CSK AUTO CORP, 10-Q, 2000-12-13

CSK AUTO CORP
10-Q, 2000-12-13
AUTO & HOME SUPPLY STORES

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 29, 2000

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-13927

CSK AUTO CORPORATION

(Exact name of registrant as specified in its charter)






Delaware (State or other jurisdiction of Incorporation or organization)		86-0765798 (I.R.S. Employer Identification No.)





645 E. Missouri Ave. Suite 400, Phoenix, Arizona (Address of principal executive offices)		85012 (Zip Code)

(602) 265-9200

(Registrant’s telephone number, including area code)

N/ A

(Former name, former address and former fiscal year,

if changed since last reports)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No .

As of December 13, 2000, CSK Auto Corporation had 27,839,484 shares of common stock outstanding.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

CSK AUTO CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


			October 29,			January 30,
			2000			2000

			(Unaudited)




ASSETS




Cash and cash equivalents			$	12,858		$	11,762




Receivables, net of allowances of $4,091 and $3,294, respectively				85,234			69,129




Inventories				620,414			625,480




Assets held for sale				3,257			4,745




Prepaid expenses and other current assets				17,903			18,471

		Total current assets		739,666			729,587

Property and equipment, net				172,133			160,561




Leasehold interests, net				20,933			8,341




Investment in and advances to joint venture				1,306			—




Goodwill, net				131,738			124,750




Other assets, net				11,479			12,413

		Total assets	$	1,077,255		$	1,035,652





LIABILITIES AND STOCKHOLDERS’ EQUITY




Accounts payable			$	205,994		$	168,770




Accrued payroll and related expenses				27,847			38,910




Accrued expenses and other current liabilities				48,063			50,663




Current maturities of amounts due under Senior Credit Facility				28,990			3,340




Current maturities of capital lease obligations				11,726			9,893




Deferred income taxes				2,261			1,417

		Total current liabilities		324,881			272,993

Amounts due under Senior Credit Facility				478,160			505,480




Obligations under 11% Senior Subordinated Notes				81,250			81,250




Obligations under capital leases				26,819			27,170




Deferred income taxes				10,600			5,801




Other				10,894			8,411

		Total non-current liabilities		607,723			628,112

Commitments and contingencies Stockholders’ equity:




	Common stock, $0.01 par value, 50,000,000 shares authorized; 27,839,484 and 27,834,574 shares issued and outstanding at October 29, 2000 and January 30, 2000, respectively			278			278




	Additional paid-in capital			291,063			291,004




	Stockholder receivable			(737	)		(584	)




	Deferred compensation			(198	)		(324	)




	Accumulated deficit			(145,755	)		(155,827	)

		Total stockholders’ equity		144,651			134,547

		Total liabilities and stockholders’ equity	$	1,077,255		$	1,035,652

The accompanying notes are an integral part of these consolidated financial statements.

CSK AUTO CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except share and per share data)



		Thirteen Weeks Ended				Thirty-nine Weeks Ended

		October 29,		October 31,		October 29,		October 31,
		2000		1999		2000		1999

Net sales		$	368,898	$	331,320	$	1,100,054	$	903,044




Cost of sales			196,200		170,946		580,359		469,790

Gross profit			172,698		160,374		519,695		433,254




Other costs and expenses:




	Operating and administrative		144,440		125,661		423,193		344,420




	Store closing costs		149		234		6,012		1,445




	Transition and integration expenses		1,308		3,551		23,818		4,170




	Equity in loss of joint venture		1,188		—		1,904		—




	Goodwill amortization		1,092		432		3,620		719

Operating profit			24,521		30,496		61,148		82,500




Interest expense, net			15,457		11,524		45,278		27,016

Income before income taxes and cumulative effect of change in accounting principle			9,064		18,972		15,870		55,484




Income tax expense			3,172		7,304		5,798		21,261

Income before cumulative effect of change in accounting principle			5,892		11,668		10,072		34,223




Cumulative effect of change in accounting principle, net of $468 of income taxes			—		—		—		(741	)

Net income		$	5,892	$	11,668	$	10,072	$	33,482

Basic earnings per share:




	Income before cumulative effect of change in accounting principle		0.21		0.42		0.36		1.23




	Cumulative effect of change in accounting principle, net of income taxes		—		—		—		(0.03	)

	Net income	$	0.21	$	0.42	$	0.36	$	1.20

Shares used in computing per share amounts			27,839,484		27,826,096		27,839,084		27,808,757

Diluted earnings per share:




	Income before cumulative effect of change in accounting principle		0.21		0.41		0.36		1.19




	Cumulative effect of change in accounting principle, net of income taxes		—		—		—		(0.02	)

	Net income	$	0.21	$	0.41	$	0.36	$	1.17

Shares used in computing per share amounts			27,839,484		28,502,784		27,839,084		28,708,125

The accompanying notes are an integral part of these consolidated financial statements.

CSK AUTO CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)



	Common Stock				Additional
					Paid-in		Stockholder			Deferred			Accumulated			Total
	Shares		Amount		Capital		Receivable			Compensation			Deficit			Equity

Balances at January 30, 2000		27,834,574	$	278	$	291,004	$	(584	)	$	(324	)	$	(155,827	)	$	134,547




Amortization of deferred compensation (unaudited)		—		—		—		—			126			—			126




Advances to stockholders (unaudited)		—		—		—		(181	)		—			—			(181	)




Recovery of stockholder receivable (unaudited)		—		—		—		28			—			—			28




Exercise of options (unaudited)		4,910		—		59		—			—			—			59




Net income (unaudited)		—		—		—		—			—			10,072			10,072

Balances at October 29, 2000 (unaudited)		27,839,484	$	278	$	291,063	$	(737	)	$	(198	)	$	(145,755	)	$	144,651

The accompanying notes are an integral part of these consolidated financial statements.

