management Agreement. Additionally, in connection with the amendment and
restatement of the Senior Credit Facility on December 8, 1997, the Company
estimates that it incurred an extraordinary loss of approximately $3.3 million,
net of taxes, attributable to the write-off of a portion of deferred debt
issuance costs. See "Use of Proceeds" and "Capitalization." 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, the Company issued 180,600 shares of
Common Stock and options to purchase 135,991 shares of Common Stock to certain
of the Company's executives. In connection with the issuance of such Common
Stock and options, the Company will recognize a charge to earnings in the fourth
quarter of fiscal 1997 for the difference between the issuance or exercise
price, as the case may be, and the fair market value of the Common Stock at the
date of grant. The Company estimates that such charge will be approximately $1.1
million.
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 leading market position and 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. By the
end of the first quarter of fiscal 1998, the Company expects to complete 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, which generated aggregate net sales of $90.9 million during the
twelve months ended September 27, 1997, for a total
22
<PAGE> 24
cost of approximately $34.8 million. The Trak West Acquisition was funded with a
$22.0 million equity investment by affiliates of the Company's existing
stockholders and additional bank borrowings.
These acquired stores were generally realizing operating margins
significantly below those of the Company's stores. The Company intends to
increase the revenues and profitability of these stores by significantly
improving their stocking levels, merchandising and customer service. In
addition, the Company intends to introduce its profitable and highly successful
Commercial Sales Program to 43 of the Trak West stores and its Priority Parts
operation to all of the Trak West stores. The Trak West Acquisition will also
enable the Company to capitalize on significant economies of scale as the
acquired stores will be serviced through the Company's existing warehouse and
distribution system. In addition, the Company believes that by increasing its
advertising presence in the Los Angeles market it will improve the financial
performance of the acquired stores as well as the Company's 65 existing Los
Angeles stores.
In connection with the integration of the Trak West stores, the Company
estimates it will incur one-time transition expenses of up to $6.0 million,
consisting primarily of grand opening advertising, training and re-merchandising
costs. The Company believes that such expenses will be recorded during the
fourth quarter of fiscal 1997 and the first quarter of fiscal 1998. In addition,
the Company estimates it 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. The Company believes
that such capital expenditures will be incurred primarily during the fourth
quarter of fiscal 1997 and the 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 will be paid in March 1998.
In addition, the Company became obligated to certain members of its
management in the amount of approximately $19.9 million under its 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. See "Management -- Equity Participation
Agreements."
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. See "Acquisition and Financings."
23
<PAGE> 25
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>
THIRTY-NINE WEEKS ENDED
FISCAL YEAR -------------------------
--------------------------------------- OCTOBER 27, NOVEMBER 2,
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................ 59.6 60.4 58.4 59.0 56.4
----- ----- ----- ----- -----
Gross profit......................... 40.4 39.6 41.6 41.0 43.6
Operating and administrative
expenses........................... 37.2 39.2 37.6 36.9 37.7
Store closing costs.................. 0.4 0.5 1.9 0.4 0.2
Acquisition charge -- equity
participation agreements........... -- -- 2.5 -- --
----- ----- ----- ----- -----
Operating profit (loss).............. 2.8 0.0 (0.4) 3.6 5.7
Acquisition fees..................... -- -- 1.6 -- --
Interest expense, net................ 1.5 2.0 2.6 1.8 4.7
Income tax expense (benefit)......... -- (0.7) (1.5) 0.7 0.4
----- ----- ----- ----- -----
Income (loss) before extraordinary
gain............................... 1.3 (1.3) (3.1) 1.1 0.6
Extraordinary gain................... 14.1 -- -- -- --
----- ----- ----- ----- -----
Net income (loss).................... 15.4% (1.3)% (3.1)% 1.1% 0.6%
===== ===== ===== ===== =====
</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.
THIRTY-NINE WEEKS ENDED NOVEMBER 2, 1997 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 27, 1996
Net sales for the thirty-nine weeks ended November 2, 1997 increased $44.0
million, or 7.4%, over net sales for the comparable period of fiscal 1996.
Comparable store sales increased $26.5 million, or 4.6%, and new stores
contributed $17.5 million to the increase in net sales for the thirty-nine weeks
ended November 2, 1997 over the comparable period of fiscal 1996. Sales to
commercial customers increased 32.6% to $87.7 million for the thirty-nine weeks
ended November 2, 1997, from $66.2 million for the comparable period of fiscal
1996. During the thirty-nine weeks ended November 2, 1997, the Company opened 35
new stores, relocated 28 stores to larger facilities, expanded one store at an
existing location, sold 4 stores and closed 5 stores in addition to those closed
due to relocations. At November 2, 1997, the Company had 606 stores in
operation.
Gross profit for the thirty-nine weeks ended November 2, 1997 was $277.5
million, or 43.6% of net sales, compared to $242.7 million, or 41.0% of net
sales, for the comparable period of 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. Warehouse and distribution costs decreased
as a percent of net sales to 3.4% for the thirty-nine weeks ended November 2,
1997, compared to 3.7% of net sales for the comparable period of fiscal 1996.
24
<PAGE> 26
Operating and administrative expenses increased by $21.2 million to $239.9
million, or 37.7% of net sales, for the thirty-nine weeks ended November 2, 1997
from $218.7 million, or 36.9% of net sales for the comparable period of fiscal
1996. The increase in this expense as a percentage of net sales is primarily the
result of the incremental operating costs of new stores that are in the early
stages of maturation.
Operating profit increased to $36.2 million, or 5.7% of net sales, for the
thirty-nine weeks ended November 2, 1997, compared to $21.5 million, or 3.6% of
net sales, for the comparable period of fiscal 1996, due to the factors cited
above.
Interest expense for the thirty-nine weeks ended November 2, 1997 totaled
$29.8 million, compared to $10.9 million for the thirty-nine weeks ended October
27, 1996. The increase in expense is the result of the issuance by Auto on
October 30, 1996 of $125.0 million of 11% Senior Subordinated Notes due 2006,
the issuance of $50.0 million of the 12% Subordinated Notes and increased
borrowings under the Senior Credit Facility.
As a result of the above factors, net income decreased to $3.9 million for
the thirty-nine weeks ended November 2, 1997, compared to $6.4 million for the
comparable period of fiscal 1996.
Earnings before interest, taxes, depreciation and amortization increased by
$15.7 million to $51.7 million for the thirty-nine weeks ended November 2, 1997,
compared to $36.0 million for the comparable period of fiscal 1996.
As of November 2, 1997, the Company had completed the relocation of 43
stores (out of a total of 91 identified locations) under the strategic store
relocation program undertaken in the fourth quarter of fiscal 1996, as described
below.
FISCAL YEAR ENDED FEBRUARY 2, 1997 COMPARED TO FISCAL YEAR ENDED JANUARY 28,
1996
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 5.9%, 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. Sales to commercial customers increased 47.4% to $89.6
million for fiscal 1996 from $60.8 million for fiscal 1995. 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. See
"Business -- Warehouse and Distribution." Warehouse and distribution costs
declined as a percentage of sales to 3.8% for fiscal 1996 from 4.9% for 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 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
25
<PAGE> 27
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, which was recorded in
January 1997 and increased 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-cancellable 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-cancellable 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 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 $20.7 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 $181.9
million of new debt in connection with the Acquisition and Financings.
As a result of the above factors, a net loss of $24.7 million was recorded
for fiscal 1996 as compared to a net loss of $9.1 million for fiscal 1995.
FISCAL YEAR ENDED JANUARY 28, 1996 COMPARED TO FISCAL YEAR ENDED JANUARY 29,
1995
Net sales for fiscal 1995 increased by $30.2 million, or 4.4%, over net
sales for fiscal 1994. This increase was due to an increase in net sales from
new stores ($16.1 million) and an increase in comparable store sales of 2.1%
($14.1 million). Comparable stores sales growth was lower than in previous years
primarily because of difficulties relating to hardware and software installed
during the conversion and automation of the Company's two distribution centers,
which caused fill rates to decline from targeted levels of approximately 95% to
as low as 65% during portions of fiscal 1995. This, in turn, resulted in higher
out-of-stock levels with respect to certain products during portions of fiscal
1995. Fill rates by year end had improved to approximately 90%. The results were
further adversely impacted by weak economic conditions in the Company's
California markets. Comparable store sales growth was positively impacted by an
increase in the number of relocated stores in fiscal 1995. Commercial sales were
$60.8 million in fiscal 1995, compared to $32.6 million in fiscal 1994. During
fiscal 1995, the Company opened 24 new stores and relocated 30 stores, expanded
nine stores at existing locations and closed a total of two stores in addition
to relocations.
Gross profit for fiscal 1995 was $284.5 million, or 39.6% of net sales,
compared with $277.8 million, or 40.4% of net sales, during fiscal 1994. The
decrease in gross profit percentage was due primarily to an increase in
warehouse and distribution costs of 0.6% of net sales resulting from the
additional costs incurred (including $1.6 million of pre-opening expenses)
during the automation of the Company's distribution centers and related
difficulties of such automation. The new distribution facilities became fully
operational in the fourth quarter of fiscal 1995. See "Business -- Warehouse and
Distribution."
Operating and administrative expenses for fiscal 1995 increased by $25.5
million over such expenses for fiscal 1994 and, as a percentage of net sales,
increased from 37.2% to 39.2%. The increase in the expense ratio
26
<PAGE> 28
for fiscal 1995 was primarily attributable to the expenses associated with
developing and implementing the store-level information systems including the
new POS system, integration of the POS with the Electronic Parts Catalog,
implementation of a Retail Paperless Management System and installation of a
company-wide satellite communications network, in the aggregate amount of $6.8
million of which $5.3 million represents non-recurring software development
costs and $1.5 million represents an increase in depreciation and amortization
expense associated with equipment installed as part of the investments in
store-level systems. In addition to the direct costs incurred by the Company to
develop and implement these new systems, the Company's store associates were
required to spend a significant amount of time off the sales floor being trained
on the use of these systems, resulting in an increase in store labor during the
period. The Company's out-of-stock position during periods of fiscal 1995 also
contributed to the higher store labor costs as a percentage of net sales as
associates were forced to direct more of their efforts to outsourcing product.
Lastly, during fiscal 1995, the Company expanded its CSCs from 59 to 176 stores.
This expansion caused store labor costs to increase as a percentage of net sales
due to the increased store labor costs required to service commercial customers
and the lower level of sales generated by new CSCs during their start-up phase.
As a result, store labor increased by $9.0 million during fiscal 1995 over
fiscal 1994 and, as a percentage of net sales, increased to 12.7% from 12.0%.
The increase in such expenses was offset in part by a reduction in advertising
costs of $4.9 million resulting from the Company limiting its advertising in
response to its reduced in stock position during portions of the fiscal year.
Store closing costs increased to $3.3 million in fiscal 1995 compared to $2.7
million for fiscal 1994.
Interest expense for fiscal 1995 was $14.4 million compared to $10.3
million for fiscal 1994. The increase in interest expense was the result of
higher average borrowings and increases in the LIBOR interest rate.
The Company recorded an income tax benefit of $5.4 million in fiscal 1995.
See Note 11 to Consolidated Financial Statements.
As a result of the above factors, the Company incurred a net loss of $9.1
million in fiscal 1995, compared to net income before extraordinary gain of $8.8
million in fiscal 1994.
RECENT FINANCIAL RESULTS
The following information is based upon the books and records of the
Company which have not yet been fully subjected to the Company's routine closing
procedures and is subject to audit. Complete financial statements for fiscal
1997 are not presently available. The following information includes the effect
of the Trak West Acquisition, which was completed on December 8, 1997, on the
operating results of the Company.
The Company expects that it will report net sales of $845.7 million for
fiscal 1997, an increase of 6.6% in total and 4.0% on a comparable store basis,
compared to net sales in fiscal 1996. Sales from the Trak West stores, which
were operated by the Company for approximately seven weeks in fiscal 1997, are
expected to be approximately $10.6 million. Commercial sales produced by the
Company's stores are expected to be $115.3 million for fiscal 1997, an increase
of $25.7 million or 28.7% over commercial sales for fiscal 1996. Commercial
sales are expected to account for 13.6% of net sales for fiscal 1997, compared
to 11.3% for fiscal 1996. Operating profit is expected to increase to $45.1
million for fiscal 1997 ($49.1 million excluding an estimate of $4 million for
one-time transition costs associated with Trak West). Excluding the impact of
the one-time transition costs, this represents, an increase of $52.5 million
over the operating loss of $3.4 million for fiscal 1996. The 1996 operating loss
includes a $20.2 million charge related to certain Acquisition and Financing
activities and a $12.9 million provision for store closing costs. The Company
expects that it will report EBITDA (as defined herein) for fiscal 1997 of $66.0
million ($70.0 million excluding the estimated impact of the Trak West one-time
transition costs). Excluding the impact of the one-time transition costs, this
represents, an increase of $19.5 million or 38.6% over EBITDA for fiscal 1996.
In addition, as disclosed elsewhere herein, the Company expects to record in the
fourth quarter of fiscal 1997 (i) a charge to earnings of $1.1 million in
connection with the issuance of shares of Common Stock and options to purchase
Common Stock to certain of the Company's executives; and (ii) an extraordinary
charge of $3.3 million, net of taxes, with respect to the early extinguishment
of debt.
27
<PAGE> 29
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 $65.0
million was utilized as of February 1, 1998. On November 18, 1997, the Company
reached an agreement in principle 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 of 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.
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. See "Description of Certain Indebtedness." 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 Auto'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. Upon the first adjustment date
following the consummation of the Offering and the application of the net
proceeds therefrom, the term loan will bear interest at LIBOR plus 2.00% and
amounts outstanding under the revolving credit facility will bear interest at
LIBOR plus 1.75%. 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 intends to open or relocate approximately 130 stores in fiscal
1998 and approximately 150 stores in fiscal 1999. The Company anticipates that
the majority of these new and relocated stores will be financed by
sale-leaseback or similar arrangements structured as operating leases that
require no net capital expenditures by the Company except for fixtures and store
equipment. For the remainder of its planned new and relocated stores, the
Company expects to spend approximately $120,000 per store for leasehold
improvements. In addition to capital expenditures, each of the Company's new
stores will require an investment in working capital, principally for
inventories, of approximately $300,000. A substantial portion of these
inventories are expected to be financed through vendor payables. Pre-opening
expenses consisting primarily of store set-up costs and training of new store
associates, average approximately $30,000 per store and are expensed during the
month in which a store is opened. New stores generally become profitable during
the first full year of operations. See Note 1 to Consolidated Financial
Statements.
In fiscal 1996, net cash used by operating activities was $38.4 million,
which consisted primarily of a $24.7 million net loss, an $11.9 million increase
in deferred tax assets and a $33.0 million increase in working capital,
partially offset by non-cash expenses of $20.7 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. See "Acquisition and Financings." At February 2, 1997, the Company
had approximately $22.9 million of net operating loss carryforwards available
which will reduce future cash requirements for the payment of federal income
taxes.
28
<PAGE> 30
For the thirty-nine week period ended November 2, 1997, net cash used in
operating activities was $16.1 million, which consisted primarily of $3.9
million of net income and $16.5 million of non-cash depreciation and
amortization expenses and a $2.5 million decrease in deferred tax assets, offset
by a $39.0 million increase in working capital. During this period, the Company
used $36.6 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 $14.3 million and
consisted primarily of $12.5 million of capital expenditures. Net cash provided
by financing activities totaled $31.5 million and consisted primarily of net
borrowings under the Senior Credit Facility.
YEAR 2000 CONVERSION
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.
29
<PAGE> 31
QUARTERLY RESULTS AND SEASONALITY
The Company's business is somewhat seasonal in nature, with the highest
sales occurring in the summer months of June through August. The Company's
business is, in addition, affected by weather conditions. While unusually severe
weather tends to reduce sales as elective maintenance is deferred during such
periods, extremely hot and cold weather tend to enhance sales by causing parts
to fail and sales of seasonal products to increase.
The following table sets forth certain quarterly unaudited operating data
of the Company for fiscal 1995, 1996 and the thirty-nine weeks ended November 2,
1997. The unaudited quarterly information includes all adjustments which
management considers necessary for a fair presentation of the information shown.
The data presented below should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus, and the other financial information included herein.
<TABLE>
<CAPTION>
FISCAL 1995
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS)
<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 profit (loss)......................... 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>
<TABLE>
<CAPTION>
FISCAL 1996
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS)
<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
Operating profit (loss)(1).................... 6,026 7,046 8,426 (24,862)
Net income (loss)(2).......................... 1,499 2,113 2,821 (31,092)
EBITDA........................................ 10,910 11,959 13,167 14,508
</TABLE>
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
NOVEMBER 2, 1997
--------------------------------
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales.................................................. $201,613 $217,944 $216,908
Gross profit............................................... 84,112 93,199 100,237
Operating profit........................................... 7,017 12,099 17,108
Net income (loss).......................................... (1,649) 1,267 4,320
EBITDA..................................................... 11,759 17,461 22,454
</TABLE>
- ---------------
(1) 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 to Consolidated Financial Statements)
as well as by a provision for store closing costs totaling $12.9 million
(see Note 12 to Consolidated Financial Statements).
(2) 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 to Consolidated Financial Statements) as well as by a
provision for store closing costs totaling $12.9 million (see Note 12 to
Consolidated Financial Statements).
INFLATION
The Company does not believe its operations have been materially affected
by inflation. The Company believes that it will be able to mitigate the effects
of future merchandise cost increases principally through economies of scale
resulting from increased volumes of purchases, selective forward buying and the
use of alternative suppliers.
30
<PAGE> 32
BUSINESS
In addition to the historical information contained herein, certain
statements under this caption constitute "forward-looking statements," which are
subject to risks and uncertainties. The Company's actual results may differ
significantly from those discussed herein. Factors that might cause such a
difference include, but are not limited to, those discussed under the captions
"Risk Factors" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" as well as those discussed elsewhere in this
Prospectus.
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 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.
On December 8, 1997, the Company completed the acquisition of 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
$34.8 million, which was funded with a $22.0 million equity investment by
affiliates of the Company's existing stockholders and additional bank
borrowings. By the end of the first quarter of fiscal 1998, the Company expects
to complete the conversion of the Trak West stores to the Kragen name and store
format and the integration of these stores into the Company's operations. The
Trak West Acquisition provides the Company with a leading market position and 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. The Company intends to increase the revenues and profitability of the
acquired stores by improving their stocking levels, merchandising and customer
service. The Company also intends to introduce its profitable and highly
successful commercial sales program (the "Commercial Sales Program") to 43 of
the Trak West stores and its Priority Parts operation to all of the Trak West
stores. The Trak West Acquisition will enable the Company to capitalize on
significant economies of scale because the Company's existing warehouse and
distribution network will service the acquired stores. In addition, the Company
believes that by increasing its advertising presence in the Los Angeles market
it will improve the financial performance of the acquired stores as well as the
Company's 65 existing Los Angeles stores.
OPERATING AND GROWTH STRATEGY
Over the past several years, the Company has introduced a variety of
operating initiatives which have enabled it to significantly increase its
productivity and the level and quality of service provided to customers. These
initiatives include the implementation of a highly efficient, centralized
infrastructure, the installation of sophisticated store-level information
systems, the expansion of a rapidly growing and profitable Commercial Sales
Program, and an accelerating new store opening and relocation program. Largely
as a result of the success of these programs, the Company's profitability has
increased, with operating profit increasing 68.5% to
31
<PAGE> 33
$36.2 million in the thirty-nine weeks ended November 2, 1997, from $21.5
million in the comparable period in fiscal 1996. The Company believes that these
initiatives have provided the foundation for continued and profitable growth.
Several of the operating initiatives that have been implemented by the
Company are summarized below.
- Expanded Product Selection -- The Priority Parts operation allows the
Company to better serve its customers by making available to more than
565 of its stores, on a same-day delivery basis, an additional 200,000
SKUs not regularly stocked in these stores, and on a next-day delivery
basis to all of its stores, an additional 1,000,000 SKUs. The Priority
Parts operation has also enabled the Company to increase sales to
commercial accounts due to the broader availability of automotive
replacement parts. The Company has expanded its Priority Parts operation
by improving its delivery system and adding 17 strategically located
Priority Parts depots to its two original Priority Parts depots. The
Company believes that its Priority Parts operation provides the Company
with an important competitive advantage.
- Warehouse and Distribution System -- The Company has completed the
conversion of its warehouse and distribution facilities from a manual,
labor-intensive, paper-based system to a technologically advanced, fully
integrated system. This system, which became fully operational during the
fourth quarter of fiscal 1995, has improved the Company's in-stock levels
and accuracy to the highest rates in recent years. The Company has
sufficient warehouse and distribution capacity to meet the requirements
of its growth plans for the foreseeable future. The Company has reduced
warehouse and distribution expense as a percentage of net sales from 4.9%
for fiscal 1995 to 3.8% for fiscal 1996 and 3.4% for the thirty-nine
weeks ended November 2, 1997.
- Store-Level Information Systems -- The Company has installed several
store-level information systems, which have improved store labor
productivity and customer service. These initiatives include installing a
point of sale system ("POS"), integrating the POS with the Company's
Electronic Parts Catalog ("EPC"), implementing its Surround Store
Inventory Program, its Retail Paperless Management System and a
sophisticated store labor scheduling system, and installing a
Company-wide satellite communications network. The enhanced information
system capabilities have enabled the Company to achieve higher average
transaction amounts by allowing sales associates to suggest appropriate
add-on products, including higher margin replacement parts. In addition,
the significant investment in information systems has been integral to
the successful penetration of the commercial market.
- Training and Technical Expertise -- In order to better develop its
associates' technical expertise and customer service skills, the Company
has increased its focus on formal classroom training and on-the-job
training, customer service measurement systems and incentive programs for
its district managers, store managers, and sales associates.
Approximately 1,400 of the Company's associates have passed the ASE-P2
test, a nationally recognized certification for parts technicians. The
Company believes these programs have resulted in an increased level of
customer service and store-level efficiency.
- Centralized Call Center -- The Company's centralized call center (the
"Call Center") provides store personnel at selected high-volume stores
the option to reroute customer calls to a central location during the
store's busiest hours of operation. Call Center associates perform all
functions that store personnel normally handle, such as store specific
parts look-up, price look-up and inventory availability verification in a
manner that is transparent to the call-in customer. Associates in the
Call Center can take an order from a customer and electronically transmit
it to the store, enabling the requested product to be picked up by the
customer. Use of the Call Center allows sales associates to give their
undivided attention to customers at the store while call-in customers are
serviced directly by Call Center associates.
- Precision Pricing Program -- The Company has recently implemented a new
pricing program (the "Precision Pricing Program"), which allows the
Company to establish pricing zones at the store level rather than the
market or chain level. This initiative enables the Company to establish
pricing levels at
32
<PAGE> 34
each store based upon that store's local market competition, thereby
providing competitive prices for customers. The Company introduced the
Precision Pricing Program in the third quarter of fiscal 1997 and
believes that, once fully implemented, it will provide the Company with
the opportunity to improve its gross profit margin.
The Company is currently generating growth in sales and operating profits
through: (i) an accelerating new store opening, relocation and acquisition
program; (ii) continued maturation and expansion of the Company's Commercial
Sales Program; and (iii) increasing operating profit margins as a result of
continued improvement in gross profit margins and continued realization of
operating efficiencies. The Company believes that it can realize accelerating
and profitable growth by continuing to aggressively pursue these strategies:
- Accelerating New Store Opening, Relocation and Acquisition Program -- The
Company's store growth strategy is focused on existing markets and
includes: opening new stores, relocating smaller stores to larger stores
at better locations and expanding selected stores. The Company believes
that its existing markets are highly fragmented and that its store growth
strategy will enable it to effectively and profitably increase its name
recognition and market penetration while benefiting from economies of
scale in advertising, management and distribution costs. In addition to
the Trak West Acquisition, the Company opened 101 stores (including 36
relocations) in fiscal 1997 as compared to 56 stores (including 37
relocations) in fiscal 1996. The Company plans to continue the
acceleration of its store growth strategy and expects to open or relocate
approximately 130 stores in fiscal 1998 and approximately 150 stores in
fiscal 1999. Additionally, the Company believes that the fragmented
nature of the industry has enabled it to effectively pursue an
opportunistic acquisition strategy. The Company focuses its acquisition
efforts in (i) existing markets to achieve further market penetration in
a timely and cost-effective manner without adding additional retail
square footage (as was done in the Trak West Acquisition), and (ii)
contiguous markets to permit further leveraging of its established
infrastructure over an increasing sales base.
- Further Penetration of the Commercial Segment -- The Company believes
that it can continue to expand its profitable and highly successful
Commercial Sales Program. The commercial segment constitutes in excess of
50% of the approximately $78 billion of annual sales in the automotive
aftermarket and is currently growing at a faster rate than the DIY
segment of the market. The Company believes it has significant
competitive advantages in servicing the commercial segment because of its
experienced sales associates, conveniently located stores, attractive
pricing and ability to consistently deliver a broad product offering with
an emphasis on national brand names. Commercial Sales Centers ("CSCs")
have been implemented in 360 of the Company's stores as of February 1,
1998. The Company's sales to commercial accounts (including sales by
stores without CSCs) have increased 32.6% to $87.7 million, or 13.8% of
total sales, in the thirty-nine weeks ended November 2, 1997, from $66.1
million, or 11.2% of total sales, in the comparable period in fiscal
1996. The Company believes that significant opportunities exist to
increase sales at its existing CSCs by focusing on the penetration of
certain segments of the commercial market such as fleet owners,
municipalities and national accounts. In addition, 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).
- Increasing Operating Profit Margin -- The Company has significantly
increased its operating profit margin to 5.7% in the thirty-nine weeks
ended November 2, 1997, from 3.6% in the comparable period in fiscal
1996. The Company believes that significant opportunities exist to
continue to increase its operating profit margin. The Company has
increased its gross profit margin primarily as a result of more favorable
vendor terms, taking advantage of cash discounts from vendors,
efficiencies from its new warehouse and distribution system and
improvements in product mix. The Company believes that the improved
vendor terms are primarily the result of the Company's improved financial
performance, a reduction in overall vendor payables and growth in its
store count. The Company believes that it can further improve its
operating profit margin through: (i) the continued focus on the
initiatives described above; (ii) effectively leveraging its fixed costs
over an increasing sales base; and (iii) obtaining improved vendor and
landlord terms due to the significant deleveraging resulting from the
Offering.
33
<PAGE> 35
The increase in the store base, combined with the success of the operating
initiatives described above, has resulted in a 68.5% increase in operating
profit to $36.2 million for the thirty-nine weeks ended November 2, 1997, from
$21.5 million in the comparable period in fiscal 1996. The Company believes it
can realize accelerating and profitable growth by continuing to aggressively
pursue its operating and growth strategies.
AUTOMOTIVE AFTERMARKET INDUSTRY
According to industry estimates, the size of the automotive aftermarket for
replacement parts, maintenance items and accessories was approximately $78
billion in sales in 1996. The Company believes that the automotive aftermarket
for parts, maintenance items and accessories is growing because of, among other
things: (i) increases in the size and age of the country's automotive fleet;
(ii) increases in the number of miles driven annually per vehicle; (iii) the
higher cost of new cars as compared to historical costs; (iv) the higher cost of
replacement parts as a result of technological changes in recent models of
vehicles; and (v) the increasing labor costs associated with parts, installation
and maintenance.
The automotive aftermarket distribution channels are highly fragmented. The
Company believes, however, that the industry is consolidating as national and
regional specialty retail chains gain market share at the expense of smaller
independent operators and less specialized mass merchandisers. Automotive
specialty retailing chains with multiple locations in given market areas, such
as the Company, enjoy competitive advantages in purchasing, distribution,
advertising and marketing compared to most small independent retailers. In
addition, the increase in the number of automotive replacement parts caused by
the significant increase in recent years in the variety of domestic and imported
vehicle makes and models has made it difficult for smaller independent retailers
and less specialized mass merchandise chains to maintain inventory selection
broad enough to meet customer demands. The Company believes this has created a
competitive advantage for those automotive specialty retailing chains, such as
the Company that have the distribution capacity and sophisticated information
systems to stock and deliver a broad inventory selection.
TRAK WEST ACQUISITION
On December 8, 1997 the Company acquired 82 stores located in the Los
Angeles market that had been owned by Trak Auto Corporation. The Trak West
Acquisition provides the Company with a leading market position and 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 expects to complete the conversion of these stores to the
Kragen name and store format and the integration of these stores into the
Company's operations by the end of the first quarter of 1998. The Company
acquired these stores, which generated aggregate net sales of approximately
$90.9 million during the 12 months ended September 27, 1997, for a total cost of
approximately $34.8 million. The Trak West Acquisition was funded with a $22.0
million equity investment by affiliates of the Company's existing stockholders
and additional bank borrowings. The Trak West stores had operated under three
store formats: (i) 35 Trak stores which carried approximately 10,000 SKUs; (ii)
34 Super Trak stores which carried approximately 15,000 SKUs; and (iii) 13 Super
Trak Warehouse stores which carried approximately 30,000 SKUs. These 82 stores
were generally realizing operating margins significantly below those of the
Company's stores. The Company believes it can significantly increase the sales
and profitability of the acquired stores. The main elements of the Company's
strategy for integrating and operating the Trak West stores are as follows:
- Expand Product Selection -- The Company intends to introduce its highly
successful Priority Parts operation in all of the Trak West stores, none
of which had operated with a comparable program. Implementation of the
Priority Parts operation will enable the acquired stores to provide
customers, on a same-day delivery basis, an additional 200,000 SKUs and,
on a next-day delivery basis, an additional 1,000,000 SKUs.
- Reduce Out-of-Stock Levels -- The Company believes that the Trak West
stores have historically operated with relatively high out-of-stock
levels. The Company further believes that by implementing its
sophisticated store-level information systems and utilizing its highly
efficient warehouse and
34
<PAGE> 36
distribution system, it will significantly improve the acquired stores'
out-of-stock and customer service levels.
- Improve Customer Service -- The Company believes it can significantly
improve the level of customer service at the acquired stores by
installing its sophisticated store-level information systems and better
developing the Trak West associates' technical expertise through the
Company's successful training programs. Furthermore, through the
implementation of the Company's store-labor scheduling system and
centralized call center, the Company believes it can improve store labor
productivity and customer service levels at the Trak West stores.
- Cost-Effective Advertising -- In conjunction with the Trak West
Acquisition, the Company intends to increase its advertising presence in
the Los Angeles market, which the Company believes will improve the
financial performance of the Trak West stores as well as the Company's 65
existing Los Angeles stores.
- Initiate Commercial Sales Program -- Historically, the Trak West stores
have not actively pursued commercial customers. Based on detailed
analysis of the service bay counts and the competitive environment in the
acquired stores' trade zones, the Company intends to implement its
profitable and highly successful Commercial Sales Centers in 43 of the
Trak West stores.
- Leverage Existing Warehouse and Distribution System -- Upon conversion of
the Trak West stores to the Kragen name and store format during the first
quarter of fiscal 1998, the Company intends to service the acquired
stores through its existing warehouse and distribution centers. The
Company believes that this will enable it to benefit from significant
economies of scale and improve the profitability of the Trak West stores.
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 segment. 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.
35
<PAGE> 37
Approximately 1,400 of the Company's associates have passed the ASE-P2 test, a
nationally recognized certification for parts technicians.
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.
The Company has enhanced its customer service through the implementation of
a program designed to measure and improve the level of customer service at each
store. The Company uses its centralized database as a source to make
approximately 72,000 calls annually to customers inquiring as to their overall
satisfaction with the Company's associates, pricing, product selection and
quality. In addition, a quantified customer satisfaction index is provided to
each store and the appropriate management personnel to ensure that customer
service levels remain a store focus.
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 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. Sales of replacement parts account for
approximately 60% of the Company's sales. Replacement parts typically generate
higher gross profit margins than maintenance items or general accessories. The
Company believes that its percentage of sales of replacement parts will increase
in the future due primarily to an increased SKU count in the replacement parts
category and to increased sales to commercial customers.
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. Prior to this expansion, this same day delivery service was
available to only 80 of the Company's stores. The Company's Priority Parts
operation handles approximately 96,000 inquiries each week. Store associates are
able to electronically inquire on price and availability and order parts from
the Priority Parts operation through the EPC and receive immediate confirmation
of availability without having to make telephone inquiries. The Company believes
that its Surround Store Inventory Program and its Priority Parts operation
provide the Company with important competitive advantages.
The Company has classified its product mix into 110 separate categories
through a merchandising program designed to determine the optimal inventory mix
at an individual store based on that store's historical sales. The Company
believes that it can improve store sales, gross profit margin and inventory
turnover by
36
<PAGE> 38
tailoring individual store inventory mix based on historical sales patterns for
each of the 110 product categories.
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. The Company's entry-level
products offer excellent value by meeting standard quality requirements at low
prices. Additionally, the Company utilizes its Step-up Program, through which it
offers alternative products at slightly higher price points. These products
typically provide extra features, improved performance, an enhanced warranty or
are of national brand recognition.
The Company has recently implemented its Precision Pricing Program which
allows the Company to establish pricing zones at the store level rather than the
market or chain level. This initiative enables the Company to establish pricing
levels at each store based upon that store's local market competition, thereby
providing competitive prices for customers. The Company introduced the Precision
Pricing Program in the third quarter of fiscal 1997 and believes that, once
fully implemented, it will provide the Company with the opportunity to improve
its gross profit margin.