CSK AUTO CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)



				Thirty-nine Weeks Ended

				October 29,			October 31,
				2000			1999

Cash flows provided by (used in) operating activities:




	Net income			$	10,072		$	33,482




	Adjustments to reconcile net income to net cash provided by (used in) operating activities:




		Depreciation and amortization of property and equipment			24,235			18,271




		Amortization of goodwill			3,620			719




		Amortization of leasehold interests			1,384			588




		Amortization of deferred financing costs			1,585			892




		Amortization of other deferred charges			674			321




		Tax benefit relating to stock option exercises			—			393




		Equity in loss of joint venture			1,904			—




		Cumulative effect of change in accounting principle, net of income taxes			—			741




		Deferred income taxes			5,643			4,784




		Change in operating assets and liabilities, net of effects of acquisitions:




			Receivables		(19,427	)		(7,387	)




			Inventories		(7,057	)		(79,300	)




			Prepaid expenses and other current assets		1,083			2,643




			Accounts payable		31,683			(3,514	)




			Accrued payroll, accrued expenses and other current liabilities		(17,818	)		17,353




			Other operating activities		5,210			(4,429	)

		Net cash provided by (used in) operating activities			42,791			(14,443	)

Cash flows provided by (used in) investing activities:




	Business acquisitions, net of cash acquired				(1,185	)		(215,784	)




	Capital expenditures				(24,477	)		(31,729	)




	Expenditures for assets held for sale				(103	)		(4,618	)




	Proceeds from sale of property and equipment and assets held for sale				3,814			6,139




	Investment in joint venture				(3,103	)		—




	Other investing activities				(1,363	)		(79	)

			Net cash used in investing activities		(26,417	)		(246,071	)

Cash flows provided by (used in) financing activities:




	Borrowings under Senior Credit Facility				199,000			451,000




	Payments under Senior Credit Facility				(200,670	)		(172,420	)




	Payment of debt issuance costs				—			(4,533	)




	Payments on capital lease obligations				(10,608	)		(8,047	)




	Advances to stockholders				(181	)		—




	Recovery of stockholder receivable				28			403




	Exercise of options				59			700




	Other financing activities				(2,906	)		(503	)

		Net cash provided by (used in) financing activities			(15,278	)		266,600

		Net increase in cash and cash equivalents			1,096			6,086




Cash and cash equivalents, beginning of period					11,762			7,490

Cash and cash equivalents, end of period				$	12,858		$	13,576

The accompanying notes are an integral part of these consolidated financial statements.

CSK AUTO CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Thirteen and Thirty-nine Weeks Ended October 29, 2000

CSK Auto Corporation is a holding company. At October 29, 2000, 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 Auto are referred to herein as the “Company.”

Auto is a specialty retailer of automotive aftermarket parts and accessories. At October 29, 2000, the Company operated 1,147 stores in 19 Western and Northern Plains states as a fully integrated company under three brand names: Checker Auto Parts, founded in 1969 and operating in the Southwestern, Rocky Mountain and Northern Plains 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 — Basis of Presentation

The unaudited consolidated financial statements included herein were prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission, but do not include all information and footnotes required by generally accepted accounting principles. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the Company’s financial position and the results of its operations. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto for the fiscal year ended January 30, 2000, as included in the Company’s Annual Report on Form 10-K filed on April 28, 2000.

Note 2 — Inventories

Inventories are valued at the lower of cost or market, cost being determined utilizing the last-in, first-out (LIFO) method. An actual valuation of inventory under the LIFO method can only be calculated at the end of a fiscal year based upon the inventory levels and costs at that time. Accordingly, interim LIFO calculations reflected herein are based upon management’s estimates of year-end inventory levels and costs. The replacement cost of inventories approximated $539 million and $548 million at October 29, 2000 and January 30, 2000, respectively.

Note 3 — Earnings Per Share

Calculation of shares used in computing per share amounts is summarized as follows (unaudited):



		Thirteen Weeks Ended				Thirty-nine Weeks Ended

		October 29,		October 31,		October 29,		October 31,
		2000		1999		2000		1999

Common stock outstanding:




	Beginning of period		27,839,484		27,824,619		27,834,574		27,768,832

	End of period		27,839,484		27,827,057		27,839,484		27,827,057

Issued during the period			—		2,438		4,910		58,225

Weighted average number of shares (Basic)			27,839,484		27,826,096		27,839,084		27,808,757




Effects of dilutive securities			—		676,688		—		899,368

Weighted average number of shares (Dilutive)			27,839,484		28,502,784		27,839,084		28,708,125

CSK AUTO CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 4 — Recent Accounting Pronouncements

In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), “Revenue Recognition in Financial Statements”. SAB 101 summarizes some of the staff’s interpretations of the application of generally accepted accounting principles to revenue recognition. In June 2000, the SEC staff issued SAB 101B which delays the implementation date of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The Company does not anticipate that the pronouncement will have a material impact on its financial position or the results of operations.

In March 2000, the FASB issued FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation: An Interpretation of APB Opinion No. 25.” The interpretation became effective July 1, 2000. The adoption of the pronouncement did not have a material impact on the Company’s financial position or the results of operations.

Note 5 — Investment in Joint Venture

On March 1, 2000, the Company participated in the formation of a new joint venture, PartsAmerica.com (“PA”), with Advance Auto Parts (“Advance”) and Sequoia Capital. PA engages in the sale of automotive parts and accessories via e-commerce. PA operates independently from its partners and utilizes both Auto’s and Advance’s existing logistic systems to support its web-based operations.

In exchange for approximately 37% of the outstanding equity of PA, the Company has contributed assets and incurred costs of approximately $3.1 million, which include associated transaction costs. The Company is accounting for its investment in PA under the equity method and, accordingly, recognizes its proportionate share of PA’s net income or loss. Through the thirty-nine weeks of fiscal 2000, the Company has recognized approximately $1.9 million of PA’s development stage and operating losses and included such amount as equity in loss of joint venture in the accompanying consolidated statement of operations. As of October 29, 2000, the investment in and advances to joint venture in the accompanying consolidated balance sheets includes the remaining investment in PA of $1.2 million and $0.1 million of advances. Auto is not obligated to support PA financially beyond the extent of its original investment.

Note 6 — Store Acquisition

On April 27, 2000, the Company acquired substantially all of the assets of All-Car Distributors, Inc. (“AllCar”), an operator of 22 stores in Wisconsin and Michigan. Under the terms of the agreement, the Company paid approximately $711,000 in cash, which includes associated transaction costs, for the assets of AllCar and assumed vendor accounts payable and certain indebtedness and accrued expenses. In August 2000, the Company made a payment of approximately $206,000 pursuant to a purchase price adjustment formula contained in the original agreement. In addition, the Company is subject to an additional payment of approximately $215,000 upon the satisfaction of certain conditions. The AllCar acquisition was accounted for under the purchase method of accounting. Accordingly, the results of operations of these stores are included in the consolidated operating results of the Company from April 28, 2000, the first day of operations subsequent to the acquisition. The financial statements reflect the preliminary allocation of the purchase price, based on estimated fair values at the date of acquisition, pending final determination of certain acquired balances, principally inventories.

The AllCar stores are serviced out of the Company’s Minneapolis Distribution Center and have been converted to the Checker name and store format and integrated into the Company’s operations. In connection with the integration of the AllCar stores, the Company incurred one-time transition and integration expenses of approximately $3.6 million, consisting primarily of grand opening advertising, training and re-merchandising costs. In addition, the Company expects to incur capital expenditures estimated to be $2.0 million,

CSK AUTO CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

consisting primarily of expenditures related to equipment, store fixtures, signage and the installation of the Company’s store-level information systems in the AllCar stores. Approximately $1.5 million of these expenditures were incurred through the third quarter of fiscal 2000 with the balance expected to be incurred during the fourth quarter of fiscal 2000.

Note 7 — Purchase Accounting Adjustments

On October 1, 1999, the Company acquired the common stock of Al’s and Grand Auto Supply, Inc. (“AGA”), formerly known as PACCAR Automotive, Inc., which operated 194 stores under the trade names of Al’s Auto Supply and Grand Auto Supply (collectively, the “AGA stores”) in Washington, California, Idaho, Oregon, Nevada, and Alaska. On June 30, 1999, the Company acquired substantially all of the assets of Apsco Products Company dba Big Wheel/ Rossi (“Big Wheel”), a leading retailer of auto parts in the Northern Plains states. Big Wheel operated 86 stores in Minnesota, North Dakota and Wisconsin along with a distribution center in Minnesota. These acquisitions were accounted for under the purchase method of accounting. Prior financial statements reflected the preliminary allocation of the purchase prices, based on estimated fair values at the date of the respective acquisition. During the first half of fiscal 2000, the Company made adjustments to reflect the final determination of certain acquired balances. The preliminary and final allocations of the fair value of the assets and liabilities recorded as a result of the above described acquisitions are as follows (in thousands):


		Preliminary			Final
		Allocation			Allocation			Change

Cash and cash equivalents		$	319		$	68		$	(251	)




Receivables			3,863			2,574			(1,289	)




Inventories			117,433			102,965			(14,468	)




Assets held for sale			3,238			3,238			—




Property and equipment			29,651			29,651			—




Goodwill			117,287			123,288			6,001




Leasehold interests			—			14,655			14,655




Prepaids and other assets			2,079			2,079			—




Deferred income taxes			2,493			2,493			—




Accounts payable			(35,056	)		(36,644	)		(1,588	)




Accrued liabilities and other			(28,848	)		(29,164	)		(316	)




Closed store reserves			(4,178	)		(6,922	)		(2,744	)

	Total cash purchase price	$	208,281		$	208,281		$	—

Significant changes in the allocation of acquired balances include: (1) a lower accounts receivable valuation primarily relating to acquired accounts payable debit balances for vendors with which the Company does not conduct business; (2) a revised inventory allocation representing (a) a lower inventory valuation on core and warranty returns as a result of excessive acquired inventory levels; and (b) a lower valuation on non-returnable inventory lines not carried by the Company; (3) a leasehold rights allocation representing the discounted net present value of the excess of the fair market rental value over the respective contractual rent of stores under operating leases acquired; (4) an accounts payable adjustment as a result of an adjustment to acquired bank overdrafts; and (5) a revised closed store reserve reflecting the final costs of closing or relocating previously identified stores.

CSK AUTO CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 8 — Legal Matters

As previously disclosed, on May 4, 1998, a lawsuit was filed against the Company in the Superior Court in San Diego, California. The case was brought by two former store managers and a former senior assistant manager. It purports to be a class action for all present and former California store managers and senior assistant managers and seeks overtime pay for a period beginning in May 1995 as well as injunctive relief requiring overtime pay in the future. The Company has also been served with two other lawsuits purporting to be class actions filed in California state courts in Orange and Fresno Counties by thirteen other former and current employees. These lawsuits include similar claims to the San Diego lawsuit, except that they also include claims for unfair business practices which seek overtime from October 1994. The Company has entered into an agreement to settle these class action lawsuits. The maximum settlement amount is $11 million (which includes plaintiffs’ attorneys’ fees and costs), but may be lower depending upon the number of potential class members that submit claims. The settlement agreement has been tentatively approved by the court in which the lawsuits are pending. The settlement will not be final until the claims process is completed and the court grants final approval of the settlement, which is anticipated in January 2001. The Company will record a charge to earnings when the final settlement amount can be reasonably estimated.