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 sponsors a National Hot Rod Association ("NHRA") Funny Car and believes
its core customer base are fans of NHRA racing. 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.
POINT OF SALE SYSTEM
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. This POS system has
improved store productivity and customer service by streamlining in-store
procedures. Customer transactions previously requiring handwritten information
have been eliminated as registers are now tied to the EPC and the central
inventory system. This allows for paperless transactions and electronic updating
of warranty information. Additionally, the POS software tracks the history of
individual customer purchases, which allows the Company to monitor customer
activity for use in regionalized marketing and merchandising programs.
ELECTRONIC PARTS CATALOG
The Company has upgraded and expanded the capabilities of its 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
37
<PAGE> 39
in parts selection and ordering based on simple input of the year, model and
engine type and application needed. The EPC system covers vehicles with model
years from 1967 through 1997. Once provided with this basic information, the EPC
displays which part is needed and whether it is located in the store. In the
event a particular product is unavailable at a store, the Company's recently
implemented Surround Store Inventory Program 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. The EPC also indicates whether it can be obtained
by special order through the Company's Priority Parts depots or certain
warehouse distributors with same-day delivery, or directly from the
manufacturer. Information about the customer's car can be entered into a
permanent customer database that can be instantly accessed whenever the customer
visits or phones 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 with its POS system and
centralized Company database. This integration improves customer service by: (i)
reducing check-out time by fully automating the ordering process between the
parts counter and the POS register; (ii) allowing the store associate to order
parts electronically with immediate confirmation of availability and/or
delivery; and (iii) providing up to the minute pricing of products.
RETAIL PAPERLESS MANAGEMENT SYSTEM
The Company's Retail Paperless Management System ("RPMS") is a store-based
software system used to improve store efficiency. The RPMS provides for
interactive store associate development and testing, communication via
Company-wide electronic mail, knowledge-based interviewing of associate
applicants, automated associate time and attendance recording and forms
automation.
LABOR SCHEDULING SYSTEM
The Company utilizes a sophisticated labor scheduling system that allocates
labor hours based on factors including, forecasted sales and customer traffic
counts. The Company believes this system enables it to provide superior customer
service while providing for improved labor productivity.
SATELLITE COMMUNICATIONS NETWORK
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. The system also broadcasts common files to all stores
simultaneously to update the EPC. Additionally, the satellite network
significantly increases the speed of credit card and check authorization.
CALL CENTER
The Company's centralized Call Center provides store personnel at selected
high-volume stores the option to reroute customer calls to a central location
during the store's busiest hours of operation. Call Center associates perform
all functions that store personnel normally handle, such as store specific parts
look-up, price look-up and inventory availability verification in a manner that
is transparent to the call-in customer. Associates in the Call Center can take
an order from a customer and electronically transmit it to the store, enabling
the requested product to be picked up by the customer. Use of the Call Center
allows sales associates to give their undivided attention to customers at the
store while call-in customers are serviced directly by Call Center associates.
STORE OPERATIONS
The Company's stores are divided into five geographic regions: Southwest,
Rocky Mountain, Northwest, Southern California and Northern California. Each
region is administered by a regional manager, each of whom oversees seven to ten
district managers. Each of the Company's district managers has responsibility
for between 11 and 18 stores. In addition, the 82 Trak West stores recently
acquired are being treated as a region
38
<PAGE> 40
during the conversion to the Kragen name and store format. Upon completion of
this conversion, the Company will redistribute its stores over seven regions.
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 AUTO CHECKER AUTO KRAGEN AUTO COMPANY
SUPPLY PARTS 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>
- ---------------
(1) Includes the 82 Trak West stores which are being 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 store size for a given new location is selected
based upon volume expectations determined through demographics and other Company
studies included in the Company's detailed site selection process. See "-- Store
Growth Strategy." The following table sets forth the Company's stores, by size,
as of February 1, 1998:
<TABLE>
<CAPTION>
STORE SIZE NUMBER OF 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>
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. The replacement
parts inventory area is fronted by a counter staffed by knowledgeable parts
personnel and is equipped with EPCs. The remaining selling space contains
gondolas for accessories and maintenance items, including oil and air filters,
additives, waxes and other items, together with specifically designed shelving
for batteries and, in many stores, oil products.
39
<PAGE> 41
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 Company's Market Strategy Group, which is a part of its Real Estate
Department, utilizes a sophisticated, market-based approach that identifies
potential locations based on detailed demographic and competitive studies. These
demographic and competitive studies include population density, growth patterns,
age, ethnicity, per capita income, vehicle traffic counts, and the number and
type of existing automotive-related facilities, such as automotive parts stores
and other competitors within a pre-determined radius of the potential new
location. These potential locations are compared to existing Company locations
to determine opportunities for opening new stores and relocating or expanding
existing stores.
Additionally, the Company believes that the fragmented nature of the
industry has enabled it to effectively pursue an opportunistic acquisition
strategy. The Company focuses its acquisition efforts in (i) existing markets to
achieve further market penetration in a timely and cost-effective manner without
adding additional retail square footage (as was done in the Trak West
Acquisition), and (ii) contiguous markets to permit further leveraging of its
established infrastructure over an increasing sales base.
The following table sets forth the Company's store development activities
during the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning stores............................................ 538 544 566 580
New stores.................................................. 10 24 19 65
Relocated stores............................................ 12 30 37 36
Acquired Trak West stores................................... 0 0 0 82
Closed stores (including relocated stores).................. (16) (32) (42) (45)
--- --- --- ---
Ending stores............................................... 544 566 580 718
=== === === ===
Expanded stores............................................. 5 9 8 3
Total new and relocated stores.............................. 22 54 56 101
</TABLE>
The Company believes that substantial growth opportunities exist in its
current, highly fragmented markets and that its store growth strategy will
increase its name recognition and market penetration while benefiting from
economies of scale in advertising, management and distribution costs. In
addition to the Trak West Acquisition, the Company opened 101 stores (including
36 relocations) in fiscal 1997 as compared to 56 stores (including 37
relocations) in fiscal 1996. The Company plans to continue the acceleration of
its store growth strategy and expects to open or relocate approximately 130
stores in fiscal 1998 and approximately 150 stores in fiscal 1999. As of
February 1, 1998, the Company had executed purchase contracts or leases for 56
sites, was in various stages of negotiation for 62 additional sites and had
identified numerous potential additional sites for store growth. New stores
generally become profitable during the first year of operation.
On November 18, 1997, the Company reached an agreement in principle 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 the commercial segment of
the automotive replacement parts market. The commercial segment constitutes in
excess of 50% of the approximately $78 billion of annual sales in the automotive
aftermarket and is currently growing at a faster rate than the DIY segment of
the market. The Commercial Sales Program, which is intended to facilitate
penetration of this market segment, 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.
40
<PAGE> 42
The Company has made a significant commitment to this business, including
the addition of a Vice President -- National Sales Manager in November 1997 and
upgrading the information systems capabilities available to the commercial sales
group. In addition, the Company employs District Sales Managers who have
responsibility for servicing existing commercial accounts and developing new
commercial accounts for approximately every five stores that have a CSC.
Furthermore, each CSC has a dedicated in-store salesperson, driver and delivery
vehicle.
The Company believes it is well positioned to effectively and profitably
service commercial customers, who typically require a high level of customer
service and broad product availability. The commercial segment of the market has
traditionally been serviced primarily by jobbers. Recently, however, automotive
specialty retailing chains, such as the Company, have entered the commercial
segment. The chains typically have multiple locations in given market areas and
maintain a broad inventory selection. The Company believes it has significant
competitive advantages in servicing the commercial segment because of its
experienced sales associates, conveniently located stores, attractive pricing
and ability to consistently deliver a broad product offering with an emphasis on
national brand names.
At September 30, 1994, the Company operated CSCs in five of its stores and
currently operates CSCs in 330 of its stores. The Company's sales to commercial
accounts (including sales by stores without CSCs) have increased 32.6% to $87.7
million, or 13.8% of total sales, in the thirty-nine weeks ended November 2,
1997 from $66.1 million, or 11.2% of total sales, in the comparable period in
fiscal 1996.
The Company intends to continue to expand its successful marketing efforts
to the commercial segment of the automotive aftermarket. The Company believes
that significant opportunities exist to increase sales at its existing CSCs by
focusing on the penetration of certain segments of the commercial market such as
fleet owners, municipalities and national accounts. In addition, 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 1996.
The Company's inventory management systems include the E-3 Trim Buying
System, which provides inventory movement forecasting based upon history, trend
and seasonality. Combined with service level goals, vendor lead times and cost
of inventory assumptions, the E-3 Trim Buying System determines the timing and
size of purchase orders. Approximately 90% of the dollar value of transactions
are sent via electronic data interchange, with the remainder being sent by a
computer facsimile interface. The Company's store replenishment system generates
orders based upon store on-hand and store model stock. This includes an
automatic model stock adjustment system utilizing historical sales, seasonality
and store presentation requirements. The Company is also able to allocate
seasonal and promotional merchandise based upon a store's history of prior
promotional and seasonal sales.
The Company offers products with nationally recognized, well-advertised
brand names, such as Armor All, Autolite, Blue Streak, Castrol, Dayco, Exide,
Fel Pro, Fram, Havoline, Mobil, Monroe, Pennzoil, Prestone, Quaker State, Slick
50, Stant, Sylvania, Turtle Wax and Valvoline. In addition to brand name
products, the Company's stores carry a wide variety of high quality private
label products. Because most of such products are produced by nationally
recognized manufacturers that produce similar brand name products that enjoy a
high degree of consumer acceptance, the Company believes that its private label
products are of a quality that is comparable to such brand name products.
The Company has increased its gross profit margin over the last several
years primarily as a result of more favorable vendor terms, taking advantage of
cash discounts from vendors, efficiencies from its new warehouse and
distribution system and improvements in product mix. The Company believes that
the improved vendor terms are primarily the result of the Company's improved
financial performance, a reduction in overall vendor
41
<PAGE> 43
payables and growth in its store count. The Company's gross profit margin
increased from 39.6% in fiscal 1995 to 43.6% for the thirty-nine weeks ended
November 2, 1997 and the Company believes it has the opportunity to continue
realizing higher gross profit margins. The Company believes it can further
improve its gross profit margin through obtaining improved vendor terms as a
result of its increased size and profitability and the significant deleveraging
resulting from the Offering.
WAREHOUSE AND DISTRIBUTION
The Company successfully converted its warehouse and distribution system
from a manual, labor intensive, paper-based system to a technologically advanced
fully integrated system. This system, which became fully operational in the
fourth quarter of fiscal 1995, has improved the Company's in-stock levels to the
highest in recent years. The Company has sufficient warehouse and distribution
capacity to meet the requirements of its growth plans for the foreseeable
future. The Company has reduced warehouse and distribution expenses as a
percentage of net sales from 4.9% for fiscal 1995 to 3.8% for fiscal 1996 and
3.4% for the thirty-nine weeks ended November 2, 1997.
The new system utilizes bar coding, radio frequency scanners and
sophisticated conveyor and put-to-light systems. The Company has instituted
engineered labor standards in each of its distribution centers which have
contributed to improved labor productivity. Each store is currently serviced by
one of the Company's two main distribution centers, with the regional
distribution centers handling bulk materials, such as oil received directly from
vendors. All of the Company's merchandise is shipped by vendors to the Company's
distribution centers, with the exception of batteries, which are shipped
directly to stores by the vendor.
The Company's fill rates and in-stocks have significantly improved since
implementation of the new warehouse and distribution system. In addition,
picking accuracy has improved from 95% to 99% which has resulted in a high level
of accuracy in the stores' perpetual inventory balances.
The following table sets forth certain information relating to the
Company's two main distribution centers as of February 1, 1998:
<TABLE>
<CAPTION>
NUMBER
OF
DISTRIBUTION NUMBER OF FULL-TIME
CENTER AREA SERVED SIZE (SQ. FT.) STORES SERVED ASSOCIATES
- ------------ ----------- -------------- ------------- ----------
<S> <C> <C> <C> <C>
Phoenix, AZ Arizona, Colorado, Idaho, Nevada, New
Mexico, California, Texas, Utah...... 273,520 315 288
Dixon, CA California, Nevada, Washington,
Oregon, Idaho, Montana, Wyoming...... 325,500 403 290
------- --- ---
599,020 718 578
======= === ===
</TABLE>
Upon completing conversion of the 82 Trak West stores during the first
quarter of fiscal 1998 to the Kragen name and store format, the Company will
service all these stores through its existing distribution centers, enabling it
to benefit from economies of scale. The Company has the capability of expanding
the Phoenix and Dixon distribution centers by approximately 80,000 and 160,000
square feet, respectively.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems constitute an important
element of the Company's operations and growth strategy. 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. The Company is currently upgrading these systems, as
necessary, to be "Year 2000" compliant.
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.
42
<PAGE> 44
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, who have
been represented by a union for more than 18 years, none of the Company's
personnel is represented by a labor union.
FACILITIES
The following table sets forth certain information concerning the Company's
principal facilities:
<TABLE>
<CAPTION>
SQUARE
PRIMARY USE LOCATION 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
Salt Lake,
Regional distribution center............. UT 32,000 Leased
Regional distribution center............. Commerce, CA 48,400 Leased
</TABLE>
- ---------------
(1) This facility is owned by Missouri Falls Partners, an affiliate of Carmel.
See "Certain Transactions."
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 "Certain
Transactions."
COMPETITION
The Company competes principally in the DIY segment 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 (such as AutoZone, Inc., Chief Auto Parts, Inc. and The
Pep Boys-Manny, Moe and Jack, Inc.), wholesalers or jobber stores (some of which
are associated with national automotive parts distributors or associations, such
as NAPA), automobile dealers, and mass merchandisers that carry automotive
replacement parts, maintenance items and accessories (such as Wal-Mart Stores,
Inc.). 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.
43
<PAGE> 45
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 Southeast 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.
Under environmental laws, a current or previous owner or operator of real
property may be liable for the cost of removal or remediation of hazardous or
toxic substances on, under, or in such property. Such laws often impose joint
and several liability and may be imposed without regard to whether the owner or
operator knew of, or was responsible for, the release of such hazardous or toxic
substances. The Company does not believe that compliance with such laws and
regulations has had a material impact on its operations to date, but there can
be no assurance that future compliance with such laws and regulations will not
have a material adverse effect on the Company or its operations.
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.
44
<PAGE> 46
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of the
directors and executive officers of the Company. Prior to the Offering, the
executive officers of Auto were given the same titles at the Company as they
held at Auto. 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.................. 47 Director, President and Chief Operating Officer
Martin Fraser................. 42 Senior Vice President -- Merchandising and Distribution
Lon Novatt.................... 37 Senior Vice President -- Real Estate, General Counsel and
Secretary
Robert Shortt................. 36 Senior Vice President -- Commercial Sales and Marketing
Henry Torres.................. 34 Senior Vice President -- Information Systems and
Re-Engineering
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).... 47 Director
Robert Smith(3)............... 59 Director
Christopher J. Stadler(1)..... 33 Director
Jules Trump(1)................ 54 Director(4)
Eddie Trump(1)................ 51 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 and Auto since January 1997. Prior to joining the Company
and Auto, Mr. Jenkins served as President and Chief 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
of Auto, Mr. Bazlen was Vice Chairman and Chief Financial Officer of Auto 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
of Auto 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 of Auto since October 1997. Prior to that, Mr. Fraser was Vice
President of Distribution and Replenishment of Auto 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.
45
<PAGE> 47
LON NOVATT has been Senior Vice President -- Real Estate, General Counsel
and Secretary of Auto since June 1997. Prior to that, Mr. Novatt was Vice
President -- Legal, General Counsel and Secretary of Auto, and Secretary of the
Company, 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 of
Auto since October 1997. Prior to that, Mr. Shortt was Vice
President -- Merchandising and Marketing of Auto 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 of Auto since April 1997. Prior to that, Mr. Torres was Vice
President -- Information Systems and Re-Engineering of Auto 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 of Auto 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 of Auto since December 1997. Mr. Watson has also served as
Senior Vice President -- Finance and Treasurer of the Company and Auto since
April 1997. Prior to that, Mr. Watson had been the Senior Vice President --
Finance, Controller and Treasurer of Auto since April 1993. From June 1988 to
March 1993, he was Vice President and Controller of Auto.
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.
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 "Principal Stockholders"). Mr. Smith has
served as President of Newmark Capital Limited, a
46
<PAGE> 48
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.
BOARD OF DIRECTORS AND COMMITTEES
Election of directors is subject to the provisions of a stockholders'
agreement (see "Certain 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. The Company will appoint two
independent directors, who will serve as members of the Audit Committee,
reasonably promptly after the Offering.
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.
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. The two independent
directors which the Company intends to appoint following the Offering will
receive compensation, which has not yet been established, for serving as
directors.
47
<PAGE> 49
EXECUTIVE COMPENSATION
The Company is a holding company which conducts all of its activities
through its main operating subsidiary, Auto, and the subsidiaries of Auto. The
officers of the Company receive no compensation in their capacities as officers
of the Company. Accordingly, 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 Auto's Chief Executive Officer and each
of the four other most highly compensated executive officers of Auto whose
annual salary and bonus during fiscal 1997 exceeded $100,000 (the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
-------------------- SECURITIES
NAME AND FISCAL ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS COMPENSATION($)
------------------ ------ --------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Maynard Jenkins.......................... 1997 525,000 0 39,940 1,014,807(1)
Chairman, 1996 10,100 0 401,967 72(2)
Chief Executive Officer
James Bazlen............................. 1997 400,000 80,000 0 6,623,419(3)
President, 1996 376,000 0 299,337 6,460,594(3)
Chief Operating Officer
Martin Fraser............................ 1997 161,731 30,500 19,756 338,207(4)
Senior Vice President -- Merchandising 1996 148,500 22,522 33,868 327,065(4)
and Distribution
Don Watson............................... 1997 159,423 33,000 6,209 178,318(5)
Senior Vice President, 1996 126,500 18,600 33,868 168,824(5)
Chief 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.
48
<PAGE> 50
(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.
The following table provides information with respect to stock options
granted during the fiscal year ended February 1, 1998 to the Named Executive
Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL
----------------------------------------------------- RATE OF STOCK
NUMBER OF % OF TOTAL PRICE APPRECIATION
SECURITIES OPTIONS FOR OPTION
UNDERLYING GRANTED TO EXERCISE 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 Feb. 1, 2005 $195,746 $456,235
James Bazlen............ 0 -- -- -- -- --
Martin Fraser........... 19,756 6.1 12.04 Dec. 23, 2004 96,834 225,664
Don Watson.............. 6,209 1.9 12.04 Dec. 23, 2004 30,430 70,925
Robert Shortt........... 8,467 2.6 12.04 Dec. 23, 2004 41,497 96,718
</TABLE>
The following table contains certain information regarding options to
purchase shares of Common Stock held as of February 1, 1998 by each of the Named
Executive Officers:
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END AT FISCAL YEAR END ($)
------------------------------ ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Maynard Jenkins............................ 0 441,907 0 3,517,580
James Bazlen............................... 42,762 256,575 340,386 2,042,337
Martin Fraser.............................. 0 53,624 0 426,847
Don Watson................................. 0 40,077 0 319,013
Robert Shortt.............................. 0 42,335 0 336,987
</TABLE>
EXECUTIVE EMPLOYMENT ARRANGEMENTS
Auto 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 of Auto 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 Auto were to terminate the employment of Mr. Bazlen
without cause or if he terminates his employment for Good Reason (as defined),
Auto 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 agreed to
pay him a cash bonus for future services of $1,000,000 which he would use to
purchase shares of Common Stock from the Investcorp Group (subject to vesting
restrictions expiring in full
49
<PAGE> 51
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.
See "Certain Transactions."
In connection with the execution of his employment agreement, Mr. Jenkins
received an option for 401,967 shares of Common 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 Common 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 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 Common Stock, exercisable at $12.04 per
share. This option has both vested and become exercisable to the extent of
42,762 shares of Common Stock. 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
Auto 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 the legal maximum of
$9,500 per individual. In accordance with the provisions of the Retirement
Program, Auto may elect to make matching contributions to the Retirement
Program. For calendar year 1996, Auto 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. Auto made
matching contributions of approximately $288,000 to the Retirement Program in
fiscal 1996. Effective October 1, 1997, Auto changed its matching formula under
the Retirement Program so that, of the first 4% of annual compensation
contributed, 40%, 50% and 60% is matched by Auto 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.
INCENTIVE COMPENSATION PLAN
In May 1996, the Company instituted a general and administrative staff
incentive compensation bonus plan (the "Incentive Plan"). The Incentive Plan is
administered by the Chief Executive Officer of the Company. It was in effect
during the Company's 1996 fiscal year. The Incentive Plan is designed to reward
eligible Company executives, managers and supervisors for the achievement of
pre-defined Company performance objectives. Generally, employees at the
supervisor level or above are eligible to participate in the Incentive Plan. At
the beginning of the plan period, a financial goal for the Company is
established by the Chief Executive Officer, who is ineligible for the Incentive
Plan. The financial goal is based upon a measure of earnings before taking into
account interest, taxes, depreciation and amortization. Depending on the
percentage of the financial goal which is met, a percentage of each eligible
employee's base salary will be paid as a bonus. Bonus awards are determined by
multiplying an eligible employee's base salary by a pre-determined,
corresponding percentage which is based on the amount of the financial goal
achieved by the Company. Bonus payments are made semi-annually and are pro-rated
if an employee has not been employed continuously by the Company during the
fiscal year. In fiscal 1996, the Company incurred approximately $1.0 million of
expense with respect to the Incentive Plan.
50
<PAGE> 52
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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Effect of the Acquisition and Financings."
1996 ASSOCIATE AND EXECUTIVE STOCK OPTION PLANS
On October 30, 1996, subject to approval by the Company's Board of
Directors and the Company's stockholders, the Company awarded options to
purchase shares of Common Stock of the Company 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, the
Company's Board of Directors and the Company's stockholders approved the Plans
and the issuance of the above-described options. Effective October 1997, the
Company 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
the Company, 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 the Company 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 the Company's securities. In the
event of a sale of more than 80% of the outstanding shares of capital stock of
the Company or 80% of its assets, the vested portion of an option and, under
circumstances, the unvested portion will be purchased by the Company.
The Company has granted options to purchase 693,591 shares under the
Associate Plan with applicable exercise prices ranging from of $12.04 to $20.00
per share. The Company has granted options to purchase 385,651 shares under the
Executive Plan with an applicable exercise price of $12.04. 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 will
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 will
be 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
51
<PAGE> 53
performance vesting criteria will be based upon achieving specified operating
results. Partial vesting of options subject to performance vesting will occur 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. See "-- Executive Employment Arrangements."
MANAGEMENT STOCK PURCHASE AGREEMENTS AND 1997 STOCK LOAN PLAN
The Company has established stock purchase and stock loan programs pursuant
to which members of Auto's management have purchased an aggregate of 180,600
shares of Common Stock at the price per share paid in 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. 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.
CERTAIN 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 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 agreed to pay to Transatlantic, in March of 1998, the sum of
$1.0 million on account of fees for past financings.
52
<PAGE> 54
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 Auto
(of which $27.3 million was for real property and $5.8 million was for
fixtures). Auto 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 Auto 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. Auto 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 Auto 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, Auto 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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 3 to Consolidated Financial Statements.
In connection with the Acquisition and Financings, $40.0 million of 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
12% Subordinated Notes, Southwest Finance received a fee of $4.0 million. In
addition, Transatlantic acquired $10.0 million of the 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 12% Subordinated Notes, including a redemption premium of
$0.5 million. See "Use of Proceeds."
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 will be 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
53
<PAGE> 55
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 the Company at such time, the Company and Auto 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 the Company ("Shares") held by the stockholders of the Company 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 the Company, 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 the Company 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 the Company and the other Stockholders on terms and conditions
established by the selling Stockholder. In the event that the Company 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 the Company, 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 the Company 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 the Company, 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 the
Company. The Stockholders' Agreement also provides the Stockholders with various
registration rights commencing upon the earlier of an initial public offering of
the Company's securities or the fifth anniversary of the Closing.
54
<PAGE> 56
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 the Company 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 the Company 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, Auto 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 Auto 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 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.
55
<PAGE> 57
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning beneficial
ownership of the Company's capital stock as of March 2, 1998, by (i) each person
which is a beneficial owner of more than 5% of the outstanding voting stock,
(ii) each director of the Company who could be deemed to be the beneficial owner
of shares of the Company's capital stock, (iii) each current Named Executive
Officer who could be deemed to be the beneficial owner of shares of the
Company's capital stock and (iv) all directors and executive officers of the
Company as a group:
<TABLE>
<CAPTION>
PERCENT
OF TOTAL
VOTING POWER(1)
-------------------------
PRIOR TO
NAME AND ADDRESS THE AFTER THE
OF BENEFICIAL OWNER NUMBER(1) OFFERING OFFERING
------------------- --------- ------------ ---------
<S> <C> <C> <C>
INVESTCORP S.A.(2)(3)....................................... 3,012,238 15.7% 11.3%
SIPCO Limited(3)(4)(5)...................................... 3,012,238 15.7 11.3
CSK Investments Limited(5).................................. 1,217,126 6.4 4.6
Investcorp CSK Holdings L.P.(2)(5)(6)....................... 1,212,798 6.3 4.5
Auto Equity Limited(5)...................................... 1,199,487 6.3 4.5
Auto Parts Limited(5)....................................... 1,199,487 6.3 4.5
Auto Investments Limited(5)................................. 1,199,487 6.3 4.5
CSK Equity Limited(5)....................................... 1,199,487 6.3 4.5
Carmel Trust(3)(7)(8)....................................... 8,955,216 46.7 33.6
Jules Trump(8)(9)........................................... -- -- --
Eddie Trump(8)(9)........................................... -- -- --
Robert Smith(7)(8).......................................... -- -- --
Maynard Jenkins(10)......................................... 83,078 * *
James Bazlen(10)(11)........................................ 364,619 1.9 1.4
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 2.9 2.1
</TABLE>
- ---------------
* Less than 1%.
(1) The Investcorp Group, as defined in the Stockholders' Agreement, will own
9,655,715 shares, or 36.3%, of the outstanding shares of Common Stock upon
consummation of the Offering. The Carmel Group, as defined in the
Stockholders' Agreement, will own 9,277,073 shares, or 34.9%, of the
outstanding shares of 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 Common Stock owned by all other such
stockholders. See "Certain Transactions -- Stockholders' Agreement."
Because the Company believes that it more accurately reflects ownership of
the Company's capital 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 the Company. The number of shares of
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
acquire from other stockholders of the Company. Investcorp owns no stock in
Equity CSKA Limited, Equity CSKB Limited, Equity CSKC Limited, South Bay
Limited, Ballet Limited, Denary Limited,
56
<PAGE> 58
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 the Company, the Company and Auto have entered into a
Stockholders' Agreement with respect to the voting, and in certain
circumstances the disposition, of the shares of capital stock of the
Company. See "Certain 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 outstanding Common Stock that Investcorp CSK
Holdings, L.P. has the right, pursuant to an option, to acquire from other
stockholders of the Company.
(7) c/o Sonnenschein Nath & Rosenthal, Suite 8000, Sears Tower, 233 S. Wacker
Drive, Chicago, Illinois 60606.
(8) The Trustee of Carmel is Chiltern Trust Company (Jersey) Limited. 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
the Company). These Protectors are not otherwise associated with 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 the Company)
and Eddie Trump (a director of 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 Common Stock which Mr. Bazlen has the right,
pursuant to an option, to acquire from the Company.
57
<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of the Offering, the Company's authorized capital stock
will consist of 50,000,000 shares of Common Stock, $.01 par value per share, of
which 26,613,388 shares will be issued and outstanding. The material terms of
the Company's Certificate of Incorporation and Bylaws are discussed below.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters on which stockholders are entitled or
permitted to vote. Holders of Common Stock are not entitled to vote cumulatively
for the election of directors. Holders of Common Stock have no redemption,
conversion, preemptive or other subscription rights. There are no sinking fund
provisions relating to the Common Stock. In the event of the liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in all of the assets of the Company, if any, remaining after
satisfaction of the debts and liabilities of the Company. The outstanding shares
of Common Stock are, and the shares of Common Stock offered hereby will be, upon
payment therefor as contemplated herein, validly issued, fully paid and
nonassessable.
Holders of Common Stock are entitled to receive dividends when and as
declared by the Board of Directors of the Company out of funds legally available
therefor. The Company does not anticipate paying cash dividends on the Common
Stock in the foreseeable future. See "Dividend Policy."
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is incorporated under the Delaware General Corporation Law (the
"DGCL"). The Company is subject to Section 203 of the DGCL, which restricts
certain transactions and "business combinations" between a Delaware corporation
and an "interested stockholder" (in general, a stockholder owning 15% or more of
the corporation's outstanding voting stock) or an affiliate or associate of an
interested stockholder, for a period of three years from the date the
stockholder becomes an interested stockholder. A "business combination" includes
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Subject to certain exceptions, unless the
transaction is approved by the board of directors and the holders of at least
66 2/3% of the outstanding voting stock of the corporation (excluding shares
held by the interested stockholder), Section 203 prohibits significant business
transactions such as a merger with, disposition of assets to or receipt of
disproportionate financial benefits by the interested stockholder, or any other
transaction that would increase the interested stockholder's proportionate
ownership of any class or series of the corporation's stock. The statutory ban
does not apply if, upon consummation of the transaction in which any person
becomes an interested stockholder, the interested stockholder owns at least 85%
of the outstanding voting stock of the corporation (excluding shares held by
persons who are both directors and officers or by certain employee stock plans).
The Company's Certificate of Incorporation contains certain provisions
permitted under the DGCL relating to the liability of directors. The Certificate
of Incorporation provides that, to the fullest extent permitted by the DGCL, no
director of the Company will be liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director. The Certificate of
Incorporation and Bylaws of the Company also contain provisions indemnifying the
directors and officers of the Company to the fullest extent permitted by the
DGCL.
Section 203 and the provisions of the Company's Certificate of
Incorporation and Bylaws described above may make it more difficult for a third
party to acquire, or discourage acquisition bids for, the Company. Section 203
and these provisions could have the effect of inhibiting attempts to change the
membership of the Board of Directors of the Company. In addition, the limited
liability provisions in the Certificate of Incorporation and the indemnification
provisions in the Certificate of Incorporation and Bylaws may discourage
stockholders from bringing a lawsuit against directors for breach of their
fiduciary duty (including
58
<PAGE> 60
breaches resulting from grossly negligent conduct) and may have the effect of
reducing the likelihood of derivative litigation against directors and officers,
even though such an action, if successful, might otherwise have benefited the
Company and its stockholders. Furthermore, a stockholder's investment in the
Company may be adversely affected to the extent the Company pays the costs of
settlement and damage awards against directors and officers of the Company
pursuant to the indemnification provisions in the Company's Bylaws. The limited
liability provisions in the Certificate of Incorporation will not limit the
liability of directors under Federal securities laws.
SHARES RESERVED FOR ISSUANCE
The Company has 1,710,500 shares of Common Stock reserved for issuance upon
the exercise of options granted or to be granted under the Plans. An additional
957,878 shares of Common Stock are reserved for issuance upon the exercise of
options granted outside of the Plans, 42,762 of which are currently exercisable.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
LISTING
The Common Stock has been approved for listing on the NYSE under the symbol
"CAO," subject to notice of issuance.
59
<PAGE> 61
DESCRIPTION OF CERTAIN INDEBTEDNESS
The material terms of certain indebtedness of the Company are described
below. Each of the following summaries is subject to and qualified in its
entirety by reference to the detailed provisions of the respective agreements
and instruments to which each summary relates. Copies of such agreements and
instruments have been filed as exhibits to the Registration Statement of which
this Prospectus is a part.
SENIOR CREDIT FACILITY
The Amended and Restated Credit Agreement dated as of December 8, 1997 (the
"Senior Credit Facility"), entered into among Auto, the several lenders from
time to time parties thereto (collectively the "Lenders"), The Chase Manhattan
Bank, as the administrative agent for the Lenders (the "Administrative Agent"),
provides for a $300.0 million aggregate term loan (the "Term Loan") and
revolving credit facility (the "Revolving Credit Facility," and, together with
the Term Loan, the "Loans").
The Loans are collateralized by a first priority security interest in
substantially all the personal property of Auto and its subsidiaries. The
Company has also issued a guarantee of the Loans, which guarantee is secured by
a pledge by the Company of all issued and outstanding capital stock of Auto.
Each of the current U.S. subsidiaries of Auto has also issued a guarantee of the
Loans, which is collateralized by a first priority security interest in
substantially all personal property of such subsidiary. Auto has pledged the
issued and outstanding capital stock of each such subsidiary to collateralize
indebtedness under the Senior Credit Facility. Any future U.S. subsidiaries of
Auto will also be required to issue a guarantee of the Loans which will be
similarly collateralized, and Auto is required to pledge the issued and
outstanding capital stock of such subsidiary as well.
TERM LOAN
The Senior Credit Facility includes a $175.0 million Term Loan. As of
February 1, 1998, $175.0 million was outstanding under the Term Loan. The Term
Loan has a final maturity date of October 31, 2003. The principal amount of the
Term Loan is scheduled to be repaid in installments totaling $1.0 million in
fiscal year 1998, $1.0 million in fiscal year 1999, $1.0 million in fiscal year
2000, $46.0 million in fiscal year 2001, $63.0 million in fiscal year 2002 and
$63.0 million in fiscal year 2003.