The Company was served on March 8, 2000 with a complaint filed in Federal Court in the Eastern District of New York by the Coalition for a Level Playing Field, L.L.C. and 179 individual auto parts dealers alleging that the Company and seven other auto parts dealers (AutoZone, Inc., Wal-Mart Stores, Inc., Advance Stores Company, Inc., Discount Auto, Inc., The Pep Boys — Manny, Moe and Jack, Inc., O’Reilly Automotive, Inc., and Keystone Automotive Operations, Inc.) violated the Robinson-Patman Act. Only 14 of the individual plaintiffs asserted claims against the Company, and three of those have voluntarily dismissed their claims without prejudice. The complaint alleges that the Company and other defendants knowingly either induced or received discriminatory prices from large suppliers, allegedly in violation of Section 2(a) and 2(f) of the Robinson-Patman Act, as well as receiving compensation from large suppliers for services not performed for those suppliers, allegedly in violation of Section 2(c) of the Robinson-Patman Act. The complaint seeks injunctive relief against all defendants and seeks treble damages on behalf of the individual auto parts dealers who are plaintiffs, plus attorneys’ fees. The complaint alleges that the estimated average damage amount per plaintiff is $1,000,000 (and more for those plaintiffs that are wholesale distributors and not simply jobbers) before trebling. The Company believes the suit is without merit and plans to vigorously defend it. The Company, with other defendants, has filed a motion to dismiss and certain other procedural motions. A decision on these motions is not anticipated until the second quarter of fiscal 2001.

The Company currently and from time to time is involved in other litigation incidental to the conduct of its business. The damages claimed in some of this litigation 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 its consolidated financial condition, results of operations or cash flows.

Note 9 — Store Closing Costs

The Company provides an allowance for estimated costs to be incurred in connection with store closures. Such costs are recognized when a store is specifically identified, costs can be estimated and closure is planned to be completed within the next twelve months. For stores to be relocated, such costs are recognized when an agreement for the new location has been reached with a landlord and site plans meet preliminary municipal approvals. The allowance for store closing costs is included in accrued expenses in the accompanying financial statements, and consists primarily of future rents to be paid over the remaining terms of the master lease agreement for stores, net of estimated sub-lease recoveries. Future rents will be incurred through the expiration of the non-cancelable leases.

CSK AUTO CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Activity in the provision for store closings and the related store closing costs for the thirty-nine weeks ended October 29, 2000, is as follows (in thousands):






Balance, at January 30, 2000			$	4,802




Store closings costs:




	Store closings costs, gross			6,053




	Adjustments to prior year plans			(41	)

		Store closings costs, net		6,012




Purchase accounting adjustment:




	Al’s and Grand Auto Supply			2,744




Payments				(9,581	)

Balance, at October 29, 2000			$	3,977

During the period that they remain open for business, the rent and other operating expenses for the stores to be closed continue to be reflected in the Company’s normal operating expenses.

Included in store closing costs is a charge of $3.7 million for store closing costs that were incurred due to overlap of certain CSK stores with more favorably sized or situated AGA stores. Adjustments to prior plans relate to costs for store closures that were accrued in prior periods but withdrawn from the Company’s store closure plan in the period of adjustment. Such withdrawals are due to subsequent improvements in the underlying economics of the store’s performance or (in the case of store relocation) because the Company was unable to secure a previously identified site upon acceptable lease terms. Further significant changes to the strategic plan are not considered likely. All relocations and store closings are anticipated to be completed within twelve months of accrual and only after costs can be estimated.

On a store count basis, closure activity and the remaining number of stores to be closed are summarized as follows:



	Number of Stores to be Closed

	Beginning		Stores		Plan			Stores			Balance to
Period	Balance		Added		Amendments			Closed			be Closed

Fiscal 1998		48		24		(10	)		(33	)		29




Fiscal 1999		29		87		(11	)		(77	)		28




Thirty-nine weeks ended October 29, 2000		28		17		(1	)		(36	)		8

At October 29, 2000, there were 8 stores remaining to be closed under the Company’s store closing plans, comprised of the following:


	Stores in		Plan			Stores			Balance to
Fiscal Year	Closing Plan		Amendments			Closed			be Closed

1996		91		(17	)		(74	)		—




1997		36		(13	)		(22	)		1




1998		24		(5	)		(19	)		—




1999		87		(2	)		(82	)		3




2000		17		—			(13	)		4
										8

The store that remains from the 1997 fiscal year plan will be closed prior to the end of fiscal 2000.

CSK AUTO CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results*

of Operations

Overview

Our business is somewhat seasonal in nature, with the highest sales occurring in the summer months of June through August (overlapping our second and third fiscal quarters). Our business is, in addition, affected by weather conditions. While unusually severe or inclement weather tends to reduce sales as our customers tend to defer elective maintenance during such periods, extremely hot and cold temperatures tend to enhance sales by causing auto parts to fail and sales of seasonal products to increase.

Results of Operations

The following table expresses the statements of operations as a percentage of sales for the periods shown:



	Thirteen Weeks						Thirty-nine Weeks
	Ended						Ended

	October 29,			October 31,			October 29,			October 31,
	2000			1999			2000			1999

Net sales		100.0	%		100.0	%		100.0	%		100.0	%




Cost of sales		53.2			51.6			52.8			52.0

Gross profit		46.8			48.4			47.2			48.0




Operating and administrative		39.2			37.9			38.5			38.1




Store closing costs		—			0.1			0.5			0.2




Transition and integration expenses		0.4			1.1			2.1			0.5




Equity in loss on joint venture		0.3			—			0.2			—




Goodwill amortization		0.3			0.1			0.3			0.1

Operating profit		6.6			9.2			5.6			9.1




Interest expense, net		4.2			3.5			4.1			3.0

Income before income taxes and cumulative effect of change in accounting principle		2.4			5.7			1.5			6.1




Income tax expense		0.9			2.2			0.5			2.3

Income before cumulative effect of change in accounting principle		1.5			3.5			1.0			3.8




Cumulative effect of change in accounting principle, net of income taxes		—			—			—			(0.1	)

Net income		1.5	%		3.5	%		1.0	%		3.7	%

Thirteen Weeks Ended October 29, 2000 Compared to Thirteen Weeks Ended October 31, 1999

Net sales for the thirteen weeks ended October 29, 2000 (the “third quarter of fiscal 2000”) increased $37.6 million, or 11.3%, over net sales for the thirteen week period ended October 31, 1999 (the “third quarter of fiscal 1999”). This increase reflects both a comparable store sales increase of 2% and an increase in the number of stores operated. During the third quarter of fiscal 2000, we opened 8 stores, relocated 7 stores, expanded 3 stores, and closed 4 stores in addition to stores closed due to relocation. At October 29, 2000, we had 1,147 stores in operation compared to 1,120 stores at the end of the third quarter of fiscal 1999.

Gross profit for the third quarter of fiscal 2000 was $172.7 million, or 46.8% of net sales, compared to $160.4 million, or 48.4% of net sales, for the third quarter of fiscal 1999. The decrease in gross profit percentage primarily resulted from the loss of purchase allowances due to the assimilation of acquired inventories without customary purchase allowances.

Operating and administrative expenses increased by $18.8 million to $144.4 million, or 39.2% of net sales, for the third quarter of fiscal 2000 from $125.7 million, or 37.9% of net sales, for the comparable 1999 period. The dollar increase is primarily the result of the operating costs of new stores. The increase as a percent of sales resulted from our inability to leverage the additional fixed costs of new and acquired stores over a larger sales base.

Operating profit decreased to $24.5 million, or 6.6% of net sales, for the third quarter of fiscal 2000 from $30.5 million, or 9.2% of net sales, for the comparable 1999 period, due to the factors cited above. In addition, during the third quarter of fiscal 2000, we incurred the following costs and charges: (1) $1.3 million of non-recurring expenses primarily associated with the transition and integration of the AllCar Distributors (“AllCar”) stores that were acquired in the first quarter of fiscal 2000, compared to $3.6 million during the 1999 period relating to the transition and integration of the Big Wheel/ Rossi (“BWR”) and Al’s Auto Supply and Grand Auto Supply (“AGA”) stores (collectively the “1999 Acquisitions”); (2) goodwill amortization charges associated with our acquisitions of $1.1 million compared to $0.4 million during the 1999 period; (3) net store closing costs of $0.1 million compared to $0.2 million during the 1999 period; (4) pre-tax operating losses associated with the winding down of acquired automobile service centers of $0.6 million (see Liquidity and Capital Resources) compared to $0.2 million during the 1999 period; and (5) $1.2 million relating to our proportionate equity share of the loss of our joint venture (see Note 5 to the Consolidated Financial Statements).

Net interest expense for the third quarter of fiscal 2000 totaled $15.5 million compared to $11.5 million for the third quarter of fiscal 1999. The net expense increased primarily as a result of the additional indebtedness incurred to fund the 1999 Acquisitions and higher variable interest rates. An additional component of the increase in interest expense is the amortization of debt issuance costs, of which $0.5 million was incurred during the third quarter of fiscal 2000, compared to $0.4 million during the comparable 1999 period.

Income tax expense for the third quarter of fiscal 2000 was $3.2 million, compared to $7.3 million for the comparable period of fiscal 1999. Our effective tax rate decreased during the 2000 period to approximately 35.0% of pre-tax income from approximately 38.5% in the comparable 1999 period as a result of certain tax credits that were realized in the current period which were not available in the prior period.

As a result of the above factors, we produced net income of $5.9 million, or $0.21 per diluted common share, for the third quarter of fiscal 2000, compared to net income of $11.7 million, or $0.41 per diluted common share, for the third quarter of fiscal 1999. Excluding non-recurring charges and the PartsAmerica.com charge, net income for the third quarter of fiscal 2000 totaled approximately $7.9 million, or $0.29 per diluted common share.

Thirty-nine Weeks Ended October 29, 2000 Compared to Thirty-nine Weeks Ended October 31, 1999

Net sales for the thirty-nine weeks ended October 29, 2000 increased $197.0 million, or 21.8%, over net sales for the thirty-nine week period ended October 31, 1999. This increase reflects both a comparable store sales increase of 2% and an increase in the number of stores operated. During the thirty-nine weeks of fiscal 2000, we opened 28 stores, relocated 12 stores, expanded 6 stores, acquired 23 stores, and closed 24 stores in addition to stores closed due to relocation. The operating results of the Big Wheel stores are reflected for only seventeen weeks in the thirty-nine weeks of fiscal 1999 and the operating results of the AGA stores are reflected for only four weeks in the same period. Both acquisitions are reflected for the full thirty-nine weeks of fiscal 2000.

Gross profit for the thirty-nine weeks ended October 29, 2000 was $519.7 million, or 47.2% of net sales, compared to $433.3 million, or 48.0% of net sales, for the comparable 1999 period.