REVOLVING CREDIT FACILITY
The Senior Credit Facility includes a $125.0 million Revolving Credit
Facility. Auto is entitled to draw amounts under the Revolving Credit Facility
to use for general corporate purposes, including (i) the redemption, repayment
or repurchase of up to $20.0 million aggregate principal amount of the 11%
Senior Subordinated Notes, (ii) acquisitions of companies engaged primarily in
businesses similar to the businesses in which Auto and its subsidiaries are
engaged, in an aggregate amount of $50.0 million, subject to pro forma
compliance with financial covenants, and (iii) investments in the development of
new or relocated stores in an aggregate amount not to exceed at any one time
$50.0 million, against which amount shall be credited any funds from the
subsequent sale of any real property or fixtures purchased or developed in
connection therewith. The Revolving Credit Facility includes separate sub-limits
for issuance of letters of credit and swing line loans available on same-day
notice. As of February 1, 1998, $65.0 million was outstanding under the
Revolving Credit Facility. The Revolving Credit Facility has a final maturity
date of October 31, 2001. The ability of Auto to borrow funds under its
Revolving Credit Facility is subject to the limits on incurrence of additional
indebtedness imposed by the 11% Senior Subordinated Notes. See "-- 11% Senior
Subordinated Notes Due 2006 -- Certain Covenants."
INTEREST RATES
The Senior Credit Facility accrues interest at either the alternate base
rate (the "Alternate Base Rate") or an adjusted eurodollar rate (the "Eurodollar
Rate"), at the option of the Company, plus the applicable interest margin. The
Alternate Base Rate at any time is determined to be the highest of (i) the
Federal Funds Rate plus 0.50% per annum, (ii) the Base CD Rate (as defined
below) plus 1.00% per annum and (iii) The
60
<PAGE> 62
Chase Manhattan Bank's prime rate. The applicable interest margin is currently
1.50% with respect to any portion of the Term Loan that accrues interest at the
Alternate Base Rate and 2.50% per annum with respect to any portion of the Term
Loan that accrues interest at the Eurodollar Rate. The applicable interest
margin is currently 1.25% with respect to any amounts outstanding under the
Revolving Credit Facility that accrues interest at the Alternate Base Rate and
2.25% with respect to any amounts outstanding under the Revolving Credit
Facility that accrues interest at the Eurodollar Rate. The applicable interest
margins with respect to all Loans made under the Senior Credit Facility are
determined pursuant to a pricing grid and are periodically subject to
adjustment, based upon the ratio of Auto's Consolidated Funded Indebtedness (as
defined in the Senior Credit Facility) at the end of a fiscal quarter to its
Consolidated EBITDA (as defined in the Senior Credit Facility) for the four
preceding fiscal quarters as determined in Auto's quarterly financial
statements. The Company believes that following the Offering and the application
of the estimated net proceeds therefrom as set forth under the caption "Use of
Proceeds," and the resulting reduction of the applicable interest margin with
respect (i) to the Term Loan, such interest margin will be 1.00% per annum with
respect to amounts that accrue interest at the Alternate Base Rate and 2.00%
with respect to amounts that accrue interest at the Eurodollar Rate, and (ii) to
loans made under the Revolving Credit Facility, such interest margin will be
0.75% per annum with respect to amounts that accrue interest at the Alternate
Base Rate and 1.75% per annum with respect to amounts that accrue interest at
the Eurodollar Rate. As used herein, "Base CD Rate" means the secondary market
rate for three-month certificates of deposit of money center banks, adjusted for
reserves and assessments.
MANDATORY AND OPTIONAL PREPAYMENTS
The Senior Credit Facility requires that upon an offering by the Company,
Auto, or any subsidiary of Auto of its common or other voting stock to any
person other than a current stockholder or an affiliate thereof, including the
Offering, 50% of the net proceeds from such offering, after deducting therefrom
the costs of redemption of the 12% Subordinated Notes, if any, and the
redemption by Auto of up to 35% of the 11% Senior Subordinated Notes, if any,
must be applied toward the prepayment of the Term Loan under the Senior Credit
Facility. See "Use of Proceeds."
Upon the receipt of proceeds from certain assets sales and exchanges, or
upon the incurrence of any additional indebtedness (other than indebtedness
permitted under the Senior Credit Facility), 100% of the net proceeds from such
incurrence, sale or exchange, will be applied toward the prepayment of
indebtedness under the Senior Credit Facility. Such payments are required to be
applied first to the prepayment of the term loan and, second, to reduce
permanently the revolving credit commitments. In addition, the Senior Credit
Facility requires that 50% of Auto's Excess Cash Flow (as defined in the Senior
Credit Facility) will be applied toward the prepayment of the term loan under
the Senior Credit Facility. Subject to certain conditions, Auto may, from time
to time, make optional prepayments of Loans without premium or penalty.
CERTAIN COVENANTS
The Senior Credit Facility imposes certain covenants and other requirements
on Auto and its subsidiaries. In general, the affirmative covenants provide for
mandatory reporting by Auto of financial and other information to the Lenders
and notice by Auto to the Lenders upon the occurrence of certain events. The
affirmative covenants also include standard covenants requiring Auto to operate
its business in an orderly manner and consistent with past practices.
The Senior Credit Facility contains certain negative covenants and
restrictions on actions by Auto and its subsidiaries that, among other things,
restrict: (i) the incurrence and existence of indebtedness; (ii) consolidations,
mergers and sales of assets; (iii) the incurrence and existence of liens or
other encumbrances; (iv) the incurrence and existence of contingent obligations;
(v) the payment of dividends and repurchases of stock; (vi) prepayments and
amendments of certain subordinated debt instruments; (vii) investments, loans
and advances; (viii) capital expenditures; (ix) changes in fiscal year; (x)
certain transactions with affiliates; and (xi) changes in lines of business. In
addition, the Senior Credit Facility requires that Auto comply with specified
financial ratios and tests, including minimum cash flow, a maximum ratio of
indebtedness to cash flow and a minimum interest coverage ratio.
61
<PAGE> 63
EVENTS OF DEFAULT
The Senior Credit Facility specifies certain customary events of default
including non-payment of principal, interest or fees, violation of covenants,
inaccuracy of representations and warranties in any material respect, cross
default to certain other indebtedness and agreements, bankruptcy and insolvency
events, material judgments and liabilities, certain ERISA events, a change of
control, and unenforceability of certain documents under the Senior Credit
Facility.
FEES AND EXPENSES
Auto is required to pay to the Administrative Agent, for the account of
each Lender, a percentage per annum of the average daily amount of the available
revolving credit commitment of each Lender. The Company believes that following
the Offering and the application of the net proceeds therefrom as set forth
under the caption "Use of Proceeds," this commitment fee will be 0.375% of such
commitment, but is periodically subject to adjustment pursuant to the criteria
used to determine the applicable interest margin. Auto is also required to pay
to the Administrative Agent an agent's fee in an amount agreed between Auto and
the Administrative Agent.
The description of the Senior Credit Facility set forth above does not
purport to be complete and is qualified in its entirety by reference to the
Senior Credit Facility and related guarantees and pledge agreements, copies of
which are available from the Company upon request.
11% SENIOR SUBORDINATED NOTES DUE 2006
On October 30, 1996, Auto 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
Auto and The Bank of New York (as successor to Wells Fargo Bank, N.A.), as
Trustee. On March 13, 1997, Auto 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 Auto
Indenture in a transaction registered under the Securities Act. Auto consummated
the exchange offer on June 18, 1997, with all of the Old 11% Notes being
exchanged for 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 of Auto. The 11% Senior Subordinated Notes are
guaranteed fully, unconditionally and jointly and severally by all of Auto's
subsidiaries and will be similarly guaranteed by any future United States
subsidiaries of Auto, on a senior subordinated basis.
MANDATORY AND OPTIONAL REDEMPTION
On and after November 1, 2001, the 11% Senior Subordinated Notes will be
redeemable, at the option of Auto, 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, Auto may (but
will not have the obligation to) redeem up to 35% of the original 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
62
<PAGE> 64
thereon, if any, to the redemption date, with the net proceeds of an Equity
Offering (as defined in the Auto Indenture), including the Offering, 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.
The Company intends to contribute approximately $48.1 million of the net
proceeds from the Offering to Auto to enable Auto, in accordance with the terms
of the Auto Indenture, to redeem approximately $43.8 million aggregate principal
amount of 11% Senior Subordinated Notes, together with the accrued and unpaid
interest, if any, and premium thereon, at a redemption price of 110% of the
principal amount thereof. See "Use of Proceeds."
CERTAIN COVENANTS
The Auto Indenture contains certain covenants that impose limitations on
Auto with respect to, among other things: (i) the incurrence of additional
indebtedness; (ii) the issuance of Disqualified Stock (as defined therein) by
Auto and preferred stock by its subsidiaries; (iii) the making of certain
Restricted Payments (as defined therein); (iv) payments of dividends and other
payment restrictions affecting subsidiaries; (v) layering if indebtedness; (vi)
the incurrence of liens; (vii) transactions with affiliates; and (viii) the
consummation of certain mergers, consolidations or sales of assets. The
limitations on the incurrence of indebtedness imposed by the Auto Indenture, may
prevent Auto from making borrowings under its Revolving Credit Facility that,
when added to the aggregate amount of outstanding borrowings under the Revolving
Credit Facility and the principal amount of outstanding Term Loans, would exceed
$200.0 million, unless (i) the new borrowings are of a type specifically
permitted pursuant to the Auto Indenture, or (ii) after giving pro forma effect
to such new borrowings, the ratio of Auto's Consolidated EBITDA (as defined in
the Auto Indenture) to its Fixed Charges (as defined in the Auto Indenture)
exceeds 2 to 1 prior to October 30, 1998 and 2.25 to 1 thereafter.
REPURCHASE AT THE OPTION OF HOLDERS
The Auto Indenture provides that upon the occurrence of a "change of
control," each holder of 11% Senior Subordinated Notes will have the right to
require Auto to repurchase all or any part of such holder's 11% Senior
Subordinated Notes at a purchase price in cash equal to 101% of the principal
amount thereof plus accrued and unpaid interest thereon, if any, to the date of
purchase. For the purposes of the 11% Senior Subordinated Notes, a "change of
control" is deemed to occur (i) at such time as any person (other than
Investcorp, any of Investcorp's affiliates, senior management of the Company or
Auto (collectively, the "Initial Control Group"), or any person acting in the
capacity of an underwriter with respect to the capital stock of the Company or
Auto) acquires or obtains the right to acquire, directly or indirectly, 35% or
more of the total voting power of the Company or Auto, provided that the Initial
Control Group does not hold at least the same percentage of such total voting
power of the Company or Auto, as the case may be, as such person and cannot
designate for election a majority of the board member, or (ii) if any person
other than the Initial Control Group nominates, in one or more elections,
directors of the Company or Auto and such directors are elected, such time as
such directors constitute a majority of the board of directors of the Company or
Auto, as the case may be.
EVENTS OF DEFAULT
An Event of Default is defined in the Auto Indenture as, among other
things, (i) a default for 30 days in the payment when due of interest on the 11%
Senior Subordinated Notes, (ii) a default in the payment when due of the
principal of or premium, if any, on the 11% Senior Subordinated Notes, (iii)
failure by Auto to comply for 30 days after notice with other covenants
contained in the Auto Indenture relating to repurchases at the option of
holders, to restricted payments, and to the incurrence of indebtedness and
issuance of preferred stock, (iv) failure by Auto for 60 days after notice to
comply with any of its other agreements in the Auto Indenture or the 11% Senior
Subordinated Notes, (v) a cross-default of other indebtedness in excess of $10.0
million, (vi) failure of Auto to pay final judgments in excess of $10.0 million,
(vii) a judicial proceeding
63
<PAGE> 65
invalidating or establishing the unenforceability of any subsidiary guarantee of
the 11% Senior Subordinated Notes, or (viii) bankruptcy, insolvency or
reorganization of Auto or a significant subsidiary.
12% SUBORDINATED NOTES DUE 2008
On October 30, 1996, the Company issued and sold in a private placement
$10.0 million aggregate principal amount of 12% Subordinated Series A Notes due
2008 (the "Series A Notes") pursuant to an indenture, between the Company and
Transatlantic, as Trustee and $40.0 million aggregate principal amount of 12%
Subordinated Series B Notes due 2008 (the "Series B Notes", and together with
the Series A Notes, the "12% Subordinated Notes") pursuant to an indenture,
between the Company and AIBC, N.V., as Trustee. The terms of the Series A Notes
and the Series B Notes are identical.
The 12% Subordinated Notes bear interest at 12% per year, payable
semiannually in arrears on each April 30 and October 31, and mature on October
31, 2008. The 12% Subordinated Notes are general, unsecured senior subordinated
obligations of the Company. The 12% Subordinated Notes are subordinated to the
all senior indebtedness of the Company, including Company's guarantee of the
Senior Credit Facility. The Series A Notes and Series B Notes rank pari passu
with one another.
OPTIONAL REDEMPTION
The 12% Subordinated Notes are redeemable at any time and from time to
time, at the option of the Company, in whole or in part, upon not less than 30
nor more than 60 days' notice, at a redemption price of 101% of the principal
amount redeemed, plus accrued and unpaid interest thereon, if any, to the
redemption date.
The Company intends to use approximately $50.5 million of the net proceeds
from the Offering, in accordance with the terms of the 12% Subordinated Notes
and the indentures pursuant to which they were issued, to redeem the 12%
Subordinated Notes, together with the accrued and unpaid interest, if any, and
premium thereon, at a redemption price of 101% of the principal amount thereof.
See "Use of Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, assuming no exercise of the over-allotment
option, 26,613,388 shares of Common Stock will be outstanding. Of these shares,
the 7,500,00 shares of Common Stock sold in the Offering will be available for
resale in the public market without restriction or further registration under
the Securities Act, except that shares purchased by an "affiliate" of the
Company (in general, any person who has a control relationship to the Company)
may be resold only if registered under the Securities Act or if transferred
pursuant to an exemption from registration, including resales pursuant to Rule
144 promulgated under the Securities Act ("Rule 144") and Regulation S
promulgated under the Securities Act ("Regulation S"). Of the remaining
outstanding shares of Common Stock, 744,401 were sold in offshore distributions
under Regulation S to members of the Investcorp Group within the past year,
7,480,647 were sold in offshore distributions under Regulation S to members of
the Investcorp Group more than one year ago, and 10,888,340 are deemed to be
"restricted securities" as that term is defined in Rule 144. Pursuant to Rule
701 under the Securities Act, 180,600 of the restricted securities will be
available for resale in the public market without restriction commencing 90 days
after the date of this Prospectus. Commencing 90 days after the date of this
Prospectus, all of the remaining restricted securities are eligible for sale in
the public market in compliance with Rule 144. As each of the members of the
Investcorp Group, the Carmel Group and their respective transferees are party to
the Stockholders' Agreement, all such stockholders may be deemed to be
affiliates of the Company and resales of Common Stock by such stockholders may
be subject to the volume limitations of Rule 144. See "Certain
Transactions -- Stockholders' Agreement." The existing stockholders of the
Company have agreed, subject to certain exceptions, that they will not offer,
sell or otherwise dispose of any of the shares of Common Stock owned by them for
a period of 180 days after the date of this Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Additionally,
the Company has agreed that, during the period of 180 days from the date of this
Prospectus, subject to certain exceptions, they will not issue, sell, offer or
agree to sell, grant any options for the sale of (other than employee stock
options)
64
<PAGE> 66
or otherwise dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable for Common Stock, other than
pursuant to the Offering. At the expiration of the 180-day period described
above, the holders of 18,932,789 shares of Common Stock will have demand
registration rights and piggy-back registration rights with respect to such
shares. See "Certain Transactions -- Stockholders' Agreement."
In addition, up to 2,037,120 shares of Common Stock may be issued upon
exercise of certain employee stock options that the Company has granted. Upon
the closing of the Offering an employee stock option will be exercisable to the
extent of 42,762 shares of Common Stock, which shares may not be sold for a
period of 180 days after the date of this Prospectus without the prior written
consent of Donaldson, Lufkin and Jenrette Securities Corporation. The Company
intends to file a registration statement on Form S-8 under the Securities Act to
register the 1,710,500 shares of Common Stock reserved for issuance under the
Plans. As a result, any shares issued upon exercise of stock options granted
under such plans will be available, subject to special rules for affiliates, for
resale in the public market after the effective date of such registration
statement, subject to applicable lock-up arrangements. See "Underwriting" and
"Management -- Stock Incentive Plan."
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement relating to the Common Stock offered
hereby (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement. Statements made in this Prospectus as to the contents of
any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an Exhibit to the Registration Statement, reference is made to such exhibit
for a more complete description thereof, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and the
exhibits and schedules thereto may be inspected without charge and copies at
prescribed rates at the Public Reference Section of the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional
offices at 7 World Trade Center, Suite 1300, New York, New York 10048, and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The Commission maintains a website that contains reports, proxy
and information statements and other information filed electronically with the
Commission at http://www.sec.gov.
The Company owns the federally registered service mark "Schuck's" for use
in connection with the automotive parts retailing business and owns rights to
use the tradenames "Checker" and "Kragen." This Prospectus also includes product
names and other tradenames and service marks of the Company and of other
companies.
65
<PAGE> 67
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
, 1998 (the "Underwriting Agreement"), the Underwriters named
below, who are represented by Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), Furman Selz LLC, Lehman Brothers Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated and Smith
Barney Inc. (the "Representatives"), have severally agreed to purchase from the
Company the respective number of shares of Common Stock set forth opposite their
names below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Furman Selz LLC.............................................
Lehman Brothers Inc. .......................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Morgan Stanley & Co. Incorporated...........................
Smith Barney Inc. ..........................................
---------
Total............................................. 7,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all the shares of Common Stock offered hereby (other than
those covered by the over-allotment option described below) if any are
purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may re-allow, to certain
other dealers a concession not in excess of $ per share. After the
initial offering of the Common Stock, the public offering price and other
selling terms may be changed by the Representatives at any time without notice.
The Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase, from time to time, in
whole or in part, up to an aggregate of 1,125,000 additional shares of Common
Stock at the initial public offering price less underwriting discounts and
commissions. The Underwriters may exercise such option solely to cover
over-allotments, if any, made in connection with the Offering. To the extent
that the Underwriters exercise such option, each Underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such Underwriter's percentage underwriting
commitment as indicated in the preceding table.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
Each of the Company, its executive officers and directors and all the other
stockholders of the Company have agreed, subject to certain exceptions, not to
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership of any Common Stock (regardless of whether any of the transactions
described in clause (i) or (ii) is to be settled by the delivery of Common
Stock, or such other securities, in cash or otherwise) for a period of 180 days
after the date of this Prospectus without the prior written consent of DLJ. In
addition, during such period, the Company has also agreed not to file any
registration statement with respect to, and each of its executive officers,
directors and all the other stockholders of the Company have agreed not to make
any demand for, or exercise any right with respect to, the registration of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock without DLJ's prior written consent.
66
<PAGE> 68
Prior to the Offering, there has been no established trading market for the
Common Stock. The initial public offering price for the Common Stock offered
hereby was determined by negotiation among the Company and the Representatives.
The factors considered in determining the initial public offering price include
the history of and the prospects for the industry in which the Company competes,
the past and present operations of the Company, the historical results of
operations of the Company, the prospects for future earnings of the Company, the
recent market prices of securities of generally comparable companies and the
general condition of the securities markets at the time of the Offering.
Up to 50,000 shares of Common Stock being sold in the Offering have been
reserved for sale to officers and employees of the Company and its subsidiaries
at a purchase price of $ , which is the initial public offering price
less underwriting discounts and commissions. The Underwriters have agreed to
waive underwriting discounts and commissions with respect to such shares. The
number of shares available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares not so
purchased will be offered by the Underwriters to the general public on the same
terms as the other shares offered hereby.
The Common Stock has been approved for listing on the NYSE, subject to
notice of issuance. In order to meet the requirements for listing the Common
Stock on the NYSE, the Underwriters have undertaken to sell lots of 100 or more
shares to a minimum of 2,000 beneficial owners.
Other than in the United States, no action has been taken by the Company or
the Underwriters that would permit a public offering of the shares of Common
Stock offered hereby in any jurisdiction where action for that purpose is
required. The shares of Common Stock offered hereby may not be offered or sold,
directly or indirectly, nor may this Prospectus or any other offering material
or advertisements in connection with the offer and sale of any such shares of
Common Stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this Prospectus
comes are advised to inform themselves about and to observe any restrictions
relating to the Offering and the distribution of this Prospectus. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any shares of Common Stock offered hereby in any jurisdiction in which such
an offer or a solicitation is unlawful.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Stock in the open market to cover such syndicate short position
or to stabilize the price of the Common Stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members if it
repurchases previously distributed Common Stock in syndicate covering
transactions, in stabilizing transactions or otherwise. These activities may
stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters are not required to engage in these activities,
and may end any of these activities at any time.
The rules of the National Association of Securities Dealers, Inc. (the
"NASD") provide that no NASD member shall participate in the offering of an
issuer's securities where more than 10% of the net proceeds are intended to be
paid to members participating in the distribution of the offering, or persons
associated or affiliated with such participating members, unless a "qualified
independent underwriter" shall have been engaged on the terms provided in such
rules. In accordance with this requirement, DLJ has performed due diligence
investigations and reviewed and participated in the preparation of this
Prospectus and the Registration Statement of which this Prospectus forms a part.
The Company has agreed to pay DLJ a fee of $5,000 in connection with its
services as qualified independent underwriter.
DLJ and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as initial
purchasers in connection with the private placement of the 11% Senior
Subordinated Notes and received customary commissions in connection therewith.
Donaldson, Lufkin & Jenrette Capital Funding, Inc., an affiliate of DLJ, is
a lender under the Senior Credit Facility. Merrill Lynch Senior Floating Rate
Fund, Inc., Merrill Lynch Prime Rate Portfolio and
67
<PAGE> 69
Merrill Lynch Debt Strategies Portfolio, each an affiliate of Merrill Lynch,
Pierce, Fenner & Smith Incorporated, are lenders under the Senior Credit
Facility. Lehman Commercial Paper Inc., an affiliate of Lehman Brothers Inc., is
a lender and the documentation agent under the Senior Credit Facility. Lehman
Syndicated Loans Inc., an affiliate of Lehman Brothers Inc., is a lender under
the revolving credit portion of the Senior Credit Facility. A portion of each of
their aggregate principal amount outstanding under the Senior Credit Facility
will be repaid from the net proceeds of the Offering. See "Use of Proceeds."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Gibson, Dunn & Crutcher LLP, New York, New York. Certain
legal matters will be passed on for the Underwriters by Davis Polk & Wardwell,
New York, New York.
EXPERTS
The consolidated balance sheet of the Company as of February 2, 1997 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended included in this Prospectus have been so included
in reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of said firm as experts in accounting and auditing.
The financial statements as of January 28, 1996 and for each of the two
years in the period ended January 28, 1996 included in this Prospectus have been
so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
CHANGE IN ACCOUNTANTS
The consolidated balance sheet of the Company as of January 28, 1996 and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended January 28, 1996 were
audited by Price Waterhouse LLP. The financial statements for the year ended
February 2, 1997 were audited by Coopers & Lybrand L.L.P., which was first
engaged effective December 5, 1996. In connection with the completion of the
Acquisition and Financings, and with the approval of the Board of Directors,
Price Waterhouse LLP was dismissed by management as the Company's independent
accountants on December 5, 1996.
The reports of Price Waterhouse LLP with respect to the financial
statements of the Company for each of the two fiscal years in the period ended
January 28, 1996 did not contain any adverse opinion or disclaimer of opinion,
and were not qualified or modified as to uncertainty, audit scope or accounting
principles. In connection with its audits for each of the two fiscal years in
the period ended January 28, 1996 and through December 5, 1996 there were no
disagreements between the Company and Price Waterhouse LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedures, which disagreements, if not resolved to the satisfaction of
Price Waterhouse LLP, would have caused it to make reference to the subject
matter thereof in connection with its reports on the financial statements for
such years.
68
<PAGE> 70
CSK AUTO CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements
Report of Independent Accountants......................... F-2
Report of Independent Accountants......................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Balance Sheets............................... F-5
Consolidated Statements of Stockholders' Equity
(Deficit).............................................. F-6
Consolidated Statements of Cash Flows..................... F-7
Notes to Consolidated Financial Statements................ F-8
</TABLE>
F-1
<PAGE> 71
CSK AUTO CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CSK Auto Corporation
We have audited the accompanying consolidated balance sheet of CSK Auto
Corporation and subsidiaries (the "Company") as of February 2, 1997, and the
related consolidated statement of operations, stockholders' equity and cash
flows for the year then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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
Corporation and subsidiaries at February 2, 1997 and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
April 22, 1997,
except for Notes 7 and 15, as
to which the date is
February 13, 1998
F-2
<PAGE> 72
CSK AUTO CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CSK Auto Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
CSK Auto Corporation and its subsidiaries at January 28, 1996, and the results
of their operations and their cash flows for each of the two years in the period
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 audits. We conducted our audits 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 audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Phoenix, AZ
December 23, 1997
F-3
<PAGE> 73
CSK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED THIRTY-NINE WEEKS ENDED
--------------------------------------- -------------------------
JANUARY 29, JANUARY 28, FEBRUARY 2, OCTOBER 27, NOVEMBER 2,
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............................ $ 688,135 $ 718,352 $ 793,092 $ 592,415 $ 636,465
Cost and expenses:
Cost of sales...................... 410,358 433,817 463,374 349,666 358,917
Operating and administrative....... 255,922 281,387 298,004 218,680 239,932
Store closing costs................ 2,678 3,310 14,904 2,571 1,392
Acquisition charge -- equity
participation agreements........ -- -- 20,174 -- --
----------- ----------- ----------- ----------- -----------
668,958 718,514 796,456 570,917 600,241
Operating profit (loss).............. 19,177 (162) (3,364) 21,498 36,224
Other Acquisition and Financings
fees............................... -- -- 12,463 -- --
Interest expense..................... 10,343 14,379 20,691 10,917 29,815
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary gain................. 8,834 (14,541) (36,518) 10,581 6,409
Income tax expense (benefit)......... 68 (5,447) (11,859) 4,148 2,471
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary
gain............................... 8,766 (9,094) (24,659) 6,433 3,938
Extraordinary gain on the elimination
of debt, net of income taxes....... 97,186 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss).................... $ 105,952 $ (9,094) $ (24,659) $ 6,433 $ 3,938
=========== =========== =========== =========== ===========
Earnings (loss) per share:........... (1.36) $ 0.36 $ 0.21
=========== =========== ===========
Shares used in computing net income
(loss) per share................ 18,109,891 17,916,645 18,574,053
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 74
CSK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
JANUARY 28, FEBRUARY 2, NOVEMBER 2,
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash and cash equivalents.................................. $ 4,364 $ 5,223 $ 6,316
Receivables, net of allowances of $1,953, $1,768 and
$2,669, respectively..................................... 25,448 28,511 35,647
Inventories................................................ 248,964 268,214 304,807
Assets held for sale....................................... 1,203 5,971 4,145
Prepaid expenses and other current assets.................. 4,823 10,139 12,519
-------- --------- ---------
Total current assets.............................. 284,802 318,058 363,434
Property and equipment, net................................ 80,018 71,363 77,303
Leasehold interests, net................................... 14,500 12,683 11,542
Deferred income taxes...................................... 9,219 18,615 16,145
Other assets, net.......................................... 2,780 23,267 21,844
-------- --------- ---------
Total assets...................................... $391,319 $ 443,986 $ 490,268
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable........................................... $153,709 $ 128,002 $ 126,750
Accrued payroll and related expenses....................... 13,503 15,851 18,156
Accrued expenses and other current liabilities............. 21,479 44,444 51,120
Due to affiliates.......................................... 5,530 -- 1,000
Current maturities of amounts due under credit agreement... 1,000 1,000 1,000
Current maturities of capital lease obligations............ 5,488 7,007 8,003
Deferred income taxes...................................... 3,045 597 597
-------- --------- ---------
Total current liabilities......................... 203,754 196,901 206,626
-------- --------- ---------
Amounts due under credit agreement......................... 95,062 137,000 172,500
Obligations under 11% Senior Subordinated Notes............ -- 125,000 125,000
Obligations under 12% Subordinated Notes................... -- 50,000 50,000
Obligations under capital leases........................... 20,453 15,673 12,541
Due to affiliates.......................................... -- 1,000 --
Other...................................................... 12,053 20,675 15,960
-------- --------- ---------
Total non-current liabilities..................... 127,568 349,348 376,001
-------- --------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.01 par value, 38,012,818 shares
authorized, 17,105,000 shares issued and outstanding... -- 171 171
Common stock, $.01 par value, 2,000 shares authorized,
100 shares issued outstanding at January 28, 1996,
redeemed on October 30, 1996........................... -- -- --
Additional paid-in capital............................... 81,680 106,677 106,677
Stockholder receivable................................... -- (5,966) --
Accumulated deficit...................................... (21,683) (203,145) (199,207)
-------- --------- ---------
Total stockholders' equity (deficit).............. 59,997 (102,263) (92,359)
-------- --------- ---------
Total liabilities and stockholder's equity
(deficit)....................................... $391,319 $ 443,986 $ 490,268
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 75
CSK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN STOCKHOLDER ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT (DEFICIT)
---------- ------ ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 30, 1994................. 100 $ -- $ 81,680 $ -- $(118,541) $ (36,861)
Net income................................ -- -- -- -- 105,952 105,952
---------- ---- -------- -------- --------- ---------
Balance at January 29, 1995................. 100 -- 81,680 -- (12,589) 69,091
Net loss.................................. -- -- -- -- (9,094) (9,094)
---------- ---- -------- -------- --------- ---------
Balance at January 28, 1996................. 100 -- 81,680 -- (21,683) 59,997
Conversion of common stock into Class A,
Class C, Class D and Class F stock...... 8,723,550 87 (87) -- --
Redemption of Class F stock............... (100) -- (81,675) -- (156,803) (238,478)
Issuance of Class E stock................. 8,381,450 84 100,793 -- -- 100,877
Stockholder receivable.................... -- -- 5,966 (5,966) -- --
Net loss.................................. -- -- -- -- (24,659) (24,659)
---------- ---- -------- -------- --------- ---------
Balance at February 2, 1997................. 17,105,000 171 106,677 (5,966) (203,145) (102,263)
Recovery of stockholder receivable
(unaudited)............................. -- -- -- 5,966 -- 5,966
Net income (unaudited).................... -- -- -- -- 3,938 3,938
---------- ---- -------- -------- --------- ---------
Balance at November 2, 1997 (unaudited)..... 17,105,000 $171 $106,677 $ -- $(199,207) $ (92,359)
========== ==== ======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 76
CSK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED THIRTY-NINE WEEKS ENDED
--------------------------------------- -------------------------
JANUARY 29, JANUARY 28, FEBRUARY 2, OCTOBER 27, NOVEMBER 2,
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows provided by (used in) operating
activities:
Net income (loss)............................... $105,952 $ (9,094) $ (24,659) $ 6,433 $ 3,938
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization of property and
equipment.................................. 10,961 14,343 17,290 12,936 13,235
Amortization and write-off of leasehold
interests.................................. 1,992 1,647 1,749 1,431 938
Amortization of deferred financing costs..... 359 737 1,504 866 1,627
Amortization of other deferred charges....... 152 271 186 171 693
Deferred interest on previous credit
agreement.................................. 1,662 -- -- -- --
Extraordinary gain on elimination of debt.... (97,186) -- -- -- --
Deferred income taxes........................ (923) (5,448) (11,859) 3,437 2,470
Change in operating assets and liabilities:
Accounts receivable........................ (5,063) (7,057) (3,063) (611) (7,136)
Inventories................................ (34,010) (23,081) (19,250) (11,080) (36,593)
Prepaid expenses and other current
assets.................................. 113 542 (5,316) 356 (2,380)
Accounts payable........................... 33,209 22,631 (25,707) (13,161) (1,252)
Accrued payroll, accrued expenses and other
current liabilities..................... (3,821) (496) 18,576 6,906 12,540
Due to affiliate........................... -- 5,530 (4,530) 9,776 --
Store closing costs........................ (618) (447) 10,544 -- --
Other...................................... 2,341 1,276 6,169 (1,605) (4,219)
-------- --------- --------- --------- --------
Net cash provided by (used in) operating
activities............................ 15,120 1,354 (38,366) 15,855 (16,139)
-------- --------- --------- --------- --------
Cash flows used in investing activities:
Capital expenditures............................ (14,597) (11,640) (6,317) (3,426) (12,468)
Expenditures for assets held for sale........... (6,038) (24,203) (19,023) (22,828) (9,160)
Proceeds from sale of property and equipment and
assets held for sale......................... 1,758 28,257 14,667 20,871 7,384
Other investing activities...................... (106) (302) (13) (14) (53)
-------- --------- --------- --------- --------
Net cash used in investing activities... (18,983) (7,888) (10,686) (5,397) (14,297)
-------- --------- --------- --------- --------
Cash flows provided by (used in) financing
activities:
Borrowings under Senior Credit Facility......... -- 809,663 805,242 658,156 56,500
Payments of debt................................ (2,362) (795,807) (763,304) (661,901) (21,000)
Issuance of 11% Senior Subordinated Notes....... -- -- 125,000 -- --
Issuance of 12% Subordinated Notes.............. -- -- 50,000 -- --
Payments on capital lease obligations........... (2,954) (4,976) (5,888) (4,296) (5,484)
Redemption of Class F stock..................... -- -- (238,468) -- --
Issuance of Class E stock....................... -- -- 100,882 -- --
Note issuance costs............................. -- -- (18,632) -- --
Recovery of Stockholder Receivable.............. -- -- -- -- 5,966
Other........................................... (67) (852) (4,921) (1,269) (4,453)
-------- --------- --------- --------- --------
Net cash provided by (used in) financing
activities............................ (5,383) 8,028 49,911 (9,310) 31,529
-------- --------- --------- --------- --------
Net increase (decrease) in cash and cash
equivalents........................... (9,246) 1,494 859 1,148 1,093
Cash and cash equivalents, beginning of period.... 12,116 2,870 4,364 4,364 5,223
-------- --------- --------- --------- --------
Cash and cash equivalents, end of period.......... $ 2,870 $ 4,364 $ 5,223 $ 5,512 $ 6,316
======== ========= ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 77
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
CSK Auto Corporation is a holding company. At November 2, 1997, CSK Auto
Corporation had no business activity other than its investment in CSK Auto,
Inc., a wholly-owned subsidiary ("Auto"). On a consolidated basis, CSK Auto
Corporation and subsidiaries are referred to herein as "the Company".