Operating and administrative expenses increased by $78.8 million to $423.2 million, or 38.5% of net sales, for the thirty-nine week period of fiscal 2000 from $344.4 million, or 38.1% of net sales, for the comparable 1999 period. The dollar increase is primarily the result of the operating costs of new stores.

Operating profit decreased to $61.1 million, or 5.6% of net sales, for the thirty-nine week period of fiscal 2000 from $82.5 million, or 9.1% of net sales, for the comparable 1999 period, due to the factors cited above. In addition, during the thirty-nine weeks of fiscal 2000, we incurred the following costs and charges: (1) $23.8 million of non-recurring expenses associated with the transition and integration of the 1999 acquisitions and the AllCar acquisition compared to $4.2 million during the 1999 period; (2) goodwill amortization charges associated with our acquisitions of $3.6 million compared to $0.7 million during the 1999 period; (3) net store closing costs of $6.0 million compared to $1.4 million during the 1999 period; (4) pre-tax operating losses associated with the winding down of acquired automobile service centers of $2.6 million (see Liquidity and Capital Resources) compared to $0.2 million during the 1999 period; and (5) $1.9 million relating to our proportionate equity share of the loss of our joint venture (see Note 5 to the Consolidated Financial Statements).

Net interest expense for the thirty-nine weeks of fiscal 2000 totaled $45.3 million compared to $27.0 million for the comparable period of fiscal 1999. The net expense increased primarily as a result of the additional indebtedness incurred to fund the 1999 Acquisitions and higher variable interest rates. An additional component of the increase in interest expense is the amortization of debt issuance costs, of which $1.6 million was incurred during the thirty-nine weeks of fiscal 2000, compared to $0.9 million during the comparable 1999 period.

Income tax expense for the thirty-nine weeks of fiscal 2000 was $5.8 million compared to income tax expense of $21.3 million for the comparable 1999 period. Our effective tax rate decreased during the 2000 period to approximately 36.5% of pre-tax income from approximately 38.3% in the comparable 1999 period as a result of certain tax credits that were realized in the current period which were not available in the prior period.

As a result of the above factors, net income decreased to $10.1 million, or $0.36 per diluted common share, for the thirty-nine week period of fiscal 2000, compared to net income of $33.5 million, or $1.17 per diluted common share, for the comparable 1999 period. Excluding non-recurring charges and the PartsAmerica.com charge, net income for the thirty-nine weeks of fiscal 2000 totaled approximately $30.4 million, or $1.09 per diluted common share.

Liquidity and Capital Resources

Overview

Our primary cash requirements include working capital (primarily inventory), debt service obligations and capital expenditures. We finance our cash requirements with cash flow from operations, funds from our leasing facility and borrowings under our revolving credit facility. At October 29, 2000, we had net working capital of approximately $414.8 million and total liquidity (cash plus availability under our revolving credit facility) of approximately $44.5 million. Under off-balance sheet operating lease facilities that are used to finance new store construction, we have $109.4 million of available funding for the acquisition and development of new stores through December 31, 2000. Of the available funding, $10.4 million has been committed to fund previously identified sites.

We believe that cash flow from operations combined with the availability of funds under our leasing facility and the revolving credit facility will be sufficient to support our operations and liquidity requirements for the foreseeable future. However, if sales trends were weaker than forecast, it could negatively impact our liquidity and capital resources in the foreseeable future.

For the thirty-nine weeks of fiscal 2000, net cash provided by operating activities was $42.8 million compared to $14.4 million of cash used in operating activities during the comparable 1999 period. The largest component of the change in cash flows from operating activities relates to our investment in inventories, where $7.1 million of cash was used during fiscal 2000 compared to $79.3 million used for such purposes during the 1999 period. The reduced investment in inventories reflects the rationalization of inventories purchased in connection with our 1999 Acquisitions and a stabilization of inventory levels in support of our commercial

sales efforts. Further significant investment in inventories to expand the depth and breadth of our replacement part offerings is not anticipated at this time.

Net cash used in investing activities totaled $26.4 million for the thirty-nine weeks of fiscal 2000, compared to $246.1 million during the comparable 1999 period. The decrease in cash used in investing activities was primarily the result of $1.2 million of cash used for business acquisitions during the fiscal 2000 period, compared to $215.8 million used to finance the Big Wheel and AGA acquisitions during the comparable 1999 period.

Net cash used in financing activities totaled $15.3 million in the thirty-nine weeks of fiscal 2000 compared to $266.6 million of net cash provided by financing activities in the comparable period of fiscal 1999. In the thirty-nine weeks of fiscal 2000, we used $1.7 million to repay loans under the Senior Credit Facility, used $0.2 million to finance loans to CSK executives to purchase CSK common stock, made payments of $10.6 million on capital lease obligations, and paid $2.9 million in connection with other financing activities. In the comparable 1999 period, we used $278.6 million of net borrowings under the Senior Credit Facility primarily relating to the Big Wheel, AGA and AIS acquisitions, made payments of $8.0 million on capital lease obligations, incurred $4.5 million of debt issuance costs, received $0.4 million of stockholder receivables, received $0.7 million in proceeds from stock option exercises, and paid $0.5 million in connection with other financing activities.

Store Activity

On April 27, 2000, we acquired substantially all of the assets of All-Car Distributors, Inc. (“AllCar”), an operator of 22 stores in Wisconsin and Michigan. Under the terms of the agreement, we paid approximately $711,000 in cash, which includes associated transaction costs, for the assets of AllCar and assumed vendor accounts payable and certain indebtedness and accrued expenses. In August 2000, we made a payment of approximately $206,000 pursuant to a purchase price adjustment formula contained in the original agreement. In addition, we may be required to make an additional payment of approximately $215,000 upon the satisfaction of certain conditions. The AllCar acquisition was accounted for under the purchase method of accounting. Accordingly, the results of operations of these stores are included in our consolidated operating results from April 28, 2000, the first day of operations subsequent to the acquisition. The financial statements reflect the preliminary allocation of the purchase price, based on estimated fair values at the date of acquisition, pending final determination of certain acquired balances, principally inventories.