CSK Auto, Inc. is a specialty retailer of automotive aftermarket parts and
accessories. At November 2, 1997, the Company operated 606 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.
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CSK Auto
Corporation, Auto and Auto's wholly-owned subsidiaries Schuck's Distribution
Company and Kragen Auto Supply Company for all years presented. During the
fiscal years ended January 28, 1996 and January 29, 1995, the consolidated
financial statements include the accounts of certain former subsidiaries of CSK
Auto Corporation. Such subsidiaries were inactive and were sold or liquidated
during the two years ended January 28, 1996. All intercompany accounts and
transactions are eliminated in consolidation.
INTERIM FINANCIAL STATEMENTS
The financial statements as of November 2, 1997, and for the thirty-nine
weeks ended October 27, 1996 and November 2, 1997 are unaudited, and in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for the fair presentation of results for these
interim periods. The results for the thirty-nine weeks ended November 2, 1997,
are not necessarily indicative of the results to be expected for the entire
fiscal year.
FISCAL YEAR
The Company's fiscal year-end is on the Sunday nearest to January 31 of the
following calendar year. The years ended January 29, 1995 (fiscal "1994") 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 2, 1997, 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.
F-8
<PAGE> 78
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
ACCOUNTS RECEIVABLE
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 January 28, 1996 and February 2, 1997 were
approximately $8.5 million and $9.7 million, respectively. The replacement cost
of inventories approximated $211.0 million at January 28, 1996, $225.6 million
at February 2, 1997 and $259.9 million at November 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 1994, 1995 and 1996 were approximately
$3.0 million, $6.2 million and $1.5 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
January 28, 1996 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.
F-9
<PAGE> 79
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
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 1994,
1995 and 1996 totaled approximately $24.7 million, $19.8 million and $21.8
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.
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. During fiscal 1996, the Company adopted this statement
and determined that no impairment loss need be recognized for applicable assets
of continuing operations.
INCOME TAXES
At the beginning of the fiscal year ended January 30, 1994, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," on a prospective basis. The adoption did not have
a material impact on the Company.
SFAS 109 provides that 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.
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed using the weighted-average
number of shares of common stock and common stock equivalent shares outstanding
(using the treasury stock method). Common equivalent shares related to stock
options are excluded from the computation when their effect is antidilutive,
except that, pursuant to Securities and Exchange Commission Staff Accounting
Bulletins, common and equivalent shares, issued at prices below the anticipated
public offering price during the 12 months immediately preceding the initial
filing date have been included in the calculation as if they were outstanding
for all periods presented, using the treasury stock method and anticipated
public offering price.
F-10
<PAGE> 80
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
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.
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.
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 the Company for $105.0 million in cash from Carmel,
which previously had held 100% of the common equity interests in the Company. A
corporation in which an affiliate of Investcorp held a minority interest also
purchased $40.0 million in aggregate principal amount of the Company's 12%
Subordinated Notes for $40.0 million in cash, and the Company in turn purchased
$40.0 million of preferred stock of Auto. Transatlantic Finance, Ltd., an
affiliate of Carmel ("Transatlantic," and with Carmel, the "Carmel Group")
purchased $10.0 million in aggregate principal amount of the 12% Subordinated
Notes, and the Company in turn purchased $10.0 million of preferred stock of
Auto. Auto then borrowed $100.0 million under the Senior Credit Facility, which
together with the net proceeds from the sale of $125.0 million of Auto's 11%
Senior Subordinated Notes due 2006 and the net proceeds from the sale by Auto to
the Company of $50.0 million of preferred stock, following a dividend to the
Company by Auto, was used to redeem the stock of the Company held by Carmel for
$238.5 million. Carmel then purchased from the Company for $100.9 million a 49%
common equity interest in the Company. 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 the
Company, a corporation in which an affiliate of Investcorp held a minority
interest owned $40.0 million in aggregate principal amount of 12% Subordinated
Notes, Carmel owned a 49% common equity interest in the Company, Transatlantic
owned $10.0 million in aggregate principal amount of 12% Subordinated Notes and
the Company owned 100% of the common equity and $50.0 million of preferred stock
of Auto.
Prior to the Acquisition and Financings, Auto had entered into incentive
compensation agreements with certain of its executives pursuant to which they
would be compensated in a sale of Auto's equity securities as if they owned
specified percentages of Auto's outstanding common stock. Pursuant to these
agreements, one
F-11
<PAGE> 81
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 2 -- ACQUISITION AND FINANCINGS -- CONTINUED
former and six 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 Auto'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 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 12% Subordinated Notes........................ 50,000
Capital Contribution from Carmel.......................... 100,882
--------
$375,882
========
USES OF CASH
Redemption of stock held by Carmel........................ $238,468
Payment to management under Equity Participation
Agreements............................................. 9,976
Retirement of 1995 Credit Agreement....................... 93,072
Payments for debt issuance costs.......................... 18,632
Payment of payroll taxes on payments to management........ 145
Payments for advisory and financing fees.................. 14,542
Increase in working capital............................... 1,047
--------
$375,882
========
</TABLE>
NOTE 3 -- 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.
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
F-12
<PAGE> 82
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 3 -- TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES -- CONTINUED
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 6). 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 agreed to pay to Transatlantic, in March 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") will 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 will end on the earliest of (i) April 30, 2004, or (ii)
a termination of the Real Estate Agreement by Carmel or the Company, at their
respective options, upon the occurrence of certain events specified in the
Agreement. The Company believes the terms of the Real Estate Agreement to be at
least as favorable to it as could be obtained from unaffiliated third parties.
As of February 2, 1997, the Funding Company had eight properties and associated
fixtures in various stages of completion which reduced availability under this
$50.0 million off-balance sheet facility by approximately $3.4 million. On
October 30, 1997, the Company notified Transatlantic of its intent to terminate
its participation in the facility.
In connection with the Acquisition and Financings, $40.0 million of 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 the 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.
F-13
<PAGE> 83
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 3 -- TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES -- CONTINUED
("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 will be terminated in connection with the Offering.
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 2,
1996 1997 ESTIMATED USEFUL LIFE
----------- ----------- ---------------------
<S> <C> <C> <C>
Land.................................. $ 1,342 $ 1,114 --
Buildings............................. 1,763 1,301 25 years
Leasehold improvements................ 39,483 43,694 15 years or life of lease
Furniture, fixtures and equipment..... 52,773 53,889 10 years
Property under capital leases......... 43,863 46,488 5-15 years or life of lease
Purchased software.................... 4,679 5,009 5 years
-------- --------
143,903 151,495
Less accumulated depreciation and
amortization........................ (63,885) (80,132)
-------- --------
$ 80,018 $ 71,363
======== ========
</TABLE>
Accumulated amortization of property under capital leases totaled $18.9
million and $25.8 million at January 28, 1996 and February 2, 1997,
respectively.
NOTE 5 -- LONG TERM DEBT
SENIOR CREDIT FACILITY
On June 22, 1994, Auto restructured its existing long-term debt obligations
which were originally recorded at a value of $178.2 million into an $81.0
million Amended and Restated Credit Agreement (the "1994 Credit Agreement"),
resulting in a gain on elimination of debt of $97.2 million. The amount recorded
under the then existing long-term obligations included principal amounts,
accrued interest and an unamortized premium resulting from a 1992 restructuring.
The Company recorded the gain on elimination of debt as a non-taxable event (see
Note 11).
In February 1995, Auto entered into a $100.0 million credit agreement (the
"1995 Credit Agreement"). Outstanding debt under the 1994 Credit Agreement was
paid in full from borrowings under the 1995 Credit Agreement. Pursuant to the
terms of the 1995 Credit Agreement, Auto obtained a $5.0 million term loan with
monthly principal payments of $83,333 commencing April 1, 1995 and with a final
payment due in February 1997. The 1995 Credit Agreement also provided for a
revolving credit facility of approximately $95.0 million. Amounts available
under the revolving credit facility were determined by inventory levels and by
the outstanding balance of the term loan. Interest was paid at LIBOR plus 3% on
outstanding balances of the term loan and revolving credit facility and prime
plus 1% on the remaining balance. Auto's average interest
F-14
<PAGE> 84
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 5 -- LONG TERM DEBT -- (CONTINUED)
rate on amounts outstanding under the 1995 Credit Agreement at January 28, 1996
was 9.03%. On October 30, 1996, Auto repaid all amounts outstanding under the
1995 Credit Agreement, terminated the 1995 Credit Agreement and entered into
agreements with various lenders for a $200.0 million Senior Credit Facility (the
"Senior Credit Facility").
The Facility provides for (i) a $100.0 million term loan ("Term Loan"),
which was drawn down at the closing of the Acquisition and Financings and (ii) a
revolving credit commitment (the "Revolver") with maximum borrowing capacity of
approximately $100.0 million, none of which was drawn upon in connection with
the Acquisition and Financings. Borrowings made by Auto under the Senior Credit
Facility are collateralized by a first priority security interest in
substantially all of the personal property of Auto, subject to certain permitted
liens. The Company also issued a guarantee of such borrowings under the Senior
Credit Facility, which guarantee is collateralized by a pledge by the Company of
all issued and outstanding capital stock of Auto. Each of the U.S. subsidiaries
of Auto also issued a guarantee under the Senior Credit Facility (the
"Guarantors") which is collateralized by a first priority security interest in
substantially all personal property of such subsidiary, and Auto pledged the
issued and outstanding capital stock of each such subsidiary owned by Auto. The
Company has no direct or indirect subsidiaries other than the Guarantors. The
Company has not presented separate financial statements or other disclosures
concerning the Guarantors because management has determined that these items are
not material to investors and that the guarantees do not enhance the likelihood
that the interest on or principal of the Notes will be paid. The Guarantors
represent an immaterial portion of the Company's assets, liabilities and results
of operations. Kragen is a name-holding corporation without any other assets and
with no liabilities or operations. At November 2, 1997, the assets and
liabilities of Schuck's, whose only operations consist of leasing a warehouse
and employing fewer than ten people, constituted less than 0.2% and 0.01% of the
Company's assets and liabilities, respectively. Schuck's operating expenses for
the year ended February 2, 1997 and the thirty-nine weeks ended November 2, 1997
were approximately $1.0 million and $0.7 million, respectively, consisting
primarily of rent, salary, maintenance and employee benefits. The Company's
consolidated operating expenses were $796.5 million and $600.2 million for the
same respective periods.
Amounts available to Auto to be borrowed under the Revolver are subject to
a borrowing base formula which is based upon certain percentages of Auto's
inventories.
The Senior Credit Facility accrues interest at either the Alternate Base
Rate (the "Alternate Base Rate") or an adjusted Eurodollar Rate (the "Eurodollar
Rate"), at the option of the Company, plus the applicable interest margin. The
Alternate Base Rate at any time is determined to be the highest of (i) the
Federal Funds Rate plus 1/2 of 1% per annum, (ii) the Base CD Rate (as defined
below) plus 1% per annum, and (iii) The Chase Manhattan Bank's prime rate. The
applicable interest margin with respect to loans made under the Revolver is
1.50% per annum with respect to loans that accrue interest at the Alternate Base
Rate and 2.50% per annum with respect to loans that accrue interest at the
Eurodollar Rate. The applicable interest margin is 2.00% with respect to any
portion of the Term Loan that accrues interest at the Alternate Base Rate and 3%
per annum with respect to any portion of the Term Loan that accrues interest at
the Eurodollar Rate. As used herein, "Base CD Rate" means the secondary market
rate for three-month certificates of deposit of money center banks, adjusted for
reserves and assessments.
In addition, the Senior Credit Facility prohibits, with certain limited
exceptions, the optional or mandatory prepayment or other defeasance of the
Notes. The Senior Credit Facility further requires that, under certain
circumstances, Auto make prepayments of the Term Loans outstanding thereunder
with
F-15
<PAGE> 85
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 5 -- LONG TERM DEBT -- (CONTINUED)
(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 voting
stock.
Borrowings under the Senior Credit Facility at February 2, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
Term Loan, variable interest rates, average 8.6%, semi
annual installments payable June 30 and December 31
through 2003.............................................. $100,000
Revolver, variable interest rates, averaging 8.1%, due
October 31, 2001, $100 million maximum capacity subject to
borrowing base limitations, $43.1 million unborrowed
availability at February 2, 1997.......................... 38,000
--------
Total............................................. 138,000
Less: Current maturities.................................... 1,000
--------
$137,000
========
</TABLE>
Commitment fees on available funds under the Revolver 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 $104,000 were incurred in
fiscal 1996.
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 November 2, 1997.
11% SENIOR SUBORDINATED NOTES DUE 2006
On October 30, 1996, Auto 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
Auto and The Bank of New York (as successor to Wells Fargo Bank, N.A.), as
Trustee. On March 13, 1997, Auto 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 Auto
Indenture in a transaction registered under the Securities Act of 1933, as
amended. Auto 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 of Auto. The 11% Senior Subordinated Notes are
guaranteed fully, unconditionally and jointly and severally by all of Auto's
subsidiaries and will be similarly guaranteed by any future United States
subsidiaries of Auto, on a senior subordinated basis.
On and after November 1, 2001, the 11% Senior Subordinated Notes will be
redeemable, at the option of Auto, 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,
F-16
<PAGE> 86
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 5 -- LONG TERM DEBT -- (CONTINUED)
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, Auto 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 Auto 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.
12% SUBORDINATED NOTES DUE 2008
On October 30, 1996, the Company issued and sold in a private placement
$10.0 million aggregate principal amount of 12% Subordinated Series A Notes due
2008 (the "Series A Notes") pursuant to an Indenture, between the Company and
Transatlantic Finance, Ltd., as Trustee and $40.0 million aggregate principal
amount of 12% Subordinated Series B Notes due 2008 (the "Series B Notes", and
together with the Series A Notes, the "12% Subordinated Notes") pursuant to an
Indenture, between the Company and AIBC, N.V., as Trustee. The terms of the
Series A Notes and the Series B Notes are identical.
The 12% Subordinated Notes bear interest at 12% per year, payable
semiannually in arrears on each April 30 and October 31, and mature on October
31, 2008. The 12% Subordinated Notes are general, unsecured senior subordinated
obligations of the Company. The 12% Subordinated Notes are subordinated to all
senior indebtedness of the Company, including the Company's guarantee of the
Senior Credit Facility. The Series A Notes and Series B Notes rank pari passu
with one another.
The 12% Subordinated Notes are redeemable at any time and from time to
time, at the option of the Company, in whole or in part, upon not less than 30
nor more than 60 days' notice, at a redemption price of 101% of the principal
amount redeemed, plus accrued and unpaid interest thereon, if any, to the
redemption date.
F-17
<PAGE> 87
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 5 -- LONG TERM DEBT -- (CONTINUED)
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 2,
1997
-----------
<S> <C>
Revolver.................................................... $ 8,444
Term Loan................................................... 2,819
11% Senior Subordinated Notes............................... 7,369
12% Subordinated Notes...................................... 4,000
--------
22,632
Less: accumulated amortization.............................. (638)
--------
$(21,994)
========
</TABLE>
At February 2, 1997, the estimated maturities of long term debt were (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1997........................................................ $ 1,000
1998........................................................ 1,000
1999........................................................ 1,000
2000........................................................ 1,000
2001........................................................ 64,000
Thereafter.................................................. 245,000
--------
$313,000
========
</TABLE>
NOTE 6 -- 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>
YEAR ENDED
--------------------------------------------------------
JANUARY 29, 1995 JANUARY 28, 1996 FEBRUARY 2, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Minimum rentals........................ $41,703 $48,629 $51,214
Contingent rentals..................... 1,390 1,094 1,455
Sublease rentals....................... (4,411) (4,369) (4,763)
------- ------- -------
$38,682 $45,354 $47,906
======= ======= =======
</TABLE>
F-18
<PAGE> 88
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 6 -- LEASES -- (CONTINUED)
Future minimum lease obligations under non-cancelable leases at February 2,
1997, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
FOR FISCAL YEARS LEASES LEASES
---------------- --------- -------
<S> <C> <C>
1997........................................................ $ 51,955 $10,325
1998........................................................ 48,284 9,751
1999........................................................ 44,146 7,002
2000........................................................ 40,858 1,070
2001........................................................ 38,910 210
Thereafter.................................................. 193,321 1,273
-------- -------
$417,474 29,631
========
Less amounts representing interest.......................... (6,951)
-------
Present value of obligations................................ 22,680
Less current portion........................................ (7,007)
-------
Long-term obligations....................................... $15,673
=======
</TABLE>
The above amounts include future minimum lease obligations under operating
leases with affiliates totaling $42.9 million at February 2, 1997. Operating
lease rental expense under leases with affiliates totaled $1.4 million for the
year ended January 29, 1995, $1.8 million for the year ended January 28, 1996
and $3.2 million for the year ended February 2, 1997.
The implicit interest rate of capital leases varies from 8.8% to 14.4% with
an average implicit rate of approximately 11.0%.
NOTE 7 -- CAPITAL STOCK
In connection with the Acquisition and Financings, the Company completed a
recapitalization of its common stock. All 100 shares of common stock outstanding
at the date of the Acquisition were converted into 8,723,550 shares of Class A,
Class C, Class D and Class F capital stock. All of the Class F Stock (consisting
of 100 shares) was then redeemed at an aggregate redemption price of
approximately $238.5 million. Concurrently therewith, the Company issued
8,381,450 shares of Class E Stock to an affiliate at an issue price of $100.9
million. See Note 2, "Acquisition and Financings".
F-19
<PAGE> 89
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 7 -- CAPITAL STOCK -- (CONTINUED)
The Company's capital stock at February 2, 1997, as adjusted for the
February 1998 stock split discussed in Note 15, consists of the following:
<TABLE>
<CAPTION>
SHARES SHARES ISSUED
TYPE OF STOCK AUTHORIZED AND OUTSTANDING
------------- ---------- ---------------
<S> <C> <C>
Class A, $.01 par value.................................. 7,318,135 7,318,135
Class B, $.01 par value.................................. 1,900,554 --
Class C, $.01 par value.................................. 1,319,890 1,319,890
Class D, $.01 par value.................................. 85,525 85,525
Class E, $.01 par value.................................. 8,381,450 8,381,450
Class F, $.01 par value.................................. 1,710 --
Common, $.01 par value................................... 19,005,554 --
---------- ----------
38,012,818 17,105,000
========== ==========
</TABLE>
Holders of Class E Stock, Class F and Common Stock are entitled to one vote
and holders of Class D Stock are entitled to 102 votes, for each share of stock
held on all matters to which stockholders are entitled to vote. Holders of Class
A, Class B and Class C Stock do not have any voting rights, except in limited
circumstances.
Under the terms of the Company's restated Certificate of Incorporation
executed in connection with the Acquisition and Financings, each share of each
class of issued and outstanding capital stock described above automatically
converts into one share of Common Stock upon the effectiveness of an IPO, as
defined therein. Accordingly, common stock has been presented as if converted in
the accompanying financial statements.
NOTE 8 -- RE-ENGINEERING DISTRIBUTION OPERATIONS
During the fiscal year ended January 30, 1994, the Company initiated a plan
to reengineer its distribution operations. In connection with this plan, a
provision to operating expense of $3.6 million was made. The re-engineering
charge includes estimated facilities and equipment charges in addition to other
related expenses. Net costs of approximately $1.5 million and $2.1 million were
charged against the accrual for the fiscal years ended January 29, 1995 and
January 28, 1996, respectively.
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 20% of employee contributions 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
$230,000, $267,000 and $288,000 for fiscal years 1994, 1995 and 1996,
respectively.
F-20
<PAGE> 90
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 9 -- EMPLOYEE BENEFIT PLANS -- (CONTINUED)
INCENTIVE COMPENSATION PLAN
The Company adopted the general and administrative staff incentive
compensation bonus plan (the "Incentive Plan") during May 1996. The Incentive
Plan is designed to reward eligible Company executives, managers and supervisors
for the achievement of pre-defined Company performance objectives. Generally,
employees at the supervisor level or above are eligible to participate in the
Incentive Plan. Expense under the Incentive Plan for fiscal 1996 totaled $1.0
million.
1996 STOCK OPTION PLANS
On October 30, 1996, subject to approval by the Company's Board of
Directors, the Company awarded options to purchase shares of Class B Stock of
the Company 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 options automatically convert to
options to purchase the Company's Common Stock upon the effectiveness of an
initial public offering.
The Plans may be administered by a committee of the Board of Directors of
the Company, 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 the Company 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 632,885 and 359,205 (amended to
1,026,300 and 684,200 in October, 1997) shares of 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 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 the Company's securities. In the event of a sale of more than 80% of
the outstanding shares of capital stock of the Company or 80% of its assets, the
vested portion of an option and, under circumstances, the unvested portion will
be purchased by the Company.
As of February 2, 1997, the Company has granted options to purchase 613,371
shares under the Associate Plan and 225,786 shares under the Executive Plan. The
exercise price applicable to these options is $12.04 per share, 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. All options
expire on the seventh anniversary of the date of grant (or, under certain
circumstances, 30 days later).
Each option granted under the Plans will be subject to vesting provisions
and, whether or not then vested, will not become exercisable until the earlier
of the occurrence of an initial public offering of the Company's securities or
the seventh anniversary of the date of grant. Options granted under the
Associate Plan will 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 will be 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 will be based upon
F-21
<PAGE> 91
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 9 -- EMPLOYEE BENEFIT PLANS -- (CONTINUED)
achieving specified operating results. Partial vesting of options subject to
performance vesting will occur 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.
EMPLOYMENT AGREEMENTS
Auto 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") of Auto 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
Auto were to terminate the employment of the Chairman and President without
cause, or if they terminate their employment for good reason, Auto 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, would be used by the Chairman to
purchase 83,079 shares of 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 recorded a charge to compensation of
approximately $687,000 in the thirty-nine weeks ended November 2, 1997
reflecting amortization of the award through such date. The Company has also
agreed to loan 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 Revolver, 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 Common Stock, exercisable at
$12.04 per share. This option will generally vest and become exercisable in
2004, subject to earlier vesting based upon the achievement of certain EBITDA
targets and the occurrence of other specified events. Upon consummation of the
Offering, the vesting of the Chairman's option for 401,967 shares of Common
Stock will be accelerated, so that any portion which remains unvested and
unexercisable on the second anniversary of the Offering will vest and become
exercisable.
In connection with the execution of his employment agreement, the Company's
President received an option for 299,337 shares of Common Stock, exercisable at
$12.04 per share. This option will generally vest and become exercisable in
2003, subject to earlier vesting based upon the achievement of certain EBITDA
targets and the occurrence of other specified events.
On October 30, 1997, the President's option for 299,337 shares of Common
Stock became exercisable to the extent of 42,762 shares of Common Stock. Upon
consummation of the Offering, the vesting of the President's option for 256,575
shares of Common Stock will be accelerated, so that any portion which remains
unvested and unexercisable on the second anniversary of the Offering will vest
and become exercisable.
F-22
<PAGE> 92
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 9 -- EMPLOYEE BENEFIT PLANS -- (CONTINUED)
Options outstanding at February 2, 1997 are:
<TABLE>
<CAPTION>
GRANTED EXERCISED CANCELED OUTSTANDING
------- --------- -------- -----------
<S> <C> <C> <C>
1,549,441 -- (8,980) 1,540,461
</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 fair value at the grant
date for awards in fiscal 1996 consistent with the provisions of SFAS No. 123,
net loss for fiscal 1996 would have been increased to the pro forma amount
indicated below (in thousands):
<TABLE>
<CAPTION>
FISCAL 1996
-----------
<S> <C>
Net Loss:
As reported............................................... $(24,659)
Pro forma................................................. $(24,803)
</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>
<S> <C>
Dividend yield.............................................. 0%
Risk free interest rate..................................... 6.07%
Expected life of options.................................... 5 years
</TABLE>
NOTE 10 -- SUPPLEMENTAL SCHEDULE OF CASH FLOWS
Interest paid during fiscal years 1994, 1995 and 1996 amounted to $8.5
million, $13.4 million and $13.4 million, respectively. Such amounts include
interest paid on the bank credit facility and capital leases.
Income taxes paid during fiscal 1994 amounted to $264,000. No income taxes
were paid in fiscal years 1995 and 1996.
F-23
<PAGE> 93
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 11 -- INCOME TAXES
The provision (benefit) for income taxes is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
JANUARY 29, JANUARY 28, FEBRUARY 2,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal........................................... $ 264 $(1,801) $ --
State............................................. 223 (406) --
------ ------- --------
487 (2,207) --
------ ------- --------
Deferred:
Federal........................................... 55 (2,922) (9,750)
State............................................. (474) (318) (2,109)
------ ------- --------
(419) (3,240) (11,859)
------ ------- --------
Total..................................... $ 68 $(5,447) $(11,859)
====== ======= ========
</TABLE>
The following table summarizes the differences between the Company's
provision (benefit) for income taxes based on the Company's income before taxes
and actual amounts recorded by the Company (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
JANUARY 29, JANUARY 28, FEBRUARY 2,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income (loss) before taxes.......................... $ 8,834 $(14,541) $(36,518)
Federal income tax rate............................. 34% 34% 34%
------- -------- --------
Expected provision (benefit) for income taxes....... 3,004 (4,944) (12,416)
State taxes, net of federal benefit................. 425 (671) (1,634)
State taxes, rate adjustment........................ (496) -- --
Valuation allowance................................. (2,948) -- --
Other............................................... 83 168 2,191
------- -------- --------
Actual provision (benefit) for income taxes......... $ 68 $ (5,447) $(11,859)
======= ======== ========
</TABLE>
As discussed in Note 5, the Company treated the $97.2 million gain on the
elimination of debt which occurred in the year ended January 29, 1995 as a
non-taxable event. As a result of this treatment, the Company lost the ability
to utilize approximately $60.0 million of net operating loss carryforwards. At
January 30, 1994, the Company carried a valuation allowance against the entire
amount of the carryforwards, and accordingly, the loss of such carryforwards had
no effect on the results of the operations of the Company for the year ended
January 29, 1995.
At January 30, 1994, a valuation allowance of $2.9 million existed as an
offset to the Company's deferred tax assets. The valuation allowance was
eliminated at January 29, 1995 due to the Company's forecasted ability to
utilize all deferred tax assets.
F-24
<PAGE> 94
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 11 -- INCOME TAXES -- (CONTINUED)
The current and non-current deferred tax assets and liabilities consist of
the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------
JANUARY 28, FEBRUARY 2,
1996 1997
----------- -----------
<S> <C> <C>
Gross deferred tax assets:
Store closing costs....................................... $ 2,048 $ 6,118
Salaries and benefits..................................... 2,847 7,710
Capital leases expenditures............................... 1,064 743
Internally developed software............................. 3,639 2,538
Preopening costs.......................................... 1,933 2,267
Provision for site selection costs........................ 1,566 3,243
Provision for bad debts................................... 744 684
Tax loss carryforwards.................................... 1,860 4,142
Other..................................................... 655 716
------- -------
Total gross deferred tax assets................... 16,356 28,161
------- -------
Gross deferred tax liabilities:
Inventory................................................. 8,159 8,991
Depreciation.............................................. 2,023 1,152
------- -------
Total gross deferred tax liabilities.............. 10,182 10,143
------- -------
Net deferred tax asset............................ $ 6,174 $18,018
======= =======
The net tax asset (liability) is reflected in the
accompanying balance sheets as follows:
Current deferred tax liability, net....................... $(3,045) $ (597)
Non-current deferred tax asset, net....................... 9,219 18,615
------- -------
Net deferred tax asset.................................... $ 6,174 $18,018
======= =======
</TABLE>
The Company has recorded a deferred tax asset of approximately $4.1 million
as of February 2, 1997 reflecting the benefit of tax loss carryforwards which
expire in 2012. Realization is dependent on generating sufficient taxable income
prior to expiration of the loss carryforwards. Although realization is not
assured, management believes it is more likely than not that all the deferred
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>
BEGINNING STORE ENDING
FISCAL YEAR BALANCE CLOSING COSTS PAYMENTS BALANCE
- ----------- --------- ------------- -------- -------
<S> <C> <C> <C> <C>
1994....................................... $6,363 $ 2,678 $(3,296) $ 5,745
1995....................................... 5,745 3,310 (3,757) 5,298
1996....................................... 5,298 14,904 (4,360) 15,842
</TABLE>
F-25
<PAGE> 95
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 12 -- STORE CLOSING COSTS -- (CONTINUED)
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 are as
follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 28, 1996 FEBRUARY 2, 1997
---------------------------- ----------------------------
ESTIMATED ESTIMATED
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Receivables....................... $25,448 $25,448 $ 28,511 $ 28,511
Amounts due under the Facility
(including current maturity).... 96,062 96,062 138,000 138,000
Obligations under Old Notes....... -- -- 125,000 125,000
</TABLE>
NOTE 15 -- SUPPLEMENTAL EARNINGS PER SHARE INFORMATION
STOCK SPLIT
In February 1998, the Company's Board of Directors approved a 17.105 for 1
stock split, subject to shareholder approval. Accordingly, all share information
for the fiscal year ended February 2, 1997 and the thirty-nine weeks ended
October 27, 1996 and November 2, 1997 has been given retroactive effect for the
stock split, for all outstanding shares of common stock.
RECAPITALIZATION
Due to the Company's 1996 recapitalization in connection with the
Acquisition and Financings, share information prior to the recapitalization is
not considered meaningful. Accordingly, earnings per share information has not
been presented and the share information in the accompanying consolidated
statement of stockholders' equity has not been retroactively adjusted for the
stock split.
ACCOUNTING CHANGE
In February 1997, the Financial Accounting Standards Board issued statement
of Financial Accounting Standards No. 128, Earnings per Share ("FAS 128"). FAS
128 establishes standards for computing and presenting earnings per share
("EPS") and supersedes APB Opinion No. 15, Earnings Per Share
F-26
<PAGE> 96
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 15 -- SUPPLEMENTAL EARNINGS PER SHARE INFORMATION -- (CONTINUED)
("APB 15"). FAS 128 replaces the presentation of primary EPS with a presentation
of basic EPS which excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding during the period. This statement also requires dual presentation of
basic EPS and diluted EPS on the face of the income statement for all periods
presented. Diluted EPS is computed similarly to fully diluted EPS pursuant to
APB 15, with some modifications. FAS 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.
Early adoption is not permitted and the statement requires restatement of all
prior-period EPS data presented after the effective date.
In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 98, ("SAB 98"). SAB 98 amends and clarifies methodology
regarding the computation of earnings per share information in an initial public
offering related to the dilutive effects of stock, warrants or options issued
with exercise prices below the IPO price.
The Company will adopt FAS 128 effective with its fiscal 1997 year end. Pro
forma EPS data calculated in accordance with FAS 128 and SAB 98 is summarized as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THIRTY-NINE WEEKS ENDED
--------------------------------------- -------------------------
JANUARY 29, JANUARY 28, FEBRUARY 2, OCTOBER 27, NOVEMBER 2,
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BASIC EPS:
Income before extraordinary item...... $ 1.00 -- -- -- --
Extraordinary item.................... $ 11.14 -- -- -- --
Net income............................ $ 12.15 $ (1.04) $ (2.28) $ 0.74 $ 0.23
Weighted average shares outstanding... 8,723,550 8,723,550 10,818,913 8,723,550 17,105,000
DILUTED EPS:
Income before extraordinary item...... $ 1.00 -- -- -- --
Extraordinary item.................... $ 11.14 -- -- -- --
Net income............................ $ 12.15 $ (1.04) $ (2.25) $ 0.74 $ 0.22
Weighted average shares outstanding... 8,723,550 8,723,550 10,975,128 8,723,550 17,737,043
</TABLE>
NOTE 16 -- SUBSEQUENT EVENTS (UNAUDITED)
LEASE FACILITY
On November 18, 1997, the Company reached an agreement, in principle, 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.