The AllCar stores are serviced out of our Minneapolis Distribution Center and have been converted to the Checker name and store format and integrated into our operations. In connection with the integration of the AllCar stores, we incurred one-time transition and integration expenses of approximately $3.6 million, consisting primarily of grand opening advertising, training and re-merchandising costs. In addition, we expect to incur capital expenditures estimated to be $2.0 million, consisting primarily of expenditures related to equipment, store fixtures, signage and the installation of our store-level information systems in the AllCar stores. Approximately $1.5 million of these expenditures were incurred through the third quarter of fiscal 2000 with the balance expected to be incurred during the fourth quarter of fiscal 2000.

In connection with our acquisitions, including the acquisition of the AllCar stores, we incurred one-time transition and integration expenses of approximately $23.8 million during the thirty-nine weeks of fiscal 2000, consisting primarily of grand opening advertising, training and re-merchandising costs. In addition, during the thirty-nine weeks of fiscal 2000, we incurred $8.2 million of capital expenditures, consisting primarily of expenditures related to equipment, store fixtures, signage and the installation of our store-level information systems in these stores.

During the thirty-nine weeks of fiscal 2000, we acquired 23 stores, opened 28 new stores, relocated 12 stores, expanded 6 stores, and closed 24 stores in addition to stores closed due to relocation. We anticipate that the majority of new, relocated or expanded stores will be financed under arrangements structured as operating leases that require limited capital expenditures by us except for fixtures and store equipment.

Store Closing Costs

We provide an allowance for estimated costs to be incurred in connection with store closures. Such costs are recognized when a store is specifically identified, costs can be estimated and closure is planned to be completed within the next twelve months. For stores to be relocated, such costs are recognized when an agreement for the new location has been reached with a landlord and site plans meet preliminary municipal approvals. The allowance for store closing costs is included in accrued expenses in the accompanying financial statements, and consists primarily of future rents to be paid over the remaining terms of the master lease agreement for stores, net of estimated sub-lease recoveries. Future rents will be incurred through the expiration of the non-cancelable leases.

Activity in the provision for store closings and the related store closing costs for the thirty-nine weeks ended October 29, 2000, is as follows (in thousands):






Balance, at January 30, 2000			$	4,802




Store closings costs:




	Store closings costs, gross			6,053




	Adjustments to prior year plans			(41	)

		Store closings costs, net		6,012




Purchase accounting adjustment:




		Al’s and Grand Auto Supply		2,744




Payments				(9,581	)

Balance, at October 29, 2000			$	3,977

During the period that they remain open for business, the rent and other operating expenses for the stores to be closed continue to be reflected in our normal operating expenses.

Included in store closing costs is a charge of $3.7 million for store closing costs that were incurred due to overlap of certain CSK stores with more favorably sized or situated AGA stores. Adjustments to prior plans relate to costs for store closures that were accrued in prior periods but withdrawn from our store closure plan in the period of adjustment. Such withdrawals are due to subsequent improvements in the underlying economics of the store’s performance or (in the case of store relocation) because we were unable to secure a previously identified site upon acceptable lease terms. Further significant changes to the strategic plan are not considered likely. All relocations and store closings are anticipated to be completed within twelve months of accrual and only after costs can be estimated.

On a store count basis, closure activity and the remaining number of stores to be closed are summarized as follows:



	Number of Stores to be Closed

	Beginning		Stores		Plan			Stores			Balance to
Period	Balance		Added		Amendments			Closed			be Closed

Fiscal 1998		48		24		(10	)		(33	)		29




Fiscal 1999		29		87		(11	)		(77	)		28




Thirty-nine weeks ended October 29, 2000		28		17		(1	)		(36	)		8

At October 29, 2000, there were 8 stores remaining to be closed under the Company’s store closing plans, comprised of the following:


	Stores in		Plan			Stores			Balance to
Fiscal Year	Closing Plan		Amendments			Closed			be Closed

1996		91		(17	)		(74	)		—




1997		36		(13	)		(22	)		1




1998		24		(5	)		(19	)		—




1999		87		(2	)		(82	)		3




2000		17		—			(13	)		4
										8

The store that remains from the 1997 fiscal year plan will be closed prior to the end of fiscal 2000.

Service Centers

As a result of our 1999 Acquisitions and the AllCar acquisition in the first quarter of fiscal 2000, we acquired 84 automobile service centers (of which 12 were closed during fiscal 1999). These centers are attached to existing retail stores and perform automotive maintenance as well as tire sales and service. We are in the process of exiting the service center business as it: (1) requires management experience that is not consistent with our core business operations; (2) requires human and financial resources better utilized in our retail operations; and (3) does not allow us sufficient economies of scale to achieve required profitability.

In conjunction with our plan, during the thirty-nine weeks of fiscal 2000, we sublet 37 centers, closed 17 centers and have tentative agreements for the sub-lease of several additional centers. The remaining centers are expected to be subleased or closed during the fourth quarter of fiscal 2000.

As of October 29, 2000, we had 18 service centers in operation, compared to 72 centers as of January 30, 2000. During the third quarter of fiscal 2000, these centers generated net revenues of approximately $1.1 million and pre-tax operating losses of approximately $0.6 million. During the thirty-nine weeks of fiscal 2000, these centers generated net revenues of approximately $7.5 million and pre-tax operating losses of approximately $2.6 million. We anticipate continued operating losses on the remaining service centers until all facilities are sub-leased or otherwise disposed.

Forward-looking Statements

The foregoing Management’s Discussion and Analysis contains certain forward-looking statements about the future performance of the Company that are based on management’s assumptions and beliefs in light of the information currently available. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from those statements. Factors that may cause differences are identified in our Annual Report on Form 10-K, and are incorporated herein by reference.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

As previously disclosed, on May 4, 1998, a lawsuit was filed against us in the Superior Court in San Diego, California. The case was brought by two former store managers and a former senior assistant manager. It purports to be a class action for all present and former California store managers and senior assistant managers and seeks overtime pay for a period beginning in May 1995 as well as injunctive relief requiring overtime pay in the future. We have also been served with two other lawsuits purporting to be class actions filed in California state courts in Orange and Fresno Counties by thirteen other former and current employees. These lawsuits include similar claims to the San Diego lawsuit, except that they also include claims for unfair business practices which seek overtime from October 1994. We have entered into an agreement to settle these class action lawsuits. The maximum settlement amount is $11 million (which includes plaintiffs’ attorneys’ fees and costs), but may be lower depending upon the number of potential class members that submit claims. The settlement agreement has been tentatively approved by the court in which the lawsuits are pending. The settlement will not be final until the claims process is completed and the court grants final approval of the settlement, which is anticipated in January 2001. We will record a charge to earnings when the final settlement amount can be reasonably estimated.

We were served on March 8, 2000 with a complaint filed in Federal Court in the Eastern District of New York by the Coalition for a Level Playing Field, L.L.C. and 179 individual auto parts dealers alleging that we and seven other auto parts dealers (AutoZone, Inc., Wal-Mart Stores, Inc., Advance Stores Company, Inc., Discount Auto, Inc., The Pep Boys — Manny, Moe and Jack, Inc., O’Reilly Automotive, Inc., and Keystone Automotive Operations, Inc.) violated the Robinson-Patman Act. Only 14 of the individual plaintiffs asserted claims against us, and three of those have voluntarily dismissed their claims without prejudice. The complaint alleges that we and other defendants knowingly either induced or received discriminatory prices from large suppliers, allegedly in violation of Section 2(a) and 2(f) of the Robinson-Patman Act, as well as receiving compensation from large suppliers for services not performed for those suppliers, allegedly in violation of Section 2(c) of the Robinson-Patman Act. The complaint seeks injunctive relief against all defendants and seeks treble damages on behalf of the individual auto parts dealers who are plaintiffs, plus attorneys’ fees. The complaint alleges that the estimated average damage amount per plaintiff is $1,000,000 (and more for those plaintiffs that are wholesale distributors and not simply jobbers) before trebling. We believe the suit is without merit and plan to vigorously defend it. We, with other defendants, have filed a motion to dismiss and certain other procedural motions. A decision on these motions is not anticipated until the second quarter of fiscal 2001.

We currently and from time to time are involved in other litigation incidental to the conduct of our business. The damages claimed in some of this litigation are substantial. Although the amount of liability that may result from these matters cannot be ascertained, we do not currently believe that, in the aggregate, they will result in liabilities material to its consolidated financial condition, results of operations or cash flows.

Item 2. Changes in Securities and Use of Proceeds

NONE

Item 3. Defaults upon Senior Securities

NONE

Item 4. Submission of Matters to a Vote of Security Holders

NONE

Item 5. Other Information

NONE

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:


3.01		Restated Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit 3.01 of the Company’s annual report on Form 10-K, filed on May 4, 1998 (File No. 001-13927).
3.02		Certificate of Correction of the Company, incorporated herein by reference to Exhibit 3.02 of the Company’s annual report on Form 10-K, filed on May 4, 1998 (File No. 001-13927).
3.03		Amended and Restated By-Laws of the Company, incorporated herein by reference to Exhibit 3.03 of the Company’s annual report on Form 10-K, filed on April 28, 1999 (File No. 00113927).
4.01		Third Amended and Restated Credit Agreement, dated as of September 30, 1999, among CSK Auto, Inc., The Chase Manhattan Bank, DLJ Capital Funding, Inc., Lehman Commercial Paper Inc. and the lenders from time to time parties thereto, incorporated herein by reference to Exhibit 4.01 of the Company’s current report on Form 8-K, filed on October 15, 1999 (File No. 001-13927).
27.01		Financial Data Schedule

(b) Reports on Form 8-K:

NONE

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CSK Auto Corporation

By: /s/DON W. WATSON

Don W. Watson

Chief Financial Officer

DATED: December 13, 2000

Exhibit Index


Exhibit
Number		Description

	3.01	Restated Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit 3.01 of the Company’s annual report on Form 10-K, filed on May 4, 1998 (File No. 001-13927).
	3.02	Certificate of Correction of the Company, incorporated herein by reference to Exhibit 3.02 of the Company’s annual report on Form 10-K, filed on May 4, 1998 (File No. 001-13927).
	3.03	Amended and Restated By-Laws of the Company, incorporated herein by reference to Exhibit 3.03 of the Company’s annual report on Form 10-K, filed on April 28, 1999 (File No. 001-13927).
	4.01	Third Amended and Restated Credit Agreement, dated as of September 30, 1999, among CSK Auto, Inc., The Chase Manhattan Bank, DLJ Capital Funding, Inc., Lehman Commercial Paper Inc. and the lenders from time to time parties thereto, incorporated herein by reference to Exhibit 4.01 of the Company’s current report on Form 8-K, filed on October 15, 1999 (File No. 001-13927).
	27.01	Financial Data Schedule