TRAK WEST ACQUISITION
On December 8, 1997, the Company acquired a newly formed subsidiary ("Trak
West") of the Trak Auto Corporation ("Trak Auto"). Upon acquisition, Trak West
had no liabilities and owned no assets other than the store leases, fixtures and
equipment and merchandise inventories of 82 specific store sites in Southern
California which were formerly owned and operated by Trak Auto. Trak West also
owned the merchandise
F-27
<PAGE> 97
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 16 -- SUBSEQUENT EVENTS (UNAUDITED) -- (CONTINUED)
inventory of the Ontario, California distribution center operated by Trak Auto.
No other assets or liabilities of the distribution center, other than the
inventories, were acquired.
The preliminary purchase price of Trak West was approximately $38.0
million, subject to a downward adjustment for the actual value of inventories
acquired. The Company paid Trak Auto $30.2 million at the time of purchase,
representing 90% of a preliminary purchase price of $33.6 million (excluding
acquisition-related fees), based on a preliminary value of inventories on hand
at the acquisition date. The Company anticipates that the final purchase price,
and a preliminary allocation of assets acquired, will be determined during the
first quarter of fiscal 1998. The Company financed the acquisition of Trak West
with a $22.0 million equity investment by affiliates of the Company's 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 Company has also executed an Operating Services Agreement with Trak
Auto for the provision of certain transitional services to be performed by Trak
Auto while the stores are integrated into the Company's operations.
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. Upon consummation of the Offering and the application of the net
proceeds therefrom, the term loan will bear interest at LIBOR plus 2.0% and
amounts outstanding under the revolving credit facility will bear interest at
LIBOR plus 1.75%. 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
Auto'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 will recognize an extraordinary charge of $5.3 million ($3.3
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.
STOCK PURCHASE AND OPTION AWARDS
In December 1997, the Company entered stock purchase agreements with
certain executives of Auto. Under the terms of the agreements, the Company
agreed to issue a total of 180,600 shares of the Company's Class B Stock at a
price of $12.04 per share, the same price paid in the Acquisition. In addition,
the Company granted certain executives non-qualified options to purchase 96,062
shares of the Company's Class B Stock, also at a price of $12.04 per share. The
options contain similar terms and vesting provisions as existing options
F-28
<PAGE> 98
CSK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF NOVEMBER 2, 1997 AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER
27, 1996 AND
NOVEMBER 2, 1997 IS UNAUDITED.)
NOTE 16 -- SUBSEQUENT EVENTS (UNAUDITED) -- (CONTINUED)
under the Company's Executive Stock Option Plan. See Note 9, "Employee Benefit
Plans". In connection with issuance of these shares, the Company will recognize
a charge to earnings in the fourth quarter of fiscal 1997 for the difference
between the issuance price and the fair market value of the Common Stock at the
date of sale. The Company estimates that such charge will be approximately $0.9
million. In addition, in the fourth quarter of fiscal 1997, the Company will
record deferred compensation of approximately $0.5 million to reflect the
difference between the exercise price and the fair market value of common 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.
The Company has agreed to loan certain executives funds to pay the income
tax consequences, if any, of the purchase of the shares (the "Tax Loans"). In
addition, of the total consideration to be paid to the Company of $2.2 million,
approximately $1.0 million will be loaned by the Company to certain executives
to purchase 84,550 of the shares (the "Stock Loans"). Both the Tax Loans and the
Stock Loans will be collateralized by the stock under pledge agreements, provide
full recourse to the executive, bear interest at the average rate paid by Auto
under the revolving portion of its Senior Credit Facility, and mature in
December 2003.
In connection with the Trak West acquisition, certain employees of Trak
West were granted options to purchase a total of 35,219 shares of the Company's
Class B Stock under the Associate Plan, with similar terms and vesting
provisions as existing options under the Company's Associate Plan. The exercise
price of the options granted is $20.00 per share, the fair market value of the
underlying stock on the date of grant. In connection with the Trak West
Acquisition, the Company's Chairman received an option for 39,940 shares of
Common 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 over the vesting period for the
difference between the issuance or exercise price, as the case may be, and the
fair market value of the Common Stock at the date of grant. The Company
estimates that such charge will be approximately $0.2 million.
In connection with the Offering, the Company's Chairman received an option
for 216,634 shares of Common Stock, exercisable at $20.00 per share. This option
will vest and become exercisable in three equal annual installments beginning in
April 2000.
During the fiscal year ended February 1, 1998, the Company issued options
to purchase 108,804 shares, net of certain cancellations, in the normal course
of business pursuant to the Plans.
F-29
<PAGE> 99
[PHOTO OF DELIVERY OF A COMMERCIAL [PHOTO OF WAREHOUSE INTERIOR]
CUSTOMER] "THE COMPANY OPERATES TECHNOLOGICALLY
"THE COMPANY HAS EXPANDED ITS ADVANCED, FULLY INTEGRATED DISTRIBUTION
OPERATIONS TO SPECIFICALLY TARGET CENTERS."
COMMERCIAL CUSTOMERS."
[CSK AUTO LOGO]
[PHOTO OF STORE INTERIOR] [PHOTO OF SALESPERSON AND CUSTOMER]
"THE COMPANY'S STORES OFFER "THE COMPANY HAS IMPLEMENTED SEVERAL
UP TO 16,000 SKUS." SYSTEMS WHICH HAVE ENABLED IT TO
PROVIDE ENHANCED CUSTOMER
SERVICE."
<PAGE> 100
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THAT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SHARES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 10
Use of Proceeds............................ 14
Dividend Policy............................ 14
Capitalization............................. 15
Dilution................................... 16
Acquisition and Financings................. 17
Unaudited Pro Forma Condensed Consolidated
Statements of Operations................. 18
Selected Consolidated Financial Data....... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 22
Business................................... 31
Management................................. 45
Certain Transactions....................... 52
Principal Stockholders..................... 56
Description of Capital Stock............... 58
Description of Certain Indebtedness........ 60
Shares Eligible for Future Sale............ 64
Available Information...................... 65
Underwriting............................... 66
Legal Matters.............................. 68
Experts.................................... 68
Change in Accountants...................... 68
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENT OR
SUBSCRIPTIONS.
======================================================
======================================================
7,500,000 SHARES
[CSK AUTO LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FURMAN SELZ
LEHMAN BROTHERS
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
, 1998
======================================================
<PAGE> 101
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The registrant's expenses in connection with the Offerings described in
this registration statement are set forth below. All amounts except the
Securities and Exchange Commission registration fee, the NASD filing fee and the
NYSE listing fee are estimated.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 53,433
NASD filing fee............................................. 18,615
Printing and engraving expenses............................. 185,000
Accounting fees and expenses................................ 185,000
Legal fees and expenses..................................... 250,000
NYSE listing fee............................................ 172,100
Fees and expenses (including legal fees) for qualifications
under
state securities laws..................................... 5,000
Transfer agent's fees and expenses.......................... 3,000
Miscellaneous............................................... 2,852
--------
Total............................................. $875,000
========
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") makes
provisions for the indemnification of officers and directors of corporations in
terms sufficiently broad to indemnify the officers and directors of the
registrant under certain circumstances from liabilities (including reimbursement
of expenses incurred) arising under the Securities Act of 1933, as amended (the
"Securities Act").
As permitted by the DGCL, the registrant's Amended and Restated Certificate
of Incorporation, as amended (the "Charter"), provides that, to the fullest
extent permitted by the DGCL, no director shall be liable to the registrant or
to its stockholders for monetary damages for breach of his fiduciary duty as a
director. Delaware law does not permit the elimination of liability (i) for any
breach of the director's duty of loyalty to the registrant or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases, or (iv) for any
transaction from which the director derives an improper personal benefit. The
effect of this provision in the Charter is to eliminate the rights of the
registrant and its stockholders (through stockholders' derivative suits on
behalf of the registrant) to recover monetary damages against a director for
breach of fiduciary duty as a director thereof (including breaches resulting
from negligent or grossly negligent behavior) except in the situations described
in clauses (i)-(iv), inclusive, above. These provisions will not alter the
liability of directors under federal securities laws.
In addition, the Charter provides that the registrant may indemnify any
person who was or is a party or who was or is threatened to be made a party to
or is otherwise involved in any threatened, pending or completed action, suit or
proceeding (including, without limitation, one by or in the right of the
registrant to procure judgment in its favor), whether civil, criminal,
administrative or investigative, by reason of the fact the he or she is or was a
director, officer, employee or agent of the registrant or is or was serving at
the request of the registrant as a director, officer, employee or agent of any
other corporation or enterprise, from and against any and all expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person. The Charter also provides that
the indemnification provided in the Charter shall not be deemed exclusive of any
other rights to which the indemnified party may be entitled and that the
registrant may maintain insurance, at its expense, to protect itself and any
director, officer, employee
II-1
<PAGE> 102
or agent of the registrant or any other corporation or enterprise against
expense liability or loss whether or not the Registrant would have the power to
indemnify such person against such expense, liability or loss under the DGCL or
under the Charter.
The registrant's Bylaws (the "Bylaws") provide that the registrant may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the registrant) by reason of the fact that he is or was a director,
officer, employee or agent of the registrant or is or was serving at the request
of the registrant as a director, officer, employee or agent of any other
corporation or enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding if such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the registrant, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful.
The Bylaws also provide that the registrant may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the registrant to procure
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted under similar
standards, except that no indemnification may be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable to
the registrant unless and only to the extent that the Court of Chancery of the
State of Delaware or the court in which such action or suit was brought shall
determine that despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to be
indemnified for such expenses which the Court of Chancery of the State of
Delaware or the court in which such action was brought shall deem proper.
The Bylaws also provide that to the extent a director or officer of the
registrant has been successful in the defense of any action, suit or proceeding
referred to in the previous paragraphs or in the defense of any claim, issue, or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith and that
indemnification provided for in the Bylaws shall not be deemed exclusive of any
other rights to which the indemnified party may be entitled.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The registrant has not issued or sold securities within the past three
years pursuant to offerings that were not registered under the Securities Act,
except as follows:
(a) On October 30, 1996, the Company converted all of its issued and
outstanding shares of common stock into 427,836 (7,318,135 giving effect to
the 17.105-for-1 stock split (the "Stock Split")) shares of Class A Common
Stock, 77,164 (1,319,890 giving effect to the Stock Split) shares of Class
C Common Stock, 5,000 (85,525 giving effect to the Stock Split) shares of
Class D Common Stock and 100 (1,710 giving effect to the Stock Split)
shares of Class F Common Stock.
(b) On October 30, 1996, the Company issued and sold 490,000
(8,381,450 giving effect to the Stock Split) shares of Class E Common Stock
to Cantrade Trust Company Limited, in its capacity as trustee of The Carmel
Trust, at approximately $206 ($12.04 giving effect to the Stock Split) per
share, or an aggregate offering price of approximately $100,940,000.
(c) On October 30, 1996, the Company issued and sold a Class A Stock
Purchase Warrant to Investcorp Bank E.C. for $10.00.
(d) On October 30, 1996, the Company issued and sold $10,000,000
aggregate principal amount of 12% Subordinated Series A Notes due October
31, 2008 to TransAtlantic Finance, Ltd.
II-2
<PAGE> 103
(e) On October 30, 1996, the Company issued and sold $40,000,000
aggregate principal amount of 12% Subordinated Series B Notes due October
31, 2008 to Southwest Finance, Ltd. In connection with this transaction, a
$4,000,000 fee was paid to Southwest Finance, Ltd.
(f) On December 8, 1997, the Company issued and sold approximately
54,498 (932,181 giving effect to the Stock Split) shares of Class C Common
Stock to South Bay Limited at approximately $206 ($12.04 giving effect to
the Stock Split) per share, or an aggregate offering price of approximately
$11,226,588. In connection with this transaction, a $1,000,000 equity
placement fee was paid to Investcorp Bank E.C.
(g) On December 8, 1997, the Company issued and sold approximately
52,360 (895,618 giving effect to the Stock Split) shares of Class E Common
Stock to Transatlantic Finance, Inc. at approximately $206 ($12.04 giving
effect to the Stock Split) per share, or an aggregate offering price of
approximately $10,786,160.
(h) On various dates from October 30, 1996 through November 2, 1997,
pursuant to the Company's 1996 Associate Stock Option Plan and the
Company's 1996 Executive Stock Option Plan (collectively, and as amended
from time to time, the "Plans"), the Company awarded to key employees of
Auto qualified incentive stock options ("ISOs"), exercisable in whole or in
part at approximately $206 ($12.04 giving effect to the Stock Split) per
share, to purchase an aggregate of 52,691 (901,279 giving effect to the
Stock Split) shares of Class B Common Stock ("Class B Shares"). On the
closing of the Offering, each option will be exercisable for an identical
number of shares of Common Stock to the number of Class B Shares for which
it was exercisable prior to the Offering, at the same price per share.
(i) On various dates from November 3, 1997 through February 16, 1998,
pursuant to the 1996 Executive Stock Option Plan, the Company issued
additional ISOs, exercisable in whole or in part at approximately $206
($12.04 giving effect to the Stock Split) per share, to purchase 99 (1,693
giving effect to the Stock Split) Class B Shares. On the closing of the
Offering, each option will be exercisable for an identical number of shares
of Common Stock to the number of Class B Shares for which it was
exercisable prior to the Offering, at the same price per share.
(j) On various dates from November 3, 1998 through February 16, 1998,
pursuant to the 1996 Associate Stock Option Plan, the Company issued
additional ISOs, exercisable in whole or in part at approximately $342
($20.00 giving effect to the Stock Split) per share, to purchase 4,689
(80,205 giving effect to the Stock Split) Class B Shares. On the closing of
the Offering, each option will be exercisable for an identical number of
shares of Common Stock to the number of Class B Shares for which it was
exercisable prior to the Offering, at the same price per share.
(k) In connection with the execution of his employment agreement in
November 1996, the Company granted James Bazlen an option exercisable in
whole or in part at a price of approximately $206 ($12.04 giving effect to
the Stock Split) per share for 17,500 (299,337 giving effect to the Stock
Split) shares of Class B Stock. On the closing of the Offering, each option
will be exercisable for an identical number of shares of Common Stock to
the number of Class B Shares for which it was exercisable prior to the
Offering, at the same price per share.
(l) In connection with the execution of his employment agreement in
January 1997, the Company granted Maynard Jenkins an option exercisable in
whole or in part at a price of approximately $206 ($12.04 giving effect to
the Stock Split) per share for 23,500 (401,967 giving effect to the Stock
Split) shares of Class B Stock. On the closing of the Offering, each option
will be exercisable for an identical number of shares of Common Stock to
the number of Class B Shares for which it was exercisable prior to the
Offering, at the same price per share.
(m) In December 1997, 22 members of the Company's management purchased
an aggregate of 10,559 (180,600 giving effect to the Stock Split) Class B
Shares at a price of approximately $206 ($12.04 giving effect to the Stock
Split) per share, or an aggregate offering price of approximately
$2,175,154, pursuant to Management Stock Purchase Agreements. These
individuals received secured loans from the Company pursuant to its 1997
Stock Loan Program in an aggregate amount equal to the purchase price of
4,943 (84,550 giving effect to the Stock Split) Class B Shares, or an
aggregate principal amount of approximately $1,018,258. At the time of
these purchases, the Company agreed to grant one ISO
II-3
<PAGE> 104
exercisable in whole or in part at approximately $206 ($12.04 giving effect
to the Stock Split) in respect of each Class B Share, purchased without the
benefit of the 1997 Stock Loan Program, to such purchasers, for a total of
5,616 (96,061 giving effect to the Stock Split) Class B Shares. On the
closing of the Offering, each option will be exercisable for an identical
number of shares of Common Stock to the number of Class B Shares for which
it was exercisable prior to the Offering, at the same price per share.
(n) In February 1998, the Company granted Maynard Jenkins an option,
exercisable in whole or in part at a price of approximately $206 ($12.04
giving effect to the Stock Split) per share for 2,335 (39,940 giving effect
to the Stock Split) shares of Class B Stock. On the closing of the
Offering, each option will be exercisable for an identical number of shares
of Common Stock to the number of Class B Shares for which it was
exercisable prior to the Offering, at the same price per share.
(o) In February 1998, the Company granted Maynard Jenkins an option,
exercisable in whole or in part at a price of approximately $342 ($20.00
giving effect to the Stock Split) per share for 12,665 (216,634 giving
effect to the Stock Split) shares of Class B Stock. On the closing of the
Offering, each option will be exercisable for an identical number of shares
of Common Stock to the number of Class B Shares for which it was
exercisable prior to the Offering, at the same price per share.
The transaction set forth in paragraph (a) above was undertaken in reliance upon
the exemption from the registration requirements of the Securities Act afforded
by Section 3(a)(9) thereof. The transactions set forth in paragraphs (b) through
(g) 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 transactions set forth in paragraphs (h) through (o) above were undertaken
in reliance upon the exemption from the registration requirements of the
Securities Act afforded by Rule 701 promulgated under the Securities Act, as
sales by an issuer to employees, directors, officers, consultants or advisors
pursuant to written compensatory benefit plans or written contracts relating to
the compensation of such persons. The purchasers of the securities described
above acquired them for their own account and not with a view to any
distribution thereof to the public. The certificates evidencing the securities
bear legends stating that the shares may not be offered, sold or transferred
other than pursuant to an effective registration statement under the Securities
Act or an exemption from such registration requirements. The Company believes
that exemptions other than those specified above may exist with respect to the
transactions set forth above. With respect to the transactions described in
paragraphs (h) through (j) and (m) above, following effectiveness of this
Registration Statement, the Company plans to register on Form S-8 under the
Securities Act the shares of Common Stock issuable upon exercise of options
granted under the Plans and the employment contracts.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C> <C>
1.01 -- Form of Underwriting Agreement.
3.01 ** -- Amended and Restated Certificate of Incorporation of the
Company, as filed with the Delaware Secretary of State on
October 30, 1996 (the "Certificate").
3.02 ** -- Certificate of Amendment to the Certificate, as filed with
the Delaware Secretary of State on December 5, 1997.
3.03 ** -- Certificate of Amendment to the Certificate, as filed with
the Delaware Secretary of State on December 19, 1997.
3.04 ** -- Form of Restated Certificate of Incorporation of the
Company, as proposed to be filed with the Delaware Secretary
of State upon the closing of the Offering.
3.05 ** -- Amended and Restated By-laws of the Company, as adopted on
October 29, 1997.
4.01 ** -- Indenture, dated as of October 30, 1996, among the Company
and TransAtlantic Finance, Ltd., as Trustee.
4.02 ** -- Indenture, dated as of October 30, 1996, among the Company
and AIBC Services, N.V., as Trustee.
</TABLE>
II-4
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C> <C>
4.03 * -- Indenture, dated as of October 30, 1996, by and among Auto,
Kragen, Schuck's and The Bank of New York (as successor to
Wells Fargo Bank, N.A.), as Trustee, including form of Note.
4.04 ** -- Amended and Restated Credit Agreement, dated as of December
8, 1997, among Auto, 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.
4.05 ** -- Form of Common Stock certificate.
5.01 ** -- Opinion of Gibson, Dunn & Crutcher LLP.
10.01 * -- Employment Agreement, dated June 19, 1996, between Auto and
Jules Trump.
10.02 ** -- Amended and Restated Employment Agreement, dated November 1,
1996, between Auto and James Bazlen.
10.03 * -- Amended and Restated Employment Agreement, dated June 19,
1996, between Auto and Arthur Hicks.
10.04 * -- Amended and Restated Participation Agreement, dated June 19,
1996, between Auto and James Bazlen.
10.05 * -- Amended and Restated Participation Agreement, dated June 19,
1996, between Auto 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 * -- 1996 General and Administrative Staff Incentive Compensation
Plan.
10.09 * -- 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 Auto.
10.10 * -- Amended and Restated Lease, dated October 23, 1989 (the
"Missouri Falls Lease"), between Auto and Missouri Falls
Associates Limited Partnership.
10.11 * -- First Amendment to the Missouri Falls Lease, dated November
22, 1991, between Auto and Missouri Falls Associates Limited
Partnership.
10.12 * -- Amendment to Leases, dated as of October 30, 1996, by and
between Missouri Falls Associates Limited Partnership and
Auto.
10.13 * -- Financing Advisory Agreement, dated October 30, 1996,
between Auto and Investcorp International Inc.
10.14 * -- Financial Advisory Services Letter Agreement, dated October
30, 1996, between Auto and Investcorp International Inc.
10.15 * -- Standby Loan Commitment Letter Agreement, dated October 30,
1996, between Auto and Invifin S.A.
10.16 * -- Agreement for Management Advisory, Strategic Planning and
Consulting Services, dated October 30, 1996, between Auto
and Investcorp International Inc.
10.17 * -- 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, the
Company and Auto.
10.17.1 -- Form of Supplemental Stockholders' Agreement Signature Page.
10.18 * -- Stock Purchase Agreement, dated September 29, 1996.
10.19 ** -- Senior Executive Stock Loan Plan.
10.20 ** -- Form of Stock Purchase Agreement.
10.21 ** -- Promissory Note of Maynard Jenkins dated December 21, 1997.
10.22 ** -- Stock Pledge Agreement between the Company and Maynard
Jenkins dated December 21, 1997.
10.23 ** -- Employment Agreement dated January 27, 1997 between Auto and
Maynard Jenkins.
10.24 ** -- Stock Acquisition Agreement dated January 27, 1997 among
Maynard Jenkins, the Company and CSK Holdings L.P.
</TABLE>
II-5
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C> <C>
10.25 -- Stock Option Agreement, dated February 1, 1998, between the
Company and Maynard Jenkins.
10.26 -- Stock Option Agreement, dated March 9, 1998, between the
Company and Maynard Jenkins.
11.01 ** -- Computation of Earnings per Share.
16.01 ** -- Letter of Price Waterhouse LLP re: Change in Certifying
Accountant.
21.01 ** -- Subsidiaries of the Company.
23.01 -- Consent of Price Waterhouse LLP.
23.02 -- Consent of Coopers & Lybrand L.L.P.
23.03 ** -- Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit
5.01).
24.01 ** -- Powers of Attorney (included on Signature Pages of
Registration Statement).
27.01 ** -- Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated herein by reference to CSK Auto, Inc.'s Registration Statement on
Form S-4 (File No. 333-22511).
** Previously filed.
(b) Financial Statement Schedule for the three years ended February 2,
1997: Schedule II -- Valuation and Qualifying Accounts and report of independent
accountants thereon.
(c) Report, Opinion or Appraisal from an Outside Party: None applicable.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 107
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has duly caused this Amendment No. 4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Phoenix, Arizona, on March 10, 1998.
CSK AUTO CORPORATION
By: /s/ MAYNARD L. JENKINS
------------------------------------
Maynard L. Jenkins
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 has been signed by the following persons in the capacities
indicated on March 10, 1998.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/s/ MAYNARD L. JENKINS Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer (Principal Executive Officer)
Maynard L. Jenkins
/s/ JAMES G. BAZLEN President, Chief Operating Officer and
- ----------------------------------------------------- Director
James G. Bazlen
Director
- -----------------------------------------------------
Jules Trump
* Director
- -----------------------------------------------------
Eddie Trump
* Director
- -----------------------------------------------------
Savio W. Tung
* Director
- -----------------------------------------------------
Jon P. Hedley
* Director
- -----------------------------------------------------
Edward G. Lord, III
* Director
- -----------------------------------------------------
Christopher J. O'Brien
* Director
- -----------------------------------------------------
Charles J. Philippin
</TABLE>
II-7
<PAGE> 108
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
* Director
- -----------------------------------------------------
Robert Smith
* Director
- -----------------------------------------------------
Christopher J. Stadler
/s/ DON W. WATSON Senior Vice President, Chief Financial Officer
- ----------------------------------------------------- and Treasurer (Principal Financial Officer
Don W. Watson and Principal Accounting Officer)
</TABLE>
*By: /s/ DON W. WATSON
-------------------------------
Don W. Watson
Attorney-in-fact
II-8
<PAGE> 109
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
In connection with our audit of the consolidated financial statements of
CSK Auto Corporation and subsidiaries as of February 2, 1997 and for the year
then ended, which financial statements are included in the Prospectus, we have
also audited the financial statement schedule listed in Item 16(b) herein.
In our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
April 22, 1997
S-1
<PAGE> 110
SCHEDULE II
CSK AUTO CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended January 29, 1995
Reserves for Closed Stores.............. 6,363 2,678 (3,296) 5,745
Reserves for Bad Debts.................. 2,128 1,447 (2,087) 1,488
Tax Valuation Allowance................. 2,948 -- (2,948) --
Year Ended January 28, 1996
Reserves for Closed Stores.............. 5,745 3,310 (3,757) 5,298
Reserves for Bad Debts.................. 1,488 1,437 (972) 1,953
Year Ended February 2, 1997
Reserves for Closed Stores.............. 5,298 14,904 (4,360) 15,842
Reserves for Bad Debts.................. 1,953 1,290 (1,475) 1,768
</TABLE>
S-2
<PAGE> 111
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGE
- ------- ----------------------- ------------
<S> <C> <C> <C>
1.01 -- Form of Underwriting Agreement.
3.01 ** -- Amended and Restated Certificate of Incorporation of the
Company, as filed with the Delaware Secretary of State on
October 30, 1996 (the "Certificate").
3.02 ** -- Certificate of Amendment to the Certificate, as filed with
the Delaware Secretary of State on December 5, 1997.
3.03 ** -- Certificate of Amendment to the Certificate, as filed with
the Delaware Secretary of State on December 19, 1997.
3.04 ** -- Form of Restated Certificate of Incorporation of the
Company, as proposed to be filed with the Delaware Secretary
of State upon the closing of the Offering.
3.05 ** -- Amended and Restated By-laws of the Company, as adopted on
October 29, 1997.
4.01 ** -- Indenture, dated as of October 30, 1996, among the Company
and TransAtlantic Finance, Ltd., as Trustee.
4.02 ** -- Indenture, dated as of October 30, 1996, among the Company
and AIBC Services, N.V., as Trustee.
4.03 * -- Indenture, dated as of October 30, 1996, by and among Auto,
Kragen, Schuck's and The Bank of New York (as successor to
Wells Fargo Bank, N.A.), as Trustee, including form of Note.
4.04 ** -- Amended and Restated Credit Agreement, dated as of December
8, 1997, among Auto, 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.
4.05 ** -- Form of Common Stock certificate.
5.01 ** -- Opinion of Gibson, Dunn & Crutcher LLP.
10.01 * -- Employment Agreement, dated June 19, 1996, between Auto and
Jules Trump.
10.02 ** -- Amended and Restated Employment Agreement, dated November 1,
1996, between Auto and James Bazlen.
10.03 * -- Amended and Restated Employment Agreement, dated June 19,
1996, between Auto and Arthur Hicks.
10.04 * -- Amended and Restated Participation Agreement, dated June 19,
1996, between Auto and James Bazlen.
10.05 * -- Amended and Restated Participation Agreement, dated June 19,
1996, between Auto 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 * -- 1996 General and Administrative Staff Incentive Compensation
Plan.
10.09 * -- 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 Auto.
10.10 * -- Amended and Restated Lease, dated October 23, 1989 (the
"Missouri Falls Lease"), between Auto and Missouri Falls
Associates Limited Partnership.
10.11 * -- First Amendment to the Missouri Falls Lease, dated November
22, 1991, between Auto and Missouri Falls Associates Limited
Partnership.
10.12 * -- Amendment to Leases, dated as of October 30, 1996, by and
between Missouri Falls Associates Limited Partnership and
Auto.
</TABLE>
<PAGE> 112
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGE
- ------- ----------------------- ------------
<S> <C> <C> <C>
10.13 * -- Financing Advisory Agreement, dated October 30, 1996,
between Auto and Investcorp International Inc.
10.14 * -- Financial Advisory Services Letter Agreement, dated October
30, 1996, between Auto and Investcorp International Inc.
10.15 * -- Standby Loan Commitment Letter Agreement, dated October 30,
1996, between Auto and Invifin S.A.
10.16 * -- Agreement for Management Advisory, Strategic Planning and
Consulting Services, dated October 30, 1996, between Auto
and Investcorp International Inc.
10.17 * -- 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, the
Company and Auto.
10.17.1 -- Form of Supplemental Stockholders' Agreement Signature Page
10.18 * -- Stock Purchase Agreement, dated September 29, 1996.
10.19 ** -- Senior Executive Stock Loan Plan.
10.20 ** -- Form of Stock Purchase Agreement.
10.21 ** -- Promissory Note of Maynard Jenkins dated December 21, 1997.
10.22 ** -- Stock Pledge Agreement between the Company and Maynard
Jenkins dated December 21, 1997.
10.23 ** -- Employment Agreement dated January 27, 1997 between Auto and
Maynard Jenkins.
10.24 ** -- Stock Acquisition Agreement dated January 27, 1997 among
Maynard Jenkins, the Company and CSK Holdings L.P.
10.25 -- Stock Option Agreement, dated February 1, 1998, between the
Company and Maynard Jenkins.
10.26 -- Stock Option Agreement, dated March 9, 1998, between the
Company and Maynard Jenkins.
11.01 ** -- Computation of Earnings per Share.
16.01 ** -- Letter of Price Waterhouse LLP re: Change in Certifying
Accountant.
21.01 ** -- Subsidiaries of the Company.
23.01 -- Consent of Price Waterhouse LLP.
23.02 -- Consent of Coopers & Lybrand L.L.P.
23.03 ** -- Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit
5.01).
24.01 ** -- Powers of Attorney (included on Signature Pages of
Registration Statement).
27.01 ** -- Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated herein by reference to CSK Auto, Inc.'s Registration Statement on
Form S-4 (File No. 333-22511).
** Previously filed.
<PAGE> 1
EXHIBIT 1.1
7,500,000 SHARES
CSK AUTO CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
, 1998
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FURMAN SELZ LLC
LEHMAN BROTHERS INC.
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
MORGAN STANLEY & CO. INCORPORATED
SMITH BARNEY INC.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities
Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
CSK AUTO CORPORATION, a Delaware corporation (the "COMPANY"), proposes
to issue and sell 7,500,000 shares of its common stock, par value $.01 per share
(the "FIRM SHARES") to the several underwriters named in Schedule I hereto (the
"UNDERWRITERS"). The Company also proposes to issue and sell to the several
Underwriters not more than an additional 1,125,000 shares of its common stock,
par value $.01 per share (the "ADDITIONAL SHARES") if requested by the
Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional
Shares are hereinafter referred to collectively as the "SHARES". The shares of
common stock of the Company to be outstanding after giving effect to the sales
contemplated hereby are hereinafter referred to as the "COMMON STOCK".
<PAGE> 2
SECTION 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430A under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT";
and the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "PROSPECTUS". If the Company has filed or is
required pursuant to the terms hereof to file a registration statement pursuant
to Rule 462(b) under the Act registering additional shares of Common Stock (a
"RULE 462(B) REGISTRATION STATEMENT"), then, unless otherwise specified, any
reference herein to the term "Registration Statement" shall be deemed to include
such Rule 462(b) Registration Statement.
SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, the Company agrees to issue and sell, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
at a price per Share of $______ (the "PURCHASE PRICE") the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to 1,125,000 Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for the
purpose of covering over-allotments made in connection with the offering of the
Firm Shares. The Underwriters may exercise their right to purchase Additional
Shares in whole or in part from time to time by giving written notice thereof to
the Company within 30 days after the date of this Agreement. You shall give any
such notice on behalf of the Underwriters and such notice shall specify the
aggregate number of Additional Shares to be purchased pursuant to such exercise
and the date for payment and delivery thereof, which date shall be a business
day (i) no earlier than two business days after such notice has been given (and,
in any event, no earlier than the Closing Date (as hereinafter defined)) and
(ii) no later than ten business days after such notice has been given. If any
Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) which bears the same proportion to the total number of Additional
Shares to be
2
<PAGE> 3
purchased from the Company as the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I bears to the total number of Firm Shares.
The Company hereby agrees not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC").
Notwithstanding the foregoing, during such period (i) the Company may grant
stock options or other stock awards pursuant to the Company's existing stock
option and other stock incentive plans and (ii) the Company may issue shares of
Common Stock upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof. The Company also agrees not to file any
registration statement, other than a registration statement on Form S-8, with
respect to any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock for a period of 180 days after the
date of the Prospectus without the prior written consent of DLJSC. The Company
shall, prior to or concurrently with the execution of this Agreement, deliver an
agreement executed by (i) each of the directors and executive officers of the
Company and (ii) each stockholder listed on Annex I hereto to the effect that
such person will not, during the period commencing on the date hereof and ending
180 days after the date of the Prospectus, without the prior written consent of
DLJSC, (A) engage in any of the transactions described in the first sentence of
this paragraph except pursuant to (i) a bona fide gift, (ii) transfers made to
family members, trusts or other similar transfers, in each case for estate
planning purposes, (iii) transfers to affiliated entities and (iv) pledges in
connection with loans, provided that any person receiving or holding shares of
Common Stock as a result of any of (i), (ii), (iii) and (iv) agrees in writing
with DLJSC to be bound by the provisions of such agreement; or (B) make any
demand for, or exercise any right with respect to, the registration of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock.
The Company hereby confirms its engagement of DLJSC as, and DLJSC
hereby confirms its agreement with the Company to render services as, a
"qualified independent underwriter", within the meaning of Section (b)(15) of
Rule 2720 of the National Association of Securities Dealers, Inc. with respect
to
3
<PAGE> 4
the offering and sale of the Shares. DLJSC, solely in its capacity as the
qualified independent underwriter and not otherwise, is referred to herein as
the "QIU". As compensation for the services of the QIU hereunder, the Company
agrees to pay the QUI $5,000 on the Closing Date. The price at which the Shares
will be sold to the public shall not be higher than the maximum price
recommended by the QIU.
SECTION 3. Terms of Public Offering. The Company is advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. Delivery and Payment. The Shares shall be represented by
temporary or definitive certificates and shall be issued in such authorized
denominations and registered in such names as DLJSC shall request not later than
two full business days prior to the Closing Date or the applicable Option
Closing Date (as defined below), as the case may be. The Company shall deliver
the Shares, with any transfer taxes thereon duly paid by the Company, to DLJSC
through the facilities of The Depository Trust Company ("DTC"), for the
respective accounts of the several Underwriters, against payment to the Company
of the Purchase Price therefor by wire transfer of Federal or other funds
immediately available in New York City. The certificates representing the Shares
shall be made available for inspection not later than 9:30 A.M., New York City
time, on the business day prior to the Closing Date or the applicable Option
Closing Date, as the case may be, at the office of DTC or its designated
custodian (the "DESIGNATED OFFICE"). The time and date of delivery and payment
for the Firm Shares shall be 9:00 A.M., New York City time, on __________ , 1998
or such other time on the same or such other date as DLJSC and the Company shall
agree in writing. The time and date of delivery and payment for the Firm Shares
are hereinafter referred to as the "CLOSING DATE." The time and date of delivery
and payment for any Additional Shares to be purchased by the Underwriters shall
4
<PAGE> 5
be 9:00 A.M., New York City time, on the date specified in the applicable
exercise notice given by you pursuant to Section 2 or such other time on the
same or such other date as DLJSC and the Company shall agree in writing. The
time and date of delivery and payment for any Additional Shares are hereinafter
referred to as an "OPTION CLOSING DATE."
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 8 of this Agreement
shall be delivered at the offices of Davis Polk & Wardwell, 450 Lexington
Avenue, New York, New York 10017 and the Shares shall be delivered at the
Designated Office, all on the Closing Date or such Option Closing Date, as the
case may be.
SECTION 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm
such advice in writing, (i) of any request by the Commission for
amendments to the Registration Statement or amendments or supplements
to the Prospectus or for additional information, (ii) of the issuance
by the Commission of any stop order suspending the effectiveness of
the Registration Statement or of the suspension of qualification of
the Shares for offering or sale in any jurisdiction, or the initiation
of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is
required to file a Rule 462(b) Registration Statement after the
effectiveness of this Agreement, when the rule 462(b) Registration
Statement has become effective and (v) of the happening of any event
during the period referred to in Section 5(d) below which makes any
statement of material fact made in the Registration Statement or the
Prospectus untrue or which requires any additions to or changes in the
Registration Statement or the Prospectus in order to make the
statements therein not misleading. If at any time the commission shall
issue any stop order suspending the effectiveness of the Registration
Statement, the Company will use its best efforts to obtain the
withdrawal or lifting of such order at the earliest possible time.
(b) To furnish to you such signed copies of the Registration
Statement as first filed with the Commission and of each amendment to
it, including all exhibits, and to furnish to you and each Underwriter
designated by you such number of conformed copies of the Registration
Statement as so filed and of each amendment to it, without exhibits,
as you may request.
(c) To prepare the Prospectus, the form and substance of which
shall be reasonably satisfactory to you, and to file the Prospectus in
such
5
<PAGE> 6
form with the Commission within the applicable period specified in Rule
424(b) under the Act; during the period specified in Section 5(d)
below, not to file any further amendment to the Registration Statement
and not to make any amendment or supplement to the Prospectus of which
you shall not previously have been advised or to which you shall
reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable
request, any amendment to the Registration Statement or amendment or
supplement to the Prospectus which may be necessary or advisable in
connection with the distribution of the Shares by you, and to use its
best efforts to cause any such amendment to the Registration Statement
to become promptly effective.
(d) To use its best efforts to furnish prior to 10:00 A.M., New
York City time, on the first business day after the date of this
Agreement and from time to time thereafter for such period as in the
opinion of counsel for the Underwriters a prospectus is required by
law to be delivered in connection with sales by an Underwriter or a
dealer, in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the
Prospectus) as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event
shall occur or condition shall exist as a result of which, in the
opinion of counsel for the Underwriters, it becomes necessary to amend
or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances when the Prospectus is delivered to
a purchaser, not misleading, or if it is necessary to amend or
supplement the Prospectus to comply with applicable law, forthwith to
prepare and file with the Commission an appropriate amendment or
supplement to the Prospectus so that the statements in the Prospectus,
as so amended or supplemented, will not in the light of the
circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such
Underwriter or dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with
you and counsel for the Underwriters in connection with the
registration or qualification of the Shares for offer and sale by the
several Underwriters and by dealers under the state securities or Blue
Sky laws of such jurisdictions as you may request, to continue such
registration or qualification in effect so long as required for
distribution of the Shares and to file such consents to service of
process or other documents as may be necessary in order to effect such
registration or qualification; provided,
6
<PAGE> 7
however, that the Company shall not be required in connection therewith
to qualify as a foreign corporation in any jurisdiction in which it is
not now so qualified or to take any action that would subject it to
general consent to service of process or taxation other than as to
matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the
Shares, in any jurisdiction in which it is not now so subject.
(g) To make generally available to its stockholders as soon as
practicable an earnings statement covering the twelve-month period
ending May 2, 1999 that shall satisfy the provisions of Section 11(a)
of the Act and the rules and regulations thereunder (including, at the
option of the Company, Rule 158), and to advise you in writing when
such statement has been so made available.
(h) During the period of three years after the date of this
Agreement, to furnish to you as soon as available copies of all
reports or other publicly available information furnished to the
record holders of Common Stock or filed with the Commission or any
national securities exchange on which any class of securities of the
Company is listed and such other publicly available information
concerning the Company and its subsidiaries as you may reasonably
request.
(i) Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or
cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including: (i) the fees,
disbursements and expenses of the Company's counsel and the Company's
accountants in connection with the registration and delivery of the
Shares under the Act and all other fees and expenses in connection
with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits),
any preliminary prospectus, the Prospectus and all amendments and
supplements to any of the foregoing, including the mailing and
delivering of copies thereof to the Underwriters and dealers in the
quantities specified herein, (ii) all costs and expenses related to
the transfer and delivery of the Shares to the Underwriters, including
any transfer or other taxes payable thereon, (iii) all costs of
printing or producing this Agreement and any other agreements or
documents in connection with the offering, purchase, sale or delivery
of the Shares, (iv) all expenses in connection with the registration
or qualification of the Shares for offer and sale under the securities
or Blue Sky laws of the several states and all costs of printing or
producing any Preliminary and Supplemental Blue Sky Memoranda in
connection therewith (including
7
<PAGE> 8
the filing fees and reasonable fees and disbursements of counsel for
the Underwriters in connection with such registration or qualification
and memoranda relating thereto), (v) the filing fees in connection with
the review and clearance of the offering of the Shares by the National
Association of Securities Dealers, Inc., (vi) all fees and expenses in
connection with the preparation and filing of the registration
statement on Form 8-A relating to the Common Stock and all costs and
expenses incident to the listing of the Shares on the NYSE, (vii) the
cost of printing certificates representing the Shares, (viii) the costs
and charges of any transfer agent, registrar and/or depositary, (ix)
the fees and expenses of the QIU (including the fees and disbursements
of counsel to the QIU), and (x) all other costs and expenses incident
to the performance of the obligations of the Company hereunder for
which provision is not otherwise made in this Section 5(i).
(j) To use its best efforts to list, subject to notice of
issuance, the Shares on the NYSE and to maintain the listing of the
Shares on the NYSE for a period of three years after the date of this
Agreement.
(k) To use its best efforts to do and perform all things required
or necessary to be done and performed under this Agreement by the
Company prior to the Closing Date or any Option Closing Date, as the
case may be, and to satisfy all conditions precedent to the delivery
of the Shares.
(l) If the Registration Statement at the time of the
effectiveness of this Agreement does not cover all of the Shares, to
file a Rule 462(b) Registration Statement with the Commission
registering the Shares not so covered in compliance with Rule 462(b)
by 10:00 P.M., New York City time, on the date of this Agreement and
to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give
irrevocable instructions for the payment of such fee pursuant to Rule
111(b) under the Act and any Rule 462(b) Registration Statement filed
after the effectiveness of this Agreement will become effective no
later than 10:00 P.M., New York City time, on the date of this
Agreement.
8
<PAGE> 9
SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than
any Rule 462(b) Registration Statement to be filed by the Company
after the effectiveness of this Agreement); and no stop order
suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or
threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the
effectiveness of this Agreement), when it became effective, did not
contain and, as amended, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, (ii) the Registration Statement (other than any Rule
462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as
amended or supplemented, if applicable, will comply in all material
respects with the Act, (iii) if the Company is required to file a Rule
462(b) Registration Statement after the effectiveness of this
Agreement, such Rule 462(b) Registration Statement and any amendments
thereto, when they become effective (A) will not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading and (B) will comply in all material respects with the Act
and (iv) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use therein.
9
<PAGE> 10
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 under the Act, complied when so filed in
all material respects with the Act, and did not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth
in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein.
(d) Each of the Company and its subsidiaries other than Kragen
Auto Supply Co., a California corporation, and Schuck's Distribution
Co., a Washington company, ( the "MATERIAL SUBSIDIARIES") has been
duly incorporated, is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation and has
the corporate power and authority to carry on its business as
described in the Prospectus and to own, lease and operate its
properties, and each is duly qualified and is in good standing as a
foreign corporation authorized to do business in each jurisdiction in
which the nature of its business or its ownership or leasing of
property requires such qualification, except where the failure to be
so qualified would not have a material adverse effect on the business,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole ("MATERIAL ADVERSE EFFECT").
(e) There are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or liens
granted or issued by the Company or any of its subsidiaries relating
to or entitling any person to purchase or otherwise to acquire any
shares of the capital stock of the Company or any of its subsidiaries,
except for the warrant dated October 28, 1996 in favor of Investcorp
Bank E.C. or as otherwise disclosed in the Registration Statement.
(f) All the outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid,
non-assessable and, except as set forth in the Stockholders' Agreement
(as defined in the Registration Statement), not subject to any
preemptive or similar rights; and the Shares have been duly authorized
and, when issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be validly issued, fully
paid and non-assessable, and
10
<PAGE> 11
the issuance of such Shares will not be subject to any preemptive or
similar rights.
(g) All of the outstanding shares of capital stock of each of the
Company's Material Subsidiaries have been duly authorized and validly
issued and are fully paid and non-assessable, and are owned by the
Company, directly or indirectly through one or more subsidiaries, free
and clear of any security interest, claim, lien, encumbrance or
adverse interest of any nature, other than the liens granted in
connection with the Amended and Restated Credit Facility dated as of
December 8, 1997 among CSK Auto, Inc., The Chase Manhattan Bank,
Lehman Commercial Paper, Inc. and the other lenders party thereto and
any prior loan agreement restated therein (the "Senior Credit
Facility").
(h) The authorized capital stock of the Company conforms in all
material respects as to legal matters to the description thereof
contained in the Prospectus.
(i) Neither the Company nor any of its Material Subsidiaries is
in violation of its respective charter or by-laws or in default in the
performance of any obligation, agreement, covenant or condition
contained in any indenture, loan agreement, mortgage, lease or other
arrangement or instrument that is material to the conduct of the
business of the Company and its subsidiaries, taken as a whole, to
which the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries or their respective property is
bound, except for any such default that would not have a Material
Adverse Effect.
(j) The execution, delivery and performance of this Agreement by
the Company, the compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby
will not (i) require any consent, approval, authorization or other
order of, or qualification with, any court or governmental body or
agency (except such as may be required under the securities or Blue
Sky laws of the various states), (ii) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
charter or by-laws of the Company or any of its subsidiaries or ,
except where such conflict or breach would not have a Material Adverse
Effect, any indenture, loan agreement, mortgage, lease or other
agreement or instrument that is material to the conduct of the Company
and its subsidiaries, taken as a whole, to which the Company or any of
its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound, (iii) assuming
compliance with all state securities and Blue Sky laws, violate or
conflict
11
<PAGE> 12
with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having
jurisdiction over the Company, any of its subsidiaries or their
respective property, except where such violation or conflict would not
have a Material Adverse Effect or (iv) result in the suspension,
termination or revocation of any Material Authorization (as defined
below) of the Company or any of its subsidiaries or any other
impairment of the rights of the holder of any such Material
Authorization.
(k) Except as set forth in the Prospectus, there are no legal or
governmental proceedings pending or threatened to which the Company or
any of its subsidiaries is a party or to which any of their respective
property is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described; nor
are there any contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be
filed as exhibits to the Registration Statement that are not so
described or filed as required.
(l) To the knowledge of the Company, neither the Company nor any
of its subsidiaries has violated any foreign, federal, state or local
law or regulation relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("ENVIRONMENTAL LAWS") or any provisions of
the Employee Retirement Income Security Act of 1974, as amended, or
the rules and regulations promulgated thereunder, except for such
violations which singly or in the aggregate would not have a Material
Adverse Effect.
(m) Each of the Company and its subsidiaries has such permits,
licenses, consents, exemptions, franchises, authorizations and other
approvals of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory
organizations and all courts and other tribunals, including, without
limitation, under any applicable Environmental Laws, other than those
permits, licenses, consents, exemptions franchises, authorizations,
approvals, filings and other notices which the failure to have or make
would not, singly or in the aggregate, have a Material Adverse Effect
(each, a "MATERIAL AUTHORIZATION"). The Company and its subsidiaries
is in compliance with all the material terms and conditions thereof
and with the rules and regulations of the authorities and governing
bodies having jurisdiction with respect thereto; and no event has
occurred (including, without limitation, the receipt of any notice
from any authority or governing body) which allows or, after notice or
lapse of time or both, would allow, revocation, suspension or
termination of any such Material Authorization
12
<PAGE> 13
or results or, after notice or lapse of time or both, would result in
any other impairment of the rights of the holder of any such Material
Authorization; except where such failure to be in compliance, the
occurrence of any such event or the presence of any such restriction
would not, singly or in the aggregate, have a Material Adverse Effect.
(n) This Agreement has been duly authorized, executed and
delivered by the Company.
(o) To the knowledge of the Company, Price Waterhouse LLP and
Coopers & Lybrand L.L.P. are independent public accountants with
respect to the Company and its subsidiaries as required by the Act.
(p) The consolidated historical financial statements included in
the Registration Statement and the Prospectus (and any amendment or
supplement thereto), together with related schedules and notes,
present fairly the consolidated financial position, results of
operations and cash flows of the Company and its subsidiaries on the
basis stated therein at the respective dates or for the respective
periods to which they apply; such statements and related schedules and
notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods
involved, except as disclosed therein; the supporting schedules, if
any, included in the Registration Statement present fairly in
accordance with generally accepted accounting principles the
information required to be stated therein; and the other financial and
statistical information and data set forth in the Registration
Statement and the Prospectus (and any amendment or supplement thereto)
including, the unaudited pro forma financial statements, are, in all
material respects, accurately presented and prepared on a basis
consistent with such financial statements and the books and records of
the Company and, except for the pro forma adjustments specified
therein, include all material adjustments to the historical financial
required by Rule 11-02 of Regulation S-X and give effect to
assumptions made on a reasonable basis and present fairly the
historical and proposed transactions contemplated by the Prospectus
and this Agreement.
(q) The Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as
such term is defined in the Investment Company Act of 1940, as
amended.
(r) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to
13
<PAGE> 14
require the Company to file a registration statement under the Act
with respect to any securities of the Company or to require the
Company to include such securities with the Shares registered pursuant
to the Registration Statement except as otherwise disclosed in the
Registration Statement.
(s) Since the respective dates as of which information is given
in the Prospectus other than as set forth in the Prospectus (exclusive
of any amendments or supplements thereto subsequent to the date of
this Agreement), there has not occurred any material adverse change or
any development involving a prospective material adverse change in the
business, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole.
(t) The Company and its subsidiaries have valid rights to lease
or otherwise use, all items of real or personal property which are
material to the business of the Company and its subsidiaries, taken as
a whole, in each case free and clear of all liens, encumbrances and
defects that would have a Material Adverse Effect, other than
Permitted Liens (as defined in the Senior Credit Facility).
SECTION 7. Indemnification. (a) The Company agrees to indemnify and
hold harmless each Underwriter, its directors, its officers and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), from and against any and all losses, claims, damages, liabilities and
judgments (including, without limitation, any legal or other expenses reasonably
incurred in connection with investigating or defending any matter, including any
action, that could reasonably be expected to give rise to any such losses,
claims, damages, liabilities or judgments) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any
14
<PAGE> 15
amendment thereto), the Prospectus (or any amendment or supplement thereto) or
any preliminary prospectus, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished in writing to the Company by or on behalf of such
Underwriter through you expressly for use therein provided, however, that the
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
such losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
losses, claims, damages or liabilities, unless such failure is the result of
noncompliance by the Company with Section 5(d) hereof.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration
15
<PAGE> 16
Statement and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent
as the foregoing indemnity from the Company to such Underwriter but only with
reference to information relating to such Underwriter furnished in writing to
the Company by or on behalf of such Underwriter through you expressly for use in
the Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 7(a) and 7(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 7(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) for all indemnified parties and all such fees and
expenses shall be reimbursed as they are incurred. Such firm shall be designated
in writing by DLJSC, in the case of parties indemnified pursuant to Section
7(a), and by the Company, in the case of parties indemnified pursuant to Section
7(b). The indemnifying party shall indemnify and hold harmless the indemnified
party from and against any and all losses, claims, damages, liabilities and
judgments by reason of any settlement of any action (i) effected with its
16
<PAGE> 17
written consent or (ii) effected without its written consent if the settlement
is entered into more than sixty business days after the indemnifying party shall
have received a written request from the indemnified party for reimbursement for
the fees and expenses of counsel (in any case where such fees and expenses are
at the expense of the indemnifying party) and, prior to the date of such
settlement, the indemnifying party shall have failed to comply with such
reimbursement request. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement or compromise of, or
consent to the entry of judgment with respect to, any pending or threatened
action in respect of which the indemnified party is or could have been a party
and indemnity or contribution may be or could have been sought hereunder by the
indemnified party, unless such settlement, compromise or judgment (i) includes
an unconditional release of the indemnified party from all liability on claims
that are the subject matter of such action and (ii) does not include a statement
as to or an admission of fault, culpability or a failure to act, by or on behalf
of the indemnified party.
(d) To the extent the indemnification provided for in this Section 7
is unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 7(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 7(d)(i) above but also the
relative fault of the Company on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company, and the total underwriting discounts and
commissions received by the Underwriters, bear to the
17
<PAGE> 18
total price to the public of the Shares, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault of the Company on the
one hand and the Underwriters on the other hand shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 7(d) are several in proportion to the respective number of Shares
purchased by each of the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 7 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
SECTION 8. Indemnification of QIU. (a) The Company agrees to indemnify
and hold harmless the QIU, its directors, its officers and each person, if any,
who controls the QIU within the meaning of Section 15 of the Act or Section 20
of the Exchange Act, from and against any and all losses, claims, damages,
liabilities and judgments (including, without limitation, any legal or other
expenses reasonably incurred in connection with investigating or defending any
matter, including any action, that could give rise to any such losses, claims,
damages, liabilities or judgments) related to, based upon or arising out of (i)
any
18
<PAGE> 19
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus, or any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading or (ii) the
QIU's activities as QIU under its engagement pursuant to Section 2 hereof,
except in the case of this clause (ii) insofar as any such losses, claims,
damages, liabilities or judgments are found in a final judgment by a court of
competent jurisdiction, not subject to further appeal, to have resulted solely
from the willful misconduct or gross negligence of the QIU.
(b) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) (the "QIU
INDEMNIFIED PARTY"), the QIU Indemnified Party shall promptly notify the Company
in writing and the Company shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the QIU Indemnified Party
and the payment of all fees and expenses of such counsel, as incurred. Any QIU
Indemnified Party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of the QIU Indemnified Party unless (i) the
employment of such counsel shall have been specifically authorized in writing by
the Company, (ii) the Company shall have failed to assume the defense of such
action or employ counsel reasonably satisfactory to the QIU Indemnified Party or
(iii) the named parties to any such action (including any impleaded parties)
include both the QIU Indemnified Party and the Company, and the QIU Indemnified
Party shall have been advised by such counsel that there may be one or more
legal defenses available to it which are different from or additional to those
available to the Company (in which case the Company shall not have the right to
assume the defense of such action on behalf of the QIU Indemnified Party). In
any such case, the Company shall not, in connection with any one action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (in addition to
any local counsel) for all QIU Indemnified Parties, which firm shall be
designated by the QIU, and all such fees and expenses shall be reimbursed as
they are incurred. The Company shall indemnify and hold harmless the QIU
Indemnified Party from and against any and all losses, claims, damages,
liabilities and judgments by reason of any settlement of any action (i) effected
with its written consent or (ii) effected without its written consent if the
settlement is entered into more than sixty business days after the Company shall
have received a written request from the QIU Indemnified Party for reimbursement
for the fees and expenses of counsel (in any case where such fees and expenses
are at the expense of the Company) and, prior to the date of such settlement,
the Company
19
<PAGE> 20
shall have failed to comply with such reimbursement request. The Company shall
not, without the prior written consent of the QIU Indemnified Party, effect any
settlement or compromise of, or consent to the entry of judgment with respect
to, any pending or threatened action in respect of which the QIU Indemnified
Party is or could have been a party and indemnity or contribution may be or
could have been sought hereunder by the QIU Indemnified Party, unless such
settlement, compromise or judgment (i) includes an unconditional release of the
QIU Indemnified Party from all liability on claims that are the subject matter
of such action and (ii) does not include a statement as to or an admission of
fault, culpability or a failure to act, by or on behalf of the QIU Indemnified
Party.
(c) To the extent the indemnification provided for in this Section 8
is unavailable to a QIU Indemnified Party or insufficient in respect of any
losses, claims, damages, liabilities or judgments referred to therein, then the
Company, in lieu of indemnifying such QIU Indemnified Party, shall contribute to
the amount paid or payable by such QIU Indemnified Party as a result of such
losses, claims, damages, liabilities and judgments (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the QIU on the other hand from the offering of the Shares or (ii) if
the allocation provided by clause 8(c)(i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause 8(c)(i) above but also the relative fault of the
Company on the one hand and the QIU on the other hand in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or judgments, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the QIU on the other hand shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received by
the Company as set forth in the table on the cover page of the Prospectus, and
the fee received by the QIU pursuant to Section 2 hereof, bear to the sum of
such total net proceeds and such fee. The relative fault of the Company on the
one hand and the QIU on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the QIU and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission and whether the QIU's activities as QIU under its
engagement pursuant to Section 2 hereof involved any willful misconduct or gross
negligence on the part of the QIU.
The Company and the QIU agree that it would not be just and equitable
if contribution pursuant to this Section 8(c) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
The amount
20
<PAGE> 21
paid or payable by a QIU Indemnified Party as a result of the losses, claims,
damages, liabilities or judgments referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such QIU Indemnified
Party in connection with investigating or defending any such action or claim. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
(d) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
QIU Indemnified Party at law or in equity.
SECTION 9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company
contained in this Agreement shall be true and correct on the Closing
Date with the same force and effect as if made on and as of the
Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New
York City time, on the date of this Agreement; and no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been
commenced or shall be pending before or contemplated by the
Commission.
(c) You shall have received on the Closing Date a certificate
dated the Closing Date, signed by James Bazlen and Don Watson, in
their capacities as the President and Chief Operating Officer, and
Chief Financial Officer and Treasurer of the Company, respectively,
confirming to the best of their knowledge after reasonable
investigation the matters set forth in Sections 6(s), 9(a) and 9(b)
and that the Company has complied with all of the agreements and
satisfied all of the conditions herein contained and required to be
complied with or satisfied by the Company on or prior to the Closing
Date.
(d) Since the respective dates as of which information is given
in the Prospectus other than as set forth in the Prospectus (exclusive
of any amendments or supplements thereto subsequent to the date of
this Agreement), (i) there shall not have occurred any change or any
21
<PAGE> 22
development involving a prospective change in the business, financial
condition or results of operations of the Company and its
subsidiaries, taken as a whole, (ii) there shall not have been any
change or any development involving a prospective change in the
capital stock or in the long-term debt of the Company or any of its
subsidiaries and (iii) neither the Company nor any of its subsidiaries
shall have incurred any liability or obligation, direct or contingent,
the effect of which, in any such case described in clause 9(d)(i),
9(d)(ii) or 9(d)(iii), in the judgment of DLJSC, is material and
adverse and, in the judgment of DLJSC, makes it impracticable to
market the Shares on the terms and in the manner contemplated in the
Prospectus.
(e) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Gibson, Dunn & Crutcher LLP counsel for the Company, to the effect that:
(i) each of the Company and its Material Subsidiaries, is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and
authority to carry on its business as described in the Prospectus and
to own, lease and operate its properties;
(ii) all the outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid,
non-assessable and have not been issued in violation of any preemptive
rights with respect to such shares provided in the Company's
Certificate of Incorporation, By-laws and any agreement identified to
such counsel by the Company as a material agreement to which the
Company is bound;
(iii) the Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor as provided by
this Agreement, will be validly issued, fully paid and non-assessable,
and the issuance of such Shares will not be subject to any preemptive
rights with respect to such shares provided in the Company's
Certificate of Incorporation, By-laws and any agreement identified to
such counsel by the Company as a material agreement to which the
Company is bound;
(iv) this Agreement has been duly authorized, executed and
delivered by the Company;
(v) the authorized capital stock of the Company conforms in all
material respects as to legal matters to the description thereof
contained in the Prospectus;
22
<PAGE> 23
(vi) the Registration Statement has become effective under the
Act, no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to such counsel's knowledge, pending
before or contemplated by the Commission;
(vii) the Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as
such term is defined in the Investment Company Act of 1940, as
amended;
(viii) to such counsel's knowledge, there are no contracts,
agreements or understandings between the Company and any person
granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with
the Shares registered pursuant to the Registration Statement except as
otherwise disclosed in the Prospectus; and
In addition, such counsel shall state that such counsel has
participated in the preparation of the Registration Statement and the
Prospectuses and in conferences with officers and other representatives of the
Company, representatives of the independent auditors of the Company and your
representatives at which the contents of the Registration Statement and
Prospectus and related matters were discussed. Such counsel also may state that
because the purpose of their professional engagement was not to establish or
confirm factual matters and because the scope of their examination of the
affairs of the Company did not permit them to verify the accuracy, completeness
or fairness of the statements set forth in the Registration Statement or
Prospectus, they are not passing upon and do not assume any responsibility for
the accuracy, completeness or fairness of the statements contained in the
Registration Statement or Prospectus, except to the extent set forth in the last
sentence of this paragraph. On the basis of the foregoing, and except for the
financial statements and schedules and other financial data included therein, as
to which such counsel need express no opinion or belief, (a) such counsel is of
the opinion that the Registration Statement at the time it became effective, and
the Prospectus as of the date thereof and as of the date of such opinion,
appeared on their face to be appropriately responsible in all material respects
to the relevant requirements of the Securities Act and the General Rules and
Regulations promulgated thereunder and (b) no facts have come to such counsel's
attention that lead such counsel to believe that (i) the Registration Statement
at the time it became effective contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, or (ii) the
23
<PAGE> 24
Prospectus as of its date and as of the date of such opinion contained or
contains an untrue statement of a material fact or omitted or omits to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The statements under the captions "Acquisition and Financings",
"Certain Transactions--Stockholders' Agreement", "Description of Certain
Indebtedness", and "Description of Capital Stock", in the Prospectus and Items
14 and 15 of Part II of the Registration Statement, insofar as such statements
constitute a summary of the legal matters, documents or proceedings referred to
therein, fairly present in all material respects the information called for with
respect to such legal matters, documents and proceedings by the Securities Act
and the applicable rules and regulations thereunder relating to a Registration
Statement on Form S-1.
The opinion of Gibson, Dunn & Crutcher LLP described in Section 9(e)
above shall be rendered to you at the request of the Company and shall so state
therein.
(f) You shall have received on the Closing Date, an opinion, dated the
Closing Date, of Lon Novatt, general counsel of the Company, to the effect that:
(i) each of the Material Subsidiaries has been duly incorporated
and each of the Company and its subsidiaries is duly qualified and is
in good standing as a foreign corporation authorized to do business in
each jurisdiction in which the nature of its business or its ownership
or leasing of property requires such qualification, except where the
failure to be so qualified would not have a Material Adverse Effect;
(ii) all of the outstanding shares of capital stock of each of
the Company's subsidiaries have been duly authorized and validly
issued and are fully paid and non-assessable, and are owned by the
Company, directly or indirectly through one or more subsidiaries free
and clear of any security interest, claim, lien, encumbrance or
adverse interest of any nature, other than the liens granted in
connection with to the Senior Credit Facility;
(iii) neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws and, to such counsel's
knowledge, neither the Company nor any of its subsidiaries is in
default in the performance of any obligation, agreement, covenant or
condition contained in any indenture, loan agreement, mortgage, lease
or other agreement or instrument that is material to the conduct of
the business of the Company and its subsidiaries, taken as a whole, to
which the Company or any of its subsidiaries is a party or by which
the Company or any of its
24
<PAGE> 25
subsidiaries or their respective property is bound, except for such
defaults which would not have a Material Adverse Effect;
(iv) the execution, delivery and performance of this Agreement by
the Company, the compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby
will not (A) require any consent, approval, authorization or other
order of, or qualification with, any court or governmental body or
agency (other than as may be required under federal, foreign or state
securities and Blue Sky laws of the various states as to which such
counsel expresses no opinion), (B) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
charter or by-laws of the Company or any of its subsidiaries or,
except where such conflict or breach would not have a Material Adverse
Effect, any indenture, loan agreement, mortgage, lease or other
agreement or instrument that is material to the conduct of the
business of the Company and its subsidiaries, taken as a whole, to
which the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries or their respective property is
bound, (C) assuming compliance with all applicable state and federal
securities and Blue Sky laws, violate or conflict with any applicable
law or any rule, regulation, judgment, order or decree of any court or
any governmental body or agency having jurisdiction over the Company,
any of its subsidiaries or their respective property, except where
such violation or conflict would not have a Material Adverse Effect or
(D) result in the suspension, termination or revocation of any
Material Authorization of the Company or any of its subsidiaries or
any other impairment of the rights of the holder of any such Material
Authorization which would result in a Material Adverse Effect;
(v) such counsel does not know of any legal or governmental
proceedings pending or threatened to which the Company or any of its
subsidiaries is a party or to which any of their respective property
is subject that are required to be described in the Registration
Statement or the Prospectus and are not so described, or of any
statutes, regulations, contracts or other documents that are required
to be described in the Registration Statement or the Prospectus or to
be filed as exhibits to the Registration Statement that are not so
described or filed as required.
(g) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Davis Polk & Wardwell, counsel for the Underwriters, as to the
matters referred to in Sections 9(e)(iii), 9(e)(iv), the penultimate paragraph
of Section 9(e) (but only with respect to the statements under the caption
"Description of Capital Stock" and "Underwriting").
25
<PAGE> 26
In giving such opinions with respect to the matters covered by the penultimate
paragraph of Section 9(e), Davis Polk & Wardwell may state that their opinion
and belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements thereto
and review and discussion of the contents thereof, but are without independent
check or verification except as specified.
(h) You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the case
may be, in form and substance satisfactory to you, from Price Waterhouse L.L.P.
and Coopers & Lybrand L.L.P., independent public accountants, containing the
information and statements of the type ordinarily included in accountants'
"comfort letters" to Underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and the
Prospectus.
(i) The Company shall have delivered to you the agreements specified
in the third paragraph of Section 2 hereof which agreements shall be in full
force and effect on the Closing Date.
(j) The Company shall not have failed on or prior to the Closing Date
to perform or comply in any material respect with any of the agreements herein
contained and required to be performed or complied with by the Company on or
prior to the Closing Date.
(k) On or after the date hereof, (i) there shall not have occurred any
downgrading, suspension or withdrawal of, nor shall any notice have been given
of any potential or intended downgrading, suspension or withdrawal of, or of any
review (or of any potential or intended review) for a possible change that does
not indicate the direction of the possible change in, any rating of the Company
or any of its subsidiaries or any securities of the Company or any of its
subsidiaries (including, without limitation, the placing of any of the foregoing
ratings on credit watch with negative or developing implications or under review
with an uncertain direction) by any "nationally recognized statistical rating
organization" as such term is defined for purposes of Rule 436(g)(2) under the
Act and (ii) there shall not have occurred any change, nor shall any notice have
been given of any potential or intended change, in the outlook for any rating of
the Company or any of its subsidiaries or any securities of the Company or any
of its subsidiaries by any such rating organization.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to
26
<PAGE> 27
the good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
SECTION 10. Effectiveness of Agreement and Termination. This
Agreement shall become effective upon the execution and delivery of this
Agreement by the parties hereto.
This Agreement may be terminated at any time on or prior to the
Closing Date by you by written notice to the Company if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States that, in your judgment, is material and
adverse and, in your judgment, makes it impracticable to market the Shares on
the terms and in the manner contemplated in the Prospectus, (ii) the suspension
or material limitation of trading in securities or other instruments on the New
York Stock Exchange, the American Stock Exchange, the Chicago Board of Options
Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or the
Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by
either federal or New York State authorities or (vi) the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion which
the number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional
27
<PAGE> 28
Shares, as the case may be, which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase on such date; provided that in no event
shall the number of Firm Shares or Additional Shares, as the case may be, which
any Underwriter has agreed to purchase pursuant to Section 2 hereof be increased
pursuant to this Section 10 by an amount in excess of one-ninth of such number
of Firm Shares or Additional Shares, as the case may be, without the written
consent of such Underwriter. If on the Closing Date any Underwriter or
Underwriters shall fail or refuse to purchase Firm Shares and the aggregate
number of Firm Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Firm Shares to be purchased by all
Underwriters and arrangements satisfactory to you and the Company for purchase
of such Firm Shares are not made within 48 hours after such default, this
Agreement will terminate without liability on the part of any non-defaulting
Underwriter and the Company. In any such case which does not result in
termination of this Agreement, either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and the
Prospectus or any other documents or arrangements may be effected. If, on an
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased on such date, the non-defaulting
Underwriters shall have the option to (i) terminate their obligation hereunder
to purchase such Additional Shares or (ii) purchase not less than the number of
Additional Shares that such non-defaulting Underwriters would have been
obligated to purchase on such date in the absence of such default. Any action
taken under this paragraph shall not relieve any defaulting Underwriter from
liability in respect of any default of any such Underwriter under this
Agreement.
SECTION 11. Miscellaneous. Notices given pursuant to any provision
of this Agreement shall be addressed as follows: (i) if to the Company, to CSK
Auto Corporation, 645 E. Missouri Avenue, Phoenix, Arizona 85012, Attention:
Chief Financial Officer and (ii) if to any Underwriter or to you, to you c/o
Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York,
New York 10172, Attention: Syndicate Department, or in any case to such other
address as the person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company and the several Underwriters set
forth in or made pursuant to this Agreement shall remain operative and in full
force and effect, and will survive delivery of and payment for the Shares,
regardless of (i) any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the officers or directors of any
Underwriter, any
28
<PAGE> 29
QIU Indemnified Party, any person controlling any Underwriter, the Company, the
officers or directors of the Company or any person controlling the Company, (ii)
acceptance of the Shares and payment for them hereunder and (iii) termination of
this Agreement.
If for any reason the Shares are not delivered by or on behalf of the
Company as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Company agrees to reimburse the several
Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) incurred by them. Notwithstanding any termination of
this Agreement, the Company shall be liable for all expenses which it has agreed
to pay pursuant to Section 5(i) hereof.
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriters, the Underwriters' directors and officers, any controlling persons
referred to herein, the QIU Indemnified Parties, the Company's directors and the
Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
29
<PAGE> 30
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
CSK AUTO CORPORATION
By:
--------------------------------
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FURMAN SELZ LLC
LEHMAN BROTHERS INC.
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
MORGAN STANLEY & CO. INCORPORATED
SMITH BARNEY INC.
Acting severally on behalf of themselves and the
several Underwriters named in Schedule I
hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
----------------------------------
Title:
30
<PAGE> 31
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF FIRM SHARES
UNDERWRITERS TO BE PURCHASED
----------------- ----------------------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities
Corporation
Furman Selz LLC
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Morgan Stanley & Co. Incorporated
Smith Barney Inc.
------------------------------
Total 7,500,000
</TABLE>
<PAGE> 32
ANNEX I
STOCKHOLDERS WHO WILL SIGN LOCK-UPS
INVESTORS OFFICERS & DIRECTORS
--------- --------------------
Equity CSKA Limited Maynard Jenkins
Equity CSKB Limited James Bazlen
Equity CSKC Limited
Auto Equity Limited Martin Fraser
Auto Parts Limited Robert Shortt
Auto Investments Limited Don Watson
CSK Investments Limited Henry Torres
CSK Equity Limited Lon Novatt
Investcorp CSK Holdings L.P. Dale Ward
New CSK Equity Limited
CSK International Limited
Chase Bank (C.I.) Nominees Limited
South Bay Limited
Ballet Limited
Denary Limited
Gleam Limited
Highlands Limited
Noble Limited
Outrigger Limited
Quill Limited
Radial Limited
Shoreline Limited
Zinnia Limited
Investcorp Investment Equity Limited
<PAGE> 33
CHT Trust Company Limited,
as trustee of Carmel Trust
Transatlantic Finance, Ltd.
<PAGE> 1
PLAN AMENDMENT
PLAN AMENDMENT to the 1996 ASSOCIATE STOCK OPTION PLAN, effective as
of October 30, 1996 (the "Plan"), of CSK AUTO CORPORATION (the "Corporation").
Terms used but not defined in this Amendment have the respective meanings
assigned to them in the Plan.
The Board of Directors of the Corporation, acting as a whole, and
pursuant to Section 14 of the Plan, amends the Plan as follows:
1. AMENDMENT. (a) Section 23 of the Plan is amended by changing the
date in the final sentence of such Section to "February 10, 1998."
(b) Section 2 of the Plan is amended by deleting the number "37,000"
in the first sentence, and replacing it with the number "60,000".
(c) Section 4 of the Plan is amended by changing the definition of
the "162(m) Maximum" from "32,000" shares to "60,000" shares.
2. NO OTHER AMENDMENTS. Except as expressly amended hereby, the Plan
is and shall remain in full force and effect.
3. EFFECTIVE DATE. Once duly executed and approved pursuant to
Section 14, this Amendment shall be effective as of October 29, 1997.
<PAGE> 1
EXHIBIT 10.06.2
SECOND PLAN AMENDMENT
SECOND PLAN AMENDMENT to the 1996 ASSOCIATE STOCK OPTION PLAN,
effective as of October 30, 1996 (as amended, the "Plan"), of CSK AUTO
CORPORATION (the "Corporation"). Terms used but not defined in this Amendment
have the respective meanings assigned to them in the Plan.
The Board of Directors of the Corporation, acting as a whole, and
pursuant to Section 14 of the Plan, amends the Plan as follows:
1. AMENDMENT.
(a) Section 7 of the Plan is amended by deleting the following from
the first paragraph thereof:
(THE "INITIAL PUBLIC OFFERING"), AS THE TERM INITIAL PUBLIC OFFERING
IS DEFINED IN THE RESTATED CERTIFICATE OF INCORPORATION OF THE COMPANY FILED
WITH THE SECRETARY OF STATE OF THE STATE OF DELAWARE ON OCTOBER 30, 1996 AND AS
THE SAME FROM TIME TO TIME MAY HEREAFTER BE AMENDED (THE "RESTATED CERTIFICATE
OF INCORPORATION")
(b) Section 7 of the Plan is amended by inserting the following
sentence at the end of the first paragraph thereof:
IN THE EVENT THAT AN INITIAL PUBLIC OFFERING OCCURS PRIOR TO THE
VESTING, IN WHOLE OR IN PART, OF ANY OPTION, THEN SUCH OPTION SHALL BECOME
EXERCISABLE AT SUCH TIME AS, AND ONLY TO THE EXTENT THAT, SUCH OPTION SHALL
HAVE VESTED IN ACCORDANCE WITH EXHIBIT I TO THIS PLAN.;
(c) Section 13 of the Plan is amended by deleting the following from
clause (iii) of subsection c) thereof:
INITIAL PUBLIC OFFERING OF SHARES OF COMMON STOCK (AN "IPO")
; and substituting the following therefor:
INITIAL PUBLIC OFFERING
(d) Section 20 of the Plan is amended by inserting the following
definition, immediately after the definition of "Disability" and immediately
prior to the definition of "Legal Representative":
c) INITIAL PUBLIC OFFERING. THE TERM "INITIAL PUBLIC OFFERING"
SHALL MEAN THE EFFECTIVENESS OF A REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, COVERING ANY OF THE CAPITAL SECURITIES OF THE COMPANY,
AND THE COMPLETION OF A SALE OF SUCH SECURITIES THEREUNDER, (i) FOLLOWING WHICH
THE COMPANY IS, OR BECOMES, A REPORTING COMPANY UNDER SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND (ii) AS A RESULT OF WHICH
SUCH SECURITIES ARE TRADED ON THE NEW YORK STOCK EXCHANGE OR THE AMERICAN STOCK
<PAGE> 2
EXCHANGE, OR QUOTED ON THE NASDAQ NATIONAL MARKET OR IS TRADED OR QUOTED ON ANY
OTHER NATIONAL STOCK EXCHANGE.
; by renumbering the definition of "Legal Representative" to be: d)
; and by renumbering the definition of "Parent" to be: e);
(e) Section 20 of the Plan is amended by inserting the following
definition immediately after the definition of "Parent" and immediately prior
to the definition of "Subsidiary":
f) RESTATED CERTIFICATE OF INCORPORATION. THE TERM "RESTATED
CERTIFICATE OF INCORPORATION" SHALL MEAN THE RESTATED CERTIFICATE OF
INCORPORATION OF THE COMPANY FILED WITH THE SECRETARY OF STATE OF THE STATE OF
DELAWARE ON OCTOBER 30, 1996 AND AS THE SAME FROM TIME TO TIME MAY HEREAFTER BE
AMENDED AT ANY TIME PRIOR TO AN INITIAL PUBLIC OFFERING.
; and by renumbering the definition of "Subsidiary" to be: g);
(f) The Plan is amended by deleting every instance of the words:
CSK GROUP, LTD.; and replacing them in each instance with the words: CSK AUTO
CORPORATION.
2. NO OTHER AMENDMENTS. Except as expressly amended hereby, the Plan
is and shall remain in full force and effect.
3. EFFECTIVE DATE. Once duly executed and approved pursuant to
Section 14, this Amendment shall be effective as of February 28, 1998.
2
<PAGE> 1
PLAN AMENDMENT
PLAN AMENDMENT to the 1996 EXECUTIVE STOCK OPTION PLAN, effective as
of October 30, 1996 (the "Plan"), of CSK AUTO CORPORATION (the "Corporation").
Terms used but not defined in this Amendment have the respective meanings
assigned to them in the Plan.
The Board of Directors of the Corporation, acting as a whole, and
pursuant to Section 14 of the Plan, amends the Plan as follows:
1. AMENDMENT. (a) Section 23 of the Plan is amended by changing the
date in the final sentence of such Section to "February 10, 1998."
(b) Section 2 of the Plan is amended by deleting the number "21,000"
in the first sentence, and replacing it with the number "40,000".
(c) Section 4 of the Plan is amended by changing the definition of
the "162(m) Maximum" from "18,000" shares to "40,000" shares.
2. NO OTHER AMENDMENTS. Except as expressly amended hereby, the Plan
is and shall remain in full force and effect.
3. EFFECTIVE DATE. Once duly executed and approved pursuant to
Section 14, this Amendment shall be effective as of October 29, 1997.
<PAGE> 1
EXHIBIT 10.07.2
SECOND PLAN AMENDMENT
SECOND PLAN AMENDMENT to the 1996 EXECUTIVE STOCK OPTION PLAN,
effective as of October 30, 1996 (as amended, the "Plan"), of CSK AUTO
CORPORATION (the "Corporation"). Terms used but not defined in this Amendment
have the respective meanings assigned to them in the Plan.
The Board of Directors of the Corporation, acting as a whole, and
pursuant to Section 14 of the Plan, amends the Plan as follows:
1. AMENDMENT.
(a) Section 7 of the Plan is amended by deleting the following from
the first paragraph thereof:
(THE "INITIAL PUBLIC OFFERING"), AS THE TERM INITIAL PUBLIC OFFERING
IS DEFINED IN THE RESTATED CERTIFICATE OF INCORPORATION OF THE COMPANY FILED
WITH THE SECRETARY OF STATE OF THE STATE OF DELAWARE ON OCTOBER 30, 1996 AND AS
THE SAME FROM TIME TO TIME MAY HEREAFTER BE AMENDED (THE "RESTATED CERTIFICATE
OF INCORPORATION")
(b) Section 7 of the Plan is amended by inserting the following
sentence at the end of the first paragraph thereof:
IN THE EVENT THAT AN INITIAL PUBLIC OFFERING OCCURS PRIOR TO THE
VESTING, IN WHOLE OR IN PART, OF ANY OPTION, THEN SUCH OPTION SHALL BECOME
EXERCISABLE AT SUCH TIME AS, AND ONLY TO THE EXTENT THAT, SUCH OPTION SHALL
HAVE VESTED IN ACCORDANCE WITH EXHIBIT I TO THIS PLAN.;
(c) Section 13 of the Plan is amended by deleting the following from
clause (iii) of subsection c) thereof:
INITIAL PUBLIC OFFERING OF SHARES OF COMMON STOCK (AN "IPO")
; and substituting the following therefor:
INITIAL PUBLIC OFFERING
(d) Section 20 of the Plan is amended by inserting the following
definition, immediately after the definition of "Disability" and immediately
prior to the definition of "Legal Representative":
c) INITIAL PUBLIC OFFERING. THE TERM "INITIAL PUBLIC OFFERING"
SHALL MEAN THE EFFECTIVENESS OF A REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, COVERING ANY OF THE CAPITAL SECURITIES OF THE COMPANY,
AND THE COMPLETION OF A SALE OF SUCH SECURITIES THEREUNDER, (i) FOLLOWING WHICH
THE COMPANY IS, OR BECOMES, A REPORTING COMPANY UNDER SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND (ii) AS A RESULT OF WHICH
SUCH SECURITIES ARE TRADED ON THE NEW YORK STOCK EXCHANGE OR THE AMERICAN STOCK
<PAGE> 2
EXCHANGE, OR QUOTED ON THE NASDAQ NATIONAL MARKET OR IS TRADED OR QUOTED ON ANY
OTHER NATIONAL STOCK EXCHANGE.
; by renumbering the definition of "Legal Representative" to be: d)
; and by renumbering the definition of "Parent" to be: e);
(e) Section 20 of the Plan is amended by inserting the following
definition immediately after the definition of "Parent" and immediately prior
to the definition of "Subsidiary":
f) RESTATED CERTIFICATE OF INCORPORATION. THE TERM "RESTATED
CERTIFICATE OF INCORPORATION" SHALL MEAN THE RESTATED CERTIFICATE OF
INCORPORATION OF THE COMPANY FILED WITH THE SECRETARY OF STATE OF THE STATE OF
DELAWARE ON OCTOBER 30, 1996 AND AS THE SAME FROM TIME TO TIME MAY HEREAFTER BE
AMENDED AT ANY TIME PRIOR TO AN INITIAL PUBLIC OFFERING.
; and by renumbering the definition of "Subsidiary" to be: g);
(f) The Plan is amended by deleting every instance of the words:
CSK GROUP, LTD.; and replacing them in each instance with the words: CSK AUTO
CORPORATION.
2. NO OTHER AMENDMENTS. Except as expressly amended hereby, the Plan
is and shall remain in full force and effect.
3. EFFECTIVE DATE. Once duly executed and approved pursuant to
Section 14, this Amendment shall be effective as of February 28, 1998.
2
<PAGE> 1
EXHIBIT 10.17.1
FORM OF
SUPPLEMENTAL SIGNATURE PAGE
TO STOCKHOLDERS' AGREEMENT
In consideration of the undersigned being permitted to purchase equity
securities of CSK Group, Ltd., a Delaware corporation ("CSK"), from either the
existing holder of such securities or from CSK, and of the mutual covenants
contained in the Stockholders' Agreement made as of October 30, 1996, by and
among TEMPE LIMITED, SCOTTSDALE LIMITED, SOUTH MOUNTAIN LIMITED, CHANDLER
LIMITED, GILA LIMITED, INVESTCORP INVESTMENT EQUITY LIMITED, BALLET LIMITED,
DENARY LIMITED, GLEAM LIMITED, HIGHLANDS LIMITED, NOBLE LIMITED, OUTRIGGER
LIMITED, QUILL LIMITED, RADIAL LIMITED, SHORELINE LIMITED, ZINNIA LIMITED, each
being a corporation organized under the laws of the Cayman Islands, CANTRADE
TRUST COMPANY LIMITED, in its capacity as trustee of The Carmel Trust, a trust
governed by the laws of Canada and established under a trust settlement made
August 17, 1977, CSK, and CSK AUTO, INC., an Arizona corporation (the
"Stockholders' Agreement"), and in accordance with the terms of the
Stockholders' Agreement with respect to the transfer or issuance of such
securities, the undersigned has executed this Supplemental Signature Page to
such Stockholders' Agreement intending to become a party to such Stockholders'
Agreement, to become a "Stockholder" as therein defined and to hereafter be
subject to all the duties, obligations and liabilities and have all the rights,
preferences and privileges of a party to the Stockholders' Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Supplemental
Signature Page as of [See Exhibit A] .
By: [See Exhibit A]
----------------------------
<PAGE> 2
EXHIBIT A
SIGNATORIES
<TABLE>
<CAPTION>
Effective Date Entity
-------------- ------
<S> <C>
December 24, 1996 EQUITY CSKA LIMITED
December 24, 1996 EQUITY CSKB LIMITED
December 24, 1996 AUTO EQUITY LIMITED
December 24, 1996 AUTO PARTS LIMITED
December 24, 1996 AUTO INVESTMENTS LIMITED
December 24, 1996 CSK INVESTMENTS LIMITED
December 24, 1996 CSK EQUITY LIMITED
December 24, 1996 CSK INTERNATIONAL LIMITED
December 24, 1996 CHASE BANK (C.I.) NOMINEES LIMITED
October 14, 1997 INVESTCORP CSK HOLDINGS L.P.
October 31, 1997 JAMES BAZLEN
December 8, 1997 SOUTH BAY LIMITED
December 8, 1997 TRANSATLANTIC FINANCE, LTD.
December 24, 1997 MAYNARD JENKINS
February 20, 1998 NEW EQUITY CSK LIMITED
February 20, 1998 EQUITY CSKC LIMITED
</TABLE>
<PAGE> 1
EXHIBIT 10.25
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") is made effective as of
February 1, 1998 (the "Effective Date"), between CSK Auto Corporation, a
Delaware corporation ("Issuer"), and Maynard Jenkins ("Optionee").
R E C I T A L S
A. In connection with the negotiation and successful completion of the
acquisition of 82 store locations from Trak Auto Corporation and certain of its
affiliates, Issuer desires to grant Optionee the opportunity to acquire a
greater proprietary interest in Issuer to encourage Optionee's further
contribution to the success and progress of Issuer and CSK Auto, Inc., an
Arizona corporation ("Employer").
B. The Board of Directors of Issuer has as of the Effective Date
granted to Optionee a non-qualified stock option to purchase shares of Class B
Stock, $.01 par value, of Issuer (the "Class B Stock") subject to the terms and
conditions of this Agreement.
AGREEMENTS
1. Definitions. Capitalized terms used herein shall have the
following meanings:
"Act" is defined in Section 10.
"Affiliate" means, with respect to any Person, any other
Person which, directly or indirectly, is in control of, is controlled by, or is
under common control with such Person. For purposes of this definition,
"control" of a Person shall mean the power, directly or indirectly, (i) to vote
fifty percent (50%) or more of the securities having ordinary voting power for
the election of directors of such Person whether by ownership of securities,
contract, proxy or otherwise; or (ii) to direct or cause the direction of
management and policies of such person whether by ownership of securities,
contract, proxy or otherwise.
"Agreement" means this Stock Option Agreement.
"Approved Sale" means a transaction or a series of related
transactions with an acquiror which had not previously been a shareholder of
Employer or Issuer (other than, if the Approved Sale occurs after an Initial
Public Offering, as a result of purchasing shares in the public market) which
results in a bona fide, unaffiliated change of beneficial ownership of (a) 80%
of Employer's or Issuer's common equity securities or (b) all or substantially
all of either of their assets, whether pursuant to the sale of the stock or
assets of Employer or Issuer, or a merger or consolidation involving Employer or
Issuer.
"Cause" shall have the meaning given to it in the Employment
Agreement.
"Class B Stock" is defined in recital B.
JENKINS STOCK OPTION AGREEMENT (TRAK) 1
<PAGE> 2
"Effective Date" is defined in the preamble.
"Employer" is defined in recital A.
"Employment Agreement" means the employment agreement between
Optionee and Employer dated as of January 27, 1997.
"Endorsed Certificate" means a stock certificate evidencing
the shares properly endorsed for transfer.
"Exercise Price" is defined in Section 2.
"Fair Market Value" means the value of an Option Share, as of
the Termination Date, determined pursuant to Section 9(c).
"Fiscal Year" means the fiscal year of Issuer.
"Good Reason" shall have the meaning given to it in the
Employment Agreement.
"Initial Public Offering" means the effectiveness of a
registration statement under the Securities Act of 1933, as amended, covering
any of the capital securities of the Issuer, and the completion of a sale of
such securities thereunder, (i) following which the Issuer is, or becomes, a
reporting company under Section 12(b) or 12(g) of the Securities Exchange Act of
1934, as amended, and (ii) as a result of which such securities are traded on
the New York Stock Exchange or the American Stock Exchange, or quoted on the
Nasdaq National Market or is traded or quoted on any other national stock
exchange.
"Initial Stockholders" means the 16 stockholders of Issuer
that purchased shares of Issuer on October 30, 1996 and who are entities
organized under the laws of the Cayman Islands with whom an affiliate of
Investcorp Bank E.C., a Bahrain corporation, has an administrative relationship,
and persons who acquire shares of Issuer from such stockholders and who are
entities so organized and administered.
"Issuer" is defined in the preamble.
"Lock-Up Period" means, in the case of an Initial Public
Offering, the 180-day period commencing on the effective date of the
registration statement covering capital stock of Issuer or Employer sold in such
Initial Public Offering, and, in the case of any subsequent registered offering,
the 90-day period commencing on the effective date of the registration statement
relating to such offering, or, in either case, such lesser period as may be
agreed upon by Issuer or Employer with the underwriters of such offering.
"Minimum Qualifying Approved Sale" is defined in Section 3(c).
"Option" is defined in Section 2.
"Optionee" is defined in the preamble.
JENKINS STOCK OPTION AGREEMENT (TRAK) 2
<PAGE> 3
"Option Shares" is defined in Section 2.
"Partial Qualifying Approved Sale" is defined in Section 3(c).
"Permanent Disability" is defined in the Employment Agreement.
"Permitted Transferee" is defined in Section 5.
"Person" means any natural person, partnership, corporation,
trust or incorporated organization.
"Public Sale" means an Approved Sale which occurs after the
consummation of an Initial Public Offering of the Issuer's common equity
securities.
"Purchase Date" is defined in Section 9(a).
"Qualifying Approved Sale" is defined in Section 3(c).
"Realization Date" is defined in Section 3(c).
"Repurchase Period" is defined in Section 9(a).
"Repurchase Price" is defined in Section 9(a).
"Restated Certificate of Incorporation" means the restated
certificate of incorporation of Issuer filed with the Secretary of State of the
State of Delaware on October 30, 1996, and as the same from time-to-time may
hereafter be amended.
"Stockholders' Agreement" means the agreement dated as of
October 30, 1996 among Issuer and all of its stockholders as of such date.
"Subsidiary" means any joint venture, corporation, partnership
or other entity as to which Issuer or Employer, whether directly or indirectly,
has more than 50% of the (i) voting rights or (ii) rights to capital or profits.
"Termination Date" means the date on which Optionee ceases to
be employed by Employer or any Affiliate of Employer for any reason; provided,
however, that Optionee shall not be considered to have ceased to be employed by
Employer or any Affiliate of Employer if he or she continues to be employed by
Issuer or any Subsidiary.
2. Grant of Option. Issuer grants to Optionee the right and option (the
"Option") to purchase, on the terms and conditions hereinafter set forth, all or
any part of an aggregate of 2,335 shares of Class B Stock (the "Option Shares"),
at the purchase price of $205.88 per Share (as such amount may be adjusted as
herein provided, the "Exercise Price"), on the terms and conditions set forth
herein.
JENKINS STOCK OPTION AGREEMENT (TRAK) 3
<PAGE> 4
3. Exercisability.
(a) Except as provided in Section 3(b) or Section 3(c),
Optionee's right to exercise the Option shall vest as set forth in Exhibit 1
hereto.
(b) Notwithstanding anything to the contrary set forth in
paragraph (a) or paragraph (c) of this Section 3, the right to exercise the
Option shall immediately vest in full upon the seventh (7th) anniversary of the
Effective Date, provided that the Termination Date has not occurred prior to
such date.
(c) A "Qualifying Approved Sale" shall occur if (i) an
Approved Sale is a Public Sale, or (ii) the Board of Directors of Issuer
determines in connection with an Approved Sale that is not a Public Sale or in
connection with an Initial Public Offering in which all of the equity securities
of Issuer held by the Initial Stockholders are sold that the annual compounded
rate of return expected to be realized by the Initial Stockholders, based upon
an initial base cost of the shares of $205.88 per share, from October 30, 1996
through the date on which it is estimated that the Initial Stockholders will
receive the net proceeds from such Approved Sale or Initial Public Offering (a
"Realization Date"), equals or exceeds 30% per annum, assuming the exercise of
all then outstanding options that are exercisable (whether upon the occurrence
of such Qualifying Approved Sale or for any other reason). A "Partial Qualifying
Approved Sale" shall occur if the Board of Directors of Issuer determines in
connection with an Approved Sale that is not a Public Sale or in connection with
an Initial Public Offering in which all of the equity securities of Issuer held
by the Initial Stockholders are sold that the annual compounded rate of return
expected to be realized by the Initial Stockholders, based upon an initial base
cost of the shares of $205.88 per share, from October 30, 1996 through the
Realization Date, equals or exceeds 25% per annum, but is less than 30% per
annum, assuming the exercise of all then outstanding options that are
exercisable (whether upon the occurrence of such Qualifying Approved Sale or for
any other reason). A "Minimum Qualifying Approved Sale" shall occur if the Board
of Directors of Issuer determines in connection with an Approved Sale that is
not a Public Sale or in connection with an Initial Public Offering in which all
of the equity securities of Issuer held by the Initial Stockholders are sold
that the annual compounded rate of return expected to be realized by the Initial
Stockholders, based upon an initial base cost of the shares of $205.88 per
share, from October 30, 1996 through the Realization Date, equals or exceeds 20%
per annum, but is less than 25% per annum, assuming the exercise of all then
outstanding options that are exercisable (whether upon the occurrence of such
Qualifying Approved Sale or for any other reason). In the event of a Qualifying
Approved Sale, the Option shall vest fully on the Realization Date. In the event
of a Partial Qualifying Approved Sale, 75% of the unvested portion of the option
shall vest on the Realization Date. In the event of a Minimum Qualifying
Approved Sale, 50% of the unvested portion of the option shall vest on the
Realization Date. The amount used in determining the rate of return on the
Realization Date shall be the per share net proceeds from such Qualifying
Approved Sale, Partial Qualifying Approved Sale or Minimum Qualifying Approved
Sale (in each case including the proceeds attributable to any outstanding
Options) reduced by the estimated fees and expenses of such Sale, including
without limitation investment banking, legal and accounting fees.
JENKINS STOCK OPTION AGREEMENT (TRAK) 4
<PAGE> 5
4. Expiration.
(a) The vested portion of the Option shall expire upon the
thirtieth (30th) day following the seventh (7th) anniversary of the Effective
Date unless (i) at any time prior to a Qualifying Approved Sale, Optionee is
terminated without Cause, Optionee ceases to be employed by Employer or a
Subsidiary due to death or Permanent Disability or Optionee resigns for Good
Reason, in which case the vested portion of the Option shall expire 180 days
following the Termination Date, (ii) Optionee resigns other than for Good Reason
or is terminated for Cause from employment by Employer, in which case the vested
portion of the Option shall expire at 5:00 p.m. Phoenix time on the second
business day after the date of such termination; provided, however, that
notwithstanding anything to the contrary contained in this Section 4(a), if the
Issuer exercises the purchase right pursuant to Section 9 hereof, the vested
portion of the Option shall expire on the business day immediately preceding the
Purchase Date.
(b) The unvested portion of the Option shall expire on the
Termination Date except in the case where Optionee is terminated from employment
by Employer without Cause, Optionee ceases to be so employed due to death or
Permanent Disability or Optionee resigns for Good Reason, in which case the
unvested portion of the Option shall terminate 180 days following the end of the
Fiscal Year during which the Termination Date occurred, subject to the vesting
of any portion of the Option as of 90 days following the end of such Fiscal Year
pursuant to Section 3(a); provided, however, that notwithstanding anything to
the contrary contained in this Section 4(b), if Issuer exercises the purchase
right pursuant to Section 9 hereof, the unvested portion of the Option shall
expire on the business day immediately preceding the Purchase Date.
5. Nontransferability. Subject to Section 9 hereof, the Option shall
not be transferable by Optionee otherwise than to his or her spouse, child,
estate, personal representative, heir or successor or to a trust for the benefit
of Optionee or his or her spouse, child or heir (a "Permitted Transferee"), and
the Option shall be exercisable, during Optionee's lifetime, only by him or her
or by any of the foregoing Permitted Transferees, or in the event of Optionee's
Permanent Disability, his or her guardian or legal representative. More
particularly (but without limiting the generality of the foregoing), the Option
may not be assigned, transferred (except as aforesaid), pledged or hypothecated
in any way (whether by operation of law or otherwise), and shall not be subject
to execution, attachment or similar process. Any assignment, transfer, pledge,
hypothecation or other disposition of the Option contrary to the provisions
hereof, and the levy of any attachment or similar process upon the Option that
would otherwise effect a change in the ownership of the Option, shall terminate
the Option; provided, however, that in the case of the involuntary levy of any
attachment or similar involuntary process upon the Option, Optionee shall have
thirty (30) days after notice thereof to cure such levy or process and reinstate
the Option. This Agreement shall be binding on and enforceable against any
person who is a Permitted Transferee of the Option pursuant to the first
sentence of this Section.
6. Effect of Merger; Adjustments.
(a) In the event of an Approved Sale that is a merger or other
form of corporate reorganization and notwithstanding any other provisions of
this Agreement, the unexercised portion of the Option shall be subject to the
terms of the agreement or plan of merger or reorganization effecting such merger
or reorganization and shall be converted, redeemed, exchanged, canceled or
otherwise treated as provided in such agreement or plan of merger
JENKINS STOCK OPTION AGREEMENT (TRAK) 5
<PAGE> 6
or reorganization, provided that Optionee shall be given at least 20 days' prior
notice of the proposed merger or reorganization and shall (notwithstanding
anything else herein to the contrary) be entitled to exercise the vested portion
of the Option at any time during such 20 day period up to and until the close of
business on the day immediately preceding the date of consummation of such
merger or reorganization (which exercise may be expressly contingent upon
completion of the Approved Sale if the unexercised portion of the Option were to
vest as a result of such sale being a Qualifying Approved Sale) and upon
exercise of the Option the Option Shares shall be treated in the same manner as
the shares of any other stockholder of Issuer.
(b) Subject to Section 6(a), in the event of any one or more
reorganizations, recapitalizations, mergers, acquisitions, stock splits, reverse
stock splits, stock dividends or similar events, an appropriate adjustment shall
be made in the number and kind of shares or other securities subject to the
Option, and the Exercise Price for each Option Share or other unit of any
securities subject to this Agreement. No fractional interests shall be issued on
account of any such adjustment unless the Board of Directors of the Issuer
specifically determines to the contrary; provided, however, that in lieu of
fractional interests, Optionee, upon the exercise of the Option in whole or
part, shall receive cash in an amount equal to the amount by which the Fair
Market Value of such fractional interests exceeds the Exercise Price
attributable to such fractional interests.
7. Exercise of the Option. Prior to the expiration thereof, Optionee
may exercise the vested portion of the Option from time to time in whole or in
part. Upon electing to exercise the Option, Optionee shall deliver to the
Secretary of Issuer a written and signed notice of such election setting forth
the number of Option Shares Optionee has elected to purchase and shall at the
time of delivery of such notice tender cash or a cashier's or certified bank
check to the order of Issuer for the full Exercise Price of such Option Shares
and any amount required pursuant to Section 16 hereof. The Issuer may, in its
discretion, also permit payment of the Exercise Price in such form or in such
manner as may be permissible under any applicable law.
8. Restrictions on Transfers of Option Shares. Subject to Section 9
hereof, prior to the termination of the Lock-Up Period following an Initial
Public Offering, the Option Shares shall not be transferable or transferred,
assigned, pledged or hypothecated in any way (whether by operation of law or
otherwise) except that Optionee may transfer the Option Shares to a Permitted
Transferee. This Agreement shall be binding on and enforceable against any
person who is a Permitted Transferee of the Option Shares. The stock
certificates issued to evidence Option Shares upon exercise of the Option
hereunder shall bear legends referring to this Agreement and the restrictions
contained herein.
9. Purchase of Option Shares.
(a) In the event that the Termination Date occurs for any
reason prior to an Initial Public Offering or an Approved Sale, the Option
Shares shall be subject to repurchase as follows:
JENKINS STOCK OPTION AGREEMENT (TRAK) 6
<PAGE> 7
(i) Issuer, during the sixty (60) days following the later of
the Termination Date or the date upon which Optionee gives notice in
accordance with Section 7 hereof of his election to exercise all or a
part of the portion of the Option vested at the Termination Date (the
"Repurchase Period"), shall have the right to purchase all, but not
less than all, of the Option Shares owned by Optionee on the
Termination Date or to be acquired by Optionee pursuant to such notice
of exercise.
(ii) In the event that Optionee becomes entitled to acquire
Option Shares after the Termination Date, Issuer may notify Optionee in
accordance with Section 9(b) hereof that Issuer will purchase any
Option Shares that Optionee may thereafter acquire upon the exercise of
the Option and shall set the Purchase Date (as hereinafter defined) and
shall purchase such Option Shares, if any, pursuant to the terms of
this Agreement.
(iii) The purchase price (the "Repurchase Price") for each
Option Share shall be Fair Market Value, provided, however, that in the
case of Option Shares purchased by Optionee during the 90-day period
immediately preceding the Purchase Date, if no material adverse change
in the business or financial condition of the Employer occurs during
such 90-day period, the purchase price shall be the greater of Fair
Market Value or the per share exercise price paid by Optionee upon his
acquisition of the Option Share.
(iv) If Issuer elects to purchase the Option Shares, it shall
notify Optionee at or before the end of the Repurchase Period and the
Repurchase Price shall be paid in cash at a time set by Issuer which
time shall be within thirty (30) days after the end of the Repurchase
Period (the "Purchase Date"), provided that Optionee has presented to
Issuer an Endorsed Certificate.
(v) The Option Shares shall be transferred to Issuer free and
clear of all liens, encumbrances, mortgages, pledges, security
interests, restrictions, prior assignments and claims of any kind or
nature whatsoever except those created by the Restated Certificate of
Incorporation or this Agreement. If Issuer does not purchase the Option
Shares, the restrictions on transfer thereof contained in Sections 5
and 8 of this Agreement shall terminate and be of no further force and
effect. Notwithstanding Optionee's failure to deliver the Endorsed
Certificate, the Option Shares represented thereby shall be deemed to
be owned by Issuer upon (A) the payment by Issuer of the purchase price
to Optionee or his or her Permitted Transferee or (B) notice to
Optionee or such Permitted Transferee that Issuer is holding the
purchase price in the United States for the account of Optionee or such
Permitted Transferee, and upon such payment or notice (x) Optionee and
such Permitted Transferee will have no further rights in or to such
Option Shares, (y) Issuer shall be entitled to specific performance of
Optionee's or such Permitted Transferee's obligation to deliver such
Endorsed Certificates, and (z) Optionee and his or her Permitted
Transferee shall be jointly and severally liable for all reasonable
attorneys' fees and other costs and expenses incurred by Issuer in
enforcing its right to repurchase the Option Shares hereunder and shall
pay to Issuer promptly upon demand the amount of all such fees and
expenses.
JENKINS STOCK OPTION AGREEMENT (TRAK) 7
<PAGE> 8
(b) In the event an unvested portion of the Option becomes
exercisable pursuant to Section 4(b), for purposes of Section 9(a), the
Repurchase Period shall commence as of the date notice of the Option's
exercisability is provided to Optionee.
(c) The Fair Market Value shall be determined in good faith by
Issuer's Board of Directors. If the Board determination is challenged by
Optionee, a mutually acceptable investment banker or appraiser shall establish
the Fair Market Value. If Optionee and Issuer cannot agree upon an investment
banker or appraiser each shall choose an investment banker or appraiser and the
two investment bankers or appraisers shall choose a third investment banker or
appraiser who alone shall establish the Fair Market Value. The Fair Market Value
shall be based on an assumed sale of 100% of the outstanding capital stock of
Issuer (without reduction for minority discount or lack of liquidity of the
Option Shares) and shall be determined using customary criteria generally
employed within the investment banking community at the time such determination
is made for valuing an entity similar to Issuer. The investment banker's or
appraiser's determination shall be conclusive and binding on Shareholder, Issuer
and Optionee. Issuer shall bear all costs incurred in connection with the
services of such investment banker or appraiser unless the Fair Market Value
established by the investment banker or appraiser is (i) less than or equal to
110% of the Board of Directors' determination, in which case Optionee shall
promptly pay or reimburse Issuer for such costs or (ii) greater than 110% but
less than 130% of the Board of Directors' determination, in which case Optionee
shall promptly pay or reimburse Issuer for 50% of such costs.
(d) For so long as Optionee or his or her Permitted Transferee
owns the Option Shares, Issuer agrees that it shall, upon the written request of
Optionee, provide Optionee with annual financial statements of Issuer promptly
upon the completion of the preparation of such statements. The annual financial
statements shall be accompanied by an audit report by Issuer's independent
accountants.
10. Compliance with Legal Requirements.
(a) No Option Shares shall be issued or transferred pursuant
to this Agreement unless and until all legal requirements applicable to such
issuance or transfer have, in the opinion of counsel to Issuer, been satisfied.
Such requirements may include, but are not limited to, registering or qualifying
such Shares under any state or federal law, satisfying any applicable law
relating to the transfer of unregistered securities or demonstrating the
availability of an exemption from applicable laws, placing a legend on the
Option Shares to the effect that they were issued in reliance upon an exemption
from registration under the Securities Act of 1933, as amended (the "Act"), and
may not be transferred other than in reliance upon Rule 144 or Rule 701
promulgated under the Act, if available, or upon another exemption from the Act,
or obtaining the consent or approval of any governmental regulatory body. Issuer
shall use its best efforts to comply with all legal requirements applicable to
the issuance or transfer of Option Shares.
(b) Optionee understands that Issuer intends for the offering
and sale of Option Shares to be effected in reliance upon Rule 701 or another
available exemption from registration under the Act and intends to file a Form
701 as appropriate, and that Issuer is under no obligation to register for
resale the Option Shares issued upon exercise of the Option. In connection with
JENKINS STOCK OPTION AGREEMENT (TRAK) 8
<PAGE> 9
any such issuance or transfer, the person acquiring the Option Shares shall, if
requested by Issuer, provide information and assurances satisfactory to counsel
to Issuer with respect to such matters as Issuer reasonably may deem desirable
to assure compliance with all applicable legal requirements. Issuer hereby
covenants and agrees to register all of the Option Shares on a Form S-8 (or any
successor form thereto) following the Initial Public Offering.
11. Capitalizations, Exchanges, Etc. Affecting Shares; Dilution.
(a) The provisions of this Agreement shall apply to any and
all shares of capital stock of Issuer or any successor or assign of Issuer that
may be issued in respect of, in exchange for, or in substitution of, the Option
Shares by reason of any stock dividend, stock split, stock issuance, reverse
stock split, combination, recapitalization, reclassification, merger,
consolidation or otherwise, other than an Approved Sale and in connection with
the occurrence of any such events, proportionate adjustments shall be made in
the number of Option Shares which may be acquired hereunder and the exercise
price of each Option Share.
(b) Except as may be specifically provided herein or in the
Restated Certificate of Incorporation, nothing herein shall prohibit or restrict
Issuer from taking any corporate action or engaging in any corporate transaction
of any kind, including, without limitation, the issuance and sale of additional
shares of capital stock of Issuer, any merger, consolidation, liquidation or
sale of assets, or create in Optionee or his or her Permitted Transferee any
rights to acquire or receive additional shares of capital stock of Issuer or
otherwise to be protected against dilution.
12. Subject to Restated Certificate of Incorporation and Stockholders'
Agreement. Optionee acknowledges that the Option Shares are subject to the terms
of the Restated Certificate of Incorporation and the Stockholders' Agreement.
Optionee hereby agrees to comply with the terms of the Stockholders' Agreement.
13. No Interest in Shares Subject to Option. Neither Optionee
(individually or as a member of a group) nor any beneficiary or other person
claiming under or through Optionee shall have any right, title, interest, or
privilege in or to any shares subject to this Agreement except as to such Option
Shares, if any, as shall have been issued to such person upon exercise of this
Option or any part of it.
14. Not an Employment Contract. Nothing in this Agreement or any other
instrument executed pursuant thereto shall confer upon Optionee any right to
continue in the employ of Employer or any Subsidiary or shall affect the right
of Employer or any Subsidiary to terminate the employment of Optionee with or
without Cause.
15. Governing Law. All terms of and rights under this Agreement shall
be governed by and construed in accordance with the internal law of the State of
New York, without giving effect to principles of conflicts of law.
16. Taxes. The Issuer may, in its discretion, make such provisions and
take such steps as it may deem necessary or appropriate for the withholding of
all federal, state, local and other taxes required by law to be withheld with
respect to the issuance or exercise of the Option
JENKINS STOCK OPTION AGREEMENT (TRAK) 9
<PAGE> 10
including, but not limited to, deducting the amount of any such withholding
taxes from any other amount then or thereafter payable to Optionee, requiring
Optionee to pay to Issuer the amount required to be withheld or to execute such
documents as the Issuer deems necessary or desirable to enable it to satisfy its
withholding obligations. Optionee shall have the right to satisfy the
withholding obligation in whole or in part by the delivery of shares of the
Issuer previously issued to Optionee or by the withholding of the delivery of
Option Shares otherwise to be received upon the Option exercise.
17. Notices. All notices, requests, demands and other communications
pursuant to this Agreement shall be in writing and shall be deemed to have been
duly given if personally delivered, telexed or telecopied to, or, if mailed,
when received by, the other party, if to Issuer at its principal executive
offices addressed to the attention of Issuer's Secretary, and if to Optionee at
his or her address as it appears on the books of his or her employer (or at such
other address as shall be given in writing by Optionee or his or her Permitted
Transferee to Issuer).
18. Amendments and Waivers. This Agreement may be amended, and any
provision hereof may be waived, only by a writing signed by the party to be
charged.
19. Entire Agreement. This Agreement sets forth the entire agreement
and understanding between the parties as to the subject matter hereof and
supersedes all prior oral and written and all contemporaneous oral discussions,
agreements and understandings of any kind or nature.
20. Headings. The headings preceding the text of the sections hereof
are inserted solely for convenience of reference, and shall not constitute a
part of this Agreement, nor shall they affect its meaning, construction or
effect.
21. Further Assurances. Each party shall cooperate and take such action
as may be reasonably requested by another party in order to carry out the
provisions and purposes of this Agreement.
22. Arbitration. The parties shall endeavor to settle all disputes by
amicable negotiations. Except as otherwise provided in Section 9(c) hereof, any
claim, dispute, disagreement or controversy that arises among the parties
relating to this Agreement that is not amicably settled shall be resolved by
arbitration, as follows:
(a) Any such arbitration shall be heard in The City of New
York, New York, before a panel consisting of one (1) to three (3) arbitrators,
each of whom shall be impartial. Upon the written Request for Arbitration by
either party hereto to commence arbitration hereunder, the parties shall attempt
to mutually agree as to the number and identity of the arbitrators within thirty
(30) days of such Request. Except as the parties may otherwise agree, all
arbitrators (if not selected by the parties hereto within thirty (30) days of a
written Request for Arbitration) shall be appointed pursuant to the commercial
arbitration rules of the American Arbitration Association. In determining the
number and appropriate background of the arbitrators, the appointing authority
shall give due consideration to the issues to be resolved, but his or her
decision as to the number of arbitrators and their identity shall be final.
JENKINS STOCK OPTION AGREEMENT (TRAK) 10
<PAGE> 11
(b) An arbitration may be commenced by any party to this
Agreement by the service of a written request for arbitration upon the other
affected parties. Such request for arbitration shall summarize the controversy
or claim to be arbitrated.
(c) All attorneys' fees and costs of the arbitration shall in
the first instance be borne by the respective party incurring such costs and
fees, but the arbitrators shall award costs and attorneys' fees to the
prevailing party. The parties hereby expressly waive punitive damages, and under
no circumstances shall an award contain any amount that in any way reflects
punitive damages.
(d) Judgment on the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof.
(e) It is intended that controversies or claims submitted to
arbitration under this Section 22 shall remain confidential, and to that end it
is agreed by the parties that neither the facts disclosed in the arbitration,
the issues arbitrated, nor the views or opinions of any persons concerning them,
shall be disclosed to third persons at any time, except to the extent necessary
to enforce an award or judgment or as required by law or in response to legal
process or in connection with such arbitration.
(f) Any arbitration under this Section 22 shall be conducted
pursuant to the commercial arbitration rules of the American Arbitration
Association.
23. Binding Effect. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective permitted successors and
assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
February __, 1998.
CSK AUTO CORPORATION
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
---------------------------------------
Maynard Jenkins
JENKINS STOCK OPTION AGREEMENT (TRAK) 11
<PAGE> 12
EXHIBIT 1
The Option shall vest as follows:
<TABLE>
<S> <C>
April 1, 1999 584 Option Shares
April 1, 2000 584 Option Shares
April 1, 2001 584 Option Shares
April 1, 2002 583 Option Shares
</TABLE>
JENKINS STOCK OPTION AGREEMENT 1
EXHIBIT 1
<PAGE> 1
EXHIBIT 10.26
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") is made effective as of
the Effective Date (as defined), between CSK Auto Corporation, a Delaware
corporation ("Issuer"), and Maynard Jenkins ("Optionee").
R E C I T A L S
A. Issuer is in the process of undertaking an initial public offering
(the "Initial Public Offering") of its common stock, par value $.01 per share
("Common Stock"), pursuant to a registration statement under the Securities Act
of 1933, as amended (the "Act").
B. In connection with the consummation of the Initial Public Offering,
Issuer desires to grant Optionee the opportunity to acquire a greater
proprietary interest in Issuer to encourage Optionee's further contribution to
the success and progress of Issuer and CSK Auto, Inc., an Arizona corporation
("Employer").
C. The Board of Directors of Issuer has as of the Effective Date
granted to Optionee a non-qualified stock option to purchase shares of Common
Stock of Issuer subject to the terms and conditions of this Agreement.
AGREEMENTS
1. Definitions. Capitalized terms used herein shall have the following
meanings:
"Act" is defined in recital A.
"Affiliate" means, with respect to any Person, any other
Person which, directly or indirectly, is in control of, is controlled by, or is
under common control with such Person. For purposes of this definition,
"control" of a Person shall mean the power, directly or indirectly, (i) to vote
fifty percent (50%) or more of the securities having ordinary voting power for
the election of directors of such Person whether by ownership of securities,
contract, proxy or otherwise; or (ii) to direct or cause the direction of
management and policies of such person whether by ownership of securities,
contract, proxy or otherwise.
"Agreement" means this Stock Option Agreement.
"Approved Sale" means a transaction or a series of related
transactions with an acquiror which had not previously been a shareholder of
Employer or Issuer (other than as a result of purchasing shares in the public
market) which results in a bona fide, unaffiliated change of beneficial
ownership of (a) 80% of Employer's or Issuer's common equity securities or (b)
all or substantially all of either of their assets, whether pursuant to the sale
of the stock or assets of Employer or Issuer, or a merger or consolidation
involving Employer or Issuer.
"Cause" shall have the meaning given to it in the Employment
Agreement.
JENKINS STOCK OPTION AGREEMENT (IPO)
1
<PAGE> 2
"Common Stock" is defined in recital A.
"Effective Date" is the date of the closing of the Initial Public
Offering.
"Employer" is defined in recital B.
"Employment Agreement" means the employment agreement between Optionee
and Employer dated as of January 27, 1997.
"Exercise Price" is defined in Section 2.
"Fair Market Value" means (a) if the principal market for the Common
Stock is a national securities exchange, the average of the highest and lowest
sales prices per share of Common Stock on such day as reported by such exchange
or on a composite tape reflecting transactions on such exchange, (b) if the
principal market for the Common Stock is not a national securities exchange and
the Common Stock is quoted on The Nasdaq National Market ("Nasdaq"), and (i) if
actual sales price information is available with respect to the Common Stock,
the average of the highest and lowest sales prices per share of Common Stock on
such day on Nasdaq, or (ii) if such information is not available, the average of
the highest bid and lowest asked prices per share of Common Stock on such day on
Nasdaq, or (c) if the principal market for the Common Stock is not a national
securities exchange and the Common Stock is not quoted on Nasdaq, the average of
the highest bid and lowest asked prices per share of Common Stock on such day as
reported on the OTC Bulletin Board Service or by National Quotation Bureau,
Incorporated or a comparable service; provided, however, that if clauses (a),
(b) and (c) of this definition are all inapplicable, or if no trades have been
made or no quotes are available for such day, the fair market value of the
Common Stock shall be determined by the Board of Directors of Issuer by any
method consistent with applicable regulations adopted by the Treasury Department
relating to stock options.
"Fiscal Year" means the fiscal year of Issuer.
"Good Reason" shall have the meaning given to it in the Employment
Agreement.
"Initial Public Offering" is defined in recital A.
"Initial Stockholders" means the 16 stockholders of Issuer that
purchased shares of Issuer on October 30, 1996 and who are entities organized
under the laws of the Cayman Islands with whom an affiliate of Investcorp Bank
E.C., a Bahrain corporation, has an administrative relationship, and persons who
acquire shares of Issuer from such stockholders and who are entities so
organized and administered.
"Issuer" is defined in the preamble.
"Lock-Up Period" means, in the case of any registered offering of
Common Stock subsequent to the Initial Public Offering, the 90-day period
commencing on the effective date of the registration statement relating to such
offering, or, in either case, such lesser period as may be agreed upon by Issuer
or Employer with the underwriters of such offering.
JENKINS STOCK OPTION AGREEMENT (IPO)
2
<PAGE> 3
"Option" is defined in Section 2.
"Optionee" is defined in the preamble.
"Option Shares" is defined in Section 2.
"Permanent Disability" is defined in the Employment Agreement.
"Permitted Transferee" is defined in Section 5.
"Person" means any natural person, partnership, corporation, trust or
incorporated organization.
"Restated Certificate of Incorporation" means the restated certificate
of incorporation of Issuer filed with the Secretary of State of the State of
Delaware on October 30, 1996, and as the same from time-to-time may hereafter be
amended.
"Stockholders' Agreement" means the agreement dated as of October 30,
1996 among Issuer and all of its stockholders as of such date.
"Subsidiary" means any joint venture, corporation, partnership or other
entity as to which Issuer or Employer, whether directly or indirectly, has more
than 50% of the (i) voting rights or (ii) rights to capital or profits.
"Termination Date" means the date on which Optionee ceases to be
employed by Employer or any Affiliate of Employer for any reason; provided,
however, that Optionee shall not be considered to have ceased to be employed by
Employer or any Affiliate of Employer if he or she continues to be employed by
Issuer or any Subsidiary.
2. Grant of Option. As of the Effective Date, Issuer grants to Optionee the
right and option (the "Option") to purchase, on the terms and conditions
hereinafter set forth, all or any part of an aggregate of 216,635 shares of
Common Stock (the "Option Shares"), at the purchase price of $20.00 per Option
Share (as such amount may be adjusted as herein provided, the "Exercise Price"),
on the terms and conditions set forth herein; provided, however, that if a stock
split effected in connection with the Initial Public Offering is other than
17.105 to 1, the number of Option Shares shall be 12,665 multiplied by the
number used in place of "17.105" in effecting such stock split; and provided
further that if the Effective Date does not occur on or prior to May 31, 1998,
this Agreement shall terminate and shall be of no further force or effect.
3. Exercisability. Optionee's right to exercise the Option shall vest as
set forth on Exhibit 1 hereto.
4. Expiration.
(a) The vested portion of the Option shall expire upon the thirtieth
(30th) day following the seventh (7th) anniversary of the Effective Date unless
(i) at any time prior to a Approved Sale, Optionee is terminated without Cause,
Optionee ceases to be employed by
JENKINS STOCK OPTION AGREEMENT (IPO)
3
<PAGE> 4
Employer or a Subsidiary due to death or Permanent Disability or Optionee
resigns for Good Reason, in which case the vested portion of the Option shall
expire 180 days following the Termination Date, (ii) Optionee resigns other than
for Good Reason or is terminated for Cause from employment by Employer, in which
case the vested portion of the Option shall expire at 5:00 p.m. Phoenix time on
the second business day after the date of such termination.
(b) The unvested portion of the Option shall expire on the Termination
Date except in the case where Optionee is terminated from employment by Employer
without Cause, Optionee ceases to be so employed due to death or Permanent
Disability or Optionee resigns for Good Reason, in which case the unvested
portion of the Option shall terminate 180 days following the end of the Fiscal
Year during which the Termination Date occurred.
5. Nontransferability. The Option shall not be transferable by Optionee
otherwise than to his or her spouse, child, estate, personal representative,
heir or successor or to a trust for the benefit of Optionee or his or her
spouse, child or heir (a "Permitted Transferee"), and the Option shall be
exercisable, during Optionee's lifetime, only by him or her or by any of the
foregoing Permitted Transferees, or in the event of Optionee's Permanent
Disability, his or her guardian or legal representative. More particularly (but
without limiting the generality of the foregoing), the Option may not be
assigned, transferred (except as aforesaid), pledged or hypothecated in any way
(whether by operation of law or otherwise), and shall not be subject to
execution, attachment or similar process. Any assignment, transfer, pledge,
hypothecation or other disposition of the Option contrary to the provisions
hereof, and the levy of any attachment or similar process upon the Option that
would otherwise effect a change in the ownership of the Option, shall terminate
the Option; provided, however, that in the case of the involuntary levy of any
attachment or similar involuntary process upon the Option, Optionee shall have
thirty (30) days after notice thereof to cure such levy or process and reinstate
the Option. This Agreement shall be binding on and enforceable against any
person who is a Permitted Transferee of the Option pursuant to the first
sentence of this Section.
6. Effect of Merger; Adjustments.
(a) In the event of an Approved Sale that is a merger or other form of
corporate reorganization and notwithstanding any other provisions of this
Agreement, the unexercised portion of the Option shall be subject to the terms
of the agreement or plan of merger or reorganization effecting such merger or
reorganization and shall be converted, redeemed, exchanged, canceled or
otherwise treated as provided in such agreement or plan of merger or
reorganization, provided that Optionee shall be given at least 20 days' prior
notice of the proposed merger or reorganization and shall (notwithstanding
anything else herein to the contrary) be entitled to exercise the vested portion
of the Option at any time during such 20 day period up to and until the close of
business on the day immediately preceding the date of consummation of such
merger or reorganization (which exercise may be expressly contingent upon
completion of the Approved Sale if the unexercised portion of the Option were to
vest as a result of such Approved Sale) and upon exercise of the Option the
Option Shares shall be treated in the same manner as the shares of any other
stockholder of Issuer.
JENKINS STOCK OPTION AGREEMENT (IPO)
4
<PAGE> 5
(b) Subject to Section 6(a), in the event of any one or more
reorganizations, recapitalizations, mergers, acquisitions, stock splits, reverse
stock splits, stock dividends or similar events, an appropriate adjustment shall
be made in the number and kind of shares or other securities subject to the
Option, and the Exercise Price for each Option Share or other unit of any
securities subject to this Agreement. No fractional interests shall be issued on
account of any such adjustment unless the Board of Directors of the Issuer
specifically determines to the contrary; provided, however, that in lieu of
fractional interests, Optionee, upon the exercise of the Option in whole or
part, shall receive cash in an amount equal to the amount by which the Fair
Market Value of such fractional interests exceeds the Exercise Price
attributable to such fractional interests.
7. Exercise of the Option. Prior to the expiration thereof, Optionee may
exercise the vested portion of the Option from time to time in whole or in part.
Upon electing to exercise the Option, Optionee shall deliver to the Secretary of
Issuer a written and signed notice of such election setting forth the number of
Option Shares Optionee has elected to purchase and shall at the time of delivery
of such notice tender cash or a cashier's or certified bank check to the order
of Issuer for the full Exercise Price of such Option Shares and any amount
required pursuant to Section 15 hereof. The Issuer may, in its discretion, also
permit payment of the Exercise Price in such form or in such manner as may be
permissible under any applicable law.
8. Restrictions on Transfers of Option Shares. Prior to the termination of
the Lock-Up Period following a secondary offering, the Option Shares shall not
be transferable or transferred, assigned, pledged or hypothecated in any way
(whether by operation of law or otherwise) except that Optionee may transfer the
Option Shares to a Permitted Transferee. This Agreement shall be binding on and
enforceable against any person who is a Permitted Transferee of the Option
Shares. The stock certificates issued to evidence Option Shares upon exercise of
the Option hereunder shall bear legends referring to this Agreement and the
restrictions contained herein.
9. Compliance with Legal Requirements.
(a) No Option Shares shall be issued or transferred pursuant to this
Agreement unless and until all legal requirements applicable to such issuance or
transfer have, in the opinion of counsel to Issuer, been satisfied. Such
requirements may include, but are not limited to, registering or qualifying such
Shares under any state or federal law, satisfying any applicable law relating to
the transfer of unregistered securities or demonstrating the availability of an
exemption from applicable laws, placing a legend on the Option Shares to the
effect that they were issued in reliance upon an exemption from registration
under the Act and may not be transferred other than in reliance upon Rule 144 or
Rule 701 promulgated under the Act, if available, or upon another exemption from
the Act, or obtaining the consent or approval of any governmental regulatory
body. Issuer shall use its best efforts to comply with all legal requirements
applicable to the issuance or transfer of Option Shares.
(b) Optionee understands that Issuer intends for the offering and sale
of Option Shares to be effected in reliance upon Rule 701 or another available
exemption from registration under the Act and intends to file a Form 701 as
appropriate, and that Issuer is under no obligation
JENKINS STOCK OPTION AGREEMENT (IPO)
5
<PAGE> 6
to register for resale the Option Shares issued upon exercise of the Option. In
connection with any such issuance or transfer, the person acquiring the Option
Shares shall, if requested by Issuer, provide information and assurances
satisfactory to counsel to Issuer with respect to such matters as Issuer
reasonably may deem desirable to assure compliance with all applicable legal
requirements. Issuer hereby covenants and agrees to register all of the Option
Shares on a Form S-8 (or any successor form thereto) following the Initial
Public Offering.
10. Capitalizations, Exchanges, Etc. Affecting Shares; Dilution.
(a) The provisions of this Agreement shall apply to any and all shares
of capital stock of Issuer or any successor or assign of Issuer that may be
issued in respect of, in exchange for, or in substitution of, the Option Shares
by reason of any stock dividend, stock split, stock issuance, reverse stock
split, combination, recapitalization, reclassification, merger, consolidation or
otherwise, other than an Approved Sale, and in connection with the occurrence of
any such events, proportionate adjustments shall be made in the number of Option
Shares which may be acquired hereunder and the exercise price of each Option
Share.
(b) Except as may be specifically provided herein or in the Restated
Certificate of Incorporation, nothing herein shall prohibit or restrict Issuer
from taking any corporate action or engaging in any corporate transaction of any
kind, including, without limitation, the issuance and sale of additional shares
of capital stock of Issuer, any merger, consolidation, liquidation or sale of
assets, or create in Optionee or his or her Permitted Transferee any rights to
acquire or receive additional shares of capital stock of Issuer or otherwise to
be protected against dilution.
11. Subject to Restated Certificate of Incorporation and Stockholders'
Agreement. Optionee acknowledges that the Option Shares are subject to the terms
of the Restated Certificate of Incorporation and the Stockholders' Agreement.
Optionee hereby agrees to comply with the terms of the Stockholders' Agreement.
12. No Interest in Shares Subject to Option. Neither Optionee (individually
or as a member of a group) nor any beneficiary or other person claiming under or
through Optionee shall have any right, title, interest, or privilege in or to
any shares subject to this Agreement except as to such Option Shares, if any, as
shall have been issued to such person upon exercise of this Option or any part
of it.
13. Not an Employment Contract. Nothing in this Agreement or any other
instrument executed pursuant thereto shall confer upon Optionee any right to
continue in the employ of Employer or any Subsidiary or shall affect the right
of Employer or any Subsidiary to terminate the employment of Optionee with or
without Cause.
14. Governing Law. All terms of and rights under this Agreement shall be
governed by and construed in accordance with the internal law of the State of
New York, without giving effect to principles of conflicts of law.
15. Taxes. The Issuer may, in its discretion, make such provisions and take
such steps as it may deem necessary or appropriate for the withholding of all
federal, state, local and other
JENKINS STOCK OPTION AGREEMENT (IPO)
6
<PAGE> 7
taxes required by law to be withheld with respect to the issuance or exercise of
the Option including, but not limited to, deducting the amount of any such
withholding taxes from any other amount then or thereafter payable to Optionee,
requiring Optionee to pay to Issuer the amount required to be withheld or to
execute such documents as the Issuer deems necessary or desirable to enable it
to satisfy its withholding obligations. Optionee shall have the right to satisfy
the withholding obligation in whole or in part by the delivery of shares of the
Issuer previously issued to Optionee or by the withholding of the delivery of
Option Shares otherwise to be received upon the Option exercise.
16. Notices. All notices, requests, demands and other communications
pursuant to this Agreement shall be in writing and shall be deemed to have been
duly given if personally delivered, telexed or telecopied to, or, if mailed,
when received by, the other party, if to Issuer at its principal executive
offices addressed to the attention of Issuer's Secretary, and if to Optionee at
his or her address as it appears on the books of his or her employer (or at such
other address as shall be given in writing by Optionee or his or her Permitted
Transferee to Issuer).
17. Amendments and Waivers. This Agreement may be amended, and any
provision hereof may be waived, only by a writing signed by the party to be
charged.
18. Entire Agreement. This Agreement sets forth the entire agreement and
understanding between the parties as to the subject matter hereof and supersedes
all prior oral and written and all contemporaneous oral discussions, agreements
and understandings of any kind or nature.
19. Headings. The headings preceding the text of the sections hereof are
inserted solely for convenience of reference, and shall not constitute a part of
this Agreement, nor shall they affect its meaning, construction or effect.
20. Further Assurances. Each party shall cooperate and take such action as
may be reasonably requested by another party in order to carry out the
provisions and purposes of this Agreement.
21. Arbitration. The parties shall endeavor to settle all disputes by
amicable negotiations. Any claim, dispute, disagreement or controversy that
arises among the parties relating to this Agreement that is not amicably settled
shall be resolved by arbitration, as follows:
(a) Any such arbitration shall be heard in The City of New York, New
York, before a panel consisting of one (1) to three (3) arbitrators, each of
whom shall be impartial. Upon the written Request for Arbitration by either
party hereto to commence arbitration hereunder, the parties shall attempt to
mutually agree as to the number and identity of the arbitrators within thirty
(30) days of such Request. Except as the parties may otherwise agree, all
arbitrators (if not selected by the parties hereto within thirty (30) days of a
written Request for Arbitration) shall be appointed pursuant to the commercial
arbitration rules of the American Arbitration Association. In determining the
number and appropriate background of the arbitrators, the appointing authority
shall give due consideration to the issues to be resolved, but his or her
decision as to the number of arbitrators and their identity shall be final.
JENKINS STOCK OPTION AGREEMENT (IPO)
7
<PAGE> 8
(b) An arbitration may be commenced by any party to this Agreement by
the service of a written request for arbitration upon the other affected
parties. Such request for arbitration shall summarize the controversy or claim
to be arbitrated.
(c) All attorneys' fees and costs of the arbitration shall in the first
instance be borne by the respective party incurring such costs and fees, but the
arbitrators shall award costs and attorneys' fees to the prevailing party. The
parties hereby expressly waive punitive damages, and under no circumstances
shall an award contain any amount that in any way reflects punitive damages.
(d) Judgment on the award rendered by the arbitrators may be entered in
any court having jurisdiction thereof.
(e) It is intended that controversies or claims submitted to
arbitration under this Section 21 shall remain confidential, and to that end it
is agreed by the parties that neither the facts disclosed in the arbitration,
the issues arbitrated, nor the views or opinions of any persons concerning them,
shall be disclosed to third persons at any time, except to the extent necessary
to enforce an award or judgment or as required by law or in response to legal
process or in connection with such arbitration.
(f) Any arbitration under this Section 21 shall be conducted pursuant
to the commercial arbitration rules of the American Arbitration Association.
22. Binding Effect. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective permitted successors and
assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
CSK AUTO CORPORATION
By:
------------------------
Name:
----------------------
Title:
---------------------
---------------------------
Maynard Jenkins
JENKINS STOCK OPTION AGREEMENT (IPO)
8
<PAGE> 9
EXHIBIT 1
The Option shall vest as follows:
April 1, 2000 72,212 Option Shares
April 1, 2001 72,212 Option Shares
April 1, 2002 72,211 Option Shares
; provided, however, that in the event of an Approved Sale, the Option shall
vest fully on the date of the closing of such Approved Sale.
JENKINS STOCK OPTION AGREEMENT
EXHIBIT 1 1
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of CSK Auto Corporation of our report dated
December 23, 1997 relating to the financial statements of CSK Auto Corporation,
which appears in such Prospectus. We also consent to the application of such
report to the Financial Statement Schedule for the two years ended January 28,
1996 listed under Item 16(b) of this Registration Statement when such schedule
is read in conjunction with the financial statements referred to in our report.
The audits referred to in such report also included this schedule. We also
consent to the references to us under the headings "Experts" and "Selected
Financial Data" in such Prospectus. However, it should be noted that Price
Waterhouse LLP has not prepared or certified such "Selected Financial Data".
PRICE WATERHOUSE LLP
Phoenix, Arizona
March 10, 1998
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-43211) of our reports dated April 22, 1997, except for Notes 7 and 15
as to which the date is February 13, 1998, on our audit of the financial
statements and financial statement schedule of CSK Auto Corporation for the
year ended February 2, 1997. We also consent to the reference to our firm under
the caption "Experts".
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
March 10, 1998
